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spk03: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1.
spk24: Ladies and gentlemen, thank you for standing by and welcome to the HashiCorp's fiscal 2023 fourth quarter and full year earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Alex Kurtz, Vice President of Investor Relations and Corporate Development. Thank you. Please go ahead.
spk11: Good afternoon and welcome to HashiCorp's fiscal 2023 fourth quarter earnings call. This afternoon, we will be discussing our fourth quarter and full year fiscal 2023 financial results announced in our press release issued after the market closed today. With me are HashiCorp CEO, Dave McGannett, CFO, Navam Wilienda, and CTO and co-founder, Arman Daggar. In conjunction with our earnings press release, we have published an earnings presentation that provides additional financial information about our quarter. We encourage you to review that presentation in advance of our call. You can access it on our investor website at ir.hashicorp.com. Today's call will contain forward-looking statements which are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning financial and business trends, our expected future business and financial performance and financial condition, and our guidance for the first quarter and full year for fiscal 2024. These statements may be identified by words such as expect, anticipate, intend, plan, believe, seek, or will, or similar statements. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. During the call, we will also discuss certain non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. The financial measures presented on this call are prepared in accordance with GAAP, unless otherwise noted. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, as well as how we define these and other metrics, is included in our earnings press release, which has been furnished to the SEC and is also available on our website at ir.hashicorp.com. With that, let me turn the call over to Dave. Dave?
spk29: Thank you, Alex, and welcome, everyone, to our fourth quarter earnings call. We're pleased to share that Q4 was a solid quarter for HashiCorp as we exceeded our guidance with revenue of $135.8 million, representing year-over-year growth of 41%, along with a trailing four-quarter average net dollar retention rate of 131%. Current non-GAAP remaining performance obligations reached 397.7 million, representing 38% year-over-year growth, and we added 38 customers with greater than or equal to $100,000 in annual recurring revenue to reach a total of 798. Our HushCorp Cloud Platform offerings reached $14.5 million in revenue, representing 11% of subscription revenue in the quarter. We were excited about adoption trends as we continued to roll out new features and capabilities. During Q4, I spent much of my time speaking with customers across North America, Asia Pacific, and Europe, and I'd like to highlight a few consistent themes. First, we continue to see strong demand for our products, which are seen as central to the tech modernization cycle, and we're still in the early stages of this generational transition. In these conversations, many customers shared concerns about macro conditions, and in Q4, we saw increased scrutiny from procurement departments, which did extend deal cycles. We were pleased, however, that Q4 represented our highest transaction count ever, indicating that customers were making smaller purchases than in previous periods, and which is what we would expect at this stage of the current economic cycle. But it is clear that the transition to cloud is ongoing, and it requires these organizations to operate their infrastructure in new ways. This remains a key driver of our market opportunity. Organizations are looking for ways to optimize for their cloud spend. Our portfolio of products offers management and automation tools that help them accomplish this, so as they adopt and operate their infrastructure in the cloud, they are doing so more efficiently as their cloud efforts mature. Throughout FY23, we delivered strong product innovation to help our customers with their operations, security, and networking challenges in the cloud. By the end of FY23, HashiCorp Vault, Console, and Boundary were all available through the HashiCorp Cloud Platform. To simplify the licensing process, we also introduced the option to procure these products in a single bundled zero-trust security package. These products used together enable identity-based security and access, helping companies secure their infrastructure, applications, and data as they move to and operate in multi-cloud environments. This new Zero Trust Security offering is indicative of our ability to provide simple licensing mechanisms that make it possible for customers to extend usage across our product portfolio and is available as hash court managed and self-managed offerings. We are already seeing interest in our ZTS offering. During Q4, for example, a US-based national retailer who had already standardized on the enterprise offerings of Terraform and Vault They extended to a zero trust bundle that included console enterprise and HCP boundary. This customer believes HashiCorp's zero trust security solution is foundational to its cloud security posture and made a multi-year, multi-million dollar investment in our ZTS offering. Outside of security, we continue to see strong demand for Terraform Enterprise and Terraform Cloud, which support the automation and management of our customer's most critical cloud infrastructure. Terraform often plays a key role in helping customers manage the cost of their cloud infrastructure. For example, during Q4, a US-based chain of restaurants, which had been a longtime user of Terraform open source, adopted Terraform Cloud to help reduce the time needed to provision cloud-based workloads on Google Cloud. With Terraform Cloud, they can efficiently manage their infrastructure while at the same time reducing costs. This customer also adopted HCP Vault after using Vault open source in order to provide more reliable sequence management for each of its locations. In all of our markets, we continue to see platform teams playing a central role in bringing a common cloud operating model to multi-cloud environments. By adopting HodgeCorp's products, platform teams are able to dramatically improve efficiency with automation and consolidated management of their company's cloud resources. Finally, I'd like to thank the entire Hashcorp team for their focus and efforts in FY23. Our successful year would not have been possible without the hard work and contributions of each of our employees. And with that, let me turn the call over to Navam.
spk27: Thank you, Dave, and thanks again to everyone for joining us today. Echoing Dave's comments, I also want to thank our team for their continued focus and execution during FY23. We've achieved a lot since the IPO, and we continue to scale our business, drive innovation into the market, and make progress against our financial targets. Turning to our top-line financial results, amid an uncertain macro backdrop, we produced solid results in our fourth quarter of FY23. We grew our fourth quarter revenue by 41% year-over-year, and we grew fiscal 23 revenue by 48% year-over-year. We are encouraged by the customer activity we saw during the year. We added 143 net new 100K plus ARR customers and 29 net new 1 million plus ARR customers during the fiscal year. The continued growth within these customer segments gives us confidence in the company's long-term objectives. And we remain focused on winning Global 2000 logos during this generational transition to cloud. On the expense side, we continue to focus on resource allocation efficiency in the business during Q4 and drove solid operating leverage. Non-GAAP operating margin was negative 20% this quarter, and we incurred a net loss of 26 cents per share on a GAAP basis and a net loss of 7 cents per share on a non-GAAP basis. For fiscal 23, non-GAAP operating margin was negative 26%, and we incurred a net loss of $1.47 per share on a GAAP basis and 55 cents per share on a non-GAAP basis. Our focus on efficiency also led us to generate positive operating cash flow for the first time as a public company and near break-even results for free cash flow. We expect to continue our momentum on operating leverage and plan to generate free cash flow margins that are approximately negative 10% for fiscal 24 compared to negative 20% in FY23. Before moving to guidance, I would like to provide a quick update on the macro environment and how it relates to our view into FY24. As Dave outlined, we continue to see a high degree of scrutiny within the procurement teams of larger enterprises. From our conversations with global enterprises, we are confident cloud transformation projects remain their strategic priorities. That said, we're assuming this higher level of procurement vigilance will persist through FY24. With this in mind, we are taking a more measured view of our full-year guidance. In addition, I want to also quickly remind everyone of our quarterly guidance philosophy. Historically, we have taken an approach that excludes larger contracts with uncertain timing from our quarterly guidance. As you saw during FY23, when these contracts closed, we saw revenue upside compared to our guidance. For FY24, our guidance assumes greater uncertainty on the close rates of these excluded contracts in any given quarter. As always, we will update our guidance as the quarters progress and we get more visibility into the macro environment. Now on to our guidance. As a reminder, we expect booking seasonality in our Q1 and Q3 periods consistent with historical periods. For the first quarter of FY24, We expect total revenue in the range of $132 to $134 million. We expect a Q1 non-GAAP operating loss in the range of $42 million to $39 million. We expect non-GAAP net loss per share to be between 15 cents and 13 cents based on 191.6 million weighted average basic and fully diluted shares outstanding. For the full fiscal year 24, we expect total revenue in the range of 591 and 595 million. We expect FY24 non-GAAP operating loss in the range of 136 million and 133 million. We expect non-GAAP net loss per share to be between 40 cents and 38 cents based on 194 million weighted average basic and fully diluted shares used in computing non-GAAP net loss per share. we expect to reach non-GAAP operating margin in the range of negative 12 to negative 14% by Q4 of FY24. Finally, given the success we have seen in driving operating leverage into our results during FY23, we are moving up our non-GAAP operating income break-even target from the second half of FY26 to the second half of FY25, a full year ahead of our original plan. We are pleased with our Q4 results, and with that, Dave, Arman, and I are happy to take any of your questions. Alex?
spk11: Thanks, Navam. With that, operator, let's go to our first question.
spk24: To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please limit yourself to one question. Please send by when you compile the Q&A roster. One moment for our first question. Our first question comes from Sterling Audi from SVP Moffitt & Nathanson. Your line is open.
spk17: Yeah, thanks. Hi, guys. Really appreciate the incremental color that you gave on the macro. I'm wondering if you can maybe describe for us the quality and the magnitude of what the sales pipeline looks like today. and perhaps anything you might be doing differently when it comes to coverage ratios within the guidance that you gave.
spk29: Hey, Sterling, this is Dave. Thanks for the question. Yeah, I think, you know, subjectively, the pipe gen feels pretty consistent, truthfully, as what we've seen before. And certainly Armand and I have been in market a lot, and it reaffirms the front-end interest is certainly there. Certainly there, I think we're seeing just a lot more caution, both with procurement departments slowing things down, extending deal cycles, but also general caution overall, just like all of our peers. That being said, the secular trend towards cloud remains intact. I don't think we're really doing anything that different, to be honest. I think that the value proposition of our products is pretty straightforward. We do reduce costs for people's cloud programs. uh and uh you know i think we remain as convicted of ever of the value proposition so in short not really material changes understood thank you thanks thoroughly next question one moment for our next question our next question comes from line of sanji singh from morgan stanley your line is open uh thank you for taking any questions and congrats on going q4
spk09: My question kind of speaks to some of the opportunities going into next year. Dave, I think you mentioned that cloud optimization, cost optimization is a big focus for a lot of your customers, and Terraform is a way to implement that policy and that cost control. When I think of that plus the Zero Trust Bundle, how much of a potential offset versus the kind of broader overall spending caution that you're seeing around budgets. How much of an offset can those two initiatives be to drive growth next year?
spk29: Yeah, thanks, Ajit. I think just to reaffirm sort of the mechanics of how it works, certainly when people begin in their cloud programs, it's relatively unconstrained and certainly has driven a lot of workloads for the cloud providers. Every organization then gets to the phase two of cloud, which is let me bring some of that under control and centralize that, hey, I can't have 400 people provisioning things. I need four Amazon accounts. And I think that certainly is a catalyst for our products because that's where our products come in. So certainly with increased scrutiny around cloud spend, our products in some sense solve that problem for when people are trying to centralize the approach. But I think, you know, the meta is we're operating in the same economy as everybody else, and it's just candidly difficult to be too precise in the view through that. So while we certainly believe the product portfolio continues to be as, you know, the value of profit is as strong as ever, honestly, it's just difficult for us to see out of the future.
spk09: That makes sense. And just as a follow-up on the Zero Trust project, I think historically the companies have generally shied away and taken a more modular approach versus, you know, packaging a lot of products together and sort of let the customers choose where they want to adopt. So could you give us a thinking behind creating the Zero Trust Bundle, and is that sort of at a cheaper overall unit price point versus if the customer had to buy these individual capabilities together? Thank you.
spk08: Yeah, great. Thanks, Sanjit. Yeah, so in general, the way we think about it is we have sort of a distinction between our land motion versus our extension to the kind of multi-product cell. So for us, our land motion isn't changed. It's really a focus on Vault and Terraform. Those are kind of our core land products, and they have been and will continue to be. The ZTS SKU really comes in play for us in that extension motion. So a customer might have started their journey with us with Terraform or with Vault, and then instead of having an individual single product conversation like we would have done in the past, now it's really elevating it to a solution discussion around, hey, we know you're on this bigger journey to zero trust, there's multiple pillars of that journey, and there's multiple products, particularly in our case, Vault, Boundary, and Console, that solve the core problems of zero trust. So for us, it's really more about positioning that as an extension play, and I think to your question of how does that change maybe the economics of it, You know, it's really around instead of them maybe expanding to just doing a vault purchase, it would now expand to its vault console and, you know, boundaries. The primary economic driver there is probably still vault as the anchor, but it allows them to access, start bringing those other tools in, and then those other tools expand, you know, from there organically.
spk29: If I could just add maybe one of these, because I think what's clear is that we're just trying to reduce the friction for that expansion motion. Very clearly, there's a common buyer for this portfolio. We do historically provide them separately. But our customers know as well as we do that they have all of those problems together. And I think it speaks to really our longer-term arc of objectives, which is trying to build trust with those buyers. And then once you do that, there are a whole bunch of solution combinations you can imagine. Certainly security is one of them. You know, there's obviously a common one around provisioning and another one around networking. Those are all available to us. It just speaks to that central buying center. So we're not keeping up anything. I understand.
spk10: Thank you for that. Thank you. One moment for our next question.
spk24: Our next question comes from Jason Adder from William Blair. Your line is open.
spk31: Yeah, good afternoon, guys. I'm feverishly trying to get to that break even in the second half of fiscal 25 in an eight easy. So can you help us figure out how you're going to get there? Because it just you know, going from whatever negative 23% operating margin to for the year this year to break even in the second half of next year, I guess you're not saying for the full second half, you're just saying at some point in the second half, I assume. but just help us kind of figure out how to get there.
spk27: Yeah, hey, Jason, it's Naval. Thanks for the question. So, you know, first of all, we're well ahead of our leverage plans. As we mentioned, we went through an investment cycle, which ended in the third quarter, and now we're in the leverage cycle and are ahead of our plans. And our original target was to get to break even in the back half of 26. We think we're well ahead of the structure and schedule we had to get there, so we're confident about the back half of 25. So, I mentioned this during the last call as well. We're going to be extremely selective in where we place our headcount investments, and that will further drive leverage from this point on. So we're confident that we'd be able to continue the momentum we saw. You know, we delivered a strong free cash flow margin quarter, and we'll continue to drive operating leverage, which will drive up our op-inc progressively between now and the back half of 25. Your comment is correct. It's a quarterly break-even rather than a full-year break-even, so we'd see progressive leverage up to that point where we'll get to break even the back half.
spk31: One quick follow-up, and maybe this is whoever wants to take it, but obviously if you're investing less over the next couple of years, it's going to affect your growth rates. How do you think about how much it's going to affect your ability to grow at the 30% level that you guys have set as a target?
spk27: Yeah, Jason, so let's not forget that we have placed all the chips we need on the table in terms of the capacity we need, and we're confident we'll be able to hit our targets for this year with the capacity that we have. So the leverage cycle anticipates maintaining the guide that we have. And we're in the same economy as everyone else, so there's going to be puts and takes in any given year. But the long term, I think Dave mentioned this well, having spoken to a lot of our customers, they're not stopping their cloud programs, and the long-term still will be moving towards cloud. So we're confident about, over the long-term, maintaining a strong CAGR.
spk32: All right. Thank you. Good luck. Thanks, Jason. Next question.
spk24: Thank you. One moment for our next question. Our next question comes from Jim Fish from Piper Sandler. Your line is open.
spk28: Hey, guys. I wanted to dive back into this past year. Dave, you had even mentioned that the go-to-market focused more on smaller lands and just getting a goal with these kind of shots on net. Historically, what have you guys seen with relative year two sort of expansion rates, and how are you thinking about that in terms of guys here with net retention, especially as there's this balance between obviously cost savings that you guys can provide with the kind of digital transformation versus that, you know, stronger procurement process kind of diligence that your end customers have going on?
spk29: Yeah, I would just say that, you know, just to reiterate the kind of the motion, for what it's worth, you know, these are deeply considered infrastructure decisions, and so we tend to take time to win the trust of those companies as they make their first transaction. A year later, I think generally speaking, there's an expansion and an extension opportunity with every one of these companies because the cloud journey is pretty predictable in terms of the problems they run into. Generally, it's in year two we have the opportunity to jump to the second product. I think that's reflected in the NDE math that we've shared, the trailing number of 131%. I think what we've said is, And our guidance was that 120% is our long-term goal. So, obviously, it'll fluctuate. But I think that year two is reflective of that. I don't think that – we certainly don't anticipate that changes, that motion changes in year two that they jump to the next product. Yes, there's more friction than ever. But, you know, these things are – you know, they're a little bit like – you know, they're a little bit – like the ocean moving, they tend to, you know, these are important long-term projects for our customers, and they're not slowing down their cloud programs. They're certainly not stopping their cloud programs. So, you know, as they build those out in year two, I think we're fairly confident that we keep that expansion and extension opportunity intact. And the NDE number is probably the best proxy for it. We just, you know, we run that model over a long period of time. Does that answer your question?
spk13: Thanks, Dave. Thanks, Jim.
spk24: One moment. One moment for our next question. Our next question comes from the line of Itai Kidron from Oppenheimer. Your line is open.
spk07: Thanks. Hey, guys. May I just follow up on Jason's kind of line of thought here? Can you remind us what was the headcount at the end of the year and how much it increased in the year? And relative to that, what would be your plan for fiscal 24, roughly? Okay.
spk27: Hey, Tai. Yeah, thanks. It's Navam. So yeah, we made substantial investments in the last year across the board, as we mentioned in our prior calls. I think our headcount, we'll disclose it in the K, was over 2,000 heads. I'll get you the exact number. This following year, we're going to make marginal investments across the sales and marketing and the R&D groups, but 2,400 heads. Marginal investments across sales and marketing and R&D. So we don't expect to see the same increase we saw last year into this year, and that's going to drive the leverage cycle that we expect to see in 2025. And just as a reminder, back in 2021, we drove a very similar leverage cycle. So we don't expect this to be a new motion for us. So we're excited.
spk07: Got it. And then as a quick follow-up, comp plan, you're starting a new fiscal year. Can you tell us what if any tweaks or tracks you've made to the comp plan as you're moving into the year?
spk29: No, I don't. There's nothing significantly different. I would just suggest that we are, as you would expect, we're getting more mature at understanding the motions that work. Like I said, there's a land motion and there's an expand-extend motion, which matches how our customers adopt. I think, if anything, we've gotten perhaps a bit more precise in that. I think it's just more reflective of us. We're operating now at a pretty different scale than we were a couple of years ago, and I think we understand how these motions work and and our compliance just reflect us sort of operationally tightening that. No big picture, not that different, but the tweaks just to lock us in a little tighter to those two motions.
spk06: Very good. Appreciate it. Thanks. One moment for our next question.
spk24: Our next question comes from the line of Fatima Bulani from Citi. Your line is open.
spk04: Good afternoon. Thanks for taking my question. Dave, I wanted to go back to a comment you made in the prepared remarks with respect to the highest transaction velocity you've seen in any quarter at the company. I wanted to better understand what factors are actually deriving that behavior. And as a related matter, in the same breath you've heard customers express a ton of caution and delays around procurement. So how does that impact your ability to drive conversion from your open core base to sort of the paid versions of the offering. So just wanted to kind of reconcile those two motions, especially as we walk into fiscal 24. Thank you.
spk29: Yeah, so I'll just go back slightly and just underscore how the motions typically work. So yes, there's certainly ubiquitous use of the open source tech, but our customer conversations end up being specifically about, hey, you're provisioning a lot of compute, for example, we can help you standardize, have policy associated how you do that. So it's sort of a different problem than the open source project solves. So just to make that clear, that's how the motion works. It's really an infrastructure conversation. I would say, as I would expect is normal in this kind of an economic cycle, people are generally wanting to do slightly smaller transactions and slightly shorter duration transactions, entirely sensible transactions. given where we are in the cycle, that tends to lend itself to perhaps a higher volume at a lower quantity because their need is not unchanged. They just need a smaller transaction. It actually has the... the impact of not really being delayed so much at the smaller part of the transaction size. So I think it's a positive for us ultimately in that the larger transactions get delayed, the smaller ones certainly don't. We tend to get more smaller transactions as a result.
spk01: Does that answer your question? Absolutely. Thank you.
spk24: One moment for our next question. And our next question comes from Nick Altman from Scotiabank. Your line is open.
spk18: Great. Thanks, guys. Last quarter, you talked about your plans to introduce Boundary into the sales force at the sales kickoff, and it sounds like the Zero Trust bundle is starting to take hold. So can you maybe just talk about how those two products and the current macro backdrop are going to posture the messaging to the go-to-market and sales org this year?
spk08: Sure, yeah, happy to talk about that. Yeah, so as we mentioned, Boundary, relatively new product. First commercial version was only introduced at our global conference last year, so October, November of last year was the initial version, so obviously late in our fiscal year. So really, this sales kickoff and the start of this fiscal year is when we have a chance to really enable our field and train them on Boundary to take that to market. You know, we're excited for the year. It's obviously an early product. It's kind of starting from a standing start, but, you know, already booked our first few boundary transactions in Q4, you know, ahead of, you know, being able to even do some of that enablement work. So, you know, we're excited going into this year that once the field's, you know, both enabled on it, now we have that as a part of our zero trust SKU. And so we'll really be able to kind of bring that into play as we talk to our existing customer base as they're going through their extension motions. both through ZTS as well as standalone opportunities just around boundaries. So we're excited about the opportunity there, but it's obviously early days, and that is still very much an extension focus as opposed to a land focus for us.
spk29: Just to kind of just layer on to Armand's comments, this is Dave. I think, again, just to make sure it's clear, as people sort of try to centralize their approach to cloud, it actually introduces three distinct conversations we have. One is around infrastructure, one is around security, and one is around networking, because those concerns get aggregated. So certainly the zero trust SKU is a really simple way to have the security conversation in a consistent way. But we have really all three of those conversations in any customer base. So it doesn't change our go-to-market messaging at all. It just says, you know, obviously these are the three conversations we can have. This is an easier form factor to have the security one in, but we could just as easily have the infrastructure conversation.
spk18: Great. And then just as a quick follow-up, when you look at your revenue guidance for the year, does it embed any sort of revenue mix shift dynamics across the product set, or do you expect the revenue mix to look similar to this year?
spk27: Yeah. Hey, Nick. This is Navam. We expect the product set to be broadly similar, meaning the majority of revenue is still coming from Terraform and Vault, but obviously as other products move from the emerging category to sorry, into the emerging category, we expect more contribution from those products. Obviously, it's a bigger base to go take percentage share from, so it's harder to get there. But we're confident that over the long term, the emerging products will make a bigger contribution. But for next year, we believe it's still going to be the core products giving the most amount of revenue.
spk15: All right. Thanks, Nick. Let's go to the next question, operator.
spk24: One moment for our next question. Our next question comes from the line of Billy Mandel from KeyBank Capital. Your line is open.
spk19: Hi, this is Billy on for Michael Torres. Just wanted to ask about the competitive landscape you're seeing for Vault. Has that evolved at all, and are you seeing any more pressure or competition from the privileged access management vendors or any of the hyperscalers?
spk08: Yeah, thanks for the question. You know, broadly, we haven't really seen a change in the competitive landscape, you know, certainly for the last few years, it's been kind of the same slate of players. We've been in market alongside other folks, so we haven't seen any major shifts in the positioning. If anything, I think we feel good about Vault as a differentiated offering. We continue to invest heavily in new capabilities and new features, and we see customers continue to expand. And I think what we're continuing to see is vendor consolidation actually being helpful for us. We obviously have a broad portfolio, Many of our customers see us as a strategic partner. And for many of our customers, as they continue to go down a multi-cloud journey, having a solution that's cloud independent and gives them consistency across all their environments is an important part of their strategy. So no major change in sort of the competitive dynamics.
spk24: Thank you.
spk14: Thanks, Billy. Next question, please.
spk24: One moment for our next question. Our next question will come from the line of Derek Wood from Callen. Your line is open.
spk34: Oh, great. Thanks, guys. It's Andrew for Derek. Congrats on the quarter. Dave was hoping to get some color on demand trends for Terraform versus Vault in the quarter. Are you seeing a higher priority on security and identity management driving stronger growth in Vault? And if so, are you making some go-to-market tweaks to lean more into the security side?
spk29: Hey, thanks for the question. Again, the short answer is I think it's pretty consistent. If anything, we've probably seen a slight uptick in terraform over the last six months. Hard to tell whether that's anything specific to the market or whether that's just the fact that we've had a commercial offering now for a few years. That just takes time. But no, it's about the same. It's It kind of goes back to those concerns being aggregated in the cloud programs. Third of the time, it's a security conversation. Third of the time, it's an infrastructure conversation. And Vault certainly is front and center for everybody's identity conversations. That hasn't changed. But proportionally, it's still pretty consistent. They're both really important products growing roughly equivalently.
spk08: And the one thing I might add to that is, I think oftentimes people think, you know, Terraform might be the value prop, might be only positioned through the lens of, you know, developer enablement or productivity. But, you know, there's a strong angle both on the cost management side as well as on the security side. So very often we're still having a Terraform conversation with security folks on how standardization of policy and guardrail and common blueprints actually improves security posture. So I see where the question is coming from in terms of, like, you know, maybe robustness of the security side. But I think Terraform actually does tap into that vein. You know, maybe not to the same extent as Vault, but it's still very much a security play as well.
spk34: Great. That's helpful. And then either Dave or Armand, on your new Terraform no-code capabilities and drift detection, what's the customer reception been like so far? And can we start to see this drive broader user adoption and potentially greater open source convergence?
spk08: Yeah, I think in general demand has been positive, reception has been positive for it. The way we think about it is we're continuing to just add more differentiated capability, so continuing to widen that gap between the open source offering and the commercial offering. And I think particularly for some of the customers that maybe had built some scaffolding early on themselves in kind of a DIY around the open source, They're seeing these new capabilities like drift detection as sort of a helpful lever to say, hey, we should justify the switch over now to commercial offering because it's like this is capability they don't want to continue to build and maintain and invest through a DIY offering. So I think improving the commercial differentiation makes it easier for us to have that land conversation and create a really clear business case of why you should buy versus build.
spk22: Great. Thank you.
spk08: Thank you.
spk24: One moment for our next question. Our next question comes from the line of Miller Jump from Truist. Your line is open.
spk20: All right, great. Thank you for taking the question, and congrats on the solid results. You know, it looked like there were really solid RPO bookings in the quarter. And, you know, last quarter you all had mentioned some of the benefit from longer-term deals. But then we also hear about the increase in kind of velocity of deals this quarter, and I'm just curious if there's any color you could give on what you're seeing with duration and maybe any change in impact quarter over quarter there.
spk27: Thanks, Miller. This is Navam. Duration-wise, you've got to remember that fourth quarter is a seasonal quarter, and it's also a strong duration quarter for us. Dave's comments are still true, which is that you have a lot of transactions And we saw a lot of customers doing shorter duration transactions. But we also saw several customers who we have good relationships with and longer term relationships with continue their partnership with us and continue purchasing longer duration contracts. So in the fourth quarter, we did see similar duration as we did in the third quarter. And that drove the dynamics of our results to be very similar. We're about slightly under 90% ratable for the quarter and a strong performance on the multi-year side.
spk20: Great. Thanks. That's helpful, Culler. And then I guess just as a follow-up, some of the other companies we've seen in the broader DevOps ecosystem have talked about raising prices this year. And I'm just curious, How does pricing factor into your strategy, and are there any areas where you believe you can make adjustments to more closely align pricing with value?
spk29: Yeah, I'll take that one. I think we view this as a very long-term opportunity, and our number one priority is to win the trust of these teams as they make an architectural decision that will last for a long time. Unlike sort of like a Git repository, which is quite easy to replace with another one, Our products are much less easy to sort of make that transition to. So I think what our focus on is really the ability to win the trust of these folks. And over the long term, we have multiple products in our portfolio that come to bear. So the truth is we have enterprise conversations with customers, and so we're sort of, you know, somewhat reacting to the market in real time. So it's sort of a left-on issue for us, but our bias is to try and, you know, win the trust and be the long-term partner. And that just is what you do when you have, you know, seven other products in the portfolio. So I hope that answers your question.
spk24: Yeah, makes sense. Thanks. One moment for our next question. Our next question will come from Brad Sills from Bank of America. Your line is open.
spk20: Oh, great. Thank you. I wanted to ask a question on this trend we're seeing in the cloud industry around workload optimization. What has been your observation here with this trend in your customer base? I mean, there's the concept of that new workload's coming in, and then there's the concept of optimizing for new workloads that have come in. Any commentaries there I think would be helpful. And then how does Hashi help here? Has this been a benefit to the business?
spk08: Yeah, thanks, Brad. You know, as we've talked about before, we often see cloud adoption through the lens of phases. And as Dave talked about, phase one tends to be, you know, where most companies start. It's a bit more ad hoc. Application teams are sort of on, you know, kind of free off the leash to kind of adopt cloud however they will. And what we tend to see even well before this year is the pattern ends up being in that phase one. You do often see an overconsumption. You do often see a lack of the appropriate security controls, compliance controls, because it's the sort of ad hoc, ungoverned approach to cloud that most people start with. I think that drives the phase two, where there's the creation of sort of platform teams or cloud teams But there's a central point of kind of excellence that's responsible for how do we govern how cloud is consumed. It's those platform teams that then have a few different stakeholders, right? Part of their concern is how do we enable our developers effectively? Part of their concern is how do we do this in a way that's secure and we're managing the risk? And then part of their concern is how do we manage the cost and make sure we're doing this in an efficient way? And for us, our open source tools tend to get used in that phase one where application teams are just pulling it in and using it to solve their problems. but it's really in that phase two that our commercial tools are designed to help the platform teams around how do they manage the risk, how do they manage the cost, how do they manage the multi-tenant concerns of those different application teams. So yeah, I think we absolutely see that optimization taking place in many of our accounts. I think many customers have a whole bunch of underutilized resources or orphaned resources that are running or workloads that are inappropriately sized. So there's a whole lot of that that we see You know, I think in some sense that's an accelerator to the trend of creating these platform teams, which is, you know, who we buy in large focus on, and that's where we build an audience with. And I think there is definitely, you know, some tailwind there of helping our products get adopted by those platform teams who are trying to get their hands around the cloud spend.
spk20: Thanks, Armand. One more, if I may, please. One for you, Navam, on the guidance. I think you made some comments as to some conservatism there on the larger deals, but those are not included in the guide. So just curious, is there an added level of conservatism that you're factoring in here into the guide, or is this kind of a consistent philosophy? Thank you.
spk27: Yeah, thanks, Brad. You know, the guidance philosophy is consistent with the last year. In any given quarter, what we do is we give you a solid execution path to where the quarter will land, and we exclude certain large deals where Inherently the timing is is uncertain now last year, you know several of those last large deals closed and that's what drove Upside to guidance which led to strong revenue performance and revenue growth performance over the last year this year, you know when we think about our guide we're in the same economy as as our peer group and We're in the same buying cycle as our peer group or buying environment as our peer group so what we're expecting is those more scrutiny on those large deals that we've excluded from guidance and and more uncertainty on those large deals that are excluded from guidance. So that's what we are expecting from a guidance perspective, similar philosophy as last year, but more scrutiny on those upside deals that we've excluded. Overall, we're pleased with how the last year turned out, and we're optimistic about the longer-term transition, and we'll execute on 24 and update you appropriately.
spk16: Thanks, Brad. Great. Thank you, Navam. One moment for our next question.
spk24: Our next question comes from the line of Mark Murphy from JP Morgan. Your line is open.
spk36: Hey guys, this is Artie Ruan for Mark Murphy. Just a quick question. As the kind of environment changes a little bit and you guys are rolling out some of these new products, boundaries, zero trust, et cetera, is the relationship with how you're selling and how the partners and system integrators are selling changing with that? Or is the motion adjusting to the new products or the new environment?
spk29: Yeah, here it is, Dave. Yeah, I think, again, pretty consistent. But you're also seeing us get a bit more mature at it, candidly. Our motion is very consistent. We try to engage with partners who have a great services opportunity over the long term with these accounts. And I would say that that ecosystem is pretty good and very receptive to the product portfolio. No changes to it expected. We have a great community of partners that do delivery work around us already. And Our view is we just add more products that they're able to grow their businesses alongside of us, and we think that's the right long-term model, but consistent.
spk02: Great. Thank you so much.
spk21: One moment for our next question.
spk24: Our next question will come from the line of Shebly Seyrafi from FBN Securities. Your line is open.
spk05: Thank you very much. You're guiding for, in my model, about three to four points of operating margin expansion in fiscal 24, and I'm getting about 13 points of margin expansion in fiscal 25. I'm just wondering if you guys are holding back on certain expense levers that you expect to implement in fiscal 25, and whether you're also potentially embedding some kind of revenue growth acceleration as perhaps the economy And if so, what are those expense levers that you may be holding back? Thanks.
spk27: Hey, Shelby. So we're delivering operating leverage every quarter over the past four quarters, as you noticed from our income statement, starting from 31% in Q1, ending close to 20% in Q4. You know, we've guided to what we expect to deliver over the next year given the environment that we're in. And we believe we can do that because of the continued success and leverage we're seeing. So that's about the extent of how we're thinking about the leverage. We believe that there's substantial leverage that we can deliver between now and the end of the year. And we're confident about the timing of these things that we've brought in the point of break even by a year. So, yeah, I don't think we're holding anything back. I think we'll execute every quarter and give you updates as they go along.
spk05: Okay. And secondly, your retention rate was 134% the prior two quarters. It went to 131% this quarter. Do you expect that metric to decline in the coming quarters further?
spk27: We're pleased with the 131. It was a very strong quarter for us. The model, just as a reminder, has always been to be above 120%. We believe that's the long-term net dollar retention rate that we should maintain. And over the past several quarters, we've been well above that range. Now, the other point to make about that net retention rate is that it comes from a very, very strong gross retention rate, which remained very solid in Q4. So there's a downtick related to procurement timing on the expansion extent side. But as always, these things are variable, and we will be above the 120% range that we aim to be at. We're continuing to see expansions and extensions from the partners and customers that we have, and we'll continue to win those expansions over time.
spk23: Okay, thank you.
spk24: Thank you. I'm not showing any further questions in the queue. I would now like to turn the conference back to Dave McJanet for any closing remarks.
spk29: I'd just like to express my thanks for the participation from everyone here. We certainly appreciate you dialing in and for all the questions and look forward to speaking with everybody soon. Thank you.
spk24: And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.
spk03: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. Music Playing Thank you. Thank you. Thank you.
spk24: Ladies and gentlemen, thank you for standing by. Welcome to the HashiCorp's fiscal 2023 fourth quarter and full year earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Alex Kurtz, Vice President of Investor Relations and Corporate Development. Thank you. Please go ahead.
spk11: Good afternoon and welcome to HashiCorp's fiscal 2023 fourth quarter earnings call. This afternoon, we will be discussing our fourth quarter and full year fiscal 2023 financial results announced in our press release issued after the market closed today. With me are HashiCorp CEO, Dave McGannett, CFO, Navam Wilienda, and CTO and co-founder, Arman Daggar. In conjunction with our earnings press release, we have published an earnings presentation that provides additional financial information about our quarter. We encourage you to review that presentation in advance of our call. You can access it on our investor website at ir.hashicorp.com. Today's call will contain forward-looking statements which are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning financial and business trends, our expected future business and financial performance and financial condition, and our guidance for the first quarter and full year for fiscal 2024. These statements may be identified by words such as expect, anticipate, intend, plan, believe, seek, or will, or similar statements. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. During the call, we will also discuss certain non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. The financial measures presented on this call are prepared in accordance with GAAP unless otherwise noted. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, as well as how we define these and other metrics, is included in our earnings press release, which has been furnished to the SEC and is also available on our website at ir.hashicorp.com. With that, let me turn the call over to Dave. Dave?
spk29: Thank you, Alex, and welcome, everyone, to our fourth quarter earnings call. We're pleased to share that Q4 was a solid quarter for HashCorp as we exceeded our guidance with revenue of $135.8 million, representing year-over-year growth of 41%, along with a trailing four-quarter average net dollar retention rate of 131%. Current non-GAAP remaining performance obligations reached 397.7 million, representing 38% year-over-year growth, and we added 38 customers with greater than or equal to $100,000 in annual recurring revenue to reach a total of 798. Our HushCorp Cloud Platform offerings reached $14.5 million in revenue, representing 11% of subscription revenue in the quarter. We were excited about adoption trends as we continued to roll out new features and capabilities. During Q4, I spent much of my time speaking with customers across North America, Asia Pacific, and Europe, and I'd like to highlight a few consistent themes. First, we continue to see strong demand for our products, which are seen as central to the tech modernization cycle, and we're still in the early stages of this generational transition. In these conversations, many customers shared concerns about macro conditions, and in Q4, we saw increased scrutiny from procurement departments, which did extend deal cycles. We were pleased, however, that Q4 represented our highest transaction count ever, indicating that customers were making smaller purchases than in previous periods, and which is what we would expect at this stage of the current economic cycle. But it is clear that the transition to cloud is ongoing, and it requires these organizations to operate their infrastructure in new ways. This remains a key driver of our market opportunity. Organizations are looking for ways to optimize for their cloud spend. Our portfolio of products offers management and automation tools that help them accomplish this, so as they adopt and operate their infrastructure in the cloud, they're doing so more efficiently as their cloud efforts mature. Throughout FY23, we delivered strong product innovation to help our customers with their operations, security, and networking challenges in the cloud. By the end of FY23, HashiCorp Vault, Console, and Boundary were all available through the HashiCorp Cloud Platform. To simplify the licensing process, we also introduced the option to procure these products in a single bundled zero-trust security package. These products used together enable identity-based security and access, helping companies secure their infrastructure, applications, and data as they move to and operate in multi-cloud environments. This new zero trust security offering is indicative of our ability to provide simple licensing mechanisms that make it possible for customers to extend usage across our product portfolio and is available as hash court managed and self-managed offerings. We are already seeing interest in our ZTS offering. During Q4, for example, a US-based national retailer who had already standardized on the enterprise offerings of Terraform and Vault They extended to a zero trust bundle that included console enterprise and HCP boundary. This customer believes HashiCorp's zero trust security solution is foundational to its cloud security posture and made a multi-year, multi-million dollar investment in our ZTS offering. Outside of security, we continue to see strong demand for Terraform Enterprise and Terraform Cloud, which support the automation and management of our customers' most critical cloud infrastructure. Terraform often plays a key role in helping customers manage the cost of their cloud infrastructure. For example, during Q4, a US-based chain of restaurants, which had been a longtime user of Terraform open source, adopted Terraform Cloud to help reduce the time needed to provision cloud-based workloads on Google Cloud. With Terraform Cloud, they can efficiently manage their infrastructure while at the same time reducing costs. This customer also adopted HCP Vault after using Vault open source in order to provide more reliable secrets management for each of its locations. In all of our markets, we continue to see platform teams playing a central role in bringing a common cloud operating model to multi-cloud environments. By adopting HodgeCorp's products, platform teams are able to dramatically improve efficiency with automation and consolidated management of their company's cloud resources. Finally, I'd like to thank the entire Hashcorp team for their focus and efforts in FY23. Our successful year would not have been possible without the hard work and contributions of each of our employees. And with that, let me turn the call over to Navam.
spk27: Thank you, Dave, and thanks again to everyone for joining us today. Echoing Dave's comments, I also want to thank our team for their continued focus and execution during FY23. We've achieved a lot since the IPO, and we continue to scale our business, drive innovation into the market, and make progress against our financial targets. Turning to our top-line financial results, amid an uncertain macro backdrop, we produced solid results in our fourth quarter of FY23. We grew our fourth quarter revenue by 41% year-over-year, and we grew fiscal 23 revenue by 48% year-over-year. We are encouraged by the customer activity we saw during the year. We added 143 net new 100K plus ARR customers and 29 net new 1 million plus ARR customers during the fiscal year. The continued growth within these customer segments gives us confidence in the company's long-term objectives. And we remain focused on winning Global 2000 logos during this generational transition to cloud. On the expense side, we continue to focus on resource allocation efficiency in the business during Q4 and drove solid operating leverage. Non-GAAP operating margin was negative 20% this quarter, and we incurred a net loss of 26 cents per share on a GAAP basis and a net loss of 7 cents per share on a non-GAAP basis. For fiscal 23, non-GAAP operating margin was negative 26%, and we incurred a net loss of $1.47 per share on a GAAP basis and 55 cents per share on a non-GAAP basis. Our focus on efficiency also led us to generate positive operating cash flow for the first time as a public company and near break-even results for free cash flow. We expect to continue our momentum on operating leverage and plan to generate free cash flow margins that are approximately negative 10% for fiscal 24 compared to negative 20% in FY23. Before moving to guidance, I would like to provide a quick update on the macro environment and how it relates to our view into FY24. As Dave outlined, we continue to see a high degree of scrutiny within the procurement teams of larger enterprises. From our conversations with global enterprises, we are confident cloud transformation projects remain their strategic priorities. That said, we're assuming this higher level of procurement vigilance will persist through FY24. With this in mind, we are taking a more measured view of our full-year guidance. In addition, I want to also quickly remind everyone of our quarterly guidance philosophy. Historically, we have taken an approach that excludes larger contracts with uncertain timing from our quarterly guidance. As you saw during FY23, when these contracts closed, we saw revenue upside compared to our guidance. For FY24, our guidance assumes greater uncertainty on the close rates of these excluded contracts in any given quarter. As always, we will update our guidance as the quarters progress and we get more visibility into the macro environment. Now on to our guidance. As a reminder, we expect booking seasonality in our Q1 and Q3 periods consistent with historical periods. For the first quarter of FY24, We expect total revenue in the range of $132 to $134 million. We expect a Q1 non-GAAP operating loss in the range of $42 million to $39 million. We expect non-GAAP net loss per share to be between 15 cents and 13 cents based on 191.6 million weighted average basic and fully diluted shares outstanding. For the full fiscal year 24, we expect total revenue in the range of 591 and 595 million. We expect FY24 non-GAAP operating loss in the range of 136 million and 133 million. We expect non-GAAP net loss per share to be between 40 cents and 38 cents based on 194 million weighted average basic and fully diluted shares used in computing non-GAAP net loss per share. we expect to reach non-GAAP operating margin in the range of negative 12 to negative 14% by Q4 of FY24. Finally, given the success we have seen in driving operating leverage into our results during FY23, we are moving up our non-GAAP operating income break-even target from the second half of FY26 to the second half of FY25, a full year ahead of our original plan. We are pleased with our Q4 results. And with that, Dave, Arman, and I are happy to take any of your questions. Alex?
spk11: Thanks, Navam. With that, operator, let's go to our first question.
spk24: To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please limit yourself to one question. Please send by when you compile the Q&A roster. One moment for our first question. Our first question comes from the line of Sterling Audi from SVP Moffitt and Nathanson. Your line is open.
spk17: Yeah, thanks. Hi, guys. Really appreciate the incremental color that you gave on the macro. I'm wondering if you can maybe describe for us the quality and the magnitude of what the sales pipeline looks like today and perhaps anything you might be doing differently in when it comes to coverage ratios within the guidance that you gave?
spk29: Hey, Sterling, this is Dave. Thanks for the question. Yeah, I think, you know, subjectively, the pipe gen feels pretty consistent, truthfully, as what we've seen before. And certainly, Armand and I have been in market a lot, and it reaffirms the front-end interest is certainly there. I think we're seeing just a lot more caution, both with procurement departments slowing things down, extending deal cycles, but also general caution overall, just like all of our peers. That being said, the secular trend towards cloud remains intact. I don't think we're really doing anything that different, to be honest. I think that the value proposition of our products is pretty straightforward. We do reduce costs for people's cloud programs, and I think we remain as convicted as ever of the value proposition. In short, not really material changes.
spk11: Understood. Thank you. Thanks, Sterling. Next question.
spk24: One moment for our next question. Our next question comes from the line of Sanjeev Singh from Morgan Stanley. Your line is open.
spk09: Thank you for taking the question and congrats on going to Q4. My question kind of speaks to some of the opportunities going into next year. Dave, I think you mentioned that Cloud optimization, cost optimization is a big focus for a lot of your customers, and Terraform is a way to implement that policy and that cost control. When I think of that plus the zero trust bundle, how much of a potential offset versus the kind of broader overall spending caution that you're seeing around budgets, how much of an offset can those two initiatives be to drive growth next year?
spk29: Yeah, thanks, Ajit. I think just to reaffirm the question, sort of the mechanics of how it works. You know, certainly when people begin in their cloud programs, it's relatively unconstrained and certainly has driven a lot of workloads for the cloud providers. Every organization then gets to the phase two of cloud, which is let me bring some of that under control and centralize that, hey, I can't have 400 people provisioning things. I need, you know, four Amazon accounts. And I think that certainly is a catalyst for our products because that's where our products come in. So certainly with increased scrutiny around cloud spend, our products in some sense solve that problem for when people are trying to centralize the approach. But I think the meta is we're operating in the same economy as everybody else, and it's just candidly difficult to be too precise in the view through that. So while we certainly believe the product portfolio continues to be as – the value of profit is as strong as ever, honestly, it's just difficult for us to see out of the future.
spk09: That makes sense. And just as a follow-up on the Zero Trust project, I think historically the companies have generally shied away and taken a more modular approach versus, you know, packaging a lot of products together and sort of let the customers choose where they want to adopt. So could you give us a thinking behind creating the Zero Trust Bundle, and is that sort of at a cheaper overall unit price point versus if the customer had to buy these individual capabilities together? Thank you.
spk08: Yeah, great. Thanks, Sanjit. Yeah, so in general, the way we think about it is we have sort of a distinction between our LAN motion versus our extension to the kind of multi-product cell. So for us, our LAN motion isn't changed. It's really a focus on Vault and Terraform. Those are kind of our core LAN products, and they have been and will continue to be. The ZTS SKU really comes in play for us in that extension motion. So a customer might have started their journey with us with Terraform or with Vault, and then instead of having an individual single product conversation like we would have done in the past, now it's really elevating it to a solution discussion around, hey, we know you're on this bigger journey to zero trust, there's multiple pillars of that journey, and there's multiple products, particularly in our case, Vault, Boundary, and Console, that solve the core problems of zero trust. So for us, it's really more about positioning that as an extension play, and I think to your question of how does that change maybe the economics of it, You know, it's really around instead of them maybe expanding to just doing a vault purchase, it would now expand to its vault console and, you know, boundaries. The primary economic driver there is probably still vault as the anchor, but it allows them to access, start bringing those other tools in, and then those other tools expand, you know, from there organically.
spk29: If I could just add one of your suggestions, because I think what's clear is that we're just trying to reduce the friction for that expansion motion. Very clearly, there's a common buyer for this portfolio. We do historically provide them separately. But our customers know as well as we do that they have all of those problems together. And I think it speaks to really our longer-term arc of objectives, which is trying to build trust with those buyers. And then once you do that, there are a whole bunch of solution combinations you can imagine. Certainly security is one of them. You know, there's obviously a common one around provisioning and another one around networking. Those are all available to us. It just speaks to that central buying center. So we're not giving up anything. I understand.
spk10: Thank you for your thoughts. Next question. One moment for our next question.
spk24: Our next question comes from a line of Jason Adder from William Blair. Your line is open.
spk31: Yeah, good afternoon, guys. I'm feverishly trying to get to that break even in the second half of fiscal 25 in an eight easy. So can you help us figure out how you're going to get there? Because it just, you know, going from whatever negative 23% operating margin to for the year this year to break even in the second half of next year, I guess you're not saying for the full second half, you're just saying at some point in the second half, I assume. but just help us kind of figure out how to get there.
spk27: Yeah. Hey, Jason. It's Naval. Thanks for the question. So, you know, first of all, we're well ahead of our leverage plans. As we mentioned, we went through an investment cycle, which ended in the third quarter, and now we're in the leverage cycle and are ahead of our plans. And our original target was to get to breakeven in the back half of 26. We think we're well ahead of the structure and schedule we had to get there, so we're confident about the back half of 25. So, I mentioned this during the last call as well. We're going to be extremely selective in where we place our headcount investments, and that will further drive leverage from this point on. So we're confident that we'd be able to continue the momentum we saw. You know, we delivered a strong free cash flow margin quarter, and we'll continue to drive operating leverage, which will drive up our off-bank progressively between now and the back half of 25. Your comment is correct. It's a quarterly break-even rather than a full-year break-even, so we'd see progressive leverage up to that point where we'll get to break even the back half.
spk31: One quick follow-up, and maybe this is whoever wants to take it, but obviously if you're investing less over the next couple of years, it's going to affect your growth rates. How do you think about how much it's going to affect your ability to grow at the 30% level that you guys have set as a target?
spk27: Yeah, Jason. So, you know, let's not forget that we have placed all chips we need on the table in terms of the capacity we need, and we're confident we'd be able to hit our targets for this year with the capacity that we have. So the leverage cycle anticipates maintaining, you know, the guide that we have. And, you know, we're in the same economy as everyone else, so there's going to be puts and takes in any given year. But the long term, I think Dave mentioned as well, having spoken to a lot of our customers, they're not stopping their cloud programs, and the long-term still will be moving towards cloud. So we're confident about, over the long-term, maintaining a strong CAGR.
spk32: All right. Thank you. Good luck. Thanks, Jason. Next question.
spk24: Thank you. One moment for our next question. Our next question comes from Jim Fish from Piper Sandler. Your line is open.
spk28: Hey, guys. I wanted to dive back into this past year. Dave, you had even mentioned that the go-to-market focused more on smaller lands and just getting a goal with these kind of shots on net. Historically, what have you guys seen with relative year two sort of expansion rates, and how are you thinking about that in terms of guys here with net retention, especially as there's this balance between obviously cost savings that you guys can provide with this kind of digital transformation versus that, you know, stronger procurement process kind of diligence that your end customers have going on?
spk29: Yeah, I would just say that, you know, just to reiterate the kind of the motion, for what it's worth, you know, these are deeply considered infrastructure decisions, and so we tend to take time to win the trust of those companies as they make their first transaction. A year later, I think generally speaking, there's an expansion and an extension opportunity with every one of these companies because the cloud journey is pretty predictable in terms of the problems they run into. Generally, it's in year two we have the opportunity to jump to the second product. I think that's reflected in the NDE math that we've shared, the trailing number of 131%. I think what we've said is, and our guidance was that 120% is our long-term goal. So obviously it'll fluctuate, but I think that year two is reflective of that. I don't think that – we certainly don't anticipate that changes, that motion changes in year two that they jump to the next product. Yes, there's more friction than ever, but these things are – they're a little bit like – they're a little bit – like the ocean moving, they tend to, you know, these are important long-term projects for our customers, and they're not slowing down their cloud programs. They're certainly not stopping their cloud programs. So, you know, as they build those out in year two, I think we're fairly confident that we keep that expansion and extension opportunity intact. And the NDE number is probably the best proxy for it. We just, you know, we run that model over a long period of time. If that answers your question.
spk13: Thanks, Dave. Thanks, Jim.
spk24: One moment. One moment for our next question. Our next question comes from the line of Itai Kidron from Oppenheimer. Your line is open.
spk07: Thanks. Hey, guys. May I just follow up on Jason's kind of line of thought here? Can you remind us what was the headcount at the end of the year and how much it increased in the year? And relative to that, what would be your plan for fiscal 24, roughly? Okay.
spk27: Hey, Ty. Yeah, thanks. It's Navam. So yeah, we made substantial investments in the last year across the board, as we mentioned in our prior calls. I think our headcount, we'll disclose it in the K, was over 2,000 heads. I'll get you the exact number. This following year, we're going to make marginal investments across, you know, the sales and marketing and the R&D groups, but 2,400 heads. Marginal investments across sales and marketing and R&D. So we don't expect to see the same increase we saw last year into this year. And that's going to drive the leverage cycle that we expect to see in 2025. And just as a reminder, back in 2021, we drove a very similar leverage cycle. So we don't expect this to be a new motion for us. So we're excited.
spk07: Got it. And then as a quick follow-up, comp plan, you're starting a new fiscal year. Can you tell us what if any tweaks or tracks you've made to the comp plan as you're moving into the year?
spk29: No, I don't. The net is there's nothing significantly different. I would just suggest that we are, as you would expect, we're getting more mature at understanding the motions that work. Like I said, there's a land motion and there's an expand-extend motion, which matches how our customers adopt. I think, if anything, we've gotten perhaps a bit more precise in that. I think it's just more reflective of us. We're operating now at a pretty different scale than we were a couple of years ago. I think we understand how these motions work and and our compliance just reflect us sort of operationally tightening that. Big picture, not that different, but the tweaks just to lock us in a little tighter to those two motions.
spk06: Very good. I appreciate it. Thanks. One moment for our next question.
spk24: Our next question comes from the line of Fatima Bulani from Citi. Your phone is open.
spk04: Good afternoon. Thanks for taking my question. Dave, I wanted to go back to a comment you made in the prepared remarks with respect to the highest transaction velocity you've seen in any quarter at the company. I wanted to better understand what factors are actually deriving that behavior. And as a related matter, in the same breath you've heard customers express a ton of caution and delays around procurement. So how does that impact your ability to drive conversion from your open core base to sort of the paid versions of the offering. So just wanted to kind of reconcile those two motions, especially as we walk into fiscal 24. Thank you.
spk29: Yeah. So I'll just go back slightly and just, just, just underscore how the motions typically work. So yes, there's certainly ubiquitous use of the open source tech, but our customer conversations end up being specifically about, Hey, you know, you're provisioning a lot of compute, for example, and, we can help you standardize, have policy associated how you do that. So it's sort of a different problem than the open source project solves. So just to make that clear, that's how the motion works. It's really an infrastructure conversation. I would say, as I would expect is normal in this kind of an economic cycle, people are generally wanting to do slightly smaller transactions and slightly shorter duration transactions, entirely sensible transactions. given where we are in the cycle, that tends to lend itself to perhaps a higher volume at a lower quantity because their need is not unchanged. They just need a smaller transaction. It actually has the impact of not really being delayed so much at the smaller part of the transaction. part of the transaction size. So, you know, I think it's a positive for us ultimately in that the larger transactions get delayed, the smaller ones certainly don't. You know, we tend to get, you know, more smaller transactions as a result.
spk01: Does that answer your question? Absolutely. Thank you.
spk24: One moment for our next question. And our next question will come from Nick Altman from Scotiabank. Your line is open.
spk18: Great. Thanks, guys. Last quarter, you talked about your plans to introduce Boundary into the sales force at the sales kickoff, and it sounds like the Zero Trust bundle is starting to take hold. So can you maybe just talk about how those two products in the current macro backdrop are going to posture the messaging to the go-to-market and sales org this year?
spk08: Sure, yeah, happy to talk about that. Yeah, so as we mentioned, Boundary, relatively new product, you know, first commercial version was only introduced at our global conference last year, so kind of October, November of last year was the initial version, so obviously late in our fiscal year. So really, this sales kickoff and the start of this fiscal year is when we have a chance to really enable our field and train them on Boundary to take that to market. You know, we're excited for the year. It's obviously an early product. It's kind of starting from a standing start, but, you know, already booked our first few boundary transactions in Q4, you know, ahead of, you know, being able to even do some of that enablement work. So, you know, we're excited going into this year that once the field's, you know, both enabled on it, now we have that as a part of our zero trust SKU. And so we'll really be able to kind of bring that into play as we talk to our existing customer base as they're going through their extension motion both through ZTS as well as standalone opportunities just around boundaries. So we're excited about the opportunity there, but it's obviously early days, and that is still very much an extension focus as opposed to a land focus for us.
spk29: Just to kind of just layer on to Armand's comments, this is Dave. I think, again, just to make sure it's clear, as people sort of try to centralize their approach to cloud, it actually introduces three distinct conversations we have. One is around infrastructure, one is around security, and one is around networking, because those concerns get aggregated. So certainly the zero trust SKU is a really simple way to have the security conversation in a consistent way. But we have really all three of those conversations in any customer base. So it doesn't change our go-to-market messaging at all. It just says, you know, obviously these are the three conversations we can have. This is an easier form factor to have the security one in, but we could just as easily have the infrastructure conversation.
spk18: Great. And then just as a quick follow-up, when you look at your revenue guidance for the year, does it embed any sort of revenue mix shift dynamics across the product set, or do you expect the revenue mix to look similar to this year?
spk27: Yeah. Hey, Nick, this is Navam. We expect the product set to be broadly similar, meaning the majority of revenue is still coming from Terraform and Vault, but obviously as other products, you know, move into the emerging category, we expect more contribution from those products. Obviously, it's a bigger base to go take percentage share from, so it's harder to get there. But we're confident that over the long term, the emerging products will make a bigger contribution. But for next year, we believe it's still going to be the core products giving the most amount of revenue.
spk15: All right. Thanks, Nick. Let's go to the next question operator.
spk24: moment for our next question. Our next question comes from the line of Billy Mandel from KeyBank Capital. Your line is open.
spk19: Hi, this is Billy on for Michael Torres. Just wanted to ask about the competitive landscape you're seeing for vault. Has that evolved at all, and are you seeing any more pressure or competition from the privileged access management vendors or any of the hyperscalers?
spk08: Yeah, thanks for the question. You know, broadly, we haven't really seen a change in the competitive landscape. You know, certainly for the last few years, it's been kind of the same slate of players. You know, we've been in market alongside, you know, other folks. So we haven't seen any major shifts in the positioning. You know, if anything, I think we feel good about, you know, Vault as a differentiated offering. We continue to invest heavily in new capabilities and new features. And, you know, we see customers continue to expand. And I think, you know, what we're continuing to see is, Vendor consolidation actually being helpful for us. We obviously have a broad portfolio. Many of our customers see us as a strategic partner. And for many of our customers, as they continue to go down a multi-cloud journey, having a solution that's cloud independent and gives them consistency across all their environments is an important part of their strategy. So no major change in sort of the competitive dynamics.
spk24: Thank you.
spk14: Thanks, Billy. Next question, please.
spk24: One moment for our next question. Our next question will come from the line of Derek Wood from Callen. Your line is open.
spk34: Oh, great. Thanks, guys. It's Andrew for Derek. Congrats on the quarter. Dave was hoping to get some color on demand trends for Terraform versus Vault in the quarter. Are you seeing a higher priority on security and identity management driving stronger growth in Vault? And if so, are you making some go-to-market tweaks to lean more into the security side?
spk29: Hey, thanks for the question. Again, the short answer is I think it's pretty consistent. If anything, we've probably seen a slight uptick in terraform over the last six months. Hard to tell whether that's anything specific to the market or whether that's just the fact that we've had a commercial offering now for a few years. That just takes time. But no, it's about the same. It's It kind of goes back to those concerns being aggregated in the cloud programs. Like, you know, we have, you know, a third of the time it's a security conversation, a third of the time it's an infrastructure conversation. And Vault certainly is front and center for everybody's identity conversations. That hasn't changed. But proportionally, you know, it's still pretty consistent. You know, they're both really important products growing, you know, roughly equivalently.
spk08: And the one thing I might add to that is, I think oftentimes people think Terraform might be the value prop, might be only positioned through the lens of developer enablement or productivity, but there's a strong angle both on the cost management side as well as on the security side. So very often we're still having a Terraform conversation with security folks on how standardization of policy and guardrail and common blueprints actually improves security posture. So I see where the question is coming from in terms of maybe robustness of the security side But I think Terraform actually does tap into that vein. You know, maybe not to the same extent as Vault, but it's still very much a security play as well.
spk34: Great. That's helpful. And then either Dave or Armand, on your new Terraform no-code capabilities and drift detection, what's the customer reception been like so far? And can we start to see this drive broader user adoption and potentially greater open source conversions?
spk08: Yeah, I think in general demand has been positive, reception has been positive for it. The way we think about it is we're continuing to just add more differentiated capability, so continuing to widen that gap between the open source offering and the commercial offering. And I think particularly for some of the customers that maybe had built some scaffolding early on themselves in kind of a DIY around the open sourced, They're seeing these new capabilities like drift detection as sort of a helpful lever to say, hey, we should justify the switch over now to commercial offering because it's like this is capability they don't want to continue to build and maintain and invest through a DIY offering. So I think improving the commercial differentiation makes it easier for us to have that land conversation and create a really clear business case of why you should buy versus build.
spk22: Great. Thank you.
spk08: Thank you.
spk24: One moment for our next question. Our next question comes from the line of Miller Jump from Truist. Your line is open.
spk20: All right, great. Thank you for taking the question, and congrats on the solid results. You know, it looked like there were really solid RPO bookings in the quarter. And, you know, last quarter you all had mentioned some of the benefit from longer-term deals You know, but then we also hear about the increase in kind of velocity of deals this quarter. And I'm just curious, if there's any color you could give on what you're seeing with duration and maybe any change in impact quarter over quarter there.
spk27: Yeah, thanks, Miller. This is Nivam. Duration-wise, you know, you got to remember that fourth quarter is a seasonal quarter, and it's also a strong duration quarter for us. So we didn't – Dave's comments are still true, which is that you have a lot of transactions And we saw a lot of customers doing shorter duration transactions. But we also saw several customers who we have good relationships with and longer term relationships with continue their partnership with us and continue purchasing longer duration contracts. So in the fourth quarter, we did see similar duration as we did in the third quarter. And that drove the dynamics of our results to be very similar. We're about slightly under 90% ratable for the quarter and a strong performance on the multi-year side.
spk20: Great. Thanks. That's helpful, Keller. And then I guess just as a follow-up, some of the other companies we've seen in the broader DevOps ecosystem have talked about raising prices this year. And I'm just curious, How does pricing factor into your strategy, and are there any areas where you believe you can make adjustments to more closely align pricing with value?
spk29: Yeah, I'll take that one. I think we view this as a very long-term opportunity, and our number one priority is to win the trust of these teams as they're making architectural decisions that will last for a long time. Unlike sort of like a Git repository, which is quite easy to replace with another one, Our products are much less easy to sort of make that transition to. So I think what our focus on is really the ability to win the trust of these folks. And over the long term, we have multiple products in our portfolio that come to bear. So, um, we're, the truth is we have enterprise conversations with customers and sort of, we're sort of, you know, somewhat reacting to the market in real time, but our bias, so we sort of left an issue for us, but our bias is to try and, you know, win the trust and be the long-term partner. And that just is what you do when you have, you know, seven other products in their portfolio. So hopefully that answers your question.
spk24: Yeah, it makes sense. Thanks. One moment for our next question. Our next question will come from Brad Sills from Bank of America. Your line is open.
spk20: Oh, great. Thank you. I wanted to ask a question on this trend we're seeing in the cloud industry around workload optimization. What has been your observation here with this trend in your customer base? I mean, there's the concept of net new workloads coming in, and then there's the concept of optimizing for new workloads that have come in. Any commentaries there I think would be helpful. And then how does Hashi help here? Has this been a benefit to the business?
spk08: Yeah, thanks, Brad. You know, as we've talked about before, we often see cloud adoption through the lens of phases. And as Dave talked about, phase one tends to be, you know, where most companies start. It's a bit more ad hoc. Application teams are sort of on, you know, kind of free off the leash to kind of adopt cloud however they will. And what we tend to see even well before this year is the pattern ends up being in that phase one. You do often see an overconsumption. You do often see a lack of the appropriate security controls, compliance controls, because it's this sort of ad hoc, ungoverned approach to cloud that most people start with. I think that drives a phase two where there's the creation of sort of platform teams or cloud teams But there's a central point of kind of excellence that's responsible for how do we govern how cloud is consumed. It's those platform teams that then have a few different stakeholders, right? Part of their concern is how do we enable our developers effectively? Part of their concern is how do we do this in a way that's secure and we're managing the risk? And then part of their concern is how do we manage the cost and make sure we're doing this in an efficient way? And for us, our open source tools tend to get used in that phase one where application teams are just pulling it in and using it to solve their problems. but it's really in that phase two that our commercial tools are designed to help the platform teams around how do they manage the risk, how do they manage the cost, how do they manage the multi-tenant concerns of those different application teams. So yeah, I think we absolutely see that optimization taking place in many of our accounts. I think many customers have a whole bunch of underutilized resources or orphaned resources that are running or workloads that are inappropriately sized. So there's a whole lot of that that we see You know, I think in some sense that's an accelerator to the trend of creating these platform teams, which is, you know, who we buy in large focus on, and that's where we build an audience with. And I think there is definitely, you know, some tailwind there of helping our products get adopted by those platform teams who are trying to get their hands around the cloud spend.
spk20: Thanks, Armand. One more, if I may, please. One for you, Navam, on the guidance. I think you made some comments as to some conservatism there on the larger deals, but those are not included in the guide. So just curious, is there an added level of conservatism that you're factoring in here into the guide, or is this kind of a consistent philosophy? Thank you.
spk27: Yeah, thanks, Brad. You know, the guidance philosophy is consistent with the last year. In any given quarter, what we do is we give you a solid execution path to where the quarter will land, and we exclude certain large deals where Inherently the timing is is uncertain now last year, you know several of those last large deals closed and that's what drove Upside to guidance which led to strong revenue performance and revenue growth performance over the last year this year, you know when we think about our guide we're in the same economy as as our peer group and We're in the same buying cycle as our peer group or buying environment as our peer group so what we're expecting is those more scrutiny on those large deals that we've excluded from guidance and and more uncertainty on those large deals that are excluded from guidance. So that's what we are expecting from a guidance perspective, similar philosophy as last year, but more scrutiny on those upside deals that we've excluded. Overall, you know, we're pleased with how the last year turned out, and we're optimistic about the longer-term transition, and we'll execute on 24 and update you appropriately.
spk16: Thanks, Brad. Great. Thank you, Navam. One moment for our next question.
spk24: Our next question comes from the line of Mark Murphy from JP Morgan. Your line is open.
spk36: Hey, guys. This is Artie Ruan from Mark Murphy. Just a quick question. As the kind of environment changes a little bit and you guys are rolling out some of these new products, boundaries, zero trust, et cetera, is the relationship with how you're selling and how the partners and system integrators are selling changing with that? Is the motion adjusting to the new products or the new environments?
spk29: Yeah, here it is, Dave. Yeah, I think, again, pretty consistent. But you're also seeing us get a bit more mature at it, candidly. Our motion is very consistent. We try to engage with partners who have a great services opportunity over the long term with these accounts. And I would say that that ecosystem is pretty good and very receptive to the product portfolio. No changes to it expected. We have a great community of partners that do delivery work around us already. And Our view is we just add more products that they're able to grow their businesses alongside of us, and we think that's the right long-term model, but consistent.
spk02: Great. Thank you so much.
spk21: One moment for our next question.
spk24: Our next question will come from the line of Shebly Seyrafi from FBN Securities. Your line is open.
spk05: Thank you very much. So, You're guiding for, in my model, about three to four points of operating margin expansion in fiscal 24, and I'm getting about 13 points of margin expansion in fiscal 25. I'm just wondering if you guys are holding back on certain expense levers that you expect to implement in fiscal 25, and whether you're also potentially embedding some kind of revenue growth acceleration as perhaps the economy And if so, what are those expense levers that you may be holding back? Thanks.
spk27: Hey, Shelby. So we're delivering operating leverage every quarter over the past four quarters, as you noticed from our income statement, starting from 31% in Q1, ending close to 20% in Q4. You know, we've guided to what we expect to deliver over the next year given the environment that we're in. And we believe we can do that because of the continued success and leverage we're seeing. So that's about the extent of how we're thinking about the leverage. We believe that there's substantial leverage that we can deliver between now and the end of the year. And we're confident about the timing of these things that we've brought in the point of break even by a year. So, yeah, I don't think we're holding anything back. I think we'll execute every quarter and give you updates as they go along.
spk05: Okay. And secondly, your retention rate was 134%. The prior two quarters went to 131% this quarter. Do you expect that metric to decline in the coming quarters further?
spk27: Yeah, we're pleased with the 131. It was a very strong quarter for us. The model, just as a reminder, has always been to be above 120%. We believe that's the long-term net dollar retention rate that we should maintain. And over the past several quarters, we've been well above that range. Now, the other point to make about that net retention rate is that it comes from a very, very strong gross retention rate, which remained very solid in Q4. So there's a downtick related to procurement timing on the expansion extent side. But as always, these things are variable, and we will be above the 120% range that we aim to be at. We're continuing to see expansions and extensions from the partners and customers that we have, and we'll continue to win those expansions over time.
spk23: Okay, thank you.
spk24: Thank you. I'm not showing any further questions in the queue. I would now like to turn the conference back to Dave McJanet for any closing remarks.
spk29: I'd just like to express my thanks for the participation from everyone here. We certainly appreciate you dialing in for all the questions and look forward to speaking with everybody soon. Thank you.
spk24: And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.
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