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spk04: Greetings and welcome to the CouchBase first quarter fiscal 2024 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Edward Parker, Head of Investor Relations. Thank you, Mr. Parker. You may begin.
spk01: Good afternoon, and welcome to CouchBase's first quarter 2024 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me are CouchBase's Chair, President and CEO, Matt Cain, and CFO, Greg Henry. Today's call will contain forward-looking statements, which include statements concerning financial and business trends and strategies, market size, and 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 discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today's press release and our most recent annual report on Form 10-K, our quarterly report on Form 10-Q, filed with the SEC. During the call, we will also discuss certain non-GAAP financial measures which are not prepared in accordance with generally accepted accounting principles. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, as well as how we define these metrics and other metrics, is included in our earnings press releases, which are available on our investor relations website. With that, let me turn the call over to Matt.
spk02: Thank you, Edward, and good afternoon, everyone. On today's call, Greg and I will provide details on our first quarter results, as well as our second quarter and full year fiscal 2024 guidance. I'll start off with a few highlights of our Q1 financial results. Couchbase delivered a strong quarter, beating our guidance across all metrics. I'm pleased with the team's execution on our strategy to deliver top line momentum while outperforming on profitability, all against a difficult economic environment. Total annual recurring revenue, or ARR, was $172.2 million, up 23% year-over-year. Revenue in Q1 was $41 million, up 18% year-over-year. Our non-GAAP gross margin remains best in class at 86.4%. Non-GAAP operating loss was 12.9 million, and non-GAAP operating margin was five percentage points above the midpoint of our implied guidance range, demonstrating our continued operating expense discipline and focus on driving leverage in our model. I'm proud of how the business is performing despite the macro environment, and I believe we are more strategically aligned than ever before. Indeed, while there are external factors outside of our control, we continue to focus on what we can control. Innovating and investing for an exciting future while placing increased rigor on our expense discipline. Recall that last quarter, we laid out our key priorities for fiscal 2024. Focus on top line growth, increase the mix of Capella, drive further sales and marketing efficiency, and accelerate the pace of leverage in our model. I'll comment on Capella and our go-to-market progress, and Greg will provide more details on the impact they're having on our growth and leverage results. Starting with Capella, our R&D team is rapidly innovating to enhance our offering, reduce barriers to adoption, and deliver even more value for customers. Last week, we announced our newest release of Capella, which will be accessible by the popular developer platform Netlify and features a new Visual Studio Code extension. This release makes it easier for developers and development teams to build modern applications on Capella. We also extended Capella's enterprise features and deployability, including new time series data capabilities to support a broader set of use cases. Looking forward, we will continue to focus our product innovation towards making Capella more accessible for customers and on improving the developer experience, all while delivering the enterprise-grade capabilities that have been the core of our DNA. In addition to Capella innovation, we continue to invest in initiatives that drive developer adoption and more efficiently drive growth. These are enabling users to discover the power of Couchbase sooner and are accelerating product-led growth for both new and existing customers. As a result of our efforts, we're enjoying higher engagement and visibility at more developer meetups and conferences, increased content consumption on a revamped developer website, and valuable feedback from some of our most strategic customers at developer workshops. Customers are selecting Capella for their long-term cloud modernization strategies due to its performance, speed, scalability, and flexibility advantages. Capella's best-in-class TCO and unique value proposition are especially important differentiators for cost-conscious customers during times like this. On the go-to-market side, we continue to create further sales and marketing efficiency by driving ongoing operational improvements and investing in our partner ecosystem. Last month, we announced the availability of Capella on Microsoft Azure Marketplace, further simplifying the process for customers to adopt Capella and deploy applications on their cloud of choice. We are excited about the opportunity for our Azure partnership to accelerate the adoption of Capella and bring the power of Couchbase to more organizations. Also on the partnership front, we are building on the momentum of our recently enhanced ISV partner program in conjunction with our expanded relationship with AWS through the launch of our ISV Starter Factory. This program supports ISVs with additional tools and resources to build and modernize their applications with Capella on AWS, reducing complexity and making it easier for organizations to modernize and migrate their applications. We remain closely aligned with AWS and are excited to participate in an increasing number of go-to-market activities with them. These include joint asset creation, developer engagement, and AWS summits around the world. we will continue to evolve and broaden our partner ecosystem in order to help organizations accelerate their application development journey and grow our reach in the market. Now, turning to wins from the quarter, I am pleased with the breadth of our customer activity across a broad range of industries, including technology, e-commerce, healthcare, and travel. Starting with Capella, we're seeing increasing engagement and uptake of our as a service offering. During the quarter, we crossed a key milestone with the number of Capella customers now in the triple digits growing dramatically year over year. Some exciting new wins included a fast growing pet health and wellness company, a next gen real estate technology company, and a revenue cycle management software company. We also continue to see existing customers migrating to Capella. a Fortune 500 energy customer that leverages Couchbase for its main field application decided to migrate a meaningful portion of its estate to Capella. The six-figure deal was one of our largest Capella deals in the quarter, demonstrating how our large enterprise customers can leverage the full capabilities of Couchbase while enjoying the greater flexibility, efficiency, and TCO inherent to our on-demand offering. A Capella expansion during the quarter came from Public, an Israeli-based online media company which uses Couchbase to power its indexing and query for its search engine. As Public continues to scale its business, it's expanding its investment in Capella because they see compelling cost efficiencies compared to competitor solutions. On the enterprise front, we want to spotlight LinkedIn, who serves over 1.4 million profiles per second at its peak. They recently published an article outlining how their existing open source platform could no longer address the loads on their storage infrastructure, which was doubling every year. LinkedIn's selection of Couchbase as a centralized storage tier cache resulted in more than a 60% reduction entail latencies and trim the cost to serve by over 10% annually. Now, turning to some thoughts on the near-term environment. As I had said before, there are things we can control and things we cannot control. We were prepared for both heading into Q1, and the quarter played out largely as we expected. One variable we, of course, cannot control is the macro environment. As we discussed last quarter and as you have been hearing from many of our technology peers, the uncertainty and volatility continues to present headwinds for IT spending. We're seeing longer deal cycles, extra layers of scrutiny and approval, and customers electing to buy in smaller increments. These trends persisted through the end of the quarter, and I am extremely pleased with our ability to navigate these headwinds. At the same time, we feel good about what we can control, which includes driving operational efficiency while preparing for the future by building our field capacity and pipeline. We're committed to improving our profitability and, if necessary, have the right levers to find further leverage in our model and react accordingly. That said, demand indicators remain strong, and we continue to see a healthy pipeline of deals and interest in our cloud database platform. The big secular trends of digital transformation, acceleration of the cloud and innovation at the edge are still in our favor. I'd be remiss if I didn't mention the topic dominating everyone's minds. Let me spend a moment touching on how the fast-moving wave of AI-driven applications will power, if not accelerate, the secular tailwinds that offer specific opportunities aligned with our strengths. At Couchbase, we're exploring a wide range of initiatives, both internally and externally, to leverage AI to increase efficiencies across various aspects of our business. Some examples of this include research, generating tests and test data for code, exploring how generative AI can drive developer productivity and adoption of Capella, and making our platform more operationally efficient. And while the benefits for Couchbase specifically and the industry more broadly are real and exciting, we believe the implications for our business and mission are more profound than increasing productivity and efficiency alone. Consider the following. The processing of unstructured data in real time is becoming a necessity. Modern applications require predictive insights and real-time decision-making for personalization. And the models are moving closer to the data for improved control and faster time to processing. This series of events collides when enterprises who are building AI-driven insights into their next generation applications leverage AI to run private models. It's at this point where enterprise will require the combination of a high performance operational database with analytical functionality, making this an exciting opportunity for Couchbase. Much of the promise of generative AI is only recently being understood, but these course concepts will be familiar to many of you who have been following Couchbase because they are all foundational elements of how we are architected. Clearly there's more to do to capitalize on this opportunity, but you've often heard me say the Couchbase has been built for this moment, and I think that's as true today as it's ever been. In closing, we have a solid start to the year, and the secular drivers behind our business remain strong. We're making progress on our initiatives, are committed to focusing on what we can control, and are nimble in navigating areas we cannot control. Before handing the call over to Greg, I want to emphasize one of our core values that I've repeated many times. At Couchbase, we attack hard problems driven by customer outcomes. With that, I'll hand the call over to Greg to walk you through our results in more detail. Greg?
spk11: Thanks, Matt, and thanks, everyone, for joining us. We had another strong quarter as we beat guidance across all key metrics. Despite the elevated level of deal scrutiny that Matt talked about, we are pleased with our execution our dedication to delivering value to our customers, and our ability to navigate the environment while driving healthy outperformance in our operating loss guidance. I'll now walk you through our first quarter in more detail before providing our guidance for the second quarter and full year. Total annual recurring revenue, or ARR, was $172.2 million at the end of the first quarter, representing 23% growth year over year. Revenue for the first quarter was $41 million, an increase of 18% year over year. Subscription revenue for the first quarter was $38.5 million, an increase of 21% year over year. Professional services revenue for the first quarter was $2.5 million, a decline of 15% year over year, consistent with our expectations following outsized strength in professional services in fiscal 2023. We continue to expect the contribution as a percentage of revenue in fiscal 2024 to be slightly below recent levels. Our ARR per customer performance in the first quarter was $254,000, up from $242,000 in the fourth quarter, and indicative of the growing wallet share we have with large customers. As a reminder, as Capella continues to grow in revenue contribution, we expect ARR per customer growth could moderate or decline in future quarters. Our dollar-based net retention rate continues to exceed 115%, driven by strong renewal and upsell activity across our base of larger enterprise customers. We exited the quarter with 679 customers, an increase of four net new customers from the fourth quarter. Our gross customer addition count was consistent with levels we saw in Q1 over the past two years, but we did see some challenges with a handful of smaller mid-market customers who are being impacted by the macroeconomic environment, including some who are no longer in business. That said, we're encouraged by the strength of our new logo pipeline and remain confident in our ability to reliably expand logos as evidenced by our consistent ARR growth and our strong retention metrics against a more challenging spending environment. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, results of operations, and share count are on a non-GAAP basis. In Q1, our gross margin remains strong at 86.4%. This compares to a gross margin of 87.3% a year ago and 86.3% last quarter. As a reminder, as Capella Mix increases, we expect gross margin will decline over time. Turning to expenses, we continue to invest to capture the generational opportunity we see in front of us, but are focused on improving the efficiency of our growth. We are pleased with our execution on this front as our expense discipline and early benefits from cost savings initiatives resulted in us outperforming our operating loss outlook. Our sales and marketing expenses for Q1 were $29.2 million, or 71% of revenue, compared to $24.8 million, or 71% of revenue a year ago. Q1 included costs associated with our annual sales kickoff event, which was held in person this year compared to last year's virtual format. Research and development expenses for Q1 were $12.5 million for 31% of revenue compared to $12.5 million or 36% of revenue a year ago. We continue to thoughtfully invest in our as-a-service offering as well as in additional features to bolster our platform. General and administrative expenses for Q1 were $6.7 million for 16% of total revenue compared to $6.5 million for 19% of revenue a year ago. Non-GAAP operating loss for Q1 was $12.9 million for a negative 32% operating margin, five percentage points higher than the midpoint of our guidance, compared to an operating loss of $13.4 million for a negative 38% operating margin a year ago. Non-GAAP net loss attributable to common stockholders for Q1 was $12.3 million for negative 27 cents per share. Turning to the balance sheet and cash flow statements. We ended Q1 with $163.6 million in cash, cash equivalents, and short-term investments. We remain well capitalized to execute against our long-term growth strategy. Our remaining performance obligation, or RPO, totaled $165.6 million at the end of Q1, a decrease of 2% year-over-year. We expect to recognize approximately 68% or $112.1 million of total RPO as revenue over the next 12 months which represents 11% year-over-year growth. As we have noted, our total RPO performance has been impacted by year-over-year contraction of billing terms as some customers are electing shorter-term contracts due to the macro uncertainty and because our sales plans no longer incentivize multi-year contracts as aggressively. Operating cash flow for Q1 was negative $7.2 million, and free cash flow was negative $8.5 million, or negative 21% free cash flow margins. We are pleased with the progress we have made in our free cash flow profile and remain committed to driving further improvement. Now, I will provide guidance for Q2 and the full year of fiscal 2024. As Matt discussed, we continue to see solid momentum and our pipeline remains strong. Furthermore, we anticipate that our investments in our product capabilities, partner ecosystem, and go-to-market motion will complement our momentum in fiscal 2024. That said, we are mindful of the macro headwinds and continue to carefully monitor their impact on our business, including bookings, pipeline conversion, retention and expansion rates, deal sizes, sales cycles, logo acquisition, and sales productivity. As such, our outlook maintains an elevated degree of conservatism across all these metrics to account for the uncertainty as well as the lack of visibility into how the macro may impact consumption trends for our emerging as-a-service offerings. With these factors in mind, for the second quarter of fiscal 2024, we expect total revenue in the range of $41.2 million to $41.8 million, or a year-over-year growth of 4% at the midpoint. We anticipate ARR in the range of $176 million to $179 million, which represents 22% growth year-over-year at the midpoint. We expect a non-GAAP operating loss in the range of negative 10.9 million to negative $10.1 million. For the full year of fiscal 2024, we are raising our ARR outlook while maintaining our revenue guidance and decreasing our operating loss. We expect total revenue in the range of $171.7 million to $174.7 million for a year-over-year growth of 12% at the midpoint. As a reminder, we've historically seen variability with respect to the implementation timing of certain enterprise deals, which impacts our revenue visibility, along with new or migrated Capella customers. We therefore continue to view ARR as a better indicator than revenue of the strength of our business. We expect ARR in the range of 191.5 million to $195.5 million, or 18% growth of the midpoint. And finally, we expect a non-GAAP operating loss in the range of negative 43 million to negative $39 million. With that, Matt and I are happy to take your questions. Operator?
spk04: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Thank you. And our first question comes from Sanjit Singh with Morgan Stanley. Please proceed with your question.
spk05: Thank you for taking the questions, and congrats on a nice start to the year in terms of the ARR growth. I wanted to start on my first question with guidance, and I sort of look at the 23% ARR growth that you did this quarter on, I think, a net UAR basis was even a little bit better than that. If I look at sort of the back half of the year in terms of what's implied, implies, I think, flattish or actually down year-over-year net new AR growth. And so just, you know, in terms of, you know, the expectations coming into this year and what you saw in Q1, I just want to get a sense of are you seeing the year sort of come in as you expected, meaning the underlying assumptions are largely holding, or do you see incremental deterioration versus what you guided to approximately 90 days ago?
spk02: Hey, Sanjit, this is Matt. I'll provide some opening commentary and then hand it over to Greg. Look, as we stepped into the year, I think we were particularly careful on articulating our perspective of things that we can control versus things that we can't. And as we mentioned in the remarks, that played out largely as we expected in Q1. We continue to be excited about the progress that we're making operationally, everything from Capella to go to market. At the same time, we're cognizant of the fact that the macroeconomic situation persists, and we wanted to be responsible with that as we think about, you know, the rest of the year. So I would say at a very high level, things are progressing as we anticipated, and Q1 was a nice start to enable us to have the year that we know is possible. There are some specifics around the number, which Greg can give some perspective on.
spk11: Yeah, Sanjeev, thanks. Look, again, we feel very good about Q1 and the overall look. We have, you know, relatively good visibility, particularly into Q2. You know, some deals obviously have closed now, and we see the renewals expansion and some of the consumption trending for Q2. The pipeline remains healthy. And so, you know, for the full year, we're pleased that we were able to raise the guidance by the beat in Q1. And, you know, we see that we still want to maintain an elevated level of conservatism. And as we've always stated, we establish guidance to, at a minimum, deliver that, if not try to overachieve as we go through the year. So that's how we sort of maintain the posture. But as Matt said, we're pleased and, you know, we think, you know, things are off to a good start.
spk05: Yeah, that's helpful, Keller. And then, you know, the LinkedIn callout was certainly a nice, you know, feather in the cap type win. Any sort of context you could give us, you know, were they a couch-based sort of customer before they, you know, started to replace that core application that was driving all those users? What was sort of the evolution to get them to where they are today? Yeah.
spk02: Yeah, Sanjit, that was an existing customer who's been enjoying the value proposition of Couchbase for multiple applications aligned with their next generation application modernization strategy. And then further leaning into the capabilities that are offered with the managed service, totally aligned with the value proposition that we've been articulating. And as you can imagine, we're having conversations with most, if not all of our existing customers on the eventuality of taking advantage for Capella for their entire estate or a subset of it.
spk05: Very exciting. Thanks, Matt. I appreciate the call.
spk04: Thank you. And our next question is from Rob Oliver with Baird. Please proceed with your question.
spk10: Great. Hey, thanks, guys. Good afternoon. Matt, I had one for you, and then Greg had a follow-up for you as well. Matt, first off, I wanted to dive a little bit deeper into that oil and gas win that you guys had, which was a Capella conversion. Obviously, an industry that you guys have done really well in. And just wondering, you know, what some of the template, what some of the decision points were for that customer along the way. And if you can help us understand, like, what got them over the hump on the move to Capella. And if this is the sort of a, you know, lighthouse went on Capella that could become a template for others within that industry. And then I had a quick follow up.
spk02: Sure. So look, this has been a customer for us for some time, and one of the capabilities that they've been taking advantage of is our mobile capability in addition to our core enterprise feature set. We've continued to grow the account over several years and have been having discussions with them about moving into Capella. I think ultimately, Rob, it became the compelling event for them where they were able to not only offload the database management and save money, but also optimize internal resources. And there's almost an insatiable demand in our enterprise customers to modernize and build new applications, but they often run into challenges in having the people and resources to do that. Capella helps with that very thing. This is a blueprint that we're using with many other customers, and we're very carefully engaging with them on the right time for them to move, again, either their entire a state or others. But look, the fact that we've architected the solution to be the full power of Couchbase with the additional value proposition of better TCO, better internal productivity, as you can imagine, that value proposition is resonating quite a bit with current environment and the foreseeable future with the application dynamics that I mentioned.
spk10: Great. That's helpful. Thank you very much. And then, Greg, just one for you, just, you know, contemplating the full year guide. You know, you called out some of that. I think it was kind of low to mid-range customer churn that happened through the quarter. Just, you know, thinking about the full year guide, you know, can you just help us get comfortable with, you know, how that might progress throughout the year? Are we through most of that? You know, you guys kind of scrubbed that portion of the customer base, you know, where did you land in the end? Thank you.
spk11: Yeah. Hey, Rob. Appreciate the question. Yeah, I think that's the case. I think we see the churn on the customers as anomalous this quarter. Like I said, like we said in the prepared remarks, the growth acquisitions were consistent with historical Q1s. The losses we had were driven by a handful of smaller challenge customers and Several of them are going out of business. We had no competitive losses. And the other thing I would say about the logos is the average loss logo was the second lowest we've seen in the last three years. So while you see the count a lot of times that we share with you, the dollars also matter. And we actually had a reasonable dollar new logo. So in terms of how it's going to play out for the year, it's going to, it's not going to materially impact the year per se, and it's already contemplated in the guide. So I think we're, you know, we're comfortable where that landed.
spk10: Okay. Super helpful caller. Thanks guys. Appreciate it. Thank you.
spk04: Thank you. And our next question is from Matt Hedberg with RBC Capital Markets. Please proceed with your question. Hi, this is Anisha from Matt Hedberg.
spk03: Thanks for taking my question here. It's good to see the improved leverage in the model. Can you remind us how you're thinking about the path to break-even profitability and what are the drivers to get there?
spk11: Yeah, thanks for the question. Yeah, again, we're pleased that we were able to continue to demonstrate, you know, leverage in the model and efficiencies. And as we stated before in some of our other discussions, that we are committed to continuing to do that. We haven't given a long-term range outlook in terms of cash breakeven or profitability. And, you know, when we do our investor day, we plan on doing that. But we certainly are committed to, you know, continuing to do that. And hopefully we saw that we delivered a beat in the quarter, the flow through of, you know, one of the one and a half million dollars for the full year, but we also, in that $1 million flow-through, we also took another million dollars of FX headwind against expenses as well. So we're feeling operationally pretty good about the leverage and efficiency that we're continuing to gain, and we're just going to keep marching towards profitability here.
spk03: Got it. And then one more from me. Now that Capella is available across all three hyperscalers, Can you talk more about the traction you're seeing there, and is there a way to quantify the new business you're seeing coming from the three marketplaces versus the more traditional go-to-market channels? Thanks.
spk02: As it pertains to the hyperscalers, a big part of our value proposition is allowing our customers to run applications anywhere from cloud to edge, and that consists of their own data centers inclusive of instances where they have deployments in any one of the big hyperscalers. And oftentimes our customers have a multi-cloud approach where they're not totally dependent on a single hyperscaler, but combine that with Couchbase with the ability to do hybrid deployments and run applications all the way out to the edge, inclusive of mobile devices, which is a big part of our differentiator. So we were excited to round out the portfolio with the addition of Azure, which has been part of our plan roadmap. And then as we indicated with commentary specific to AWS, we're now able to go after go-to-market partnerships and programs with the other providers where we have solutions in market. quite frankly, to allow customers total freedom of choice and movement in and between the cloud solution. So it's a big part of our value proposition. We've thought about the market that way for some time, even before we had Capella in market. And so I think it's an extension of how we think about supporting our customers and being the cloud database for modern applications. As far as the breakdown on numbers, that's great. not something we provide. Greg, I don't know if you have any more.
spk11: Yeah, I mean, as Matt stated, we're working with all the hyperscalers, both on Capella and through their marketplaces. So we continue to see good traction all around, but we haven't given specifics on, you know, by vendor.
spk03: Got it. Thank you.
spk11: Thank you.
spk04: Thank you. And our next question is from Cass with Goldman Sachs. Please proceed with your question.
spk06: Hello, thank you very much. Nice quarter. I just want to understand the consumption patterns you're seeing with Capella. Not sure if we quantified how it is contributing to revenue, but since you've been at it for a couple of years, you probably have enough cohort analysis to conclude some patterns. So curious how much more visibility you're getting into the consumption model, granted that consumption model, it's a relative subscription. It's not that visible. But as you study the cohorts, what are your conclusions? And what are the things that you're doing from a contracting standpoint to ensure that you have some level of visibility as Capella contracts continue to ramp? Thank you so much.
spk11: Hey, Cash. Thanks for the question. Yeah, we are starting to get, obviously, some insights into the Capella consumption trends, given that we've been at it for, like you said, a year and a half or so now. And Look, overall, we can see is once customers begin their journey on Capella, they tend to consume at a very healthy rate. And a lot of them, you know, consume at a rate faster than they had originally anticipated. We're seeing, you know, some of our customers that are having to buy at least once or sometimes multiple times before they get to their first anniversary from a consumption. And look, we have monitoring, obviously, very closely of the consumption trends by customer We can see it all real time. So we know whether customers are under-consuming and we can go help them get up and running faster. We can see where they're over-consuming. We can obviously spend time and make sure they're over-consuming for the right reasons and they're not going to get surprised. So we are seeing healthy trends there. And I think the theory is starting to play out, although we don't share the metric yet, but we do believe that net retention rate will probably be greater in our Capella customer cohort than it is for the non-Capella customer cohort.
spk06: And that should also result in structural lift to the growth rate of the company as Capella becomes a larger part of the business, obviously. And if that's the case, if you agree with that, how are you scaling your expenses alongside the increase in consumption so you can still achieve the proper targets that you probably have somewhere in the not-too-long term? Thank you so much, and that's it for me. Yep.
spk11: Look, we're, as we've talked about, even starting late last year and through current, we are, we are, you know, focused on, you know, profitability rule 40 efficiency. So we are absolutely monitoring, you know, the top line and the pace at which it's growing and we're moderating the expenses to, to go, to go with it so that we can continue to gain that leverage and, and efficiency as we go. So we will be monitoring it closely. Obviously we've talked, um, you know, for a while now that we've, you know, really shifted all of our focus and resources really around Capella from a development perspective. So we are all in on Capella there, and we're going to try to continue to go as fast as we can. But, again, keeping in mind that we are, you know, focused on, you know, leverage and efficiency at the same time.
spk04: Thank you. And our next question is from Ramo Lenshow with Barclays. Please proceed with your question.
spk08: Hey, thank you. Congrats from me as well. The quick question on Capella, do you see any patterns in terms of use cases that are emerging in terms of some clients kind of particularly focusing on certain areas? And what do you see there in terms of like uh, test development and test of development on, uh, Capella versus kind of production workloads. And then I had to follow up for it. Correct. Thank you.
spk02: Rhymo a dynamic that I would bring attention to is kind of two sides of the spectrum. As we think about new Capella customers to Couchbase and on the one end, you have new logos or customers that are brand new to Couchbase in general, and are signing up with Capella. as their entree to the way to get access to the database. On the other side, you have some of our largest customers that are evaluating the eventual migration of existing applications into the managed service. And I think the dynamics of how a customer adopts varies pretty significantly from some of the smallest deals that we see in new logo acquisition. We just want to get people started and enjoy the growth that we're seeing in Capella and And on the other side where people are, you know, our largest customers are going to be pretty specific and, you know, probably run it through more robust testing and proof of concept before they eventually move into Capella. And I would say as we're driving the transformation to cloud first, that's probably a more important dynamic than any specific vertical or use case where quite frankly, you know, we're very fortunate that our platform is, everything from financial services to next-gen healthcare and gaming and everything in between. So I wouldn't say the Capella consumption model is changing the quote-unquote vertical dynamic. More so, how are customers thinking about getting into the managed offering? And again, depending on which side of the spectrum, it can be a different on-ramp, and we're set up operationally to support both.
spk08: Perfect. Makes sense. Thank you. And then, Greg, one follow-up. As the new year started, have there been any changes in terms of how you're selling, in terms of incentive structure to get maybe more Capello in the mix? How are you handling that transition, and does that create headwinds for you that we should be aware of? Thank you.
spk11: Yeah, hey, Ramo. Yeah, I think if I was going to comment sort of at a high level in terms of like sales compensation this year, we clearly made more shift to focus on Capella. That's what we're trying to drive. So there is a, you know, more incentive on Capella this year than there even was last year. We're still focused on obviously growing the business and new business, but clearly Capella is the, you know, is the focus and where we're, you know, looking for the sales team to be motivated to go sell. Thank you.
spk04: Thank you. And our next question is from Howard Ma with Guggenheim Securities. Please proceed with your question.
spk12: Thank you. And thanks for sharing the triple-digit Capella customer set. Can you reconcile that number with the limited number of net new customer ads? I think it implies that I mean, if you use triple digit, if you use like 100, it implies that at least 15% of your existing server customers are now Capella customers. But can you comment on the pace of growth of these Capella customers since Capella has been available? And so I guess that's one part, the pace of growth. And then looking ahead, should we expect a meaningful acceleration in net new Capella customers? Or will, for like the foreseeable future, you know, for the next year or so, will most of the Capella contribution come from the existing customer base?
spk11: Yeah, hey, Howard. Thanks for the question. Yeah, so very pleased to reach that mark. And you're right, if you take the least triple digit, you'd get 15% of our customer set. So we align there. And I would just say that as a reminder, we can have customers that have both Capella and non-Capella. And in some cases, in a lot of cases now, there's both. So we still see very healthy Capella customer acquisition. So we're seeing that for sure. I think the other thing to consider is when you see the Capella customer count grow, it can grow through migration of existing customers as well. It doesn't have to all be new acquisition. So, you know, again, healthy on the Capella side. In fact, you know, Look, for Capella migrations, we did 2X the migrations in Q1 this year versus Q1 last year. So we feel good about migrating customers over, and we also feel good about the pace of the ads that we're delivering as well.
spk02: Howard, if I could pile on, I think the net number in Q1 is a combination of, you know, Capella and enterprise, and it was really sort of two different stories there. So we have very high expectations for Capella, and it's playing out largely as we expected. To be frank, this is an area of the business that we've been pretty transparent that we know we can do better, and Capella will be the biggest driver of that. And so we continue to expect that as we move forward with the business. To your question on percentage of customers, if I go back to that dynamic of big existing customers that are migrating versus net new logos. I think we're going to see higher number of customers on the new logos faster as we get new logos that start with Capella. But the dollar contribution is going to be more correlated with the timing at which our large customers decide to move into Capella. what you can't see reflected in the numbers are the conversations that we're having with those large customers. And I believe that it is an eventuality. At the same time, we don't want to try to push our customers before, you know, they're ready and they have resources lined up and determine that it's the right, you know, compelling event for them. And so it's really important for us as these customers are making two, three, five, 10 year decisions that we work alongside of them, particularly in current economic times. And we're more focused on, you know, the mid- to long-term prospects of the business than artificially trying to get, you know, quickly over some threshold of percentage of economics. So I'd say those are dynamics that we're very aware of and managing, and we'll share, you know, more of that as we go forward.
spk12: Okay, great. Thanks for adding that color, Matt, onto what Greg was explaining. And, Greg, just a quick follow-up. To be clear on guidance – I think last quarter you said that you're baking in a heightened level of conservatism into guidance relative to what you're actually seeing. Could you just clarify if that's still the case? Thank you.
spk11: Yeah, Howard, it's quite similar to be perfectly honest. Obviously, we've just got one quarter under our belt and we've, you know, seen the results from Q1. So I think, you know, I think in the prepared remarks, we say we're continuing to have an elevated level of conservatism as we go through the year because we're very cognizant of what's happening out in the world today. And we want to be, you know, in a position where, as I stated earlier, we can at a minimum meet the guidance, if not beat it as we go forward. So I think things are, you know, continuing as we had stated a quarter ago.
spk04: Thank you. And our next question is from Rudy Kessinger with... Great.
spk09: Thanks for taking my questions. Greg, I want to start with you and double-click on the customer turn commentary. I think you said it was on a dollar basis. You said it was, I think, the second lowest in the last few years. Could you just clarify what comment you had thrown in there? And then just any other color you could share. Were these smaller comments? Enterprises, were they mid-market customers? Any verticals in specific? Any regional banks to call out that churned? I know you said some that went out of business. Just any more color you can give on the customer churn.
spk11: Yep, no problem, Rudy. So first of all, there were no regional banks part of this. And what I stated before was if I looked at the average loss, dollar loss per customer, it was the second lowest we've seen in three years. So they were very small on the SMB side of things, customers. And as I said, they were many that were quite honestly challenged with what's going on in the macro today that either put them out of business or were on a path to go out of business. And so that was the churn piece, but the dollar component of it was relatively low, which which is why I was referencing that while we share the count with you, that doesn't always tell you the whole picture and that the net dollar new logo for the quarter was actually pretty reasonable, but the count was impacted by those terms.
spk09: Okay, that's helpful. And then, Matt, you mentioned, say, in this call, and you've mentioned it in our past conversations, potentially holding an investor day at some point in the future. Investors that I speak with are certainly looking for some kind of target date on operating breakeven or free cash flow breakeven that they can hang their hat on. And I certainly understand there might be some hesitancy to give some kind of intermediate long-term targets when you're operating in a volatile macro as we are today. But just have you put any more thought to that? And when could we expect an investor day or getting some of those longer-term targets for unprofitability?
spk11: Yeah, hey, Rudy, it's Greg. I'll take this one. Look, yeah, we absolutely are still considering doing an investor day later this year. To your point on the macro, we want to really see where this is going to go, but we fully intend when we do the investor day that we will lay out Capella metrics, a long-term model, path of profitability. We're obviously trying to share some of that as we go, which is why we disclosed today about hitting the triple digits on the Capella customer count. And hopefully, you know, we're seeing that the path to profitability has begun in terms of our ability to, you know, start getting leverage in the model and generating some efficiency and letting that flow through the bottom line. So all is good. And we, like I said, we still will plan on doing an investor day. And as soon as we, you know, land on a date, we certainly will let you know.
spk04: Thank you. And our next question is from Taz Kuchagi with Wedbush Securities. Please proceed with your question.
spk07: Hey, guys. Hi. Thanks for taking my question. I have a question on the impact. When a customer moves from on-prem to Capella, you mentioned that you're seeing a lot of success on customers moving from on-prem to Capella. Can you, I guess, help us understand what the uptake in customer spend is? I'm assuming Capella is obviously a higher price point. But when a customer goes from an on-prem offering to Capella, let's say like-for-like capacity or like-for-like, I guess, usage, what is the kind of uptake you see in customer spend?
spk11: Yeah, hey, Taz. It's Greg. Appreciate the question. Yeah, I think how we stated it before is if a customer was spending a dollar on self-managed couch-based enterprise and they moved to Capella, they would go to like $1.50 to $2 depending on which flavor of Capella they chose. So that's sort of the uplift. And that's assuming, again, like for like, no additional volume or consumption, just pure moving over.
spk07: Got it. Very helpful. And just one follow-up. Your revenue, any comment on linearity for revenues? Because your revenue looks like it was better than usual seasonality. Usually, I believe Q1 revenues are down versus Q4. This quarter, we saw that improve. I think your Q1 revenues were better than your subscription revenues in Q1. this quarter were better than last quarter. Any comment on linearity? Was it, you know, a more front-end lower quarter? How did the linearity play out versus other quarters?
spk11: Yeah, look, we would expect, you know, subscription revenue will continue to grow over time. I think there is obviously timing involved with that, in particular around the non-Capella piece and the way the accounting is for, you know, when you start the subscription term, with the accounting rules. So some of that can drive some of the timing difference, but nonetheless, we expect it to continue to grow. Again, we feel very good about the performance in Q1 and that we're maintaining the guidance for the full year. So I think it really has to do a lot of it with the timing of the start dates. And that's why we've talked about in the past about ARR being the measure we think is more important because it can cut through some of that noise. But you will see some, again, some timing differences around revenue recognition based on how the rules work.
spk07: Just one last point if I may. Services revenue is a little bit lighter this quarter, I think, down year over year. What are we expecting for the rest of the year? Should that uptake, or is there a reason why they were a little bit light this quarter?
spk11: Yeah, it's a good question. We tried to, you know, share with people that last year was an outperformance on service, we had a healthy backlog and a higher than normal customer demand to deliver services. So we had a performance last year that this year would be would be a down year just because we can't read, we're not going to repeat that. And that, you know, the mix of services on our business was around 8% last last year, and we'd expect it to be even maybe potentially a little bit below normal, which is around 6%. So maybe 5% for the year is a is the way you should think about it, but you should still continue to expect to see that be a headwind for us the rest of the year. Got it. Thank you very much. Thanks, Ted.
spk04: Thank you. There are no further questions at this time. I would like to turn the floor back over to CEO and Chairman Matt Cain for closing comments.
spk02: Thanks, Operator. To recap, we had a strong quarter and start to the year. We remain excited about our opportunity with Capella due to some very big trends in our favor like digital transformation, acceleration of the cloud, innovation at the edge, and AI. We're cognizant of the macro environment and are sharply focused on execution during times like this, while also building for what we believe will be a very exciting future. Thank you all for joining us, and we look forward to speaking with you next quarter.
spk04: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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