Couchbase, Inc. (NASDAQ:BASE) Q4 2024 Earnings Call Transcript

Couchbase, Inc. (NASDAQ:BASE) Q4 2024 Earnings Call Transcript March 5, 2024

Couchbase, Inc. beats earnings expectations. Reported EPS is $-0.06, expectations were $-0.14. Couchbase, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to Couchbase’s Fourth 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, product capabilities, our 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 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 releases, which are available on our Investor Relations website.

With that, let me turn the call over to Matt.

Edward Parker: Good afternoon, and welcome to Couchbase’s fourth 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, product capabilities, our 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 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 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 thank you all for joining us on the call today. I’m delighted to report that we have delivered a strong Q4 with all our key financial metrics exceeding our outlook. Highlights include growing Capella mix, continued big deal activity, including a particularly robust quarter for renewals and expansions, strong new customer logos, and overall excellent operational performance from all teams across the company. Total annual recurring revenue, or ARR, was $204.2 million, up 25% year-over-year. Revenue in Q4 was $50.1 million, up 20% year-over-year. Non-GAAP operating loss in Q4 was $4.1 million, representing a negative operating margin of 8.2%, 8.6 percentage points above the midpoint of our implied operating margin guidance range.

We finished fiscal 2024 with strong momentum, capping off a historic year for Couchbase. We drove strong top-line growth in a challenging macroeconomic environment, including accelerating our net new ARR growth. We achieved important milestones with Capella, which now represents 11% of our ARR and over 25% of our customer base. We worked tirelessly to improve our operational rigor and improve our efficiency across the entire company, which resulted in meaningful operating profit outperformance and substantial operating and free cash flow margin expansion. We enhanced and refined our go-to-market motion across marketing, sales and our partner ecosystems. Our product and engineering teams delivered multiple important enhancements and capabilities across our platform and did so at an accelerated pace.

And we welcomed many of you to our first Analyst Day as a public company just this last December in New York. I couldn’t be more proud of the progress we made across all of our key strategic initiatives: deliver top-line growth, increase the mix at Capella, drive sales and marketing efficiency, and accelerate the pace of leverage in our model. Now, let me discuss some highlights of the quarter and the year. I’ll start by reviewing the many innovations we have announced over the past few months. These have contributed to the inflection point we’re seeing with Capella and will be instrumental in unlocking future growth and leverage opportunities. From day one, we’ve architected our platform to enable demanding applications to not only deliver premium performance, but also provide rich, hyper-personalized, differentiated experiences for end users.

Because of our differentiated architecture, our multipurpose platform converges operational and analytical capabilities and seamlessly integrates advanced services like indexing, eventing, full text search and more in a single solution. This approach is why Couchbase can uniquely power adaptive applications for customers. We’ve built a strong foundation with differentiation we can sustain. And now, we’ve taken that foundation and have layered on new features and capabilities that we have recently announced that position us well for how adaptive applications are evolving with AI. First, we increased developer productivity by introducing the Capella iQ copilot into our database as a service. iQ allows developers to interact with Capella using natural language conversation, making database interactions more intuitive, efficient and accessible for developers.

They can go from an idea to code in just a few clicks. Next, we further extended our platform capabilities by announcing a columnar service for Capella, which converges operational and real-time analytic workloads into a single platform. Customers can ingest data from anywhere into Capella in real time, reducing complexity and costs while increasing developer productivity. Initial feedback from the private preview has been exceptional and we are excited about what this key new service will unlock. Finally, as you may have seen last week, we announced vector search as a new feature in our platform, optimized for running on-site, across clouds and devices at the edge, including mobile and IoT. While vector database point solutions aim to solve the challenges of processing and storing data for LLMs, having multiple standalone solutions adds complexity to the enterprise IT stack and flows application performance.

Our multipurpose capabilities eliminate that friction and deliver a simplified and unified architecture to improve the accuracy of LLM results. We also make it easier and faster for developers to build applications by using a single SQL++ query, which incorporates vector index, removing the need to use multiple indexes or products. And we are the first vendor to announce vector search at the edge, enabling organizations to run AI applications anywhere in connected or disconnected modes. I’m also pleased to announce that we are extending our AI partner ecosystem with LangChain and LlamaIndex integrations, enabling a common API interface to converse with a broad library of LLMs, while providing developers with choices for LLMs. Taken together, we’re embracing the opportunity to enable hyper-personalized, high-performing and adaptive applications powered by AI that deliver exceptional experiences to their end users.

Customers are responding very positively to how our approach is aligned to their AI-powered adaptive application journey. As you can see, we’ve achieved a lot in a short amount of time on both product innovation and customer uptake, and it’s gratifying to see our efforts bearing fruit. As our Capella base continues to grow, we’re seeing favorable consumption dynamics emerge as both existing and new customers realize our platform’s unique performance and scale. We’re seeing increased consumption across our customer base, which is indicative not only of the value we bring, but also gives us confidence in our ability to deliver sustainable growth. As such, we are committed to taking advantage of this recent inflection we’ve seen. We fully expect Capella to become an increasingly meaning driver behind ARR and net retention, as well as an important engine for new logo acquisition.

And it will contribute to leverage across our entire business. Now, I’d like to turn to customer wins. In Q4, we saw new Capella wins across many industries, including manufacturing, media, fintech, technology, retail and telco. Array is a financial innovation platform that helps digital brands, financial institutions and fintechs get compelling consumer products to market faster. Array’s offerings helps its partners drive revenue, increase engagement and empower millions of consumers to achieve their financial goals. This quarter, Array selected Capella to support profile management for its privacy application because of the compelling value and impressive database performance. In Q4, a leading cloud communications provider expanded its investment in Capella to continue supporting its real-time communications platform.

This platform connects widely used applications to carriers worldwide with all conversations being managed and recorded with our cloud database platform. This customer initially began migrating to Capella because of the scalability and benefits that a fully-managed service provided to its developer team. They gain the ability to step away from database management and focus on developing core business applications. Another Capella expansion from the quarter came from a premier provider of life insurance in the Asia Pacific region. Couchbase powers Customer 360 data for this provider’s many millions of customers. The customer decided to expand its investment in Capella on Google Cloud for cost optimization and to continue modernizing their architecture and database management in the cloud.

Of note, this was our first multimillion-dollar Capella migration. We also continue to see robust large deal activity with the strong foundation of our enterprise server. A new enterprise logo for us this quarter came from a multinational financial services company and one of Europe’s leading banks, BBVA. They selected Couchbase to replace another NoSQL database at a worldwide level because of the price performance our platform offered and they will be using Couchbase to power profile management for its entire customer base. Finally, as I previously mentioned, we saw robust renewal and expansion activity in the quarter with some of our largest customers. This includes a Fortune 500 shipping and logistics company, which saw the largest expansion in our history, and a major multinational technology company that provides software solutions for the global travel and tourism industry.

Both customers rely on Couchbase for multiple applications and deployment modalities, and we’re honored to continued their journey with them. As we look ahead towards fiscal 2025, we have a massive opportunity in front of us. Our foundation rests upon a carefully-architected platform purpose built to enable mission critical adaptive applications that are often being deployed at the edge in an increasingly AI-powered world. I strongly believe that our foundational tenets of scale, performance and flexibility have never been more relevant as we continue to leverage our core innovations while adding new ones. These include our new real-time analytic and vector search capabilities, both of which together have the potential to make a meaningful impact to our business.

Our priorities going forward are to continue to drive sustained growth, capitalize on the inflection we’re seeing across the business and accelerate the pace of leverage in our model. If I were to emphasize one of these priorities, it’s the forthcoming leverage that I see building across all aspects of our business. This spans from how we innovate and deliver new capabilities and services to how we go to market, growing our outstanding customers, while also acquiring new ones to driving more efficiency in our P&L and model. Having held our annual kickoff last month, I can say confidently that we have a strong, motivated and highly aligned team in place to achieve our ambitions in fiscal 2025. At Couchbase, we’re inspired by the generational opportunity that is in front of us and in being a trusted advisor for our customers, partners and the broader industry.

It’s an honor to be a strategic technology provider to so many organizations that are changing the way we interact through their modern applications. We have work to do and it won’t be easy. But at Couchbase, we pride ourselves on attacking 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 finished fiscal 2024 with another strong quarter as we beat guidance across all key metrics. We are pleased with our execution, our dedication to delivering value to our customers and our ability to navigate the environment while driving very strong outperformance in our operating loss guidance. I’ll now walk you through our fourth quarter and full year fiscal 2024 financial results in more detail. Total annual recurring revenue, or ARR, was $204.2 million at the end of the fourth quarter, representing 25% growth year-over-year and 8% sequentially, driven by strong growth in Capella contribution as well as our core enterprise business. At the end of the quarter, Capella ARR was $21.8 million, representing 11% of our total ARR.

Revenue for the fourth quarter was $50.1 million, an increase of 20% year-over-year and 9% sequentially, and $180 million for the full year, an increase of 16% year-over-year. Revenue growth benefited from growing consumption of Capella and strength in our enterprise business, partially offset by declines in professional services. Subscription revenue for the fourth quarter was $48.1 million, an increase of 26% year-over-year and 9% sequentially, and $171.6 million for the full year, an increase of 20% year-over-year. Professional services revenue for the fourth quarter was $2 million, a decline of 42% year-over-year and an increase of 12% sequentially, and $8.5 million for the full year, a decline of 29% year-over-year. As a reminder, this was consistent with our expectations following outsized strength in professional services in fiscal 2023.

We expect professional services to normalize at current levels in fiscal 2025. Our ARR per customer performance in the fourth quarter was $273,000, up from $264,000 in the third quarter, up 12% year-over-year, an indicative of the growing wallet share we have with large customers. As a reminder, as our Capella mix continues to grow in contribution, we expect ARR per customer growth could moderate or decline in future quarters. Our dollar-based net retention rate, or NRR, continues to exceed 115%, driven by strong renewal and upsell activity across our base of larger enterprise customers. Our NRR has been steadily improving, thanks to Capella. We exited the year with 749 customers, an increase of 34 net new customers from the third quarter. Capella once again represented the majority of new logos in the quarter, and we grew our Capella customer logo count by 41, over 25% from the third quarter.

We continue to be 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. 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 are on a non-GAAP basis. In Q4, our gross margin was 90.4%, benefiting from sustained enterprise gross profit margin strength, lower services revenue mix, the completion of the amortization from some of our initial Capella investments and leverage as a result of our expanding Capella revenue base, offset by growing Capella mix, which carries lower gross margins. This compares to a gross margin of 86.3% a year ago and 89.5% last quarter.

For the full fiscal year, our gross margin was 88.5% compared to 87.6% in fiscal 2023. As a reminder, as Capella mix increases, we expect gross margin will decline in fiscal 2025. Turning to expenses. We continue to invest to capture the generational opportunity we see in front of us, but are focused on driving leverage across our business. We are pleased with our execution on this front as our expense discipline and benefits from our cost savings initiatives resulted in us again outperforming our operating loss outlook. Our sales and marketing expenses for Q4 were $29.4 million or 59% of revenue compared to $26.7 million or 64% of revenue a year ago. For the full fiscal year, our sales and marketing expenses were $113.6 million or 63% of revenue compared to $101.3 million or 65% of revenue in the prior fiscal year.

Research and development expenses for Q4 were $12.9 million or 26% of revenue compared to $12.9 million or 31% of revenue a year ago. For the full fiscal year, our research and development expenses were $50.5 million or 28% of revenue compared to $49.7 million or 32% of revenue in the prior fiscal year. General and administrative expenses for Q4 were $7.1 million or 14% of total revenue compared to $6.3 million or 15% of revenue a year ago. For the full fiscal year, our general and administrative expenses were $26.5 million or 15% of revenue compared to $25.9 million or 17% of revenue in the prior fiscal year. Operating loss for Q4 was $4.1 million or negative 8% operating margin compared to an operating loss of $9.9 million or negative 24% operating margin a year ago.

Operating loss for the full fiscal year was $31.3 million or negative 17% operating margin compared to an operating loss of $41.3 million or negative 27% operating margin in the prior fiscal year. Net loss attributable to common stockholders for Q4 was $2.9 million or negative $0.06 per share. For the full fiscal year, net loss was $27 million or negative $0.57 per share. Before I turn to the balance sheet and cash flow statement, I want to mention an impairment charge of $5.2 million that we recognized in Q4. This impairment charge relates to a reprioritization of some R&D resources as we have focused our efforts on Capella, AI capabilities, services and related developments. This has been excluded from, but does not affect our non-GAAP results for the quarter.

Turning to the balance sheet and cash flow statement. We ended Q4 with $153.6 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 $241.8 million the end of Q4, an increase of 46% year-over-year, driven in part by the timing of robust renewal activity with some of our larger customers, several of which are on multiyear contracts, driving higher average duration than we have seen in recent quarters. We expect to recognize approximately 61% or $147.6 million of total RPO as revenue over the fiscal year 2025, which represents 26% year-over-year growth. As a reminder, we experience fluctuations in our RPO balances due to a host of factors, including renewal time as well as changes in contract duration.

Operating cash flow for Q4 was negative $6.5 million, and for the full year was negative $26.9 million. Free cash flow for Q4 was negative $7.7 million or negative 15.4% free cash flow margin. Free cash flow for the full year was negative $31.6 million or negative 17.6% free cash flow margin. Now, I will provide guidance for Q1 and the full year fiscal 2025. As Matt discussed, we entered fiscal 2025 with very strong momentum across our businesses, and our pipeline remains strong. We achieved a critical milestone with Capella and expect it will continue to be an important driver behind all aspects of our business in fiscal 2025. Furthermore, we anticipate that our investment in our product capabilities, partner ecosystem and go-to-market motion will continue to complement our ARR momentum.

While we continue to scrutinize our expenses as we remain dedicated to increasing our efficiency, growing our free cash flow and operating margins and driving leverage across the business with continued focus on increasing the Rule of 40 metric, we will continue to invest in our strategic priorities. As such, we expect to grow OpEx slightly faster in fiscal 2025 than in fiscal 2024. We remain committed to achieving positive free cash flow by fiscal 2026 and positive operating income by fiscal 2027, underpinned by 20%-plus compound annual ARR growth, as I discussed last December at Analyst Day. Finally, we remain mindful of the macro headwinds and continue to carefully monitor their impact on our business. As such, our outlook maintains a consistent degree of conservatism to account for the uncertainty as well as 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 first quarter of fiscal 2025, we expect total revenue in the range of $48.1 million to $48.9 million or year-over-year growth of 18% at the midpoint. We anticipate ARR in the range of $206.5 million to $209.5 million, which represents 21% growth year-over-year at the midpoint. We expect a non-GAAP operating loss in the range of negative $8.5 million to negative $7.5 million. For the full year of fiscal 2025, we expect total revenue in the range of $203 million to $207 million or a year-over-year growth of 14% at the midpoint. As a reminder, we’ve historically seen variability with respect to the implementation timing of certain enterprise deals and new or migrated Capella customers, which impacts our revenue visibility.

We expect this timing dynamic to influence the pace of revenue growth in fiscal 2025, with aforementioned large customer renewals continuing into the first half of fiscal 2025 and causing our revenue seasonality to be slightly more weighted in the first half of the year relative to what we saw in fiscal 2024. As such, we’d expect fiscal Q3 revenue could be flattish from Q2. We, therefore, continue to view ARR as a better indicator than revenue of the strength of our business. We expect full year fiscal 2025 ARR in the range of $235.5 million to $240.5 million or 17% growth at the midpoint. And finally, we expect a non-GAAP operating loss in the range of negative $27.5 million to negative $22.5 million. With that, Matt and I are happy to take your questions.

Operator?

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Q&A Session

Operator: Thank you. We will now conduct our question-and-answer session. [Operator Instructions] Our first question comes from Matt Hedberg with RBC Capital Markets. Please state your question.

Matt Hedberg: Great, guys. Thanks for taking my questions. Congrats on a really strong year. And it’s really, really good to see the success with Capella and just general buying behavior improvement. I think it feels like it’s a lot of hard work that’s gone into that, so well done guys. On the strong customer adds this quarter, and I guess most specifically Capella wins, can you talk about sort of both that partner motion as well as sort of the direct effort there? Because I know it’s been a lot of work, not only on the product side, but on the go-to-market side. Maybe where you’re seeing some of the most success on some of the go-to-market initiatives?

Matt Cain: Hey, Matt. How are you? Good to speak. Certainly appreciate the acknowledgment on the hard work. We do look at it as a historic year for the company. Look, we’ve been talking all year on the expectation that Capella is really going to help us on new logo acquisition. We saw great geographic balance in the quarter, continue looking after new logos as well as migrations. But you’re right to call out the partner contribution. We’ve been really focused for some time now on driving robust relationships at a global and local level with the likes of AWS and the other cloud providers. I’d say that was a highlight in the quarter. But it wasn’t only AWS. We called out the largest Capella migration we’ve ever seen with GCP. So, I think when you mentioned that this is a result of a lot of hard work, I’d say there’s a lot of diversification to the outcome.

And we had high expectations and continue to do so on a lot of fronts with Capella in general and the success with the partnerships.

Matt Hedberg: Really good to hear that. That’s — it’s great. And then maybe just as a follow-up, you mentioned in your prepared remarks, you talked about vector search. Can you talk about what you expect to see some customer use cases for that? And maybe how you think that might impact monetization or growth rates from a customer perspective?

Matt Cain: Yeah. Look, we’re really excited to be on the forefront of what we think is maybe the largest market transition the world has seen and certainly the greatest catalyst to application innovation that we’ve seen for some time, you can appreciate that due to the nature of our sophisticated platform, we’re fortunate to engage in a lot of future discussions with customers, and it’s coming across a wide variety of verticals. A couple of examples that I would point to that I like a lot. Recently, we were talking to an e-commerce provider and they’re envisioning, “Well, how do I change the customer experience at the edge?” An example could be, “Hey, I want a new pair of shoes that matches the outfit that I’m wearing, that’s the color of the car parked outside, available within 15 miles with inventory in store today.” That would be really hard to do without the addition of AI and combining that with platform capabilities that allow not just vector search, but understanding text and range-based search and geospatial technology.

And the fact that we’ve taken the comprehensive platform approach Capella and enterprise allows us to support those types of applications. Now, a lot of people, Matt, are excited about the upside of AI and those hyper personalized adaptive applications that are going to be increasingly common on our lift, but there’s downside that enterprises are worried about. Another customer that we’re actively talking about is in the logistics space. And they’re looking about — they’re looking about integrating chatbot technology to drive efficiency throughout their organization. And while we’re working with them, they have a peer in an industry where the chatbot went wrong, started making disparaging remarks about the company, negatively interfacing with customers.

And so, what that points to is the downside of ensuring that enterprise information is protected and that you avoid the downside of AI getting angry. And so, we’re engaged in POCs to prove that we can minimize the downside with our use of data and integrating multiple data sources, but also provide the upside of those unique experiences. So hopefully, that gives you a sense of the types of engagements that we’re having with our customers and really taking pride of being a future strategic platform that they can bet on for the necessity of multiple use cases that we bring together.

Matt Hedberg: Thanks a lot, Matt. Well done.

Operator: Thank you. And our next question comes from Jason Ader with William Blair. Please state your question.

Jason Ader: Yeah, thank you. Good afternoon, guys. Just wanted to try to square the guidance a bit with all the positive commentary and in particular the 25% ARR growth that you just reported for the quarter and for the year. It basically looks like based on the Q1 guidance, there need to be some deceleration as the year progressed in ARR growth. And just given all the good things that you have going on in the business, I’m just trying to reconcile that. And maybe there’s something more specific going on, maybe you had some large renewals or early renewals in FY ’24 that won’t recur in FY ’25. Can you just help us kind of square the guidance with all the positive commentary?

Greg Henry: Yeah. Hey, Jason, it’s Greg. Good to hear from you. Thanks for the question. Look, we’re obviously very happy with how we performed in fiscal ’24 with ARR performance accelerating again yet another year. And we remain committed to being to growing our top-line 20%-plus. Obviously, we’re early days into fiscal ’25. We feel very good about how we’ve guided, and as we’ve always stated, we’re working to, at a minimum, meet it, if not beat it. And I think we have established a good track record of that now. And so, we just got to go out there, as Matt said, and it’s going to be a lot of hard work, but we know what’s in front of us and we feel good about it. And like I said, we’re still committed to over this medium-term period that we laid out over the Investor Day, be a 20%-plus grower. And that’s what we’ve been working for, for the last month, and we’ll continue for the rest of the year.

Jason Ader: Got you. So, it’s just — we’re just going to be conservative on the year given all of the macro uncertainty?

Greg Henry: I think we’re going to continue to maintain the same level of conservatism that we had last year and with some of the macro and again as Capella continues to ramp over time. But again, we feel like we’re in a good position and coming off a good year, and we’ll go work at it for the next 11 months to deliver at least what we’ve guided to, if not better.

Jason Ader: Got you. And then, one quick follow-up for you, Greg, on the gross margin. Can you give us a sense of where gross margin — where the gross margin outlook will be for FY ’25 and beyond? I know you have Capella, that’s a lower gross margin offering. So, can you just help us with the models there?

Greg Henry: Yeah. It’ll certainly continue to — it’ll tick down from where it is now. It’ll probably tick down quarter-on-quarter as we go throughout the year as Capella becomes more and more meaningful to the business. So that’s how I would think about modeling that as you go through fiscal ’25.

Jason Ader: Got you. Okay. Thanks, guys.

Greg Henry: Thanks, Jason.

Operator: Our next question comes from Rob Oliver with Baird. Please state your question.

Rob Oliver: Great. Good evening. Thanks, Matt. Thanks, Greg. Two questions for me. The first is on ARR. I know you guys have said that ARR could moderate as you ramp Capella, but you’re continuing to see really nice growth up 12% year-over-year. And I know from the Analyst Day and from some of our conversations, it does seem like some of the Capella transitions are actually producing larger ARR numbers. So, would just be curious to know what sort of color you can provide and what you’re seeing in that uplift on ARR as you move your customers to Capella? And then, I had a quick follow-up.

Greg Henry: Yeah. Hey, Rob, great to hear from you. Yeah, look, we still feel great. I mean, we laid out, obviously, at the Investor Day how Capella was performing. We gave you the — that for last Q3, the in-quarter net retention rate was 167%. So, when we bring those customers on, we continue to grow them very nicely. And we think we can maintain doing that. We talked about that we have continued progress in terms of Capella penetration of our ARR balance. We will continue to see that throughout the year. And we feel, again, very good about how Capella is performing both migrations, and as Matt talked about, the new logo piece of things. So I don’t think we’re going to see moderation from Capella. I think it’s going to continue to be the tailwind, and that’s why we felt confident at the Investor Day to talk about having this medium-term growth rate of 20%-plus for the top-line.

Matt Cain: Rob, let me tell you an exciting story from recently speaking with a customer. They started off they were a very small Couchbase customer. And this is a company that you would know, big scale, big technology focus. At the beginning of this fiscal year, the one that we just finished, they were less than $20,000. Over the course of the year, we proved our value proposition to them with Capella. They had multiple applications that they migrated into Couchbase Capella, and we exited the year with them running north of $800,000 ARR. Now they would have said out of the gate, hey, we’re interested in this, and we hear what you’re saying on the value proposition. What the customer explicitly said that was running this is, I need to prove this out to me and my teams.

These are mission critical applications that company is running on, and we need to be very diligent with how we prove this out, how we plan our workflows, how we plan our upgrade project. And that’s indicative of conversations that we’re having with a lot of customers on migrations. And as we’ve said before, we don’t want to push customers before they’re ready. We don’t think that’s smart. Reality is there’s only so much that we would be successful with that. We want to be a trusted partner. So, we think there’s a lot many, many, many more of those to come. We can’t predict when we’re going to get those growth rates, just like we wouldn’t have predicted the scale of that one over the course of the year. So, I think we’re just we got to balance what we can control and what we can’t.

And I think you hear us talking about the potential because that’s real and customers are telling us how valuable it is once they get in there. But there’s some work to do based on the mission critical nature of a lot of these applications.

Rob Oliver: That’s super exciting. Okay. Yeah. Thanks, Matt. Thanks, Greg. And then my quick follow-up is just, Greg, for you on Capella iQ and some of the costs associated with that. I appreciated earlier my previous question, Jason was pushing you guys on potential conservatism on the top-line and on ARR. And I guess, how firm a handle do you guys have on the costs associated with Capella iQ? And just wanted to get a sense for how you sort of factored that into the cost outlook for the year. Thanks again, guys.

Greg Henry: Yeah. Thanks, Rob. Yeah, look, we have a I think we have a very good handle on the cost profile of Capella and can easily model that out. I think the more challenging piece, what Matt said, is just the pace of adoption and particularly the migrations that are going to drive the growth of Capella as we go here. So, I feel very comfortable about how we are on managing the cost and understanding how that’s going to play out over the course of the next year or even several years. It’s really about the top-line growth that’s associated with it. So, we feel very good about where the — that business is going and where we’ll eventually get from a Capella margin perspective.

Rob Oliver: Awesome. Appreciate it. Thanks again, guys.

Greg Henry: Thanks, Rob.

Operator: Our next question comes from Raimo Lenschow with Barclays. Please state your question.

Raimo Lenschow: Hey, thank you, and congrats from me as well. Matt, one for you. Like, as Capella becomes like a bigger part of the overall mix and obviously the momentum is clearly there for you, how do you think about your sales approach and how you sell, how you incentivize the sales force? I’m asking because a lot of your peers that have gone through the same transition at some point discovered like you probably need to kind of think about differently, so think more about consumption rather than just kind of putting like a proper project in place. Like, is there anything on the horizon for you guys as we think about this year or next year? Thank you.

Matt Cain: Raimo, great question. We had our sales kickoff week one of this fiscal year, and I was particularly excited about it. And people are asking me why the excitement. And obviously, we wanted to share the good news on the fiscal year and celebrate a lot of great work by many people. What I was more excited about is the work that we’ve done to get in front of this year. And despite the fact that we delivered results that we were proud of, knowing that we can do more, and a lot of it is understanding underlying dynamics of Capella and consumption at a much higher level than we did a year ago, because we have a lot of data that we can chew on. We’re now able to look at our pipeline in an even more sophisticated way to understand, look, is this a customer that’s building a net new application that needs to understand the capabilities and how to integrate SQL with natural language for developers?

Or is this a use case where somebody is replatforming an application off a competitive solution and displacing an existing database for something like TCO and application rewrite is so much more important. As we peel those layers, we can be much more fine tune with our go-to-market approach and aligned to what prospects and customers are looking for. And so, we’ve layered this approach in to everything we’re doing on the go-to-market, and that just goes above and beyond what we already had in place. Then, we can follow-up with specific enablement to our teams to say, “Hey, if you’re getting these types of questions, this is part of the value proposition that you need to point to” or “Here’s how to leverage a trial or professional services.” All of that is with the lens of Capella and consumption.

And then over the course of the year, as we’ve executed on this inflection, really building the instrumentation that we need to understand every aspect of how customers are consuming. Maybe they’re tracking below what we might have thought, maybe they’re running hot, being able speak to them on a proactive basis to make sure that that’s headed in the direction that we want it to be and we want them to be. So I’d say those are all different dynamics that the team is really leading into, and we’re excited to keep pushing forward.

Greg Henry: Yeah. And Raimo, I’ll just add one thing is even last year and it will continue this year, we have an element of consumption as part of the sales compensation plan. So, it’s not just about selling the project, but also getting consumption going as well.

Raimo Lenschow: Yeah. Okay, perfect. That makes sense. And then, Greg, one for you, and it’s more not so much for this year, but more conceptually. If you think about professional services, how do you kind of plan with that as a percent of the total? Or like how do you think about the growth there in the long run? Is there kind of like a base level that you need to do because some of the initial or early stage project — early in the market kind of product releases, you kind of want to handle yourself to see the feedback quicker and the rest can go with partners? Like, if I think about modeling professional services beyond this year as well, like how should we think about that? Thank you.

Greg Henry: Yeah. Thanks, Raimo. Yeah, I think modeling services going forward, at least for the next year or two, I think, we obviously had a significant outperformance in fiscal ’23. I think we got to ’24 was more of a normal level. And I think that’s the way you should think about it going forward. And as we’ve talked about over time, as more of our business goes to Capella, the services — because there’s embedded obviously services is part of Capella, the professional services component will probably moderate and flatten out over time. It won’t continue to grow because that’s really — the majority of the services we’re driving today are on the enterprise business versus Capella. So, I think this year was a good year to sort of re-level set and see sort of moderate growth from here on out.

Raimo Lenschow: Okay. Perfect. Thank you.

Matt Cain: Thanks, Raimo.

Operator: And our next question comes from Howard Ma with Guggenheim Securities. Please state your question.

Howard Ma: Thanks. And I want to add my congratulations on a — to a solid finish to the year. For either Matt or Greg, can you help us think about the mix of total ARR between Capella and Server exiting this year or enterprise exiting this year, so fiscal ’25? What are the biggest pieces that would shift ARR mix to Capella? Is it more expansions of existing Capella customers or is it migrations for on-prem? And how much are on-prem renewals driving the mix shift? Thanks.

Greg Henry: Yeah. Hey, Howard, thanks for that. This is Greg. Look, as we noted, we finished the year at 11% of our ARR was Capella. And I think I would go back to at the Investor Day, we said during that medium term four to six year horizon, we would be disappointed if we didn’t get to at least a third of Capella mix, if not even half of the business. So just sort of plotting the course of that timeframe, because we are not guiding to Capella mix in fiscal ’25, I would say though that the bigger drives are: first, migrations of enterprise customers over, particularly the large — some of the larger scale ones, that will accelerate it; two, would be expanding the existing Capella customer base, which Matt gave a great example of just recently; and then lastly, look, we’ve talked about that new logos, you’re going to see the quantity tick up, but they’re going to be a lower starting point as we enter into the Capella journey.

So that’s probably the third one in terms of rank order, if you will.

Howard Ma: Okay. I appreciate you rank ordering that, Greg. And just a follow-up for you. What is — you mentioned the longer average contract duration, what is driving that? Is it renewals or new logos? And do you expect that to be a persisting revenue tailwind this year or only in the first half?

Greg Henry: Yeah. So, Howard, in Q4, we did two renewals of our largest enterprise customers. One, we talked about within the quarter, one was actually in Q1, they renewed early. And so, those two went in and they were both multiyear deals. So, we saw a higher than average duration this quarter because of those two deals in particular. But again, I think it’s going to get back to where we normally see the duration. I think that was anomalous for those two specific deals. And you obviously see it show up in RPO. And if you go back a couple of years, you saw a large RPO and then over time, those largest customers, they burn off their revenue they get to this renewal point, and then we put them back into the RPO and then the same thing is going to happen. So, it was a Q4 dynamic, I would say, from a duration perspective.

Howard Ma: Okay. Very helpful. Thanks.

Greg Henry: Thank you.

Operator: Our next question comes from Stephen Schwartz with Wells Fargo. Please state your question.

Unidentified Analyst: Hi, this is [Stefan] (ph) on for Andy Nowinski. Thanks for taking my question. I guess to start off on these large deals, I think you had mentioned there were some renewals coming up in Q1 as well. Was there anything that maybe pulled into Q4 that maybe had an impact beyond what you’re expecting?

Greg Henry: Yeah. We talked about — this is Greg. We talked about last quarter that there was two large deals, in particular, like very large deals. And one was due for renewal in the quarter and one was not. And we weren’t sure at the time whether that was going to close because it wasn’t due in the quarter. They both did close. So, as we just talked about the duration of the RPO, pick those up. The one that was in quarter renewal obviously hit ARR and revenue. The one that was again just a little bit early into Q4, you’ll see it in ARR, but it obviously hasn’t started revenue because it has a Q1 revenue start date. So, those were the only sort of dynamics that were at play with those couple large deals.

Unidentified Analyst: Got it. Okay. And then, as a follow-up, as you think about capitalizing on this inflection in demand that you’re seeing, how do you think about how that plays out in terms of investments in sales and marketing and R&D?

Matt Cain: Look, we certainly want to continue with the momentum, and we’re excited about it. But we’re equally focused on the leverage side of the business on a go-forward basis. And so, when I think about momentum, leverage comes in multiple forms. The pace of innovation from our product team is better than it’s ever been. And we haven’t talked about up to this point on the call our internal use of AI, but that’s helping our development teams be that much more productive. The more insights we have on Capella, the more fine tune we can be with features that we’re working on. And so I expect that we’re going to get much more efficient as we execute through this inflection. Same is true on the go-to-market side. Having an additional level of telemetry and signaling from the product side, getting into complementing our enterprise motion with more product-led growth, better fine tuning our spend based on the type of demands per my previous comment.

And so, a big part of how we’re thinking about inflection is continuing to go fast and being smart about all things Capella, but then being really excited about a more leveraged future across all aspects of our business. And that’s before we benefit from the addition of AI into our platform as we take things to market. So, a lot of our focus is, again, continued execution that we’re proud of and the momentum we’ve established, how do we maintain that and get into levels of efficiency and leverage that we know are possible.