GitLab Inc.

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.

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.

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.