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spk05: Thank you for standing by, and welcome to CouchBase's third quarter fiscal 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference may be recorded. Should you require any further assistance, please press star 0. I would now like to hand the conference over to your host. Edward Parker, Investor Relations. Please go ahead.
spk06: Good afternoon, and welcome to Couchbase's third quarter 2022 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me are Couchbase's 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, 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 risk discussed in today's press release, our quarterly report on Form 10Q for the quarterly 2021 to be filed with the SEC and other periodic filings 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 that's included in our earnings press release and our final IPO prospectus, which are available on our investor relations website. With that, let me turn the call over to Matt.
spk03: Thank you, Edward and good afternoon everyone, thank you all for joining us today during today's call Greg and I will provide details on our third quarter results, as well as our fourth quarter and full year guidance. let's kick this off with a few highlights of our Q3 financial results our third quarter revenue was $30.8 million growing 20% year over year. Total annual recurring revenue, or ARR, was $122.3 million, which was up 21% year over year. RPO grew 41% to $124.3 million. Our gross margin remains best in class at 88.3%. We had a great quarter. In our core business, we saw ongoing big deal momentum, robust renewal activity, some significant expansions, and delivered accelerating year-over-year revenue and ARR growth ahead of our guidance. We also saw several COVID-impacted customers return to growth and were cautiously optimistic that others will follow, which would add a tailwind behind our accelerating ARR growth. But perhaps most importantly, we're seeing momentum in our cloud business, bolstered by positive reception and very strong initial uptake of our recently announced hosted Database as a Service offering, Capella, which I'll discuss more in a moment. Overall, our strong fiscal third quarter performance demonstrates how enterprises are turning to and investing in Couchbase as a key technology partner, supporting their digital transformation initiatives. I'm proud of the team, and I've never been more confident in our strategy, our technology, and our opportunity. Looking ahead, we're set up for what we believe will be a great fiscal fourth quarter and a landmark year for the company in fiscal 2023. At Couchbase, our mission is to empower enterprises with the ability to build, deploy, and maintain their mission-critical applications by delivering the world's most scalable, highest performing, and flexible modern databases. Enterprises are confronting the reality that relational platforms are fundamentally unable to accommodate the requirements of modern applications. While many emerging NoSQL technologies address these limitations, they struggle to do so at the mission-critical scale and performance levels required by the modern enterprise. And these technologies weren't architected to accommodate the wide spectrum of deployment and consumption modalities increasingly common across enterprise environments. Couchbase was born to bridge these critical gaps. Enterprises are choosing to build their most important applications on Couchbase because we offer the scalability, flexibility, and ease of adoption necessary to accommodate the incessant growth in data volume and variety that is at the core of digital transformation. We empower architects tasked with designing, building, and supporting applications on which their businesses depend. We also provide developers the tools they need to build software in a modern, agile, and elegant way. And we do this for both new applications and existing ones that need to be replatformed. We enable modern application design while leveraging the existing and ubiquitous knowledge of SQL. We can run anywhere from cloud to on-prem, from the data center to the edge, in managed or hosted deployments. We proudly do all these things with uncompromised performance, but in an approachable and familiar way. And we do all this in a single, carefully architected enterprise platform. Simply put, I remain confident that we have the opportunity to drive a generational rethink in the $60 billion database market. Turning to some of the developments in the quarter, in October we held our annual user conference, Couchbase Connect Online, with the theme of Modernize Now, which underscores the need for organizations to become more flexible and increase developer agility to expedite modern application initiatives. Connect was an impactful week as we raised awareness among key influencer audiences with a particular focus on developers. We saw over 5,200 registrations, and we educated customers and prospects about our modern database across more than 100 sessions, over half of which were for developers. Of course, the big news at Connect was our introduction of Couchbase Capella, our new fully-hosted database-as-a-service offering that delivers database flexibility and ease of adoption for developers and performance at scale for enterprise applications with the best price performance of any databases of service. Capella is available as a free trial for developers, enabling them to get up and running with Couchbase with just a few clicks in a matter of minutes. And it is now available on AWS, with additional cloud providers becoming available in the future. I want to take some time to talk through why the introduction of Capella is so significant. As you know, one of the core value propositions of Couchbase is that we are architected to run anywhere and in whatever consumption model an organization desires. Recall that our core platform is cloud native and more than 50% of our customers deploy Couchbase in any one of the major public clouds today. On top of that, we have had our virtual private cloud offering in market for over 18 months. And now with Capella, which is fully managed and automated, customers can focus exclusively on agile development of their most important applications instead of worrying about operational database management efforts. Though it is still early days for Capella, the feedback from customers has been overwhelmingly positive. We are excited by the leading indicators of our buy-from business. An example of this is developer trial activity. including account sign-ups and cluster creation. Overall, trial activity in the month since launch has meaningfully outpaced all other product launches in our history. More specifically, we had more than double the number of clusters deployed in the first month of Capella than we did in the previous three quarters. This is the activity we would hope to see. further reinforcing our confidence that this new offering will be a major growth driver for Couchbase and will greatly accelerate developer adoption. And we intend to keep our foot on the gas. We will maintain an aggressive investment cadence to support our ambitious product roadmap, and Capella will be a cornerstone within our buy-from sales motion, complementing our world-class sell-to motion. I look forward to updating you all on our progress with Couchbase Capella in the quarters to come. In Q3, we saw continued momentum across our partner ecosystem. I am pleased with the volume of partner deal activity. Of note, the partner sourced and influenced new business for the first three quarters of FY22 has already surpassed that of all our previous fiscal year. On the CSP front, we continue to work with all major cloud providers And in Q3, we specifically saw continued strong engagement and support from AWS. Beyond launching Capella on AWS with support from AWS SaaS factory team, we were invited to two new select go-to-market programs and qualified for multiple designations and integrations with AWS offerings. Now I'd like to spend a few minutes discussing some customer wins in the quarter, and how enterprises are leveraging the power of Couchbase to transform their business. A new G2K logo in Q3, Mgen Technologies, a leading insurance company in France, began its modernization journey by selecting Couchbase over another NoSQL solution to replace Oracle and Postgres to power their data hub, the system of record for the more than 4 million people they insure. The data hub must be able to continuously ingest a large volume of data, but also expose this data to consuming applications through REST APIs. Mgen chose Couchbase due to our ability to join a large volume of data, full-text search, scalability, and supporting a large number of transactions with low latency. Another new win from the quarter, which was also our largest Capella deal to date, was with the leading financial services provider that empowers billions of people and millions of merchants to buy and sell online across many emerging global markets. The company selected Capella on AWS over MongoDB Atlas to power its payment gateway. This customer's development team cited database performance and the familiarity of our SQL++ query language as the key factors in their decision to partner with Couchbase. Also in the quarter, Domino's Pizza significantly expanded with Couchbase. Domino's will be using Couchbase for real-time point-of-purchase customer segmentation and behavior analytics to determine customer lifetime value and to deliver personalized marketing campaigns. They were also able to take things that they already knew about their customers and then combine that with the new information to take action in hours versus weeks or months, as was previously the case. This is a great land and expand example. Once customers adopt our technology, they quickly find new use cases. With our platform, Domino's can deliver not only the perfect pizza, but also insights to its internal business partners in real time. As I take stock of Couchbase's first few months into our journey as a public company, I am very proud of all that we have accomplished in just a short period of time. It has been very encouraging to see the recognition and validation of our modern database for enterprise applications from across the industry, including partners, industry analysts, and customers. But I'm even more excited about the months and years to come. It is clear to me that enterprises are increasing the urgency by which they modernize their application stacks, which intensifies the need for a modern database like Couchbase and is the reason why we are so excited to come to work every day. And while we are not completely back to a normal enterprise buying and selling environment, as pandemic protocols are still impacting our business, we are seeing spending from some of our key customers in our distressed industries recover. And our go-to-market organization is starting to get back in front of our customers in face-to-face engagements. I'm encouraged by these developments, and I remain cautiously optimistic that the recovery will continue with increasing momentum in the coming months. From a technology perspective, our product portfolio has never been stronger. Drafting off the momentum of our release of Couchbase Server 7 in the second quarter and building off our current virtual private cloud offering, the release of Couchbase Capella hosted database as a service offering in the third quarter marks the beginning of a new chapter in the Couchbase story. Enterprises are increasingly looking to offload the management and tuning of database systems so they can fully focus on the applications that run their business. And Capella provides this capability while offering all the mission-critical attributes customers have come to expect from Couchbase. Bigger picture, Capella enhances one of the core value propositions of Couchbase. the ability to enable enterprises to leverage our modern database in whatever deployment and consumption model that that business requires, while at the same time fundamentally changing how developers can access the platform. With Capella, this access is just a matter of a few clicks away. We've invested an enormous amount of time into this offering, and as I discussed earlier, we're thrilled with the customer feedback we've received so far. We have a robust Capella roadmap ahead of us, and you can expect more announcements next year, including support for additional cloud providers, more features, and more capabilities. Needless to say, we have very high ambitions for our as a service portfolio. And of course, our product investments go beyond Capella. Couchbase is built for a world where the applications are delivered as a continuously running service. from the cloud and consumed at the edge on occasionally connected devices as mobile applications. As you know, early on we uniquely made investments in our mobile and edge database capabilities to completely round out our ability to run anywhere. We are currently investing in the next release of Couchbase Mobile, our full featured embedded NoSQL database for mobile and edge computing. The forthcoming innovations will make our capabilities more easily embeddable and programmable at the edge, catering to a vast variety of industrial, retail, healthcare, and IoT applications. You'll also see focus on secure management and operations from cloud to edge and simplify administration to make remote databases at scale significantly easier for customers. We look forward to sharing more about the next phase of our mobile and edge offerings. Stay tuned. The next release of our core platform is also coming next year. And with it, we are making it even easier to migrate from relational databases. We are the only modern database for enterprise applications that makes it easy to seamlessly combine operational capabilities and analytical insight. And the next Couchbase server release will feature important updates to our analytics features. You will also see us extending our core platform support to additional processing architectures, which will reduce the cost for both our customers as well as Capella in the future. In summary, we had a strong quarter. We wouldn't have had this opportunity without the extraordinary team we have in place, as well as the core values that guide us in what we do every single day. At Couchbase, we aim to be good humans always, to act with uncompromised integrity, and to allow all our employees to serve their families. This allows us to attack hard problems for our customers and play to win together so that we make tomorrow better than today. We achieved that in Q3 and expect to do so in Q4. The best of Couchbase is yet to come. I will now turn the call over to Greg to talk about our financial results. Greg?
spk02: Thanks Matt. And thanks again, everyone for joining us. As Matt mentioned, Couchbase's strong third quarter performance was driven by ongoing large deal momentum and our core enterprise business, including some significant expansion as well as acceleration of our cloud business. While some of our customers and distressed industries remain impacted by the pandemic, we saw improvement in the third quarter and are cautiously optimistic that those customers will continue to recover. Total revenue in Q3, was $30.8 million, growing at 20% year-over-year and up 4% from the prior quarter. Subscription revenue was $29.0 million, also up 20% year-over-year and up 3% from the prior quarter. Professional services revenue in Q3 was $1.8 million, up 16% year-over-year and 9% quarter-over-quarter. Total annual recurring revenue, or ARR, was $122.3 million, representing 21% year-over-year growth and 6% quarter-over-quarter growth. We are pleased with our ARR performance as year-over-year growth accelerated in the quarter. We expect this trend to continue into the next fiscal year. As a reminder, ARR represents the annualized recurring revenue at the end of the period that is currently contracted and committed over the forward 12-month period. We believe ARR best represents our business performance by accounting for timing variability among our customers' implementation times. As most of you may know, we continue to serve the most mission-critical applications at the largest enterprises. We remain focused on this segment of the market and are pleased to report our ARR per customer performance in the quarter was $215,000, up from $193,000 from the same period last year. Our dollar-based net retention rate was 115% for Q3. In discussing the remainder of the income statement, Please note that unless otherwise noted, all references to our expenses, operating results, and share count are on a non-GAAP basis. Our gross margin profile remains best in class. In Q3, our gross margin was 88.3%. This compares to a gross margin of 87.9% a year ago and 88.3% last quarter. We have a long-term gross margin target to remain above 80%, with our trajectory somewhat contingent on the rate of uptake and eventual mix of our growing as-a-service offering. Turning to expenses, our sales and marketing expenses for Q3 were $21.5 million, or 70% of total revenue, compared to $17.1 million, or 67% of revenue a year ago. We continue to make significant investments across our sales and marketing organizations, including aggressive additions to quota-carrying headcount as well as ongoing investments to customer success, our partner program, and bolstering our go-to-market expertise in cloud. Research and development expenses for Q3 were $12.0 million for 39% of revenue compared to $9.8 million and 38% a year ago. We've invested purposely and aggressively in product engineering. Specifically, we continue to invest in Couchbase Capella in addition to ongoing core platform development. General and administrative expenses for Q3 were $5.8 million for 19% of revenue compared to $3.6 million and 14% a year ago. On a dollar basis, the growth in G&A was mainly a result of expenses incurred in connection with our initial public offering and preparing for and being a public company. Non-GAAP operating loss for Q3 was $12.1 million for a negative 39% operating margin compared to a negative $7.9 million for a negative 31% operating margin in the year-ago quarter. This result was significantly better than our expectations and was driven by better-than-expected revenue as well as lower-than-expected OPEX, primarily due to timing. We remain committed to investing aggressively, and although we are on track to exceed our full-year operating loss target, we now expect our second-half OPEX investments to be more weighted towards Q4. Non-GAAP net loss attributable to common stockholders for Q3 was negative $12.6 million, or negative 29 cents per share. As we continue to scale the business, we believe we have a significant opportunity to gain leverage. Turning to the balance sheet and cash flow statement, we ended Q3 with $207.6 million in cash, cash equivalents, and short-term investments. Our remaining performance obligations, or RPO, totaled $124.3 million, up 41% from $88.3 million last year, and up 5% from $118.9 million from the prior quarter. Our year-over-year RPO growth is reflective of the strong renewal and upsell activity. We expect to recognize approximately 62% or $76.7 million of the total RPO as revenue over the next 12 months. Operating cash flow was negative $19.7 million compared to negative $13.1 million a year ago. Free cash flow was also negative $20.3 million for negative 66% free cash flow margin compared to negative $13.3 million and a negative 52% free cash flow margin a year ago. I will now conclude the call by providing guidance for Q4 and full year fiscal 2022. We continue to see strong business momentum and elevated database infrastructure migration activity across our industry, and our pipeline momentum is strong. Furthermore, as I indicated earlier, we are seeing signs of recovery in portions of our customer base impacted by COVID. That said, we're continuing to see variability with respect to the implementation timing of certain deals, which impacts our revenue visibility. Accordingly, we are prudently considering this variability in our revenue guidance, even as we see continued upside to our ARR outlook. Our guidance also assumes some continued uncertainty among distressed industries and our go-to-market motion as we continue to monitor pandemic-related developments. Clearly, a deviation from this assumption would cause us to modify our guidance higher or lower. For the fourth quarter of fiscal 2022, we expect total revenue in the range of $33.9 million to $34.1 million, therefore a year-over-year growth rate of 16% at the midpoint. We anticipate ARR in the range of $129 million to $130 million, which represents 20% growth at the midpoint. We expect a non-GAAP operating loss in the range of negative $10.6 million to negative $10.2 million. For the full year of fiscal 2022, we expect total revenue in the range of $122.4 million to $122.6 million, therefore a year-over-year growth rate of 19% at the midpoint, As noted above, we expect ARR growth to be 20% at the midpoint. And finally, we expect a non-GAAP operating loss in the range of negative $47.0 million to negative $46.6 million. With that, Matt and I are happy to take your questions. Operator?
spk05: To ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Sanjit Singh of Morgan Stanley. Your line is open.
spk01: Hi. Thank you for taking the questions, and congrats on the, you know, improved ARR growth, you know, above 20%. Really nice to see. I guess I'll start with Capella. And, you know, you mentioned, Matt, you know, some of the number of clusters deployed in the month after release being significantly up. I think broad strokes, if you just go through some of the developer initiatives you're working on, and when do you think this can, you know, Capella can, you know, cross some important thresholds, let's say 10% of revenue given from where you're starting today? Is that a two-year timeframe, a one-year timeframe, what's a reasonable timeframe to think about hitting some of these initial revenue thresholds?
spk03: Sanjeev, thanks for the question and appreciate the commentary. We're certainly excited about the re-acceleration. Capella marks a major milestone for us as a company. As you know, Couchbase has been architected for the most mission-critical applications. We have a cloud-to-edge, cloud-native platform. But what the Capella offering allows us to do is completely simplify the ability for developers and other personas to adopt that industry-leading technology. What I talked about in the call is the early indication that we're seeing of just how valuable that consumption model is. And it took us three weeks to see the volume of clusters and trial activities that we saw in the previous three quarters. That's not to diminish our NVPC offering, but more so to demonstrate how powerful it is when we provide a form factor that is so easy that within a couple clicks they're up and running with the full power of the Couchbase platform. It's not just about the cluster volume either. It's about the conversion that we're seeing in people that are interested to deploying clusters where we've seen a 4 to 5x increase in efficiency of of that metric. So leading indicators suggest that we've got the product market fit that we've been working so hard for and talking about. Setting aside kind of the product-led growth initiative you asked about developers, we're putting a lot of time into the developer experience. And more specifically, when we think about it, there's developer advocacy, making sure we're building great products and providing integrations for developers to see the full power of Couchbase. You can go out there and get up and running via web-based interface and what we call the playground, really simplifying the path to trying out Couchbase. We're investing in developer relations, so engaging the developers, articulating what other customers are doing with the power of our platform, how they're finding our elegant design and enabling truly next-generation applications. And then finally, organizing... communities to make all of that that much more efficient. We're excited that in the quarter, Sanjit, all leading indicators on developer traction, everything from web page views to organic traffic, time on page, downloads, were materially up quarter over quarter and year over year. So these are initiatives that we've been working hard on for a long time. Our development cycles, our go-to-market efforts are aligned. We're going to keep our foot on the gas pedal, and we think we're only scratching the surface on what's possible.
spk02: Yeah, and so this is Greg. Just to touch on your question. Hey, good evening, Boyd. While we're really excited about Capella and what it's going to do for us and doing for us today, we're still not at the point where we're going to be, you know, disclosing anything specifically around the financial or the timeframe. We're certainly, you know, continuing to work through that. And when the time comes, we will obviously share that. But we're just not ready to do that today, given that it's still an immaterial part of the business.
spk01: Got it. And I just want to follow up a question for you, Greg. As we think about the relationship between ARR and revenue, and this certainly came up in the last call around some of the timing of deployments, but if you could just sort of big picture it for us, we've had, I think, going on three straight quarters, actually multiple quarters of sustained 20% or above ARR growth. And so as we think going into fiscal year 23, given that you've put up that sustained 20% growth in AR, shouldn't that converge or align with a 20% or better type revenue growth profile going into next year? And if it doesn't, if you could just sort of walk us through why wouldn't that be the case?
spk02: Yeah, good question, Sanjit. So just about next year, obviously, we're not at the point where we're going to give fiscal 23 guidance yet. We'll do that a quarter from now. So I'm not going to comment on specifically about next year. But, look, I agree with your assessment that revenue is lagging and it will eventually catch up with ARR. So that is ultimately going to be our view as well. And right now, because of our definition of ARR, we're obviously – you know, able to count things that are in the future where they're not generating revenue today. But they will be in the future. And I would also point you to RPO as another good metric to show you the really high-quality deals that we're seeing with RPO growing over 40% and current RPO, you know, on an escalating path for the last several quarters. So it will certainly come. We obviously like the fact and we hope that ARR continues to remain above the revenue growth. But that's what we're going to see. And, again, I would always focus that ARR is our most important metric that we follow. We set the definition of that for that exact reason because the deals we do with these large customers, the implementation timing and the start dates is always a little uncertain, and so we have to account for that.
spk01: Makes perfect sense. Thank you, Greg. I appreciate it.
spk05: Thanks, Sanjit. Thank you. Our next question comes from Matt Hedberg of RBC Capital Markets. Your question, please.
spk11: Hi, guys. Thanks for taking my questions. And I'll offer my congrats as well on the acceleration this quarter. You know, and what sounds like a strong start to Capella. Matt, I guess I wanted to ask on the partner front. I mean, you noted, I think you said that the first three quarters of the year has outpaced all of partner activity in fiscal 21. I guess I'm wondering why. Could you put a finer point on why that's been such – you've seen a lot of strength there. And I guess to the extent that Capella offers another interesting sales motion for the partner channels, could you articulate that as well?
spk03: Matt, great to hear from you and appreciate the question. When we think about our partner business, This is an area of the company that we've been investing in for many, many years and believe it's a key foundation to building a great database and specifically an enterprise database company. When we talk about our partner investments, that's everything from GSIs to ISVs to cloud service providers. And we study very carefully not just how we're influencing large enterprise opportunities and leveraging the relationships and the reach that these partners provide, but also opportunities that are sourced where, you know, partners are bringing net new opportunities to the company. I'd say the continued strength is expected, Matt, because we've continued to make this a point of focus and have been investing in it for many years. And if anything, we are accelerating our investments there, particularly in the area of cloud service providers as well. you know, they become even more important for us with Couchbase Capella. But I would tell you that Capella is not just an opportunity for cloud service providers. It's an opportunity across the enterprise. SIs deploy hundreds of thousands of developers and touch developers and large enterprises. Having a form factor that's conducive to allowing them to accelerate digital transformation projects is critically important. The ISV channel is one of particular strength for us. and the ability to embed a hosted offering into a solution stack opens up opportunities that are additive to our existing portfolio. So we remain very excited about this. It's helping us gain leverage in our overall go-to-market and will be an area that we continue to focus on, not just with go-to-market investment, but ensuring that we have the appropriate roadmaps and technology integrations to grow that channel as we go forward.
spk11: That's super great and exciting. And then, Greg, if I have my math right, I believe CRPO grew near 34%. Am I in the right ballpark for CRPO growth?
spk02: Correct. Yes, that's exactly right.
spk11: And I guess, you know, maybe following up on Sanjay's question, I know you're not guiding the next year, but to me that would seem like a pretty good indicator of, you know, kind of the trajectory of the business. Our RPO has grown north of 40%, I believe now two quarters in a row. I mean, how should we think about, I guess, you know, and maybe the question is, was there anything abnormal, like large deals that drove the RPO strength? And is it right to kind of look at CRPO as a good indicator for maybe where next year could eventually get to for ARR growth?
spk02: Yeah, yeah. So great question, Matt. And, again, I'll answer this. Again, we will continue to reinforce ARR is the key metric that we focus on in the business. But, look, we had a very strong quarter. Again, we're working with some of the largest enterprises, underpinning the very complex deployments, and we're doing big, healthy renewal and expansion deals. And there is a multi-year dynamic, so you're seeing that in the total RPO But you're also seeing in the short-term RPO, as I mentioned with Sanjit's question was around the implementation timings, you know, there's variability there. And so that's why you see some of what you're seeing with current RPO and ARR versus revenue. It's a lagging indicator. But we feel great about where the ARR is heading in terms of reaccelerating and getting, you know, healthfully back in the 20s. And the CRPO just adds to that. So we're excited about what that brings in the future, and we're going to continue to do these great, healthy deals that are long-term focused for Couchbase.
spk11: Got it. Thanks a lot, guys.
spk05: Thanks, Matt. Thank you. Our next question comes from Ty Kidron of Oppenheimer. Please, go ahead.
spk09: Thanks, Matt. Guess what? I want to talk about Capella as well. Maybe you can talk about when you think about the first users that you're now seeing on the platform, how many of them, by the way, are completely new to Couchbase versus existing customers that are just kind of looking to diversify their deployment mode?
spk03: Well, Itai, first of all, I'm not surprised you want to talk about Capella, and I could talk about it all day because of the potential it has for us. Quite frankly, we're seeing a very healthy balance of existing customers and new customers. You know, we had the biggest quarter in our history from our overall cloud business, which was our MVPC product. And, you know, I was asked what was I pleasantly surprised by from the quarter. Quite frankly, the commercial activity on all things cloud. It's as if we released Hosted Capella a quarter ago because of the number of conversations that we're having, which I think is indicative of the demand that we have. We had a new logo, as a matter of fact, in Asia where we work closely with AWS, short sales cycle, heavy demand for the technology and the partnership allowed us to show up in local language and local support to get things over the line. That was a completely new logo. At the same time, we're talking to some of our largest customers for net new applications and eventually you know, migrating existing applications. So I'd say the activity is very healthy. When we look at that trial activity, we do fundamentally believe that Capella will be the new logo engine for the company as we go forward. And I think when we study the clusters deployed and, you know, some of the early stage top of funnel activity, we're certainly seeing that really extending the reach of the Couchbase platform to many, many more customers.
spk09: That's great. So maybe a follow-up on this, if you think of this as a major driver for you going forward, how do you think the go-to-market needs to evolve in order to enable that? Is self-serve going to be a material element here with Capella, or is it still going to require significant direct Salesforce investment?
spk03: Yeah, Itai, we think about our go-to-market as an enterprise sell-to motion, and we are augmenting that with a buy-from motion. And so we certainly expect new customers to, you know, come to us, find us, and, you know, start to get into trials on Couchbase Capella. At the same time, we will be articulating the value proposition and that offering to existing customers. We've been investing in both of those motions and ensuring that we have a well-orchestrated set of handoffs between them. But over the course of the past many quarters, everything from additional sales capacity to marketing investment to cloud specialization to overlay cloud security experts, we're really being mindful of that balance. And most importantly, starting from how do we satisfy our customers and ensure that they're successful, whether they're coming on their own via one of the marketplaces or, you know, we are working with one of our existing customers to migrate over. So we're pretty excited about the investments and the foundation we have on the go-to-market side and are starting to, you know, see those really start to pay off.
spk09: Very good. Thanks. Good luck, guys. Thank you.
spk05: Thank you. Our next question comes from Remo Lensha of Barclays. Your line is open.
spk07: Hey, thanks. Two quick questions for me. Greg, if I look at Q3, that looks really healthy. If I look at Q4 guidance compared to some of the consensus numbers out there, and maybe consensus is a little bit all over the place, looked a bit differently. Was there any pull forward from Q4 and Q3 that kind of maybe impacted numbers or, you know, what's driving it there? And then one from Matt, if I... Think about the pandemic-impacted industries, and then coming back, you talked about some progress there. How much of a, like, if you think about that in the coming quarters, do you think there's more to come, or are we kind of done now with recovery there? Thank you.
spk02: Thanks, Raimo. This is Greg. I'll answer your first question, then turn over to Matt. Look, we don't necessarily pull forward quickly, from future quarters per se. Look, we do deals when customers want to do deals. So are there times where we do early renewals? Sure. But it's not a pull forward per se. We're not aggressively pulling forward. And we talked about that in the last call. There was a couple of early renewals where customers, you know, wanted to do deals. So I wouldn't say there's any pull forward. I think you're probably talking potentially about the revenue guidance. Look, I would tell you on the revenue side, look, we're just starting to see some of these large customers we have just think further ahead about their implementation timing. And part of it I would say is budget related. Part of it is just more prudence in terms of their buying timing. And so we're very excited about these deals. We're trying to provide the most accurate guidance to you and also be prudent. So there's a little bit of that in there on the revenue side. And the only other thing I would tell you on the guidance is, look, we had less expenses, and I talked about this in the preparative marks, a little less expenses in Q3 than we had originally planned. Those have moved to Q4. It's just a timing difference, but there's no impact on the full year. And that's why you saw for the full year we've raised ARR revenue and op profit guidance as well.
spk07: Yeah. Okay.
spk03: So, Ryan, let me address your question on pandemic and, in particular, distressed industries. As you know, our platform serves travel and hospitality and other verticals for that matter very, very well. And clearly with the pandemic being what it was, those companies were under duress. As we've talked previously, we took great pride in showing up as true partners to those companies during those times, making sure that we weren't just a technology vendor, but a partner that was there for them in good times and in future great times. We did mention that we saw some return to some very healthy levels. One of my most proud moments during the quarter on behalf of the company, we were dealing with one of the world's largest hospitality companies. They communicated to us that their business is at 50% of pre-pandemic volume, and yet we had a significant expansion with them as they invest in Couchbase as a true digital transformation platform for the future. I don't think that happens if we don't have technology that's future-proof, that we have great relationships, that they're truly seeing Couchbase as is one of their key partners. So we're seeing, you know, points of strength. We are certainly engaged with our customers, you know, in this quarter and beyond. And I'd say we're cautiously optimistic. You know, we can't predict the future. Obviously, there's still variance and, you know, pressure on, you know, return to normal activity. But, I think, as we mentioned, this is part of our acceleration and, you know, one of the many contributing factors to additional tailwinds as we go forward.
spk02: Yeah, and I would just add there was one other customer to Unique Situation Cruise Line that last year came to us, obviously, in the midst of the pandemic, wasn't generating, wasn't sailing, generating any revenue. And, look, we had to sort of, you know, do a special deal and take care of them as one of our valued customers. And they've come back this year and they're getting back to business. And we've got now a multi-year deal where we're going to more than double the estate at that customer. And so that's just a great example of where we are starting to see some of that, you know, that return from COVID and how we've, you know, taken care of these customers and done right by them. And we're going to see them as great customers for many years to come. Okay, perfect. Thank you.
spk05: Thanks, Ronald. Thank you. Our next question comes from Jason Adder of William Blair. Please go ahead.
spk08: Yeah, thank you. Good afternoon, guys. I wanted to ask about the comment, Greg, that you made on ARR expected to accelerate, continue to accelerate going forward. I just wanted to unpack that a bit and understand what's giving you that confidence, how much of it is with kind of the pipeline that you see right now, versus some of the macro assumptions around COVID recovery versus the uptake of Capella and the contribution from Capella?
spk02: Yeah, great question, Jason. Yeah, look, I think we talked about this even on the IPO Roadshow that we knew we were going to be heading into a reacceleration period, and we feel like we're entering that now. And based on what we see both on the existing customer base and our pipeline, The new logo in particular is coming, we believe, from Capella here. We have seen an improvement from the COVID-impacted cohort that we've talked about before. That cohort is no longer negative growth. We're starting to turn to positive growth. And so it's just a combination of all those things, what we see in the pipeline, the product launches we have. All those things give us excitement and confidence that we will be able to continue this acceleration you know, beyond Q3 into Q4 in the next year.
spk08: Okay, great. And then did you provide the customer count, Greg?
spk02: I did not, but I'm happy to because you will eventually see it. So the customer count for ending Q3 was 568 customers.
spk08: Okay. And then, Matt, for you, just – wanted to get some comments on the competitive environment, who you're competing against mainly today, and how has that changed, let's say, over the last 12 to 18 months, if at all?
spk03: Jason, I think one of the things that we take pride in is that we're focused on being the modern database for enterprise applications. We're multimodal. We're designed as a cloud-native database that can run from cloud to edge at the highest you know, performance and scalability, and now with any consumption model that the customers want. And so I think, you know, we take great pride in our unique differentiation that we believe we will be able to sustain in helping customers, not just with new applications, but in replatforming relational ones. And so as we think about enterprises, you know, they're going to be evaluating legacy relational technologies, next generation you know, modern databases, but there really is not a platform that can provide the true breadth and depth of capabilities that Couchbase was designed for. And so, anytime we're engaged with an account, you know, we're proving our value and articulating, you know, all aspects of that value proposition, proving things out and proof of concept. With Capella, we're able to let, you know, developers do that directly. And so, look, if you were to pick a database, you know, our customers are going to have those or will be trialing them. But there is no other database that can do the things that we have because of the architectural approach and, you know, point of optimization that we've chosen from the very outset of our company, which we remain committed to.
spk08: Well, let me ask you a slightly different way. If I think about kind of the three buckets – you know, kind of the cloud guys, the incumbent relational guys, and then a sort of newer, no sequel folks, who are you seeing the most within those among those three groups?
spk03: Look, that is exactly how we break it down. And we think about, you know, the, if I put my, whenever I think about competitive dynamics, I put myself in the shoes of our, of our customers and they're saying, what do I need for my application? If I have an existing database, an incumbent, whether it be Oracle or someone else, can that provide the capabilities that I need? We know that the answer to that question is no, and they're often in evaluation to figure out which technologies they can layer in to augment their applications or, in some cases, offload off of relational databases. So that's a dynamic that we see. There are several next-generation NoSQL solutions. Mongo, obviously, and others, their point of optimization is different than ours. And so while there is overlap and we may have points of comparison, when we get into scale and performance and cloud-to-edge deployments, those comparisons go in our favor for the applications that we're architected for. Obviously, enterprises are constantly evaluating, you know, the embedded solutions in cloud. AWS and Microsoft probably the leading two. But again, our job is to ensure that we're solving database problems that our enterprises can't get from other areas. And if you were to go listen to our customer bases, I know you have, Jason, you're going to hear that played out, right? Performance and scale that's not available with other solutions. The familiarity with SQL. cloud to edge deployment, you know, multimodal capabilities, everything from key value cash, document database, asset transactions, becoming a true source of truth and, you know, system of record for the most mission critical applications. You put all that into a single platform that was architected from the beginning to make those things happen. When we get into alternatives, yes, they're looking at them, but there is no other solution that you know, has that full set of capabilities integrated into a single platform.
spk08: Thank you very much.
spk05: Thanks, Jason. Thank you. Our next question comes from Robert – I'm sorry, Rob Oliver of Baird. Your question, please.
spk10: Great. Thanks. Good evening, guys. Appreciate it. First question for you, Matt, also on Capella. Just around the large deal that you saw, I assume that was a current customer migration, but would love to hear some of the dynamics around that deal, in particular around kind of sales cycle. I know one of the things that's exciting about Capella is just the decline, the lower sales cycles associated with it. So Just would be curious in some of the early activity, particularly the larger deals, if that was reflected in terms of what you saw this quarter. And then I had a quick follow-up.
spk03: Rob, thanks for the question. So we have multiple cloud deals to talk about. I think the one that you may be referring, our largest Capella deal today, that was an accelerated sales cycle out of emerging markets. You know, they were in an evaluation cycle between us and MongoDB Atlas. You know, they talk about not just our performance, the breadth of our capabilities, you know, per my comments to Jason, but also the familiarity and ease of use of SQL and what we've built into, you know, Capella as an offering. But quite frankly, we're seeing some very nice-sized deals in new logos. You know, a large gaming company in Asia, turned into an over six-figure transaction, those are really important deals for us. And the fact that we can see those enter into the pipeline and move to closure at a fraction of the normal time period that we would have with a customer-managed solution, those are the things that have us really excited. And so this is not a story about just migrating our base. As a matter of fact, we think about the impact of Capella in the following order new logos first second net new applications and existing customers and then the final piece will be you know customers migrating their existing applications but per my commentary the fact that we I mean we have really healthy activity across all three of those already and we think that that's only going to accelerate with the fully hosted offering you know that we're that we're now in market with so Really exciting stuff. Again, this is new opportunities, new applications, extending reach. And it's not just in production, Rob. As you know, developers want to try technology. They want to be deployed in test environments. They want to expand easily. These are benefits that we now have in market because of this consumption model. And you combine that with all of the capabilities in the Couchbase platform that we've worked so hard on. to build and, you know, take such great pride in, you can see why we're excited about the path forward.
spk10: That's great. Thanks, Matt. Appreciate it. And, Greg, just one for you as well. Thanks for some of the other metrics you provided in AR per customer up nicely, again, I think even sequentially. I know you've tried to help us understand some of the metrics that could change, like margin, for example, gross margin around as we shift to Capella. And is AR one of them? In other words, clearly we're not in the flywheel yet where the customer count is seeing a big impact from Capella. But as we start to do, will that AR per customer change? you know, be a bit lower? Are there any other metrics that we should be aware of, you know, as Capella starts to ramp in 22? Thanks a lot.
spk02: Yeah, thanks, Rob. Yeah, look, certainly there could be an impact on the AR per customer. I mean, we, as Matt talked about, we hope that this becomes our new logo engine, and we will, you know, see a lot of, you know, new logos, and obviously those come in at a smaller ticket price, and then we typically grow them. So if we do start seeing the pickup, which we expect, yes, that certainly could have an impact on the AR per customer as we go. As you mentioned on gross margin, obviously, the cost of Capella is greater than the self-managed software. So we'll see impact there. We've stated that we believe we can continue to be an 80% plus gross margin business over time, but that will all depend on you know, the mix and how fast the uptake is and all that. So those are the areas that we look for. Obviously, the offset is more customers, you know, faster growth rate is what we're, you know, looking for out of Capella as the engine to grow new levels.
spk10: Understood. Okay. Thanks again, guys. Appreciate it.
spk05: Thank you, Rob. Thank you. Our next question comes from Dan Church of Goldman Sachs. Your line is open.
spk04: Thanks for taking the question and squeezing me in here. Just a quick one in terms of kind of the feedback that you've seen post-release of Couchbase Server 7.0 and how does support for asset transactions change the types, if at all, the types of workloads you can go after? And then to that end, when you talk to customers today – What are you seeing with respect to kind of growth in net new workloads versus replatforming off legacy relational technology? Is there any change there with respect to replacement of relational databases?
spk03: Ian, thanks for the question, and appreciate you articulating the importance of Couchbase 7, you know, our largest server release in history and made material advancements on, making it that much easier for companies that are replatforming applications off of relational technologies. One of the concepts that's really important to us is not just moving those applications, but enabling Couchbase to move from what we call a source of truth to a full system of record. We talked about one of the G2Ks, Mgen, not only was that a relational migration, but we are now the system of record for their data hub. Another deal that we saw In the quarters, another G2K actually, one of the world's largest auto manufacturers, starting to repurpose offer relational technologies, combining that with net new capabilities, powering things like marketing research applications. In this case, the team had no previous familiarity with, quote, unquote, NoSQL technologies, but because of the SQL bridge that we've enabled, you know, they can get into and enjoy all the benefits of Couchbase. And so the combination of being able to service the relational data model, but also open up all the power and flexibility and agility that comes with, you know, the NoSQL engine, and to do that in a single form factor, allows us, with the addition of asset-based transactions that we've been in market with for a long time, to again become that full system of record and what we say, increase the density of the application that we support. You layer in couch-based Capella, and now not only are we managing all aspects of the you know, the database technology, but the underlying, you know, platform and infrastructure as a service. So you can see how that, you know, increases our reach, increases our wallet share, but, you know, most importantly, able to satisfy customer demand for, you know, net new and replatformed applications.
spk04: Great. Just a quick follow-up from me. You mentioned a couple, some expenses shifting from 3Q into 4Q. Can you kind of update us on hiring efforts and how that's tracked relative to plan? And as you look into next year, when you think about some of the go-to-market investments that you're making, whether it's in Capella or quota capacity on the direct side of the fence, can you just kind of give us a sense as to what top priorities are for investment and how you're thinking about the pace of quota additions in the next year?
spk02: Yeah, good question, Dan. Yeah, I think headcount hiring is, the headcount is where we expect it to be. We're on track. Hiring, as you probably have heard universally, is remaining challenging. We're managing through it. So we are tracking where we want to be for headcount. We're obviously continuing to aggressively invest in both the R&D side of the house as well as sales and marketing, and you'll continue to see that as we go into Q4 and into next year, purely from a capacity quota carrying, we tend to do most of our hiring in Q4 and Q1 as we ramp for next year. And we're on track to do that again this year, but we feel very comfortable where we are from a headcount and sales capacity perspective at this point.
spk03: And Dan, one of the things that we talk a lot about is field capacity. So it's not just quota carriers, but ensuring that those quota carriers have all of the support they need across the company to make our customers successful. Everything from SE teams to services teams, cloud specialists, customer success, more investment on the partner side. What we think about first is how do we get to and support our customers and then ensure that we have the appropriate investments to make sure that we're showing up as a true business partner. So we take a very balanced approach. We study this maniacally. We understand the ratios of those resources that we need and everything from our largest companies, G2Ks, and we're obviously going to have a different model for you know, the buy-from motion and really being mindful about the work to be done and the resources that we need to, you know, to put in place in addition to, you know, continued aggressive investment on the innovation side. And we put those two things together and, you know, good things happen.
spk04: Great. Congrats on the quarter and thanks again. Thanks, Dan.
spk05: Thank you. And at this time, I'd like to turn the call back over to Matt Cain for closing remarks. Sir?
spk03: Great. Thanks again, everyone, for joining us today. I just want to reiterate how excited I am about the future of Couchbase. With the continued innovation on our leading core platform, our ongoing strength in our mobile and edge portfolio, the launch of the fully hosted Couchbase Capella, recent large customer wins, and continued execution of our land and explode motion, We're well positioned for acceleration. We're looking forward to keeping you posted on our progress in the quarter ahead. Thank you very much.
spk05: This concludes today's conference call. Thank you for participating. You may now disconnect.
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