Couchbase, Inc. (NASDAQ:BASE) Q1 2024 Earnings Call Transcript

Couchbase, Inc. (NASDAQ:BASE) Q1 2024 Earnings Call Transcript June 6, 2023

Couchbase, Inc. beats earnings expectations. Reported EPS is $-0.27, expectations were $-0.32.

Operator: Greetings, and welcome to the Couchbase First Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Edward Parker, Head of Investor Relations. Thank you, Mr. Parker, you may begin.

Edward Parker: Good afternoon, and welcome to Couchbase’s first quarter 2024 earnings call. We will be discussing the results announced in our press release issued after the market close today. With me are Couchbase’s Chair, President and CEO, Matt Cain; and CFO, Greg Henry. Today’s call will contain forward-looking statements which include statements concerning financial and business trends and strategies, market size and expected future business and financial performance and financial condition, and our guidance for future periods. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date and we do not undertake any duty to update these statements. Forward-looking statements, by their nature, address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations.

For 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-K, our quarterly report on Form 10-Q filed with the SEC. During the call, we will also discuss certain non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, as well as how we define these metrics and other metrics, is included in our earnings press releases which are available on our Investor Relations website. With that, let me turn the call over to Matt.

Matt Cain: Thank you, Edward. And good afternoon, everyone. On today’s call, Greg and I will provide details on our first quarter results, as well as our second quarter and full-year fiscal 2024 guidance. I’ll start off with a few highlights of our Q1 financial results. Couchbase delivered a strong quarter beating our guidance across all metrics. I’m pleased with the team’s execution on our strategy to deliver topline momentum, while outperforming on profitability all against a difficult economic environment. Total annual recurring revenue or ARR was $172.2 million, up 23% year-over-year. Revenue in Q1 was $41 million, up 18% year-over-year. Our non-GAAP gross margin remains best-in-class at 86.4%. Non-GAAP operating loss was $12.9 million and non-GAAP operating margin was 5 percentage points above the midpoint of our implied guidance range, demonstrating our continued operating expense discipline and focus on driving leverage in our model.

I’m proud of how the business is performing despite the macro environment. And I believe we are more strategically aligned than ever before. Indeed, while there are external factors outside of our control, we continue to focus on what we can control. Innovating and investing for an exciting future, while placing increased rigor on our expense discipline. Recall that last quarter, we laid out our key priorities for fiscal 2024. Focus on top line growth, increase the mix of Capella, drive further sales and marketing efficiency and accelerate the pace of leverage in our model. I’ll comment on Capella and our go-to-market progress and Greg will provide more details on the impact they’re having on our growth and leverage results. Starting with Capella.

Our R&D team is rapidly innovating to enhance our offering, reduce barriers to adoption and deliver even more value for customers. Last week, we announced our newest release of Capella, which will be accessible by the popular developer platform Netlify and features a New Visual Studio Code extension. This release makes it easier for developers and development teams to build modern applications on Capella. We also extended Capella’s enterprise features and deployability, including new time series data capabilities to support a broader set of use cases. Looking forward, we will continue to focus our product innovation towards making Capella more accessible for customers and on improving the developer experience, all while delivering the enterprise-grade capabilities that have been the core of our DNA.

In addition to Capella innovation, we continue to invest in initiatives that drive developer adoption and more efficiently drive growth. These are enabling users to discover the power of Couchbase sooner and are accelerating product-led growth for both new and existing customers. As a result of our efforts, we’re enjoying higher engagement and visibility at more developer meet-ups and conferences, increased content consumption on a revamped developer website and valuable feedback from some of our most strategic customers at developer workshops. Customers are selecting Capella for their long-term cloud modernization strategies due to its performance, speed, scalability and flexibility advantages. Capella’s best-in-class TCO and unique value proposition are especially important differentiators for cost-conscious customers during times like this.

On the go-to-market side, we continue to create further sales and marketing efficiency by driving ongoing operational improvements and investing in our partner ecosystem. Last month, we announced the availability of Capella on Microsoft Azure marketplace further simplifying the process for customers to adopt Capella and deploy applications on their cloud of choice. We are excited about the opportunity for our Azure partnership to accelerate the adoption of Capella and bring the power of Couchbase to more organizations. Also on the partnership front, we are building on the momentum of our recently enhanced ISV partner program in conjunction with our expanded relationship with AWS through the launch of our ISV Starter Factory. This program supports ISVs with additional tools and resources to build and modernize their applications with Capella on AWS, reducing complexity and making it easier for organizations to modernize and migrate their applications.

We remain closely aligned with AWS and are excited to participate in an increasing number of go-to-market activities with them. These include joint asset creation, developer engagement and AWS summits around the world. We will continue to evolve and broaden our partner ecosystem in order to help organizations accelerate their application development journey and grow our reach in the market. Now turning to wins from the quarter. I am pleased with the breadth of our customer activity across a broad range of industries, including technology, e-commerce, healthcare and travel. Starting with Capella, we’re seeing increasing engagement and uptake of our as a service offering. During the quarter, we crossed a key milestone with the number of Capella customers now in the triple-digits growing dramatically year-over-year.

Some exciting new wins included a fast-growing pet health and wellness company, a NextGen real estate technology company and a revenue cycle management software company. We also continue to see existing customers migrating to Capella. A Fortune 500 energy customer that leverages Couchbase for its main field application decided to migrate a meaningful portion of its estate to Capella. This six-figure deal was one of our largest Capella deals in the quarter demonstrating how our large enterprise customers can leverage the full capabilities of Couchbase while enjoying the greater flexibility, efficiency in TCO inherent to our on-demand offering. A Capella expansion during the quarter came from public and is really based online media company, which uses Couchbase to power its indexing and query for its search engine.

As public continues to scale its business, it’s expanding its investment in Capella, because they see compelling cost efficiencies compared to competitor solutions. On the enterprise front, we want to spotlight LinkedIn, who serves over 1.4 million profiles per second at its peak. They recently published an article outlining how their existing open source platform could no longer address the loads on their storage infrastructure, which was doubling every year. LinkedIn selection of Couchbase as a centralized storage tier cash resulted in more than a 60% reduction in tail latencies and trim the cost to serve by over 10% annually. Now turning to some thoughts on the near-term environment. As I have said before, there are things we can control and things we cannot control.

We were prepared for both heading into Q1 and the quarter played out largely as we expected. One variable we, of course, cannot control is the macro environment. As we discussed last quarter and as you’ve been hearing from many of our technology peers, the uncertainty and volatility continues to present headwinds for IT spending. We’re seeing longer deal cycles, extra layers of scrutiny and approval and customers electing to buy in smaller increments. These trends persisted through the end of the quarter and I am extremely pleased with our ability to navigate these headwinds. At the same time, we feel good about what we can control which includes driving operational efficiency while preparing for the future by building our field capacity and pipeline.

We’re committed to improving our profitability and if necessary have the right levers to find further leverage in our model and react accordingly. That said, demand indicators remain strong and we continue to see a healthy pipeline of deals and interest in our cloud database platform. The big secular trends of digital transformation, acceleration of the cloud and innovation at the edge are still in our favor. I’d be remiss if I didn’t mention the topic dominating everyone’s minds. Let me spend a moment touching on how the fast-moving wave of AI-driven applications will power if not accelerate the secular tailwinds that offer specific opportunities aligned with our strengths. At Couchbase, we’re exploring a wide range of initiatives both internally and externally to leverage AI to increase efficiencies across various aspects of our business.

Some examples of this include research, generating tests and test data for code, exploring how generative AI can drive developer productivity and adoption of Capella and making our platform more operationally efficient. And while the benefits for Couchbase specifically in the industry more broadly are real and exciting, we believe the implications for our business and mission are more profound and increasing productivity and efficiency alone. Consider the following: the processing of unstructured data in real-time is becoming a necessity; modern applications require predictive insights and real-time decision-making for personalization; and the models are moving closer to the data for improved control and faster time to processing; this series of events collides when enterprises, who are building AI-driven insights into their next-generation applications leverage AI to run private models.

It’s at this point, where enterprise will require the combination of a high-performance operational database with analytical functionality making this an exciting opportunity for Couchbase. Much of the promise of generative AI is only recently being understood. But these core concepts will be familiar to many of you, who have been following Couchbase, because they are all foundational elements of how we are architected. Clearly, there is more to do to capitalize on this opportunity, but you’ve often heard me say that Couchbase has been built for this moment and I think that’s as true today as it’s ever been. In closing, we had a solid start to the year and the secular drivers behind our business remained strong. We’re making progress on our initiatives, our committed to focusing on what we can control and are nimble in navigating areas we cannot control.

Before handing the call over to Greg, I want to emphasize one of our core values that I’ve repeated many times. At Couchbase, we attack hard problems driven by customer outcomes. With that, I’ll hand the call over to Greg to walk you through our results in more detail. Greg?

Greg Henry: Thanks, Matt. And thanks everyone for joining us. We had another strong quarter as we beat guidance across all key metrics. Despite the elevated level of deal scrutiny that Matt talked about, we are pleased with our execution, our dedication to delivering value to our customers and our ability to navigate the environment, while driving healthy outperformance in our operating loss guidance. I’ll now walk you through our first quarter in more detail before providing our guidance for the second quarter and full-year. Total annual recurring revenue or ARR was $172.2 million at the end of the first quarter, representing 23% growth year-over-year. Revenue for the first quarter was $41 million, an increase of 18% year-over-year.

Subscription revenue for the first quarter was $38.5 million, an increase of 21% year-over-year. Professional services revenue for the first quarter was $2.5 million, a decline of 15% year-over-year, consistent with our expectations following outsized strength in professional services in fiscal 2023. We continue to expect the contribution as a percentage of revenue in fiscal 2024 to be slightly below recent levels. Our ARR per customer performance in the first quarter was $254,000, up from $242,000 in the fourth quarter and indicative of the growing wallet share we have with large customers. As a reminder, as Capella continues to grow in revenue contribution, we expect ARR per customer growth could moderate or decline in future quarters. Our dollar-based net retention rate continues to exceed 115%, driven by strong renewal and upsell activity across our base of larger enterprise customers.

We exited the quarter with 679 customers, an increase of four net new customers from the fourth quarter. Our gross customer addition count was consistent with levels we saw in Q1 over the past two years, but we did see some challenges with a handful of smaller mid-market customers, who are being impacted by the macroeconomic environment, including some who are no longer in business. That said, we’re encouraged by the strength of our new logo pipeline and remain confident in our ability to reliably expand logos as evidenced by our consistent ARR growth and our strong retention metrics against a more challenging spending environment. In discussing the remainder of the income statement, please note that unless otherwise stated all references to our expenses, results of operations and share count were on a non-GAAP basis.

In Q1, our gross margin remained strong at 86.4%. This compares to a gross margin of 87.3% a year ago and 86.3% last quarter. As a reminder, as Capella mix increases, we expect gross margin will decline over time. Turning to expenses. We continue to invest to capture the generational opportunity we see in front of us, but our focus on improving the efficiency of our growth. We are pleased with our execution on this front as our expense discipline and early benefits from cost savings initiatives resulted in outperforming our operating loss outlook. Our sales and marketing expenses for Q1 were $29.2 million or 71% of revenue, compared to $24.8 million or 71% of revenue a year ago. Q1 included costs associated with our annual sales kickoff event, which was held in-person this year, compared to last year’s virtual format.

Research and development expenses for Q1 were $12.5 million or 31% of revenue, compared to $12.5 million or 36% of revenue a year ago. We continue to thoughtfully invest in our as-a-service offering, as well as an additional features to bolster our platform. General and administrative expenses for Q1 were $6.7 million was 16% of total revenue, compared to $6.5 million from 19% of revenue a year ago. Non-GAAP operating loss for Q1 was $12.9 million or negative 32% operating margin, 5 percentage points higher than the midpoint of our guidance, compared to an operating loss of $13.4 million or negative 38% operating margin a year ago. Non-GAAP net loss attributable to common stockholders for Q1 was $12.3 million from negative $0.27 per share. Turning to the balance sheet and cash flow statement.

We ended Q1 with $163.6 million in cash, cash equivalents and short-term investments. We remain well capitalized to execute against our long-term growth strategy. Our remaining performance obligations or RPO totaled $165.6 million at the end of Q1, a decrease of 2% year-over-year. We expect to recognize approximately 68% or $112.1 million of total RPO as revenue over the next 12 months, which represents 11% year-over-year growth. As we have noted, our total RPO performance has been impacted by a year-over-year contraction in billings terms as some customers are electing shorter-term contracts due to the macro uncertainty and because our sales plans no longer incentivize multiyear contracts as aggressively. Operating cash flow for Q1 was negative $7.2 million and free cash flow was negative $8.5 million or negative 21% free cash flow margin.

We are pleased with the progress we have made in our free cash flow profile. We remain committed to driving further improvements. Now, I will provide guidance for Q2 and the full-year fiscal 2024. As Matt discussed, we continue to see solid momentum and our pipeline remains strong. Furthermore, we anticipate that our investments in our product capabilities, partner ecosystem and go-to-market motion will complement our momentum in fiscal 2024. That said, we are mindful of the macro headwinds and continue to carefully monitor their impact on our business, including bookings, pipeline conversion, retention expansion rates, deal sizes, sales cycles, logo acquisition and sales productivity. As such, our outlook maintains an elevated degree of conservatism across all these metrics to account for the uncertainty as well as the lack of visibility into how the macro may impact consumption trends for our emerging as-a-service offering.

With these factors in mind, for the second quarter of fiscal 2024, we expect total revenue in the range of $41.2 million to $41.8 million or a year-over-year growth of 4% at the midpoint. We anticipate ARR in the range of $176 million to $179 million, which represents 22% growth year-over-year at the midpoint. We expect a non-GAAP operating loss in the range of negative $10.9 million to negative $10.1 million. For the full year of fiscal 2024, we are raising our ARR outlook while maintaining our revenue guidance and decreasing our operating loss. We expect total revenue in the range of $171.7 million to $174.7 million or a year-over-year growth of 12% at the midpoint. As a reminder, we’ve historically seen variability with respect to the implementation timing of certain enterprise deals which impacts our revenue visibility along with new or migrated Capella customers.

We therefore continue to view ARR as a better indicator than revenue of the strength of our business. We expect ARR in the range of $191.5 million to $195.5 million or 18% growth at the midpoint. And finally, we expect a non-GAAP operating loss in the range of negative $43 million to negative $39 million. With that, Matt and I are happy to take your questions. Operator?

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question comes from Sanjit Singh with Morgan Stanley. Please proceed with your question.

Sanjit Singh: Thank you for taking the questions. And congrats on a nice start to the year net new ARR growth. I wanted to start my first question with guidance and just sort of look at that 22% ARR growth that you did this quarter. I think on a net ARR basis was even a little bit better than that. If I look at sort of the back half of the year in terms of what’s implies, it implies I think flattish or actually down year-over-year net new ARR growth? And so just in terms of the expectations coming into this year than what you saw in Q1, just wanted to get a sense of — are you seeing the year sort of come in as you expect it or it mean the underlying assumptions are largely holding or did you see incremental deterioration versus what you’ve guided to approximately 90 days ago?

Matt Cain: Hey. Sanjit. This is Matt. I’ll provide some opening commentary and then hand it over to Greg. Look, as we stepped into the year, I think we were particularly careful on articulating our perspective of things that we can control versus things that we can’t. And as we mentioned in the remarks that played out largely as we expected in Q1. We continue to be excited about the progress we’re making operationally everything from Capella to go to market. At the same time, we’re cognizant of the fact that the macroeconomic situation persists and we want to be responsible with that as we think about the rest of the year. So I would say as — at a very high level, things are progressing as we anticipated and Q1 was a nice start to enable us to have the year that we know is possible. There are some specifics around the number which Greg can give some perspective on.

Greg Henry: Yes, Sanjit, thanks. Look, again, we feel very good about Q1 and the overall look. We have relatively good visibility, particularly into Q2 some deals obviously have closed now and we see the renewals expansion. Some of the consumption trending for Q2. The pipeline remains healthy. And so for the full-year, we’re pleased that we raised the guidance by the beat in Q1 and we see that — we still want to maintain an elevated level of conservatism. And as we’ve always stated, we established guidance to at a minimum deliver that if not try to overachieve as we go through the year. So that’s how we sort of maintain the posture. But as Matt said, we’re pleased and we think things are off to good start.

Sanjit Singh: That’s helpful color. And then the LinkedIn comment was certainly a nice feather in the cap type win, any sort of context you could give us where they Couchbase, sort of, customary for before they start to replace their — that core application that was driving all those users. What sort of the evolution to get them to where they are today?

Matt Cain: Yes, Sanjit, that was an existing customer who has been enjoying the value proposition of Couchbase for multiple applications aligned with their next-generation application modernization strategy. And then further leaning into the capabilities that are offered with the managed service totally aligned with the value proposition that we’ve been articulating. And as you can imagine, we’re having conversations with most if not all of our existing customers on the eventuality of taking advantage for Capella for their entire estate or a subset of it.

Sanjit Singh: Very exciting. Thanks, Matt. I appreciate the color.

Operator: Thank you. And our next question is from Rob Oliver with Baird. Please proceed with your question.

Rob Oliver: Great. Hey, thanks, guys. Good afternoon. Matt, I had one for you. And then Greg, I had a follow-up for you as well. So, Matt, first off, the — I wanted to dive a little bit deeper into that oil and gas when that you guys had, which was a Capella conversion obviously an industry that you guys have done really well in and just wondering what some of the template — what some of the decision points were for that customer along the way. And if you can help us understand like what got them over the hump on the move to Capella. And if this sort of lighthouse went on Capella that could become a template for others within that industry. And then I had a quick follow-up.

Matt Cain: Sure. So look, this has been a customer for us for some time. And one of the capabilities that they’ve been taking advantage of is our mobile capability, in addition to our core enterprise feature set. We’ve continued to grow the account over several years and have been having discussions with them about moving into Capella. I think ultimately, Rob, it became the compelling event for them where they were able to not only offload the database management and save money but also optimize internal resources. And there is almost an insatiable demand in our enterprise customers to modernize and build new applications but they often run into challenges and having the people and resources to do that. Capella helps with that very thing.

This is a blueprint that we’re using with many other customers and we’re very carefully engaging with them on the right time for them to move again either their entire state or others. But look, the fact that we’ve architected the solution to be the full power of Couchbase with the additional value proposition of better TCO, better internal productivity as you can imagine that value proposition is resonating quite a bit with current environment and the foreseeable future with the application dynamics that I mentioned.

Rob Oliver: Great. That’s helpful. Thank you very much. And then Greg, just one for you, just contemplating the full year guide. You called out some of that I think it was kind of low to mid-range customer churn that happened through the quarter. Just thinking about the full-year guide, can you just help us get comfortable with how that might progress throughout the year? Are we through most of that, as you guys kind of scrubbed that portion of the customer base, what — how did you — where did you land in the end? Thank you.

Greg Henry: Yes. Hey, Rob. Appreciate the question. Yes, I think that’s the case. I think we see the churn on the customers is anomalous this quarter. Like I said, like we said in the prepared remarks, the gross acquisitions were consistent with historical Q1. The losses we had were driven by a handful of smaller challenge customers and several of them are going out of business. We had no competitive losses. And the other thing I would say about the logos is the average loss logo was the second lowest we’ve seen in the last three years. So while you see the count, a lot of times that we share with you the dollar is also matter and we actually had a reasonable dollar of new logo. So in terms of how it’s going to play out for the year, it’s going to — it’s not going to materially impact the year per se, and it’s already contemplated in the guide. So I think we’re comfortable where that landed.

Rob Oliver: Okay. Super helpful color. Thanks, guys. Appreciate it.

Greg Henry: Thank you.

Operator: Thank you. And our next question is from Matt Hedberg with RBC Capital Markets. Please proceed with your question.

Unidentified Analyst: Hi. This is [Anita] (ph) for Matt Hedberg. Thanks for taking my question here. It’s good to see the improved leverage in the model. Can you remind us how you’re thinking about the path to breakeven profitability and what are the drivers to get there?

Matt Cain: Yeah, Thanks for the question. Yeah, again we’re pleased that we were able to continue to demonstrate leverage in the model and inefficiencies. And as we stated before, it’s our other discussions that we are committed to continuing to do that. We haven’t given a long-term range outlook in terms of cash breakeven or profitability. And when we do our Investor Day, we plan on doing that but we certainly are committed to continuing to do that. And hopefully, we saw that we delivered a beat in the quarter. The flow-through of one of the $1.5 million for the full year, but we also in that $1 million flow-through. We also took another $1 million of FX headwind against expenses as well. So we’re feeling operationally pretty good about the leverage and efficiency that will continue to gain and we’re just going to keep marching towards profitability here.

Unidentified Analyst: Got it. And then one more from me. Now that Capella is available across all three hyperscalers, can you talk more about the traction you’re seeing there? And is there a way to quantify the new business you’re seeing coming from the three marketplaces? What is the more traditional go-to-market channel? Thanks.

Matt Cain: As it pertains to the hyperscalers, a big part of our value proposition is allowing our customers to run applications anywhere from cloud edge and that consists of their own datacenters, inclusive of instances where they have deployments in any one of the big hyperscalers. And oftentimes, our customers have a multi-cloud approach where they’re not totally dependent on a single hyperscaler, but combine that with Couchbase with the ability to do hybrid deployments and run applications all the way out to the edge inclusive of mobile devices, which is a big part of our differentiator. So we were excited to round out the portfolio with the addition of Azure, which has been part of our plan roadmap. And then as we indicated with commentary specific to AWS, we’re now able to go after go-to-market partnerships and programs with the other providers, where we have solutions in market quite frankly to allow customers total freedom of choice and movement in between the cloud solution.

So it’s a big part of our value proposition. We thought about the market that way for some time even before we had Capella end market. And so I think it’s an extension of how we think about supporting our customers and being the e-cloud database for modern applications. It’s hard breakdown on numbers, that’s not something we provide. Greg, I don’t know if you have any more.

Greg Henry: Yes. I mean, as Matt stated, we were working with all the hyperscalers both on Capella and through their marketplaces. So we continue to see good traction all around but we haven’t given specifics on by vendor.

Unidentified Analyst: Got it. Thank you.

Greg Henry: Thank you.

Operator: Thank you. And our next question is from Kash Rangan with Goldman Sachs. Please proceed with your question.

Kash Rangan: Hello, thank you very much. Nice quarter. I just wanted to understand the consumption patterns you’re seeing with Capella. Not sure if we quantified how it is contributing to revenue budget. Since you’ve been added for a couple of years, you probably have enough cohort analysis to conclude some pattern. So curious how much more visibility you’re getting into the consumption model granted that consumption model itself relative to subscription. It’s not that visible. But as you study the cohorts, what are your conclusions? And one of the things that you’re doing from a contracting standpoint to ensure that you have some level of visibility as Capella contracts continue to ramp. Thank you so much.

Matt Cain: Hey, Kash. Thanks for the question. Yeah, we are starting to get obviously some insights into the Capella consumption trends given that we’ve been at it for, like you said, a year and a half or so now. And look overall, we can see is once customers begin their journey on Capella, they tend to consume at a very healthy rate and a lot of them consume at a rate faster than they had originally anticipated. We’re seeing some of our customers that are having to buy at least once or sometimes multiple times before they get to their first anniversary from a consumption. And look, we have monitoring, obviously very closely of the consumption trends by customer. We can see it all real time, so we know whether customers are under consuming and we can go help them get up and running faster.

We can see where they’re over-consuming. We can obviously spend time and make sure they’re over-consuming for the right reasons and they’re not going to get surprised. So we are seeing healthy trends there. And I think the theory is starting to play out although, we share the metric yet. But we do believe that net retention rate will probably be greater in our Capella customer cohorts than it is for the non-Capella customer cohorts.

Kash Rangan: And that should also result in a structural lift of the growth rate that the company as Capella becomes a larger part of the business obviously. And if that’s the case, if you agree with that, how are you scaling your expenses alongside the increase in consumption so that you can still achieve the proper targets that you probably have somewhere in the not too long-term? Thank you so much. And that’s it from me.

Matt Cain: Yes. Look, we’re — as we’ve talked about even starting late last year and through current, we are focused on profitability rule 40 efficiency. So we are absolutely monitoring the topline and the pace at which it’s growing and we’re moderating the expenses to go with it, so that we can continue to gain that leverage and efficiency as we go. So we will be monitoring it closely. Obviously, we’ve talked for a while now that we’ve really shifted all of our focus and resources really around Capella from a development perspective. So we are all in on Capella there and we’re going to try to continue to go as fast as we can. But again keeping in mind that we are focused on leverage and efficiency at the same time.

Operator: Thank you. And our next question is from Raimo Lenschow with Barclays. Please proceed with your question.

Raimo Lenschow: Thank you. Congrats from me as well. The quick question on Capella. Do you see any patterns in terms of use cases that are emerging in terms of some clients kind of particularly focusing on certain areas? And what do you see there in terms of like test development and test development on Capella versus kind of production workloads? And then I have a follow-up for Greg. Thank you.

Matt Cain: Raimo, a dynamic that I would bring attention to is kind of two sides of the spectrum as we think about new Capella customers to Couchbase. And on the one end, you have new logos or customers that are brand new to Couchbase in general and are signing up with Capella as their entree to the way to get access to the database. On the other side, you have some of our largest customers that are evaluating the eventual migration of existing applications into the managed service. And I think the dynamics of how a customer adopts it varies pretty significantly from some of the smallest deals that we see a new logo acquisition we just want to get people started and enjoy the growth that we’re seeing in Capella. And on the other side, where people — our largest customers are going to be pretty specific and probably run it through more robust testing and proof of concept before they eventually move into Capella.

And I would say, as we’re driving the transformation to cloud-first, that’s probably a more important dynamic than any specific vertical or use case. We’re quite frankly — we’re very fortunate that our platform services everything from financial services to NextGen Healthcare and gaming and everything in between. So I wouldn’t say that Capella consumption model is changing the quote unquote vertical dynamic more so the how our customers thinking about getting into the managed offering. And again, depending on which side of the spectrum, it can be a different on ramp and we’re setup operationally to support both.

Raimo Lenschow: Makes sense. Thank you. And then Greg, one follow-up. After the New Year started, has there been any changes in terms of how are you selling in terms of incentive structure to get maybe more Capella in the big’s — like how do you handling that transition and does that create headwinds for you that we should be aware of? Thank you.

Greg Henry: Yes. Hey, Raimo. Yes, I think if I was going to comment sort of at a high level in terms of like sales compensation this year, we clearly made more shift to focus on Capella, that’s what we’re trying to drive. So there is a more incentive on Capella this year than there even was last year. We’re still focused on obviously growing the business and new business. But clearly, Capella is the focus and where we’re looking for the sales team to be motivated to go sell.

Raimo Lenschow: Okay. Perfect. Thank you.

Greg Henry: Thank you.

Operator: Thank you. And our next question is from Howard Ma with Guggenheim Securities. Please proceed with your question.

Howard Ma: Thank you. And thanks for sharing the triple-digit Capella customer set. Can you reconcile that number with the limited number of net new customer adds? I think it implies that if you triple-digit — if you take 100 and imply that at least 15% of your existing server customers are now Capella customers. But can you comment on the pace of growth of these Capella customers since Capella has been available? And so I guess that’s one part that the pace of growth. And then looking ahead, should we expect a meaningful acceleration in net new Capella customers or will — for like foreseeable future for the next year or so, will most of that Capella contribution come from the existing customer base.

Matt Cain: Yeah. Hey, Howard. Thanks for the question. Yes, so very pleased to reach that mark and you’re right if you take the least triple-digit you’d get 15% of our customer set. So we align there. And I would just say that, as a reminder, we can have customers that have both Capella and non-Capella. And in some cases — a lot of cases now, there is both. So we still see very healthy Capella customer acquisition. So we’re seeing that for sure. I think the other thing to consider is, when you see the Capella customer count grow, it can grow through migration of existing customers as well. It doesn’t have to all the new acquisitions. So again, healthy on the Capella side. In fact, look, for Capella migrations, we did 2 times the migrations in Q1 this year versus Q1 last year. So we feel good about migrating customers over and we also feel good about the pace of the add that we’re delivering as well.

Greg Henry: Howard, if I could hop on. I think the net number in Q1 is a combination of Capella and enterprise and it was really sort of two different stories there. So we have very high expectations for Capella and that’s playing out largely as we expected. To be frank, this is an area of the business that we’ve been pretty transparent that we know we can do better and Capella will be the biggest driver of that. And so we continue to expect that as we move forward with the business. To your question on percentage of customers, if I go back to that dynamic of big existing customers that are migrating versus net new logos, I think we’re going to see a higher number of customers on the new logos faster as we get new logos that start with Capella.

But the dollar contribution is going to be more correlated with the timing at which our large customers decide to move into Capella. What you can’t see reflected in the numbers or the conversations that we’re having with those large customers. And I believe that it is an eventuality. At the same time, we don’t want to try to push our customers before they are ready and they have resources lined up and determine that it’s the right compelling event for them. And so it’s really important for us as these customers are making two, three, five to 10-year decisions that we work alongside of them, particularly in current economic times and we’re more focused on the mid to long-term prospects of the business. Then artificially trying to get quickly over some threshold of percentage of economics.

So I’d say those are dynamics that we’re very aware of and managing and we’ll share more of that as we go forward.

Howard Ma: Okay. Great. Thanks for adding that color, Matt, to what Greg was explaining. And Greg, just a quick follow-up. To be clear on guidance, I think last quarter you said that you’re baking in a heightened level of conservatism into guidance relative to what you’re actually seeing. Can you just clarify if that’s still the case? Thank you.

Greg Henry: Yes, Howard. It’s quite similar to be perfectly honest. Obviously, we’ve just got one quarter under our belt and we’ve seen the results from Q1. So I think in the prepared remarks, we say we’re continuing to have an elevated level of conservatism as we go through the year because we’re very cognizant of what’s happening out in the world today and we want to be in a position where, as I stated earlier, we can at a minimum meet the guidance if not beat it as we go forward. So I think things are continuing as we had stated a quarter ago.

Operator: Thank you. And our next question is from Rudy Kessinger with [Technical Difficulty]

Rudy Kessinger: Great. Thanks for taking my questions. Greg, I wanted to start with you and double-click on the customer churn commentary. I think you said it was — on a dollar basis, you said it was I think the second-lowest in the last few years. Could you just clarify what comments you had thrown in there? And then just any other further color you could share with these smaller enterprises where their mid-market customers, any verticals and specific any regional banks to call out that churn. I know you said some that went out of business. Just any more color you can give on the customer churn?

Greg Henry: Yes. No problem, Rudy. So first of all, there were no regional banks part of this. And what I stated before was, if I looked at the average loss — dollar loss per customer, it was the second lowest we’ve seen in three years. So they were very small on the SMB side of things, customers. And as I said they were many that were quite honestly challenged with what’s going on in the macro today that either put them out of business or we’re on a path to go out of business. And so that was the churn piece, but the dollar component of it was relatively low, which is why I was referencing that while we share that count with you that doesn’t always tell you the whole picture and the dollar — the net dollar new logo for the quarter was actually pretty reasonable. But the count was impacted by those churns.

Rudy Kessinger: Okay, that’s helpful. And then Matt, you mentioned I’d say in this call you’ve and then you’ve mentioned it in our past conversations potentially holding our Investor Day at some point in the future. Investors that I speak with are certainly looking for some kind of target date on operating breakeven or free cash flow breakeven that they can hang their hat on. And I certainly understand there might be some hesitancy to give some kind of intermediate long-term targets when you’re in an — operating in volatile macro as we are today. But just have you put any more thought to that? And when could we expect an Investor Day or getting some of those longer-term targets profitability?

Greg Henry: Yes. Hey, Rudy. It’s Greg. I’ll take this one. Look, yes, we absolutely are still considering doing an Investor Day later this year. To your point on the macro, we want to really see where this is going to go but we fully intend when we do the Investor Day that we will lay out Capella metrics, a long-term model path to profitability. We obviously trying to share some of that as we go which is why we disclosed today about hitting the triple digits on the Capella customer account. And hopefully, we’re seeing that the path to profitability has begun in terms of our ability to start getting leverage in the model and generating some efficiency and letting that flow through to the bottom line. So all is good. And we, like I said, we still plan on doing an Investor Day. And as soon as we land on a date, we certainly will let you know.

Operator: Thank you. And our next question is from Taz Koujalgi with Wedbush Securities. Please proceed with your question.

Taz Koujalgi: Hey, guys. Thanks for taking my question. I have a question on the impact, when a customer moves from on-prem to Capella, you’ve mentioned that you’ve seen a lot of success from customers moving from on-prem to Capella. Can you I guess help us understand would the uptick in customer spend is, I’m assuming Capella is obviously the higher price point. But when a customer goes from an on-prem offering to Capella that’s a like-for-like capacity or like-for-like, I guess usage. What is the kind of uptake you see in customer spend?

Greg Henry: Yes. Hey, Taz. It’s Greg. Appreciate the question. Yes, I think how we stated it before is — if a customer was spending a dollar on self-managed Couchbase enterprise and they move to Capella, they would go to like $1.50 to $2 depending on which flavor of Capella they chose. So that’s sort of the uplift and that’s assuming again like-for-like no additional volume or consumption just pure moving over.

Taz Koujalgi: Got it. Very helpful. And just one follow-up. Your revenue — any comment on linearity for revenue, because your revenue looks like it was better than usual seasonality. Usually, I believe Q1 revenues are down versus Q4 this quarter we saw that improve. I think your Q1 revenues were better than your subscription revenues in Q1. This quarter were better than last quarter. Any comment on linearity? Was it a more front and lower quarter? How does the linearity play out versus other quarters?

Greg Henry: Yes. Look, we would expect subscription revenue will continue to grow over time. I think there is obviously timing involved with that in particular around the non-Capella piece and the way the accounting is for when you start the subscription term with the accounting rules. So some of that can drive some of the timing difference. But nonetheless, we expect it to continue to grow. Again, we feel very good about the performance in Q1 and that we’re maintaining the guidance for the full-year. So I think it really has to do a lot of it with the timing of the start dates and that’s why we’ve talked about in the past about ARR being the measure we think is more important, because it can cut through some of that noise, but you will see some — again, some timing differences around revenue recognition based on how those rules work.

Taz Koujalgi: Got it. Just one last one, if I may. Services revenue is a little bit lighter this quarter, I think, down year-over-year. What are we expecting for the rest of the year? Should that uptake or is there a reason why they were a little bit light to this quarter?

Greg Henry: Yes, it’s a good question. We had tried to share with people that last year was an outperformance on service. We had a healthy backlog and a higher than normal customer demand to deliver services. So we had a outperformance last year and that this year would be a down year just, because we can’t — we’re not going to repeat that. And that the mix of services on our business was around 8% last year and we’d expect it to be even maybe potentially a little bit below normal, which is around 6%. So maybe 5% for the year is the way you should think about it, but you should still continue to expect to see that be a headwind for us the rest of the year.

Taz Koujalgi: Got it. Thank you very much.

Greg Henry: Thanks, Taz.

Operator: Thank you. There are no further questions at this time. I would like to turn the floor back over to CEO and Chairman, Matt Cain for closing comments.

Matt Cain: Thanks, operator. To recap, we had a strong quarter and start to the year. We remain excited about our opportunity with Capella, due to some very big trends in our favor like digital transformation, acceleration of the cloud, innovation at the edge and AI. We’re cognizant of the macro environment and are sharply focused on execution during times like this, while also building for what we believe will be a very exciting future. Thank you all for joining us and we look forward to speaking with you next quarter.

Operator: Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.