Couchbase - Q4 2022

Transcript

Speaker 0

Good afternoon, and welcome to Couchbase's 4th quarter and full year fiscal 2022 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me are Couchbase's President and CEO, Matt Cain and CFO, Greg Henry. Today's call will contain forward looking statements, which include statements concerning financial and business trends and strategies, our expected future business and financial performance and financial condition and and our guidance for future periods. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and We do not undertake any duty to update these statements.

Forward looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today's press release and our most recent annual report on Form 10 today or quarterly report on Form 10 Q filed with the SEC. During the call, we will also discuss certain non GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of these non GAAP financial measures to the most directly comparable GAAP financial measures as well as how we define these metrics and other metrics is included in our earnings press release, which is available on our Investor Relations website. With that, let me turn the call over to Matt.

Speaker 1

Thank you, Edward, and good afternoon, everyone. Thank you all for joining us today. During today's call, Greg and I will provide you details on our 4th quarter results as well as our Q1 and full year fiscal 2023 guidance. I'm delighted to report that we finished the year on an excellent note, with revenue, annual recurring revenue and non GAAP operating profit all beating guidance. Revenue in Q4 was $35,100,000 an increase of 19% year over year, while ARR ended the year at 130 $2,900,000 representing 23% growth and an acceleration from prior year's growth.

Net new ARR was a record $10,600,000 up 65% year over year. RPO grew 58% to $161,600,000 We added 22 net new logos in the quarter, signifying that more businesses are choosing our modern database for their business critical applications. Our gross margins remain best in class at 88.7%. Greg will go into more details on Q4 in a moment, but first I'd like to highlight some of our accomplishments over the past year, including some exciting Q4 wins. I'll then lay out what our focus will be for fiscal 2023.

In fiscal 2022, we invested heavily To scale the business for long term growth, further building out our differentiated product portfolio, enhancing our go to market organization, expanding our world class team, all while successfully completing our IPO in July. We delivered on our innovation agenda, Enhancing our core server offering while launching our highly anticipated managed service. Specifically, we launched Couchbase Server 7 in July, which combines the best aspects of relational technology with the flexibility of a modern database, Further increasing Couchbase's capability as a relational offload. And we introduced Couchbase Capella, Our fully hosted database as a service offering at our Couchbase Connect conference in October. As most of you remember, our highly anticipated Base as a service offering provides flexibility and ease of adoption for developers and performance at scale for enterprise applications With the best price performance of any database as a service.

I'm thrilled that leading indicators for this new offering continue to be very strong, Including the engagement from developers within trials, we are seeing strong pipeline generation across multiple segments of existing Couchbase customers and new logo opportunities. And I am confident we will see meaningful revenue contribution this fiscal year. We enhanced our go to market organization by investing in both our buy from and our complementary world class sell to sales motion. Coordinated investments across top of funnel marketing, developer tools, sales capacity and customer success to name a few, Extend our reach and effectiveness across a variety of enterprise personas from systems architects to developers. We're seeing great results on both sides of these investments.

On the buy from side, we're seeing continued interest in our free trial, Strong engagement from existing customers and great responses to our Capella workshops. On the sell to side, we're seeing strength In new deals, including 22 new logos in Q4. At the same time, we're expanding our wallet share within existing customers And driving big deal momentum. We're enjoying robust and increasing demand from the largest enterprises, driven by very healthy renewal and expansion activity. Additionally, I'm pleased to see that our investments in our partner ecosystem are contributing to our growth, both in terms of awareness and directly in terms of revenue.

Q4 was the largest quarter ever for partner sourced and influence new business. All of this contributed to ARR growth of 23% in Q4 and an acceleration from prior year's growth. This is how we expected the business to progress and we believe we are poised to continue this trend into fiscal 2023. And we've achieved all this despite persistent pandemic related headwinds that have impacted many of our customers as well as how we go to market. Looking back at fiscal 2022, I am so proud of the entire Couchbase organization for the tremendous accomplishments across every level of our company.

We have a world class team. And as I have always said, our people are our greatest strength. Speaking of the team, I'm excited to welcome Gopi Dutti, who we recently announced has joined as our Senior Vice President of Engineering. Gopi will oversee all product development and delivery for Couchbase. He brings nearly 25 years of database and cloud experience from industry leading companies.

Gopi has been with AWS for the past decade, where he was most recently a General Manager and has been a leader in AWS' database, analytics and observability product teams, helping scale solutions such as AWS Glue, AWS CloudWatch, DynamoDB and Amazon Relational Database Service. Gopi's unique combination of cloud And database experience at scale makes him an outstanding fit for team Couchbase. Welcome, Gopi. Now I'd like to spend a few moments discussing some customer wins during the quarter, which were strong across new lands as well as expands and included some very exciting Couchbase Capella deals. In what is now the largest deal in company history, A Fortune 500 Shipping and Logistics company significantly expanded its more than 5 year partnership with Couchbase.

This customer relies on Couchbase for numerous mission critical applications, many of which require global availability, Submillisecond response times and 0 downtime. Dow Chemical was a G2K new logo win for Couchbase in Q4. Dow, along with the Accenture manufacturing team, selected Couchbase to power its Connect Field Professional Modern Mobile application, which streamlines and improves the workflow and experience of Dow colleagues working in a manufacturing environment. Couchbase was selected due to the maturity of our differentiated mobile product set, our offline capability and our overall vision for mobile computing. Another new customer in the quarter was Five9, a leading provider of cloud contact center software.

As part of their continued global expansion and growth, Five9 needed a more modern database that can handle the massive performance scalability Required to continue to deliver the high quality of experience its customers are used to. Five9 chose Couchbase Capella because of our superior performance delivered in the convenience of a service. Additionally, in Q4, a global communications API company Renewed and expanded their Couchbase estate, while transitioning their consumption to Capella, making them our first 7 figure Capella customer. Capella on AWS supports real time communication, session management and recording SMS messages for this company's clients. This customer credits the scalability, availability and performance of Couchbase as the reason for increasing their Couchbase investment.

Now let me talk about fiscal 2023. We are dedicated to building on our momentum to make 2023, a landmark year for Couchbase. We believe emphatically that this will be a remarkable year for Couchbase given the strength of our platform, Expanding go to market capabilities and numerous tailwinds at our back. First, our product portfolio is as strong as it ever has been, and And we're going to continue to consolidate our gains. Couchbase Capella is off to a great start, and we believe it will become an important contributor to our business this year.

It's well known that the cloud database market is accelerating. Industry analysts forecast that this year cloud Database management service revenue will account for 50% of the total database market revenue and we are now in a great place to participate in this growth. This mirrors what we see in our customer base as there is hardly a customer conversation that does not include cloud. Because of this trend, we believe we are well positioned with Capella and continue to have very high expectations for the offering. This year, you'll see us invest more in Capella, including extending it to more cloud service providers.

I do want to reiterate that our cloud offering is part of a larger set of capabilities enterprises are demanding As they press forward with their digital transformation initiatives, customers choose Couchbase in part due to the ability to enable applications Across a wide spectrum of deployment and consumption models from cloud to on prem, from the data center to the edge and everything in between. We released Couchbase Mobile 3 just last month, which delivers a single universal platform for mobile developers, empowering developers to move data and compute closer to where it's being used, making mobile applications faster and more resilient by eliminating dependencies on distant cloud data centers. These unique capabilities make Couchbase more easily embeddable and programmable at the edge, catering to a vast variety of industrial, Retail, Healthcare and IoT applications. The next release of our core platform is also coming this year. And with it, we will enhance our single unified platform to further eliminate the need for point solutions, so customers don't have to manage separate Technologies and independent data models.

We are the only modern database for enterprise applications that makes it easy to seamlessly combine Relational and operational capabilities with analytical insights. The next Couchbase server release will have many important updates, Such as extending our core platform support to additional processing architectures, which will reduce the cost for both our customers as well as Capella in the future. Our differentiated technology will always be at the heart of who we are, And we continue to aggressively invest in our innovation agenda. 2nd, we believe our expanding go to market The capabilities and investment in our buy from sales motion will continue to broaden our reach to a wider audience of professionals tasked with modernizing their organizations, including developers. Furthermore, We have allocated dedicated Capella resources and cross functional initiatives that will be deployed across our entire go to market organization To further drive our as a service adoption, these targeted investments have been carefully added to enhance our well instrumented Enterprise sales organization to support our growth and acceleration agenda.

3rd, We remain cautiously optimistic that pandemic related headwinds will continue to diminish in the coming months. We continue to see customers in COVID impacted industries show signs of recovery as spending has improved across this cohort after a challenging 18 months. And on balance, our sales productivity continues to recover. That said, we are not We lead back to a normal enterprise buying and selling environment. The world is still very much working itself back to what life was like pre pandemic.

I know how eager our world class enterprise sellers and support teams are to get back to what they do best, Getting in front of customers, having face to face engagements and sitting side by side with them to help modernize their architectures. And finally and perhaps most critically, we're seeing digital transformation initiatives and the litany of activities required to support them Receiving increasing attention and prioritization at the highest levels of organization. I am hearing this from business leaders far and wide, And our conversations with customers increasingly revolve around how Couchbase can play an essential role in driving multi year Strategic transformation journeys. It's this accelerating digital transformation backdrop that has me so excited about Couchbase and our opportunity to drive a generational rethink in the $62,000,000,000 database market. CEOs, CTOs and CIOs are all telling me that relational systems are too expensive and ill suited for the task And that other emerging NoSQL solutions lack the performance and scale requirements they need.

They are asking for a platform that can accommodate the incessant growth in data volume and variety that is at the core of digital transformation. But with uncompromised reliability and performance, Couchbase does precisely that In a fast, flexible and familiar way, I can share with you all that day by day, our customers and prospective customers We're increasingly gaining an appreciation for what Couchbase does and how we do it differently. In summary, we had a great quarter and a strong year. And in looking to FY 2023, There are some very big trends in our favor. I hope that you all detect the high expectations we have for ourselves for the coming year.

The best of Couchbase is yet to come. We wouldn't have this opportunity without the extraordinary team we have in place, as well as the core values that guide us in what we do every single day. At Couchbase, we aim to be good humans, Always to act with uncompromised integrity and to allow all our employees to serve their families. We are especially mindful of our values as we watch The tragic events unfolding in Ukraine. Our thoughts and prayers go out to all those who have been impacted by the crisis.

Like so many others, we We are hoping that we return to a peaceful and safe environment as soon as possible. With that, I will now turn the call over to Greg to talk about our financials. Greg?

Speaker 2

Thanks, Matt. Before I get into our results, I want to thank our employees, customers and partners For their efforts over the past year amidst a myriad of unprecedented challenges, the Couchbase team once again proved to be exceptionally resilient, And I am proud of our achievements. Strength in the quarter was driven by strong renewal and upsell activity as well as improving new deal activity. We have referenced our upselling opportunity to the land and expand motion, and we are pleased to see it play out quarter after quarter. As Matt mentioned, we are thrilled to once again have closed the largest deal in company history, the second time we've been able to claim that this fiscal year.

What is most significant about this deal is that we believe we are only just scratching the surface of that customer spend potential. Time and time again, we have conversations with this customer's most senior IT leaders and they continue to look at Couchbase as a strategic partner for the long term. I'll now walk you through our results for the Q4 and full year fiscal 2022. Revenue for the Q4 was $35,100,000 An increase of 19% year over year and $123,500,000 for the full year, an increase of 20% year over year. Subscription revenue for the Q4 was $32,800,000 an increase of 17% year over year And $116,300,000 for the full year, an increase of 20% year over year.

Professional services revenue for the Q4 was $2,300,000 an increase of 64% year over year and $7,300,000 for the full year, an increase of 14% year over year. Total annual recurring revenue or ARR was $132,900,000 at the end of the fiscal year, representing 23% growth year over year. As a reminder, ARR represents the annualized recurring revenue at the end of the period that is currently contracted and committed over the forward 12 month period. We continue to believe ARR best represents our business performance by accounting for timing variability among our customers' implementation times. We exited the year with 5.90 customers, an increase of 22 customers from the 3rd quarter.

Our ARR per customer performance in the 4th quarter with $225,000 up from $199,000 from the Q4 of fiscal 2021. Also in the Q4, We are pleased to report our dollar based net retention rate exceeded 115%. In discussing the remainder of the income statement, please note that unless otherwise noted, All references to our expenses, results of operations and share count are on a non GAAP basis. In Q4, our gross margin was 88.7%. This compares to a gross margin of 89.5 percent a year ago and 88.3% last quarter.

Our gross margin for the full fiscal year was 88.4%, slightly lower than our fiscal year 2021 of 88.9% Due to foundational investments in our as a service offering, our gross margin is currently among the best in class. We have a long term target for our gross margin to remain Above 80%. The trajectory for our gross margin target is contingent on the rate of uptake and eventual mix of our growing as a service offering. Turning to expenses. Our sales and marketing expenses for Q4 were $22,200,000 or 63 percent of revenue compared to $18,600,000 or 63 percent of revenue a year ago.

For the full year, our sales and marketing expenses were $85,400,000 We're 69% of revenue compared to $68,700,000 or 67% of revenue in the prior fiscal year. We continue to aggressively lean in to build out our go to market muscle as we see consistent demand in our large and very global addressable market. Research and development expenses for Q4 were $12,300,000 or 35 percent of revenue compared to $10,300,000 or 35 percent of revenue a year ago. For the full fiscal year, our research and development expenses were $48,300,000 or 39 percent of revenue compared to $37,700,000 or 36 percent of revenue in the prior fiscal year. During the past year, we thoughtfully invested in the build out of our as a service offering as well as additional features to bolster our platform offering.

General and administrative expenses for Q4 were $5,700,000 or 16 percent of total revenue compared to $4,200,000 or 14% of revenue a year ago. For the full fiscal year, our general and administrative expenses were $21,000,000 or 17 percent of revenue compared to $13,600,000 or 13% of revenue in the prior fiscal year. Significant G and A investments were made in fiscal year 2022 as we built out the necessary public company infrastructure for scaling the business. As we exit the year and enter fiscal year 2023, we expect general and administrative expenses to increase on a dollar basis, but to remain roughly consistent as a percent of revenue. Operating loss for Q4 was $9,100,000 or a negative 26% operating margin compared to an operating loss of $6,700,000 or negative 23% operating margin a year ago.

Operating loss for the full fiscal year was $45,500,000 or negative 37% operating margin compared to an operating loss of $28,200,000 or negative 27% operating margin in the prior fiscal year. Non GAAP net loss attributable to common stockholders for Q4 was $9,600,000 or negative $0.22 per share. For the full fiscal year, net loss was $50,400,000 or negative $1.96 per share. Turning to the balance sheet and cash flow statement. We ended Q4 with $206,000,000 in cash, cash equivalents and short term investments.

Our remaining performance obligations Our RPO totaled $161,600,000 at the end of Q4, an increase of 58% year over year. Our continued exceptional strength in RPO growth is fueled by significant upsell and renewal deals. We expect to recognize approximately 61 percent or $98,000,000 of total RPO as revenue over the fiscal year 2023. Operating cash flow for Q4 was negative $2,700,000 and for the full year was negative $41,600,000 Free cash flow for Q4 was negative $2,700,000 or negative 8% free cash flow margin. Free cash flow for the full year was negative $42,400,000 or negative 34% free cash flow margin.

As we continue to scale the business through foundational investments, we are well capitalized as we enter fiscal 2023. Now to conclude the call, I will provide guidance for Q1 and the full year fiscal 2023. We continue to see strong business momentum and elevated database infrastructure migration Activity across our industry and our pipeline momentum is strong. Furthermore, as Matt indicated, we are seeing signs of recovery in our customer base impacted by COVID, and We are cautiously optimistic that business conditions will continue to normalize. That said, we've seen recovery take longer than expected and are assuming some continued uncertainty in our distressed industries and our go to market motion as we continue to monitor pandemic related developments.

Additionally, we've seen variability with respect to the implementation timing of certain deals continue to persist, which impacts our revenue visibility. Accordingly, we are prudently considering these factors into our revenue guidance even as we see continued upside to our ARR outlook. Clearly, a deviation from this assumption would cause us to modify our guidance higher or lower. For the Q1 of fiscal 2023, We expect total revenue in the range of $32,500,000 to $32,700,000 therefore a year over year growth of 17% at the midpoint. We anticipate ARR in the range of $136,000,000 to $138,000,000 which represents 25% growth at the midpoint.

We expect a non GAAP operating loss in the range of negative $16,800,000 to negative $16,600,000 For the full year of fiscal 2023, we expect total revenue in the range of $146,500,000 to $147,500,000 Therefore, a year over year growth of 19% at the midpoint. We expect ARR in the range of $160,000,000 to $164,000,000 We're 22% growth at the midpoint. And finally, we expect a non GAAP operating loss in the range of negative $57,200,000 to negative $56,200,000 With that, Matt and I are happy to take your questions. Operator?

Speaker 3

Thank

Speaker 4

you. Our first question comes from Raimo Lenschow with Barclays. You may proceed with your question.

Speaker 5

Hey, thank you. Congrats for a solid Q4. Two questions if I may. Matt, first for Capella, what are you seeing in terms of pipeline Bill activity in terms of where the deals are coming from, is that like an existing on premise customer trying to move over? Is Is it new customers that you can attract there?

So that's the first question. And then for Greg, on the guidance, how much of an impact Will you get if you have more Capello deals because you don't have the revenue, the upfront revenue recognition in there? And so from that perspective, that could be an headwind. Is that a factor in the guidance as well? Thank you.

Speaker 1

Remo, thanks for the question. Let me start off in addressing the Capella Pipeline. The first thing that I would tell you is we are excited about the continued momentum that we've seen across the board on Capella, everything from Top of funnel dynamics, an increase in web based traffic 30 plus percent year over year, more engagement from developers, Continued strength in trials and an increased number of deals along with pipeline. As it pertains to pipeline, Raimo, as we've talked about and what we expected to see is that we would see a mix of Net new customers and new applications, new applications inside of existing customers, those existing customers being Capella customers where we've seen expansion and also server based customers that are deploying Capella for the first time. And then finally, migrations of our installed base.

So we are actually seeing that across the board, which is what we expected. And Raimo, I think that's a function of the core value proposition of Capella starts with the foundation of the Couchbase value proposition And then the ease of use and overall TCO dynamics that layer into Capella as an overall solution. So we're excited about The pipeline, the fact that it's broad based across both new and existing customers and we think that's indicative of what we're going to see as we go forward.

Speaker 2

And Raimo, on your revenue guide question. So just again, reminder that obviously we focus and run the business on ARR and we had a great net new ARR Resulted highest in the company history in Q4. We obviously also think RPO is a good forward looking measure and we've seen that Increasing over the last 5 quarters. So revenue is a good measure, but that's not how we run the business. And then we obviously have talked about previously, we do work Some of the largest enterprises in the world underpinning very large complex deployments.

There's timing variability with these projects. So we're pleased with how the business performed, Really good deal activity. But we do realize some of this variability is also playing. We've seen this In the year and so we wanted to ensure that our guidance reflected that. In addition to your question, we are seeing an increased mix versus what we had given you a preview for Sort of pre IPO to our fiscal 2023 around Capella.

We are seeing more Capella. And to your point, yes, the revenue recognition around that is on more on a pro rata basis than Under the subscription part of our business, which is under ASC 606, where we do take an upfront and that is also having an impact on the revenue guide as well.

Speaker 5

Okay, perfect. Thank you.

Speaker 4

Thank you. Our next question comes from Jason Ader with William Blair. You may proceed with your question.

Speaker 6

Yes, thanks. I just want to follow-up on the guidance. So also at the time of the IPO, you talked about ARR Acceleration. And it was from the guidance, it looks like it's a slight deceleration. But then in your prepared remarks, you talked about maybe some upside to ARR.

So can you help us Understand what you mean by that. I mean, are you just trying to be a little more conservative on ARR because of the macro conditions?

Speaker 2

Yes, Jason, thanks for the question. So again, we do run the business off ARR. That is our Key measure, we're really proud of how we did and we saw the growth acceleration happening in fiscal 2022. So when we are guiding to Fiscal 2023, look, we want to take extra care in formulating our guidance. We do the best to provide the most accurate guidance and everything we know.

We feel comfortable about our guidance, but we obviously are trying to be prudent again as we have been and deliver guidance that we can At a minimum, meet, we will strive to work really hard to beat that. So we feel good about our guidance. We do also feel good that there is Opportunity to do more here, but for the time this is what we see and we want to deliver to you guys.

Speaker 1

And Jason, if I could add on in terms of acceleration beyond just the specifics on the numbers, we talk about The best of Couchbase being in front of us and we're seeing data points that are playing out on that thesis. Obviously, the results in Q4, the Accelerating ARR growth rate, record new AR. We've seen strength in the renewal base, continued significant expansions, Increased new logo activity, but I'll tell you Jason what's sitting behind all that as well is the dialogue that we're having with customers both new and existing And the nature of Couchbase being seen as a true digital transformation technology partner, I'm personally having conversations at the C level with companies across auto parts retailers, global logistics companies, streaming providers And they're all talking about the need for a modern database for their enterprise applications, which combines relational technology and the flexibility of the Couchbase Couchbase platform from cloud to edge and of course Capella now is a consumption model that brings All of the capability that we've worked so hard to engineer into Couchbase and magically combines that with the ease of use of the consumption model of Capella. And so those conversations are additional data points that give us great optimism on the acceleration of Couchbase overall, and we expect those to continue as we go forward.

Speaker 6

Great. And just one quick follow-up for you, Matt. What would you say the main constraint for the company is right now on growing faster?

Speaker 1

Look, Jason, I think we're really focused on cloud as we go forward. Now the foundation of Couchbase at the core is critically important. And as you saw in the fiscal year, we came out with major Product innovations on 7.0, we released our mobile product 3.0.

Speaker 7

But

Speaker 1

I think in terms of unlocking the next phase of growth, We continue to be very aggressive as Greg mentioned in his remarks on investing in Capella both from a product perspective where you're going to see us add additional Cloud providers, you're going to see us bring mobile into the fold. You're going to see us continue to make that an even better TCO offering for Our customers and at the same time, we are augmenting our go to market model with dedicated Capella Everything from presale trial engagement, technical resources to sellers to customer success resources. We've been very surgical about how we've architected this growth strategy. But consistent with what we've talked about, we think that's going to be a major Catalyst of additional growth for us as we go forward. And that's of course above and beyond us getting beyond Some of the headwinds that we've disproportionately faced as a company and that we serve the travel industry Very well.

And we're an enterprise driven sales organization that does very well when we show up with large enterprise Customers and work through complicated and long term projects. So I think we're starting to see great data points on both of those things coming off. And then we layer on the Capella. I think that's why we continue to invest in and why we feel great about where we are as a company and where we're headed.

Speaker 6

Thank you. Good

Speaker 2

luck. Thanks, Jason.

Speaker 4

Thank you. Our next question comes from Sanjit Singh with Morgan Stanley. You may Steve, your question.

Speaker 7

Thank you for taking the questions. I apologize for the background noise. Matt, to your point on

Speaker 1

Hey, Sanjeet, unfortunately, we're trying to listen as hard as we can, but we can't make out the question. And I don't want to miss what you're asking.

Speaker 7

Hold on one second, sorry. So yes, hopefully that's better. The question that I was going after is, In terms of unlocking that faster growth in the cloud, I think I kind of one of the necessary conditions is targeting those developers More specifically, that user group. And I know you rolled out some initiatives over the last several months. What's been sort of the early signs Traction on that front to target that persona?

Speaker 1

Yes, Sanjay, you're right. We Obviously, believe that the developer is an absolutely essential persona for us, and particularly once we Prove our value to developers being able to also appease the enterprise architect is critically important. But Back to the developer point, I think if you were to look at every aspect of our business from marketing to our sales efforts and certainly Our product initiatives, they all have a developer orientation. We are starting to see those investments pay off. As I mentioned to Raimo, our web based traffic for developers was up 34% year over year.

In addition to just traffic, we're seeing increased engagement. So the amount of time the developers are spending in the portal, Engaging in our documents, downloading our trials. In Q4, as a matter of fact, We had more than double the amount of Capella trials than we had in the 4 previous quarters combined. And I think that's a direct result of us Articulating the value proposition at Couchbase to developers and then having a product experience that Provides the ease of use that they're looking for that then helps them see the value of the Couchbase platform. We're starting Land new business where it's more developer focused.

An example of this is a company called Entouragea, an Indonesian logistics company, where they were looking to replace Postgres. We support everything from order packing to shipping confirmation and so on. And we went head to head with Mongo on that, Improve that Capella was the right solution for them. That's developer led. It allows them to build applications faster And it doesn't create any limitations on scale because they're now in Couchbase which manages applications at a level that other solutions don't.

So a lot of effort, Sanjeet. We're going to continue to invest in developer relations and our community efforts And in making sure that we have the right solution and the right experience in our cloud based offerings specifically for that persona.

Speaker 7

That sounds very promising, Matt. Thank you for that color. Greg, as my follow-up question And I hear you loud and clear that the timing of implementation is driving the delta between the ARR growth and the revenue growth, particularly with Back to the guidance, I think for those investors that look to ARR as a leading indicator of future revenue growth, What would be a reasonable baseline assumption for those two numbers to start to converge, right? Because I think you've done a couple of quarters now where AR growth has sustained Very nicely above 20%, and the revenue is just slightly under. And so I'm just trying to get a sense of what a reasonable timeframe Might look like for those two numbers should begin to converge.

Speaker 2

Yes, Sanjeet. Thanks for that. And You're right. Obviously, it's something we do watch ourselves. Look, I don't think there's any we're not going to guide to any specific time frame, But we do expect that revenue in AR will converge over time.

I don't think it's going to be years per se, but I do think it's it will begin to And in the relatively near future, and we are watching that. And look, we're trying to be, again, smart about how we're giving guidance here. We feel really good about how the ARR is going and we think the revenue will certainly come behind it. And again, I would also point to our RPO in terms of how that's been Trending and progressing over the last several quarters is an indicator of where we think things are going to go in general. But for now, our Revenue will be lagging behind us just a little bit.

Speaker 7

Understood. Appreciate the color, Greg. Thank you.

Speaker 2

Yes. Thanks, Sanjit.

Speaker 4

Thank you. Our next question comes from Rob Oliver with Baird. You may proceed with your question.

Speaker 8

Great. Thank you guys and I apologize in advance for a spotty connection. I'll ask both my questions upfront. First is for Matt. Congrats on the 7 figure customer in Capella.

If you could just help us understand when a customer transitions to Capella, what is the timeframe on that? How long does that typically take? And through how the trend work goes? And then Greg, my question follow-up question for you is, Matt talked about the allocated dedicated Capella resources. When you look at the incremental spend in FY On that around Capella and the Capella resources or are there other in that spend as well?

Thank you guys.

Speaker 1

Rob, appreciate the question. There were a few moments where you dropped out, but I think we have the essence of it. If for some reason our commentary misses the question in any way, let us know and And we'll address it. As it pertains to the 7 figure customer, obviously very excited about that. This was an existing Couchbase customers, I mentioned, they've been expanding dramatically with their usage of Couchbase, more applications, more users, and really leaning into our differentiated scale and performance that serves today's needs and on a go forward basis.

And when we're engaging with this customer on their go forward plan, they were not only thinking about how to expand with Couchbase, But what the best consumption model was for them. And I think it speaks volumes about the Solution that we've built with Capella that not only are they continuing to increase what they're putting into Couchbase, but The value proposition of us managing the database and the TCO that we can provide to them was the consumption model that they're going forward with. Now in terms of the timeframe of moving from a server deployment To Capella, that could actually be a pretty simple migration, Rob, because it's still Couchbase server. It's not as if we have a different underlying Solution and that's one of the major points of value proposition for Capella as a whole. If you get into the intricacies, Rob, what it can some Cut times come down to is what version of Couchbase server is a customer running versus the Up to date version that is running on Capella and we need to do a check to see is there anything that the application may be Depending on in a way that we've upgraded, outside of that, if it's version to version, it's a pretty seamless migration and We built the solution for it.

Now as was the case with this customer and will be the case with other customers, there's a reason why we Continue to invest in our services organization and we're going to have specific service engagements where These may be really big migrations or they may be more complex where we can walk customers through that, help them with their Project plans as we go forward. But by and large, Rob, we've architected the solution for that not to be an issue and to allow Customers to do it at the pace that they feel ready and willing to do it.

Speaker 2

Yes. And Rob, on your Question to me, some of that got cut off. So if I don't quite answer it the way you had intended, we can obviously follow-up. But So we started making the sort of augmentation towards the Capella model, if you will, even in fiscal 2022 in the sales and marketing spend. So I I think we previously talked about really taking our inside team and making that the Capella sales team.

So we've already started building that framework out. What we're going to augment that with is what Matt talked about is having these Capella sellers or this Capella overlay, not only to assist that, but to also Assist with our outside reps, our enterprise sales reps in really helping think about selling into not only the existing customer base that we have, which we do think will have some of that transition over to Capella, but also about going and acquiring the new logo activity in Capella that we know is out there and we know we're going to try to go after. So all of that has sort of been building. We're augmenting it further. It is all built into the model for next year and we'd always sort of Knowing this was sort of the transition we're going to have.

So we feel good about being able to sort of support with our sales and marketing investment, both The core business that we've been running for years as well as this transition as we build more sales and marketing efforts around Capella and the consumption model we're going to have.

Speaker 8

Great. Yes, appreciate it. You guys got them. Sorry for the connection and appreciate it. Thank you guys very much.

Speaker 1

Thanks, Rob.

Speaker 4

Thank you. Our next question comes from Matt Hedberg with RBC Capital Markets. You may proceed with your question.

Speaker 1

Hey, guys. Great. Thanks for taking my question. It sounds like you're having some increased success on the partner side. I think you called out the deal with Accenture.

Could you provide a little bit more detail there? I think if I recall right, maybe partners used to be involved in maybe 40% of deals and it moved up to 50% recently, if memory serves me correct. Could you talk about where that mix could go longer term, especially as Capella ramps? Matt, Appreciate the question. Good to hear from you.

Let me kind of talk at a high level about the partner business and then I'll let Greg comment about the specific percentages. We think the partner business is absolutely essential for us as we go forward. And we've built a very balanced program that includes Everything from GSIs to a very healthy and growing ISV business, up to and including partnerships with our cloud providers And the strength of the partner business, we're actually seeing growth across all of those. In the GSIs, we continue to see Vertical specific solutions that systems integrators are building and bringing into enterprises, ISVs It is a great and effective channel for us for new business activity. We've seen some growth in particular strength in Areas like telco and 5 gs.

And then we're really starting to see kind of disproportionate growth in what we're doing with The cloud providers and have expanding partnerships on the go to market side, everything from joint account planning to Direct marketing investments from cloud solutions. In fact, we have a pretty significant and increased joint go to market Model with AWS for fiscal 2023, as we really think about them as a strategic partner on the Capella side. And so this is something that we're going to continue to invest in. It extends our reach. Partners are in our enterprise accounts And new logos that we want to source and we think this is an important leverage model for us.

We are excited about the increased momentum and maybe Greg you can talk about How we landed up for the full year, which is very healthy.

Speaker 2

Yes. Hey, Matt. So yes, for the full year, we had over 50% of our new business was sourced And or influenced through the channel partner program. And we believe that it could Certainly stay around that level. I mean, I think that's a good level for us.

I think if it went up a little bit that that'd be fine as well. But we think that that's a pretty good Spot for us to be in and I think it'll oscillate from quarter to quarter, but overall I think that's a good place For us to be in, we'll have to see how that changes over time with Capella, just because it's still new to the business of How much of that comes or does not come through the channel per se, but right now we're at just over 50%.

Speaker 1

Got it. That's really good to hear. And I guess the analog or the flip side of that is, as enterprise demand picks up and normalizes, Capella starts or continues to ramp. How do we think about some of these sales and marketing expenditures now Sort of getting back to sort of like more normal efficiency there and kind of sort of like showing a bit more of margin improvement off of Some high levels of spending to support, obviously, a lot of good stuff going on the product side. Yes.

So Matt, Let me take a crack at your question, and if I'm off and how I'm answering it, let me know. Look, I think we've spent time talking about the balanced investment. We have to have a great product. We're going to continue to market The value proposition, but we also need to ensure that we have a sales organization, a go to market organization that's in place to truly engage with customers and expand once we've landed. I think our specific investments That we've articulated on Capella are in addition to our existing go to market resources.

And so I think it's critically important that this is an and and we've unlocked the entire Couchbase go to market To work on cloud and then we've layered on specific resources where we think there are, in addition to activities that will help augment You know what those organizations are doing. So, as an example, this trial activity that's very healthy for us, we now Now have the product instrumented in such a way that we can see the behavior of developers engaging with the solution, when are they getting to that moment, When is it an appropriate time to transition to our enterprise sellers? We've put resources in place who are dedicated on the trial experience. At the same time, we have cloud sellers that we are bringing in from places like Azure that can engage with customers and have cloud Specific discussions on long term TCO and how we can be competitive against hyperscale solutions, we're still going to have Account teams and SCs that are fully ramped up and focused on those accounts and territories. So we do believe that we're going to drive better efficiency over time.

At the same time, we want to make sure that we are investing to support the build out of the cloud model. And we've got some critical capabilities like the ones I've mentioned that we want to make sure are in place. So we're investing for growth. Certainly, we will be looking for efficiency, but right now we're really focused on Make sure we're capitalizing on this opportunity, realizing the long term generational market opportunity that we are aggressively going after. That makes a ton of sense.

Certainly seems justified from my perspective. Thank you. Thanks guys.

Speaker 2

Thanks Matt.

Speaker 4

Thank you. Our next question comes from Rob Galvin with Stifel. You may proceed with your question.

Speaker 2

Hi, this is Rob Galvin on for Brad Reback. Thanks

Speaker 1

I'm just wondering if there's any sort of a typical revenue uplift when a customer migrates to Capella.

Speaker 2

Hey, Rob. Yes, this is Greg. Yes, there is absolutely. Obviously, because now we are not only Managing the database for them coming from a self managed, but we're also hosting from an infrastructure perspective. So there absolutely is an uplift.

And I think Historically, we've talked and we'll have to see how this plays out, but we think there could be an uplift on an annual credit basis in the range of 30% to 40% and even more when they go to a on demand basis.

Speaker 7

Great. Thank you.

Speaker 2

Thank you.

Speaker 4

Thank you. Our next question comes from Tom Singh with Oppenheimer. You may proceed with your question.

Speaker 3

Hi, thank you. Yes, this is Param Singh with Oppenheimer on for his hi, Kieran.

Speaker 4

So thank you Thank you for taking my question. Firstly, maybe you guys

Speaker 3

could help me quantify the near term headwind you're seeing from the Capella mixed to your revenue recognition That's baked into your guidance. And then how should we think about any sort of headwind over the next few years until the mix gets more normalized and you're expecting, like you said, About 50% of new workloads coming on as a service. So how should we think about that? And then I have a follow-up.

Speaker 2

Yes. Thanks for that question. Yes. So as I mentioned before with the revenue guidance is we're seeing slightly more Capella in the mix than we had originally anticipated, which we're very excited about. There is it does provide a slight revenue headwind.

And over time, that will also continue until we get to a sort of a normalized run rate or a more material part Capella being part of the mix of the story. So yes, you will see that over time. Again, we're trying as best we can based on what we know today To provide the most accurate guidance on everything we know and we feel good about our guidance. But you will see some of this over time and we'll as we get more specific on Capella's are sharing more details, we'll probably share more on what kind of Revenue headwind expectations, you can see right now. Again, today Capella is not a material part of our business, even though it is starting to have some impacts on Things like the rev rec, the gross margins, etcetera.

Speaker 3

Understood. Thank you for that. And as my follow-up, I wanted to understand how much Of your sales and marketing increase that you're expecting in fiscal 'twenty three is based on new hire and the teams you just mentioned Versus say higher cost base for new hires or even the existing base because labor is so tight.

Speaker 2

Yes. So it's definitely both. Obviously, as we go into a new year and we go through A typical merit cycle, there's an increase to the cost of the existing resources, but then we're adding we're also adding capacity. I would say the larger part of it is through the adding of capacity around sales and marketing resources as we build out to continue to grow the business. So while there's a little bit more pressure in the market today and so the annual cost of existing employees It was going up.

I would say that the majority is really the new additional resources that we're adding to go from The outside reps, the Capella overlay, and even some of the inside teams to kind of continue to grow the business, but that's where the majority the majority of the increase lies.

Speaker 3

Got it. Thank you for that. And maybe if I could just sneak in another one. Just looking at ARR, Why would ARR exiting the year would go at a slower rate than 1Q? What am I missing here?

Speaker 2

Well, again, some of it depends on timing. So As we talked about last year in Q1, we had a in particular a single large customer that Exited the ARR base, so that's giving us specific, particularly in Q1, a pop. And then additionally, look, this is our guidance. We feel comfortable with our guidance, as I stated before, We build it to be prudent in a position where we can at a minimum meet this and try to over deliver towards Further as we get into the year. So we'll provide updated guidance as we go through the year, of course.

Speaker 3

Thank you so much for the color. Much appreciated.

Speaker 4

Thank you. This concludes the Q and A portion of today's call. I'd like to turn the call back over to Matt Cain for any closing remarks.

Speaker 1

Thanks again everyone for joining us this afternoon. We've come to the end of our 1st fiscal year as a public company on an excellent note. Clearly, we're excited about what's to come and we are very well positioned for fiscal 2023. And again, I want to sincerely thank Our customers, our partners and team Couchbase for making this past year possible. We'll see you back here next quarter.

Speaker 4

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.