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spk14: Thank you for joining us today for GitLab's third quarter of fiscal year 2024 financial results presentation. GitLab's co-founder and CEO, Sid Sabrandi, and GitLab's chief financial officer, Brian Robbins, will provide commentary on the quarter and fiscal year. Please note, we will be opening up the call for panelist questions. To ask a question, please use the chat feature and post your questions directly to IR Questions using the dropdown menu. Before we begin, I'll cover the safe harbor statement. During this conference call, we may make forward-looking statements within the meaning of the federal securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risk associated with these forward-looking statements in our business, please refer to our earnings release distributed today in our SEC filings, including our most recent quarterly report on Form 10-Q and our most recent annual report on Form 10-K. Our forward-looking statements are based upon information currently available to us. We caution you to not place undue reliance on forward-looking statements and we undertake no duty or obligation to update or revise any forward-looking statement or to report any future events or circumstances or to reflect the occurrence of unanticipated events. We may also discuss financial performance measures that differ from comparable measures contained in our financial statements prepared in accordance with U.S. GAAP. These non-GAAP measures are not intended to be a substitute for our GAAP results. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release, which along with these reconciliations and additional supplemental information are available at ir.gitlab.com. A replay of today's call will also be posted on ir.gitlab.com. I will now turn the call over to GitLab's co-founder and chief executive officer, Sid Sabrandi.
spk20: Thank you for joining us today. We delivered a strong quarter. Revenue grew 32% year over year, driven by the continued adoption of our DevSecOps platform. GitLab is the only DevSecOps platform that brings together security, compliance and governance, AI, and enterprise agile planning. Enterprises face complexity from all directions in the form of rapidly increasing user expectations, more advanced cyber attacks, and more strict industry regulations. We believe they need GitLab to help them navigate this complexity and realize business value. Our platform improves engineering productivity, reduces software spend. That's why our customers report seeing 7x faster cycle times with GitLab. Today, I'll discuss how we are driving results in three key areas. First, we're adding new security and governance capabilities in our platform. Second, we integrated AI throughout the software development lifecycle. And third, we added an enterprise agile planning offering to make our platform available to non-technical users. Let's start with our security and governance functionality. These are at the heart of our platform and set us apart from the competition. Organizations like Carfax and Lockheed Martin trust GitLab to help them build security and compliance into their workflows. With GitLab, organizations and their engineering teams report that they can catch vulnerabilities earlier in the development process, and compliance leaders can set the right controls and governance frameworks. In contrast, security point solutions can cause friction for developers, With point solutions, developers either have to wait on security teams to identify vulnerabilities, or if they have access to a security scanner to assess their code, they need to manually copy and paste the scanner results back into their development tool. The result is code that isn't scanned at the time it's written. This increases the time required to detect and resolve vulnerabilities. Our platform enables organizations to integrate security directly into the developer workflow. A recent product innovation our customers are excited about is our new security findings workflow extension. This extension enables developers to see and address their security findings directly in their IDE while they work without breaking their flow. Our customers see the value of bringing security and compliance into the same platform where developers work. An example is DoubleVerify, a leading software platform for digital media measurement, data and analytics. DoubleVerify was previously using GitLab Premium alongside several point solutions for the application security needs. They recently upgraded to GitLab Ultimate to bring security findings closer to their developers. Now their developers can identify, learn about, and fix vulnerabilities in the same place where they work without switching applications. Another key differentiator for us in the security and compliance space is GitLab Dedicated, our single-tenant SaaS solution that provides customers with data isolation and residency. With GitLab Dedicated, customers in highly regulated industries could get the benefit of a comprehensive DevSecOps platform while meeting complex and stringent compliance and regulatory requirements. A large telecommunications company in Asia Pacific recently upgraded to GitLab Dedicated to enhance their privacy and compliance capabilities across their software development lifecycle. In Q3, we also launched a new self-service portal where customers can configure and maintain their GitLab Dedicated instances. This product innovation will create a more effective onboarding experience for new customers. Now I'd like to discuss our second topic, which is our unique approach to AI. We already have 14 AI features available to our customers. That's more than any other DevSecOps platform. We continue to innovate. GitLab Duo is our suite of AI-powered DevSecOps workflows that enables customers to boost speed and efficiency without sacrificing privacy, security, and compliance. We have three principles in our AI strategy. First, we're the only platform that integrates AI throughout the entire software development lifecycle. As developers become more effective, we enable security and operations team members to keep pace. Also, developers only spend 25% of their time writing code. AI within DevSecOps should focus on more than just code creation. Second, we are privacy and transparency first in our approach to AI. Our customers are eager to use AI, but they want to do so responsibly. To support them with this, we do not use their code to train the AI models used by other customers. Our privacy first approach is why more than 50% of the Fortune 100 trust GitLab to secure their intellectual property. And third, our AI is powered by a diverse set of models, from technology partners as well as our own AI models. That allows us to select the best AI model for each use case. In Q3, we released the beta of GitLab Duo Vulnerability Summary. This is a cool feature that provides AI generated explanations of security vulnerabilities and suggestions for how to fix them. Another example of our progress is GitLab Duo Code Suggestions, our AI powered code creation feature. It will be generally available in our December product release. We have been hearing from our customers that they are seeing efficiency improvements upwards of 50% with coach suggestions. And finally, we recently announced the beta release of GitLab Duo Chat. With GitLab Duo Chat, users can quickly understand project status, get help with planning and configuration, receive explanations of suggested code, and generate tests, all without contact switching. To start, GitLab Chat is available within the GitLab UI, Web IDE, and VS Code. We plan to add support for more editors in the future. Our approach to AI is resonating with our customers. For example, Amado Gramajo, Vice President of Infrastructure and DevOps at Nasdaq, recently shared his excitement about how GitLab Duo will help Nasdaq protect their intellectual property and stay in line with regulatory mandates. And presenting at this year's Gartner Application Innovation Summit, Bell Kang at NatWest said, GitLab Duo enables our developers to be more productive, efficient, and successful in creating secure code. We're excited to see the benefits of GitLab's AI features across the entire value chain, and even our most seasoned engineers are seeing value. Our next focus area is enterprise agile planning. Our enterprise agile planning offering brings portfolio and project management capabilities into the same platform where engineers work. Organizations already see our enterprise agile planning capabilities as a strong alternative to established tools on the market, like Jira. For example, Iron Mountain, a global information management service provider, was struggling to manage the plugins required to integrate Jira with the rest of their development process. By moving from Jira to GitLab Ultimate, Iron Mountain was able to scale their agile framework to drive more effective collaboration between enterprise IT teams and key stakeholders. Atlassian's decision to stop support for its server offering is making customers reconsider what product they use for enterprise agile planning. We are focused on making it easier for these customers to move to GitLab SaaS and self-managed. We recently launched a new enterprise agile planning SKU. Now, GitLab Ultimate customers can easily bring non-technical users into the platform. Security and compliance, AI and enterprise agile planning strengthen our position as the leader in the DevSecOps platform category. The breadth and depth of our platform across the entire software development lifecycle differentiate us from point solutions and our main competitor, GitHub. Let me give a few examples of why enterprises choose GitLab. First is a leading global financial platform that tried to integrate GitHub with several other DevOps tools. This created complex workflows that require time-consuming maintenance. Now the customer is moving their code repository and CI from GitHub to GitLab, and GitLab was able to replace other point solutions for automation, continuous delivery, and package management as well. With GitLab, the customer is able to reduce costs and centralize their work on a single platform with eight times faster deployments and four times faster feature delivery. Another example is a business networking organization that initially built its software development workflows around GitHub. They began hitting usage limits when running builds and quickly realized that GitHub was not efficient enough to support their growth. They switched to GitLab Premium and saw a 7x increase in the number of pipelines run. They also needed a comprehensive security and compliance solution that GitHub was unable to provide. As a result, the company upgraded to GitLab Ultimate this year to help them build a major new product to serve their rapidly growing customer base. We believe that enterprises need more than a developer platform. They need a full DevSecOps platform that scales and streamline software development workflows while ensuring robust security and compliance. And this was on full display at our DevSecOps World Tour. We recently rounded out this year's 11-Stop World Tour with a final event in Washington, D.C., and each event included a fireside chat where customers like CataFour, Deutsche Telekom, Southwest Airlines, and Splunk shared how they rely on GitLab to improve security, drive efficiency, and accelerate time to market. we created the devops platform category and we continue to set the standard we remain focused on helping enterprises build fast and stay secure with tools that teams love to use we are well positioned to win the estimated 40 billion dollar market opportunity in front of us i'd like to thank all of our customers as well as our partners our team members, community members, and investors for their continued support. And I will now turn it over to Brian Robbins, GitLab's Chief Financial Officer.
spk02: Thank you, Sid. And thank you again for everyone joining us today. Overall, we saw strong performance in the third quarter. Our revenue grew 32% year-over-year, and we delivered over 2,200 basis points of non-GAAP operating margin expansion. I'm pleased to share our first quarter of non-GAAP operating profit. This is a major milestone for us in efficiently scaling the business to address our large market opportunity. At the same time, we continue to make targeted investments in key product areas. These include security and governance, AI, and enterprise agile planning. Looking back at the quarter, I want to share some of the areas we have been closely monitoring. These include sales cycles, win rates, contraction, and ultimate. In comparing Q3 with Q2 of FY24, we've seen overall sales cycles lengthen. During Q3, buying behavior in our enterprise segment stabilized. However, in the mid-market and S&B, we see customers continue to be cautious in the uncertain macro environment. We have adopted our go-to-market approach in this environment to deliver predictable and strong results. In Q3, our win rates have improved, signaling that the value proposition of the DevSecOps platform is resonating in the market. Contraction during Q3 also improved for the third consecutive quarter and is in line with levels from Q3 last year. And finally, we continue to see strong adoption of Ultimate, our top tier. Ultimate represents over 50% of Q3ARR bookings driven by customer wins for security and compliance use cases. Now turn into the numbers. Revenue of $149.7 million this quarter represents an increase of 32% organically from Q3 of the prior year. We ended Q3 with over 8,100 customers with ARR of at least 5,000 compared to over 7,800 customers in the second quarter of FY24. This compares to over 6,400 customers in Q3 of the prior year. This represents a year-over-year growth rate of approximately 26%. Currently, customers with greater than 5,000 in ARR represent approximately 95% of our total ARR. We also measure the performance and growth of our larger customers, who we define as those spending more than 100,000 ARR with us. At the end of third quarter of FY24, we had 874 customers with ARR of at least 100,000 compared to 810 customers in Q2 of FY24. This compares to 638 customers in the third quarter of FY23. This represents a year-over-year growth rate of approximately 37%. As many of you know, we don't believe calculated billings to be a good indicator of our business, given that prior period comparisons can be impacted by a number of factors. Most notably, our history of large prepaid multi-year deals. This quarter, total RPO grew 40% year over year to 548.1 million. CRPO grew 34% to 371.8 million for the same timeframe. We ended our third quarter with a dollar-based net retention rate of 128%. As a reminder, this is a trailing 12-month metric that compares the expansion activity of customers over the last 12 months with the same cohort of customers during the prior 12-month period. This quarter, we've updated our dollar-based net retention rate calculation methodology to reflect operational changes to our customer account hierarchies. The trend of declining but stabilized rate has been consistent based on both the previous and the new dollar-based net retention rate calculations. Non-GAAP gross margin were 91% for the quarter, which is consistent with the preceding quarter. This is slightly improved from third quarter of FY23. SAS represents over 25% of total revenue and grew 53% year-over-year. We have been able to maintain best-in-class non-GAAP gross margins despite the higher cost of SAS delivery. This is another example of how we continue to drive efficiencies in the business. We saw improved operating leverage this quarter, largely driven by realizing greater efficiencies as we continue to scale the business. Q3 non-GAAP operating profit was 4.7 million, or 3% of revenue, compared to a loss of 21.6 million, or negative 19% of revenue in the third quarter of last year. This includes an operating loss of 2.6 million for Jihu, RJV, and majority-owned subsidiary. On a standalone GitLab basis, Q3 non-GAAP operating income was 7.3 million, or 5% of revenue. Operating cash use was $6 million in the third quarter of FY24 compared to $1.2 million use of cash in operating activities in the same quarter of last year. Since FY23, we have been proactively negotiating a bilateral advanced pricing agreement, or APA, relating to the transfer pricing arrangements between the Netherlands and the U.S. tax authorities. The proposed agreements between the company, the IRS, and the Dutch tax authority are not yet final. However, given the stage of discussions during the third quarter, we recorded an estimate of $254 million non-recurring income tax adjustment. The adjustment does not impact our non-GAAP earnings per share. I believe this change positions GitLab for the future by optimizing our long-term tax position. The APA will result in an exit cash tax payment to the Dutch tax authority in the future. The timing is dependent on ongoing work with both parties, and we will keep you updated on future earnings calls. Our modeling shows the exit payment should be recouped as tax savings over future periods. Now let's turn to guidance. We're assuming that the trends in the business we have seen over the last few quarters continue. For fourth quarter of FY24, we expect total revenue of 157 million to 158 million, representing a growth rate of 28% to 29% year over year. We expect a non-GAAP operating income of 5 million to 6 million, and we expect a non-GAAP net income per share of 8 cents to 9 cents, assuming 164 million weighted average diluted shares outstanding. For the full year FY24, we now expect total revenue of $573 million to $574 million, representing a growth rate of approximately 35% year-over-year. We expect non-GAAP operating loss of $10 million to $9 million. And we expect non-GAAP net income per share of $0.12 to $0.13, assuming 162 million weighted average diluted shares outstanding. On a percentage basis, our new annual FY24 guidance implies non-GAAP operating improvement of approximately 1,900 basis points year-over-year at the midpoint of our guidance. We believe that our continued focus on responsible growth will yield further improvements in our unit economics. I'm pleased to guide to a profitable non-GAAP operating income in 4Q. We remain on track to achieve free cash flow break-even for FY25, excluding any non-recurring cash tax payments related to the APA result I discussed earlier. There are a number of drivers we believe will fuel our business in FY25 and beyond. At our core, continuing to deliver customer value with our DevSecOps platform aligns our success with our customer success. Additionally, in April this year, we raised the price of our premium tier for the first time in five years. Thus far, customer behavior has been in line with our expectations. Although, as a reminder, we anticipate the real financial impact from this change through FY26. Another driver is the launch of Dedicated. GitLab Dedicated allows us to serve companies in highly regulated industries with complex security and compliance requirements. The largest deal we signed in Q3 was an eight-figure TCV expansion with an auto company on Dedicated. The final driver for FY25 Beyond is the monetization of our AI capabilities. Last month, we announced the general availability of GitLab Duo code suggestions is expected in our December product release. Separately, I'd like to provide an update on Jihoo, our China joint venture. Our goal remains to deconsolidate Jihoo. However, we cannot predict the likelihood or timing of when this may potentially occur. Thus, for modeling purposes for FY24, we now forecast approximately 22 million of expenses related to Jihoo compared to 19 million in FY23. Excluding the impact of Jihu, we anticipate GitLab will be non-GAAP operating income break-even in FY24. In closing, I'm pleased with our business momentum driven by our market-leading platform approach and commitment to capturing our large market opportunity. Chris, our new CRO, has led consistent execution with our sales team and partners to drive a strong quarter. Looking forward, we continue to prioritize driving revenue growth in a responsible manner. With that, we'll now move to Q&A. To ask a question, please use the chat feature and post your question directly to IR questions. We are ready for the first question.
spk14: In the essence of time, we do request everyone to limit themselves to one question, and our first question comes from Koji with Bank of America.
spk11: Hey, guys.
spk00: Thanks for taking the question. A couple of times in the prepared remarks, you guys mentioned enterprise agile planning. I thought that was pretty interesting that you guys are highlighting that. So curious to hear what you believe the opportunity is there. Is this a big replacement opportunity? How do we think about that? I believe it's included in the pricing model. Just want to make sure we understand the opportunity here on the planning side. Thank you.
spk20: Yeah, thanks for the question. We're really thrilled about this market opportunity. With Enterprise Agile Planning, we bring portfolio and project management capabilities into the same platform where the engineers work, and it is included in our ultimate pricing today. But we introduced a new SKU where we can reach a different non-engineering audience, people who will use the Enterprise Agile Planning, but not the DevSec and Ops features. And we've shown that we can migrate thousands of these planning users successfully. I want to note it's still very early days for this. So our guidance includes the limited anticipated impact for Q4. This is a long-term strategy that will take some time to come to fruition. The biggest impact is not expected in the coming fiscal year, but in the years after. Thank you.
spk13: Up next, we have Carl with UBS.
spk17: Congratulations on the results. I'll pose this question to you. One of the interesting things I thought you said on the last earnings call was that you suggested that we might be at the very beginning of a displacement cycle for Atlassian Jira, and you called out a large bank that was, in fact, beginning to do that. With the passage of another three months, Sid, do you mind updating us on that? Is there any further evidence that's giving you conviction that that's, in fact, starting to happen? Any other anecdotes or metrics you could share?
spk20: Yeah, thanks for asking. We're very pleased with our pipeline for enterprise agile planning in this new SKU we have. And it's being helped by Atlassian's end of support for their server product. Because of that being deprecated, a lot of customers are taking stock of where they're at. And they're not even always moving to GitLab Self-Managed. Sometimes they move to GitLab SaaS, but it is a time, a natural point for them to evaluate. And they see the advantage of bringing together their planning users with their engineer security people and operations people. The tighter those work together, the faster the cycle time.
spk11: Okay. Thank you.
spk20: Thank you.
spk13: Our next question comes from Mike at Needham.
spk15: Hey, guys. Thanks for taking the question here. I did just want to double check. So the first piece there, Brian, appreciate the update. It sounds like the premium price queue increase is tracking in line with expectations. Just wanted to see if there was any more color you could parse out there and if that in any way or your assumptions for that premium price queue has changed when we think about that Q4 guidance that you guys are putting out there today. We'd just like to tackle that first. Thank you.
spk02: Yeah, thanks, Mike. We're happy with the performance of the premium price skew. It's in line with what we modeled. One of the things that we've noted is first orders, especially in SMB and mid-market, are lower than expected. And you'll see some of that in the base customers of greater than 5K. But overall, we're happy with the premium price impact, and it's in line with our expectations.
spk15: Thanks for that. And on the SMB and mid-market as well, is there any way you could help us think about, I think you cited that with the elongated deal cycles we saw on a sequential basis. So can you help us think about what is the company's revenue exposure to those SMB and mid-market customers, as well as when that elongation did start to show itself? And I'll leave it there. Thank you guys.
spk02: Yeah, the enterprise percentage of the total has remained pretty consistent. It's around 60% of the total base. And then PubSec is a little over 10%. So SMB and mid-market makes up the remainder.
spk11: Thank you.
spk13: We will now hear from Ryan at Barclays.
spk03: Hey guys, thanks for taking the question. One for Brian and one for Sid. Brian, great to see the strong improvement in net retention. Just for modeling purposes, what was the benefit to the net retention number from the premium price increase? And for Sid, I was just wondering, when it comes to the new capabilities and interest from your customers around generative AI, has that shifted at all their calculus between choosing between self-hosted or the cloud? Just love to see maybe how they're thinking about that decision. Thanks.
spk02: Yeah, I'll take the dollar base net retention first. And so, you know, wanted to call out. We've made a change in the way that we've calculated dollar base net retention rate this quarter to better reflect the business itself. And so this quarter, if you did the old way, be flat 124 to 124. But the new way basically takes into the account the account hierarchies. The the old way that we did it actually kept the static view of the parent accounts. And if there is a merger, a new subsidiary division being shut down or something, it actually showed a churn and then a new business. And so the change that we made, it's important to note, doesn't change the business at all. It just shifts between growth and new to give a better reflection of what's going on in the business. This is reflected in our 10Q for Q1 and Q2. And so you can see the disclosures there. But under the old method was 124 to 124. And it's under the new method, it's 128. Sid, over to you.
spk20: Thanks. Regarding AI and SaaS versus self-managed, you're able to do SaaS and AI self-managed with the AI on SaaS. And we also plan to have some of the AI features available purely self-managed. The way to keep, like most things will ship SaaS first only, then come to self-managed using SaaS for AI and then go to self-managed if they go there at all. What we are very positive about is our dedicated offering because it combines the convenience of SaaS and then having a single tenant installation with the increased kind of security posture that comes with that. I think that's going to be a great solve, but we want to make sure that in the interim, our self-managed customers can use the AI features on SaaS, even if they keep having their self-managed installation. So that's a priority for us.
spk03: Excellent. Yeah, we've heard really good feedback on Get Lab Dedicated. Brian, just real quick, on that 128, under the new method, what was the net retention the prior quarter? And just if you could parse out maybe what the contribution was from the price increase or like a general range, that'd be helpful just on that retention side. Thank you.
spk02: Yeah, so they'll be in our queue. We'll follow up later today. It was roughly about the same flat quarter to quarter. And we don't break out the difference. Well, I guess from a price increase perspective, we don't break that out in particular. But one of the things I talk about is in the net dollar retention rate. what the percentage was between seat change price change and tier change historically seat change has been roughly about 50 percent price change and tier change have been 25 because of the price increase the price change now makes up roughly about a third of the total of the net dollar retention rate um the seat change is a little less than 50 and then the tier change is a little less than 25 excellent thank you guys thank you
spk14: We will now hear from Kash with Goldman Sachs.
spk08: Hey, thank you very much. Happy holidays. Great to see the results. Same question for you. It looks like your tone and confidence level and conviction level in going after the competitive opportunity with Atlassian and Microsoft is actually stronger than before. I'm curious. what gives you the conviction to pursue that comparativeness? And what are things that GitLab has to do from a product perspective and a go-to-market perspective to be able to take advantage of what you consider to be these nascent opportunities? And second and final, the waiting for Google to more closely align or for you to closely align your generative AI efforts with Google, how close or how far are we from a full blown integration, an announcement of sorts. Thank you so much.
spk20: Thanks, Cash. Yeah, the customer feedback on our AI functionality has been positive. And as you might have heard in the prepared remarks, customers like NetWest and Nasdaq are using it in their engineering teams and seeing the value and the productivity and efficiency that it brings. Our customers have reported efficiency improvements upwards of 50% with code suggestions. We recently spoke with a leading international travel agency, and they said that the features They test it. They believe that GitLab offers a better quality there. We also spoke with a multinational financial technology company, and their team is excited about using GitLab Duo for generating configurations, test generation, book finding, and automating operational work. So we're very excited that we have a broad platform so that we can do AI across the life cycle with 14 features for customers available today.
spk11: You're muted.
spk08: Sorry, the other question, the competitiveness against Atlassian and Microsoft, what are the things you have to do from a product and go-to-market perspective to really take advantage of the opportunity that you see, the replacement opportunity?
spk20: Yeah, I think apart from AI, I think it's really unique to GitLab to have better security and compliance. Our features like SAST and DAST, container scanning API security compliance management, are unique to GitLab. We also talked about the planning and management features. We talked about enterprise agile planning, but also think of value stream management and DORA metrics that are all unique to GitLab as a DevOps platform. And for example, we had a Q3 deal at a European telecom. We partnered there with AWS and we won against GitHub.
spk11: Thank you so much. Happy holidays. You too.
spk14: Nick with Scotiabank is next.
spk22: Awesome. Thanks, guys. I wanted to build on Ryan's question just around the generative AI functionality with GitLab Duo. It sounds like there's not going to be really any difference in feature functionality and sort of folding in some of the new enhancements into SaaS and self-managed, but I I wanted to ask how you guys think about layering additional feature functionality into premium versus ultimate and whether there's going to be kind of any difference there. And then just as a follow-up to that, as you sort of layer in more functionality into that ultimate SKU more broadly, how do you think about pricing? Thanks.
spk20: Yeah, I think our code suggestions, I think, is very comparable to a market. But I think what's unique about GitLab is having 14 AI features in the platform available to customers today. I think that's a big differentiation. As for how do we sell it, some features will be a different skew. For example, code suggestions. And that's then available not just to ultimate and premium, but also free customers that might be not paying for GitLab today. I think that's an exciting opportunity, especially over the long term. And then some of the features we're going to put into Ultimate or Premium, and there might even be extra SKUs we introduce in the future.
spk11: Thanks, guys.
spk13: Michael with KeyBank is next.
spk06: Hey, everybody. Good evening. Hey, Brian, everybody. So given some of that weakness you did call out in SMB from sales cycle on the size perspective, can you just be a little bit more specific about what really drove the upside in the quarter, you should call it on enterprise and or public, and how that might be related to some of the things we've seen more broadly this quarter with cloud optimizations seeming to stabilize and some of the cloud consumption model companies seem to do better.
spk20: Yeah, if you look at cloud consumption, it's an increasing part of our business, but it's currently a relatively small part of our business. So we aren't materially affected by the cloud consumption stabilizing.
spk06: Right. I guess I meant it more from the general demand perspective. In other words, people are using more cloud. Is that driving more need, demand for GitLab subscriptions, seats, et cetera? And again, what's really offsetting that SMB weakness that drove the upside in the quarter?
spk20: I think that with GitLab, it has the biggest benefit, the more complex your organization is. So the more complex your security and governance, the more... heterogeneity in your projects, where you go from kind of having projects on mainframe to the latest agile, that is where we can really shine. By bringing that all together in one platform, we typically see a 7x acceleration of cycle time. So give us the hardest problems, that's where we shine. And the enterprises are having the hardest time of kind of having to move really fast, having all that all these things they have to move at the same time, but having the most compliance and security questions to do. We do believe if you look at the overall market, software is just going to keep getting more complex. You get AI now, you'll have more regulatory friction coming for everyone. So that gives us a lot of optimism about the future.
spk11: Thanks, Ed. Thanks, Michael.
spk13: Ethan with Piper Sandler.
spk18: Great. Thanks for taking my question. Kind of filling in here for Rob this afternoon. I just wanted to kind of talk about kind of on the same topic of cloud optimizations and as these kind of come to maybe start to slow down, how are companies thinking about ramping the velocity of new development projects, especially as we head into 2024? I'd just be curious to hear how your customer conversations have been trending on that topic. Thank you.
spk20: I think there's a lot of focus on ROI, like how do we do more and what measures should we look at? One of the best practices today is DORA metrics, looking, for example, at how frequently can we deploy. Also, cycle time is becoming really important for customers. How fast can I go from planning something to getting it out there? We've learned as an industry not to focus on lines of code written. It's not a good metric to measure efficiency. And with GitLab, you're able to look at those value stream metrics much more easily because you have everything in a single platform. And you're able to say, hey, if I move to GitLab, I know I'm able to make faster progress against my most important initiatives.
spk11: Got it. Thank you. Thanks.
spk13: Our next question comes from Matt with RBC.
spk07: Great. Thanks for taking my question, guys. Congrats from me as well. Maybe for either of you. William Boschelli, M.D.: : You know, one of the drivers that we think about over the next couple years is free to pay, I think you guys have changed slightly. William Boschelli, M.D.: : sort of how you think about free to pay usage within your base, can you talk a little bit more about that philosophically and you know I see any benefit from that you know in in the in the Q3 results.
spk02: Yeah, Matt, I'll take that. Thanks for thanks for the question. And so, you know, we did implement a user limit on GitLab.com and it's led good conversion from free to paid. However, the vast majority fall below 5000, the base customer limit that we report. And so the impact is relatively low. We're continuing to pursue that product led growth. We think it will be, you know, it's built into our guidance. And so that's on free to pay. I'll also take this as just an opportunity. I know a lot of a lot of you have had a wide range of outputs in the model for FY 2025 related to the premium price increase. We're halfway through our planning process right now, so we aren't giving guidance for next year. It's still a bit early. but the early work that we've done we believe that the premium price increase will contribute roughly 10 to 20 million in revenue for next year and so that should help you out from a modeling perspective thanks guys great detail thanks matt joel with truest is up next hi thanks for taking the question sid you mentioned on the call the aws deal where you beat out
spk19: I would love to get a little bit more color on the partnerships and with Google and AWS and how that go to market's working and maybe some updates from you there in terms of maybe driving some deal sizes, et cetera. Thanks.
spk20: Yeah, thanks, Joel. So we got strong partnerships with both Google and AWS, and they're interested because we help their customers move to their cloud faster. We help them accelerate moving those workloads. And an interesting thing we did with Google recently, we announced at Google Next that they'll be integrating GitLab into their development console for GCP. I think that's a really interesting development that will pay off as many things over the longer term. But I think it speaks to the strength of these partnerships together with the AWS example I mentioned earlier.
spk19: Just a quick follow-up. Can you just explain to us how maybe Amazon Q, you may work in conjunction with that as opposed to being a competitive product? That'd be helpful as well. Thanks.
spk20: Yeah, for sure. We're going to make sure we're discussing with Amazon how we can make Q work really well with GitLab.
spk11: Thank you. Thank you. Thanks, Joel.
spk13: Angela with JP Morgan.
spk05: Hey guys, congrats on the quarter. Just one question for me. Ultimate ARR seems like was a big number, 50% of ARR, if I heard that correctly. Seems like a big uptick sequentially. Has the premium price increase actually driven kind of a big upgrade cycle for you on Ultimate? Or I guess I can think of the reverse as well. Has premium seed growth slowed dramatically sequentially?
spk02: Yeah, a couple things there to unpack. Thanks for the question. So just for clarity, we said in the prepared remarks that ultimate bookings were greater than 50% of the total bookings. Ultimate ARR comprises of 43% of the total. And ultimate continues to be our fastest growing tier, primarily as it relates to our security compliance that's found within ultimate. And so I hope that helps out from a clarity standpoint.
spk05: That does. Thank you very much.
spk14: Next is Greg with Mizuho.
spk12: All right, thank you for taking the questions. Sid, regarding GitLab Duo, just wondering if there are any usage updates that you might be able to share for suggested reviewers or some of the other features. And then secondly, in your recent state of AI in software development report, which really is excellent by the way, there were a lot of interesting data points. One that caught my eye is that more than half of respondents said that they think AI will replace their role within the next five years. And I'm wondering if that in any way changes the way in which you're thinking about the impact that Gen AI could have on the number of seeds over a longer-term basis, of course. Thank you.
spk20: Yeah, thanks for that. I think that another really interesting thing that was in that study is that AI needs to be throughout the life cycle and for multiple things, like only 25% of the time of a developer spend on coding, 75% is other tasks. And as developers get more productive, they write more code, you need to also increase the productivity. productivity of security and operations. So we're focused on making it work throughout the lifecycle. I think you'll see parts of roles being replaced. But what also will happen is that creating software will get more affordable. And I think that will also lead to an increase in the amount of software we're writing. If something becomes more affordable, sometimes consumption goes up and the overall number of people involved increases. Still see a lot of humans being needed in even the medium term. and the productivity going up might be a good thing for the number of people in this sector. That's helpful. Thank you. Thanks.
spk14: Next is Andrew with Cohen.
spk16: Great, thanks. Congrats on the quarter. It's Andrew on for Derek. Sid, your dedicated offering has been GA since June. Can you talk about demand trends there? You mentioned the big eight-figure deal. That's great to hear. Talk about how large of a growth driver next year this could be. Thanks.
spk20: Yeah, thanks. We're really excited about Dedicated. As a reminder, it combines the best of GitLab.com and self-managed. We manage it like GitLab.com, but just like self-managed or a single tenant, you have increased isolation and increased security through that. So we believe it's a huge opportunity, especially to convert current self-managed customers I think it's going to play out over many years. So we're just at the starting point. We're signing those large deals that Brian mentioned, eight-figure TCV expansion in the automotive space. We see more coming. And I think there's a huge opportunity there considering the majority of our revenue comes from self-managed today. And for the larger self-managed customers, this is a great option.
spk11: Thank you.
spk13: Peter with Bernstein.
spk01: Thank you. You know, I think over the last quarter you talked about kind of several exciting things, both with Google and AWS specifically. You know, the integration of GitLab into Google Cloud Console and, you know, AWS introducing the support for GitLab and AWS CodePipeline. How can we think about the initial impact of these relationships, you know, either being seen in new or existing customers? I mean, are we seeing more contracts through, you know, Google Cloud and AWS?
spk11: Or how should we think about it? Yeah, I'm happy to start on that.
spk02: We have several ways that we go to market and through the hyperscalers is one way. As I've mentioned before, the business that they bring us is somewhat lumpy in nature because they're selling to a wide base of customers. But I'm happy to report that they almost increased their bookings year over year by almost approximately 100%. And so we had great contributions from them this quarter. And so we continue to work with them on enablement. We're also technology partners with them as well. And so we have a pretty broad-based partnership with both hyperscalers.
spk11: Thank you. Our next question comes from Jason with William Blair.
spk21: Yeah, thank you. Hi, guys. Just wanted to ask you, excuse me, on the single DevOps platform vision that you've been talking about for many years now. It seems that there is consolidation happening, certainly from a tools perspective, Sid. um but it doesn't sound like larger enterprises really want a single devops tool they want maybe instead of 15 or 20 they want four or five uh first of all do you agree with that do you think that could change over time and then for the mid market so under that 60 that's not large enterprise How realistic is it for those customers and any evidence so far that they are gravitating towards that sort of single DevOps platform vision?
spk20: Yeah, I would say it's happening. It's finally happening. People have gotten the message. The consolidation is happening. Some of them indeed are like, hey, we've got 15 tools. We got to go to five. The best ones, the most advanced ones, they get it. It's just the movement will continue. The next thing is from five to one. And we have seen customers doing that and having seen customers getting amazing results. Like the more they consolidate, the more they save, the more they consolidate, the faster their cycle time. We haven't gotten every single customer there yet. And it's going to be really important to continue to be an open platform, open to coach suggestions everywhere in our code base, open to, um, having great APIs and open to having very many integrations. We never want to lock customers in, but we know that the more they consolidate, the better the outcomes are and we'll keep beating that drum and we'll try to make sure the majority of the market gets there. I think the analysts are now also repeating the message with Gartner creating a DevOps platform category.
spk21: Is it fair to say that So source code management, CI, that's sort of an obvious consolidation point. For your larger enterprise customers, is it security and compliance that's sort of next on the list in terms of putting it into that bundle?
spk20: Yeah, I think every customer is different, but people have gotten the message in dev development The shift is now happening in security, bringing Dev and Sec together. But the writing is on the wall. Eventually, it's going to be Dev, Sec, Ops all together in one platform. And we're kind of spreading that gospel.
spk21: Great. Thank you. Good luck.
spk20: Thank you.
spk14: We have four minutes remaining in the Q&A. Gray with BTIG is next.
spk04: Okay, thank you. Thank you very much. Maybe a question on the margin side of things. So if I'm looking at the updated guidance, for every dollar of new revenue that you add this year, a little over 50% of that's flowing through to the operating income line. Can you talk about what the main drivers of leverage are this year? And then is there any reason that that trend would not continue in the next year?
spk02: Yeah, great. Thanks for your question. You know, super happy, big milestone in company history. This is our first quarter of non-GAAP operating income positive. You know, since we were on the road show in every quarter, we reemphasize the message, you know, our number one goal is to grow and we'll do that responsibly. And so we've been continuing to get operating leverage out of the model. For instance, in Q3, year over year, we added approximately $37 million of revenue for $10 million of additional expense. And we achieved non-GAAP operating income positive of $4.7 million. And so, as I mentioned earlier, you know, we're early in the process of FY25. We'll give FY25 guidance on our fourth quarter call. And so, you know, we'll continue to operate in a disciplined manner. Okay. Thank you very much. Thank you.
spk13: Alan with Wolf Research.
spk10: Hey, guys. Just a quick math question for me, Brian. That $10 to $20 million benefit comment you made to next year's numbers from the pricing increase is really helpful. Do you know what to understand what growth turn or NMR has been for premium customers renewing over the last two quarters? And what kind of rough assumptions are you using to get to that $10 to $20 million deal in next year?
spk02: Yeah, so it's similar to what we walked through before where we took a certain amount of bookings. We saw when they were coming up for renewal, what the stage would be with the one year for existing customers and then the price increase for new customers. And then taking an average of your average contract term right now is roughly about 15 months and then building that waterfall model. And so I've talked about historically that it is ratable and you have to build the ratable sort of nature of the waterfall out. You know, since there's been so many estimates that have come out, you know, in the various models, we thought it would be good just to quantify what the impact for next year would be to help you with your modeling.
spk11: Thank you. Jonathan with Cantor Fitzgerald. Yeah, thank you.
spk09: So I wanted to ask about the concept of software bill of materials. You know, we've seen a lot of software supply chain attacks. I think the Biden administration's executive order really seemed to elevate the importance of software supply chain security. So I'm just kind of curious how you see that playing out in the market. And then the second part of that question is CycloDX is an open source tool that a lot of companies can use to create these SBOMs. So I believe you use that tool. So beyond that, where do you look to differentiate?
spk20: So we have software bills of materials in GitLab today. It's a super important thing to know what you're using within a company. For example, in GitLab, you can also have allow list and deny list based on the licenses that software has. Of course, it also has security implications. We help customers with that too. A feature that will be coming up from us is the ability to have a global SBOM, kind of aggregate the SBOMs throughout your company, deduplicate it, and get that overall view, which I think we will be one of the first companies to do that. Okay, helpful. Thank you. Thank you.
spk14: That concludes our Q3 FY24 earnings presentation. Thanks again once more for joining us. Have a great day.
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