Jun 9 • 12M

GitLab Q1 Financial Results

"Every company needs to become a software company"

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Disclosure: I am long GitLab. Here is the real-money portfolio I run alongside this newsletter.

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On Monday, June 06, GitLab (NASDAQ: GTLB) reported Q1 Fiscal Year 2023 Financial Results. I shared my confidence in GitLab in an earnings preview before the report (link). Shares are up 26% after strong results.

Quick Takeaways

  • The company reported $87.4 million in revenue, up 75% year over year (YoY) which beat analyst expectations by $9.28 million.

  • Non-GAAP EPS was -$0.18 compared to -$0.44 in Q1 2022, which beat analyst expectations by $0.08.

  • Dollar-based net retention rate remained above 130% which means customers are spending 30% more on average from one year to the next.

  • Management increased FY 2023 revenue guidance to $400 million, up from their previous guidance of $397 million.

If I had to judge the quarter on these numbers alone, I’d be a happy shareholder. But let’s dive into the rest of the quarter.

First Quarter Fiscal Year 2023 Financial Highlights

First Quarter Fiscal Year 2023 Business Highlights:

  • Customers with more than $5,000 of ARR increased to 5,168, up 64% YoY.

  • Customers with more than $100,000 of ARR increased to 545, up 68% YoY

  • Dollar-Based Net Retention Rate remained above 130%.

  • Awarded software licensing program reseller agreements with the State of California.

Second Quarter and Fiscal Year 2023 Financial Outlook

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Management Commentary

On revenue acceleration

Underpinning this acceleration in revenue growth is both a higher velocity of new customer wins as well as larger strategic commitments. We achieved momentum in growth in both $1 million deals and $500,000 deals. In addition, we continue to experience strong success in upgrading existing customers and signing new customers to our Ultimate tier.

Ultimate adoption represented the highest proportional mix of new logos landed during our first quarter of 2023. And Ultimate remains our fastest-growing tier by addressing use cases for security, compliance and portfolio management.

Four reasons management believes GitLab is well-positioned to achieve durable growth with improving unit economics

First, we believe the business imperative for digital transformations remain strong regardless of macro conditions.

Second, we believe the market we are targeting is very large and early-stage in nature. We believe our One DevOps Platform is addressing an estimated $40 billion opportunity. We're focused on selling a business outcome and a time to value.

Third, we are addressing this estimated large market opportunity with a compelling platform. GitLab's One DevOps Platform provides one interface, one data store, one set of reports, one spot to secure your code, one location to deploy to any cloud and one place for everyone to contribute.

Fourth, one of our core values is that we strive to do the smallest thing possible as quickly as possible. This leads to more improvements that address customer problems in a shorter time frame.

On Ultimate Tier adoption

The Ultimate tier is our fastest-growing tier, now representing 39% of annual recurring revenue for the first quarter of FY 2023 compared with 26% of annual recurring revenue for the first quarter of FY 2022 and continuing to grow in excess of 100%.

We see tremendous business outcomes from our customers who adopt Ultimate. And so we, as a company, GitLab, believe that every customer should adopt Ultimate over time, given the tremendous value with a price point of only $1,200 per developer per year. So Ultimate gives our customers enhanced security features, compliance, vulnerability management and so forth, just to name a few

On how customers are reacting to fears of recession/inflation in terms of development projects

We believe that every company needs to become a software company regardless of what the macroeconomic environment is. And the way to do that is DevOps. And maybe I can share a story, what happened during the pandemic. Global airlines saw their revenue crash 90%-plus reduction in revenue. And at that time, we partnered with 3 global airlines to help them expand their GitLab footprint and to help them make that transformation.

The platform approach helps customers to consolidate tools. And with that, they save money, both on licensing and on integration costs

On competition and balance of growth/profitability moving forward

We're really, really early in the $40 billion market. Our main competition continues to be DIY DevOps.

Companies need a way to plan, build and secure and deploy software. In about half the deals, we don't see anyone else in the deal. We're competing against DIY or what they currently have.

When we do see companies, we typically most run into Microsoft, Atlassian and Jenkins. They are the 3 that make up over 70% of what we run into on the deals.

It's important to note that our win rate against Microsoft, whether they're in a deal or not in a deal, is almost identical. And if you look at the total amount of deals that we're in, Microsoft accounts for less than 20% of the deals that we see them in.

On profitability, I just want to go back and remind everyone, we land small and expand over time. And the quarterly cohorts from over 6 years ago are still expanding today, which is remarkable, which helps us with our net dollar retention rate.

And these cohorts, not only are they still expanding, they're extremely predictable. So we're continuing to show improving unit economics in the business. We are committed to responsible growth.

On risk of smaller-VC backed private companies reducing headcount hurting GitLab

Together, GitLab and GitHub, we believe to be less than 5% of the $40 billion market. And as customers are forced to slow down hiring, they want to get more out of their existing people. And that's what GitLab can bring, they can do more with the people they already have instead of hiring without an end.

We looked at sort of the VC-backed startup community and to see how much of our current ARR [was comprised at] and how much we think it will be. It was less than 5% every way that we looked at it. So really small by ARR and absolute volume.

Austin’s Takeaways

This was a great quarter and I believe GitLab is still in the very early innings of its growth curve. The company has beaten analyst expectations for Adjusted EPS and revenue in each of its three quarters as a public company.

It’s trading at what I believe are very reasonable FW P/S ratios if we look out to FY 23 and FY 24 given its growth potential and improving unit economics.

I have no idea what happens over the short term, but all signs point to this being a great long-term investment.

Let me know your thoughts on GitLab’s quarter and any stocks I should be following!

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