HashiCorp, Inc. (NASDAQ:HCP) Q3 2023 Earnings Call Transcript

HashiCorp, Inc. (NASDAQ:HCP) Q3 2023 Earnings Call Transcript December 7, 2022

HashiCorp, Inc. beats earnings expectations. Reported EPS is $-0.13, expectations were $-0.31.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to HashiCorp’s Fiscal 2023 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your first speaker today, Alex Kurtz, VP of Investor Relations and Corporate Development. Thank you. Please go ahead.

Alex Kurtz: Good afternoon, and welcome to HashiCorp’s fiscal 2023 third quarter earnings call. This afternoon, we will be discussing our financial results for the third quarter announced in our press release issued after the market close today. With me are HashiCorp’s CEO, Dave McJannet; CFO, Navam Welihinda; and CTO and Co-Founder, Armon Dadgar. At the close of market today and in conjunction with our earnings press release, we have published an earnings presentation that contains additional financial information pertaining to the quarter. We encourage you to review the presentation in advance of our call. You can access it on our investor website at ir.hashicorp.com. Today’s call will contain forward-looking statements which are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include statements concerning financial and business trends, our expected future business and financial performance and financial condition, and our guidance for the fourth quarter and full year for fiscal 2023. These statements may be identified by words such as expect, anticipate, intend, plan, believe, seek or will or similar statements. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. During the call, we will also discuss certain non-GAAP financial measures, which are not prepared in accordance with the Generally Accepted Accounting Principles.

The financial measures presented on the call are prepared in accordance with GAAP, unless otherwise noted. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, as well as how we define these metrics and other metrics is included in our earnings press release, which has been furnished to the SEC and is also available on our website at ir.hashicorp.com. With that, let me turn the call over to Dave. Dave.

Dave McJannet: Thank you, Alex, and welcome, everyone, to our third quarter earnings call. We’re excited to share with you that Q3 was a solid quarter for HashiCorp as we exceeded our guidance with revenue of $125.3 million, representing year-over-year growth of 52% along with the trailing four quarter average Net Dollar Retention rate of 134%. Current non-GAAP remaining performance obligations reached $553 million, representing 50% year-over-year growth and we added 26 customers with greater than or equal to a $100,000 in annual recurring revenue to reach a total of 760. Our HashiCorp Cloud Platform offerings reached $12.9 million in revenue, representing 10.7% of subscription revenue in the quarter. We’re excited about adoption trends as we continue to rollout new features and new capabilities.

We’re also pleased to announce that during Q2 we had our third customer reached $10 million in annual recurring revenue. This global financial institution has made significant investments across our three core products, and I’ll discuss this customer’s journey in a few minutes. Armon and I have spent the last few weeks meeting in-person with customers and prospects across North America, Asia Pacific, Europe, and also last week at Amazon re:Invent and I wanted to share some more insights. Regardless of location, all buyers are under increasing scrutiny and pressure to do more with less, a theme I think will continue through next year. However, despite these pressures, for large organizations worldwide the transition to a cloud infrastructure remains a key strategic investment over the long-term.

And because of the ongoing prioritization of cloud, even with economic pressures HashiCorp products continued to be a strategic investment for our customers. Our products are fundamental to running a modern infrastructure estate and conducive to cost control. As I’ve said before, organizations worldwide are still very early in cloud adoption. As they continue their transitions to the cloud and multicloud becomes the standard, our products become increasingly valuable because they offer operations, networking and security teams with a consistent operating model that provides a system of record across each layer of their infrastructure stack. During my travels this quarter, I continue to hear the most successful companies describe their use of centralized Platform Teams.

Platform teams help these organizations move from tactical cloud adoption to strategic cloud programs, enabling a common infrastructure foundation for operations, security and networking. I heard many examples of how these teams prioritize the adoption of products that offer unique capabilities to help them extract more value from their cloud investments, and they continue to invest their tightening budgets with us. Before turning it over to Navam, I’d like to briefly highlight some of the announcements we made at HashiCorp in October, which focused on product enhancements and new offerings across security and infrastructure automation. Each of our new releases helps teams utilize automation to do more with less, which is important as skills and talent shortages threaten the bottleneck cloud programs.

Many of these enhancements also help our customers with the most significant challenge, security, which is a critical component of the cloud operating model. Platform teams under immense pressure to secure massive attack services of different clouds, private data centers and remote workforces. Just as HashiCorp pioneered the concept of secrets management, we’re building on another concept to help improve the security posture of the world’s digital infrastructure, a differentiated approach to Zero Trust Security. And we are delivering the Zero Trust Security approach for the cloud. In fact, we’re proud to note that AWS just named us North America’s Security Partner of the Year at re:Invent last week, their Annual User Conference. To deliver our vision for Zero Trust Security, we announced the general availability of Boundary on the HashiCorp cloud platform at HashiConf Global.

HCP Boundary joins HCP Vault and HCP Consul to provide platform teams with the first Zero Trust Security solution, purpose-built for the cloud to secure applications, networks and people. To help organizations better manage cloud provisioning and infrastructure challenges, we also announced several new capabilities for Terraform. With these enhancements we are continuing to build high-value enterprise features into Terraform, which provide greater security, compliance and operational consistency as customers standardize their infrastructure automation for multicloud. Now, I’d like to turn your attention to notable third quarter transactions that highlight our Adopt, Land, Expand, Extend, Renew motion in action. First, a land deal, an APJ-based oil and gas corporation standardized on Vault enterprise in order to secure its configuration files.

Additionally, Vault will expedite the customer’s initiative to move to passwordless backend systems and improved reliability across its monolithic applications. Next, an expand deal. An international manufacturing company expanded its Consul and Vault deployments to support a rollout of a multicloud strategy for its next-generation smart building control services. With plans to deploy across all the major cloud service providers, HashiCorp has enabled a consistent approach for its development teams and provides a single control plane for both service networking and secrets management. And third, an extend deal. A top domestic banking company extended to use HCP Boundary to simplify, streamline and automate common developer tasks and workflows for accessing remote systems and applications, provision by Terraform, secured by Vault, and connected by Consul.

This is one of our first enterprise deals for Boundary since announcing general availability at HashiConf in September. We are proud to count companies like these as our customers and are deeply committed to continue to earn their trust. And finally, I’d like to spend a minute on HashiCorp’s $10 million ARR customer that I mentioned earlier. This organization is another example of a customer who started working with us around a single product and expanded and extended over time. They became a Terraform customer in calendar 2018, then Consul in 2019, and then Vault in 2020 and 2021, starting with our Open Source products in each case. This global financial institution began its journey with us with an initial investment around its public cloud engineering teams and how they were going to scale operations using AWS.

The early days with this customer began with the philosophical conversation around the future of infrastructure as code and the value of Terraform for its independence, given the reality of their hybrid estate. This led them to adopt Terraform enterprise for their early cloud Platform team. Then, starting in 2019, they made an investment in Consul to add application resiliency that was part of their data center migration projects. At the same time, Terraform saw massive growth across multiple units as it became the standard behind this company’s cloud projects, working through platform teams as a main conduit into its global organization. Finally, Vault was deployed in 2020 as part of this company’s blockchain initiatives that are now deployed across public clouds, and that allowed to provide global namespace, performance replication and disaster recovery.

We are extremely proud of this partnership as this customer has been side-by-side with us on the journey to enhance our three core products, and we look forward to our continuing collaboration. And with that, let me turn the call over to Navam.

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Navam Welihinda: Thank you, Dave, and thanks again to everyone for joining us today. Turning your attention to the top line financial results. We produced solid results in our third quarter of FY 2023. We grew our total revenue by 52% year-over-year. We continue to see strong expansions and extensions in our customer base, as shown in our trailing four quarter average Net Dollar Retention rate, which remained at 134%. On the expense side, we continue to focus on resource allocation efficiency in the business during Q3. Doing so allowed us to come in ahead of our non-GAAP gross margin, non-GAAP operating income, as well as our GAAP and non-GAAP net income plans. We achieved negative 24% in non-GAAP operating margins this quarter, and incurred a net loss of $0.38 per share on a GAAP basis and $0.13 per share on a non-GAAP basis.

Before discussing guidance, I wanted to provide some background around the macro conditions we are seeing. We clearly saw solid revenue performance during Q3 which exceeded the high-end of our guidance, as well as our own internal expectations for what is historically a seasonally low quarter. In Q3, we also saw a stronger than expected multiyear contract activity from our customer base, when our existing customers recommitted to us as a critical vendor for the long-term. After reviewing some of our top Q3 multiyear deals with our sales teams, we believe some of this outperformance may have been related to larger customers looking to lock-in pricing with us against the volatile inflationary environment. This is a good outcome for the customer and it clearly helps us gain better long-term visibility to our business as well.

Similar to last quarter, in Q3, we continued to see high scrutiny of spend by customer procurement and finance teams causing elongation in our sales cycles. The spend scrutiny was particularly high with new contracts from first time customers. We are incorporating the macro uncertainty we are seeing into our fourth quarter guidance. And as always, we are taking a measured approach to our revenue guidance for the next quarter. Given the macro uncertainty, we are also continuing to optimize our cost structure and being extremely considered in our head count investment plans over the next 12 months. Now on to our guidance. Despite the macro uncertainty I have discussed, we are very pleased to raise our full year guidance. For the fourth quarter of fiscal 2023, we expect total revenue in the range of $123 million to $125 million.

We expect Q4 non-GAAP operating loss in the range of negative $54 million to negative $51 million. We expect non-GAAP net loss per share between $0.23 and $0.21 based on 189.1 million weighted average basic and fully diluted shares outstanding. For the full year 2023, we expect total revenue in the range of $463 million and $465 million. We expect our FY ’23 non-GAAP operating loss in the range of negative $152 million and negative $149 million. We expect non-GAAP net loss per share to be between $0.71 and $0.69 based on 186.2 million weighted average basic and diluted shares used in computing non-GAAP net loss per share. We are pleased with our Q3 results. And with that, Dave, Armon and I are happy to take any of your questions. Alex?

Alex Kurtz: Thanks, Navam. With that, operator, let’s go to our first question.

Q&A Session

Operator: Thank you. Our first question comes from Ittai Kidron with Oppenheimer. You may proceed.

Ittai Kidron: Thank you. Hi guys, great quarter, great results, nice execution. I guess, Navam, I’d like to kind of perhaps try to look ahead in time you’re heading into the fourth quarter. Are there any preliminary fiscal ’24 thoughts and modeling points you think we need to take into account as we think about ’24 right now?

Navam Welihinda: Hi, Ittai. Thanks. Yes, we’re very pleased with how queue – the third quarter turned out. And as we mentioned, we’re very pleased with being able to raise the year as well. So all things considered, I think we’re on a solid execution path for the rest of the year. We’re – our normal practice, which we followed last year was to give you the year guide in Q1. So we’re looking forward to execute for Q4 and we’ll give you the update in Q1 next year. But overall, strong performance in Q3, which we’re very happy with.

Ittai Kidron: Okay. Very good. So maybe I’ll try to kind of dig into the go-to-market approach. Clearly, your portfolio is much bigger now and adoption is broad-based on multiple products. So first of all, is there any multiproduct color you can give us adoption-wise on your customer base? And second, as you move into next year how much tweaking do you think you need to do to comp plans? Do you think the way you incentivize people is going to have to change either given environment, either given customers preference? It seems like to sign more multiyear deals or for any other reason, do you feel like you need to make any material tweaks to your comp plan sales force?

Dave McJannet: Hey, Ittai, this is Dave. Thanks for that. I’ll maybe answer the two of them. The first one on what percentage of our customers continue to be multiproduct. I would just underscore, the $10 million customer that we talked about is probably very indicative of how the motion works. I think as you know, we have a common buying center to a large degree the cloud program owners and they essentially adopt next use-case along next product along. And I think you see that being played out pretty consistently in the cohorts of customers. So we haven’t seen a material change in that. By and large Terraform and Vault are where people start. I will say there’s tremendous interest in Boundary, which is relatively newer product.

And I expect this multiproduct motion to continue, but we haven’t disclosed specifics of that. But I would say, subjectively, it feels very consistent. On the – what we’re thinking for next year? I think we feel good about the overall model truthfully, which is we have a multiproduct portfolio that address multiple challenges on cloud programs. And our sales organization goes – and sort of engages with those buyers in a very consistent way. I think we’re pleased with the multiyear portion that we do. We’re pleased with the multiproduct aspect. But the motion really continues to be very, very similar and I expect that to continue into next year. Again, so these are long-term arc trends, these are long-term relationships we have with our customers, and we’ll follow their lead in terms of what they want to buy from us.

But it certainly feels consistent with what we’re already doing.

Operator: Thank you. One moment for questions. Our next question comes from Jason Ader with William Blair. You may proceed.

Jason Ader: Thank you. I got one for Navam, one for Armon. On the message you were giving on the price lock-in, Navam, is that – are you saying that there was a pull-in of demand into Q3? Or maybe just clarify what you mean by that?

Navam Welihinda: Yes, certainly, and thanks for the question. The price lock-in is more – there’s a lot of spend scrutiny happening in the market right now, and customers want certainty on pricing. So what they are doing is reaffirming us as a critical vendor of choice for the long-term. So they’re coming in and asking for commitments over the next three years on pricing and that is factoring in long-term deals being structured by mostly a lot of our existing customers and larger customers. So that’s essentially what’s happening from the long-term side. On the pull-in side, no, it’s a normal third quarter. There was no pull-in on – from Q4 to Q3. All said, very pleased with the revenue growth we saw in Q3 despite being a seasonal quarter.

Jason Ader: Okay. Great. And then Armon, can you talk about the technical differentiation for Boundary, especially relative to your main competitor there? And what’s the sales playbook?