Couchbase Inc

NASDAQ:BASE

Earnings Call Transcript 2025-Q1

[Operator]

Greetings, and welcome to the Couchbase First Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Edward Parker, Head of Investor Relations. Thank you. You may begin.

[Edward Parker]

Good afternoon, and welcome to Couchbase's first quarter 2025 earnings call. We will be discussing the results announced in our press release issued after the market closed 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.

[Matthew Cain, executive]

Thank you, Edward, and good afternoon, everyone. We entered fiscal 2025 with strong momentum coming off a historic 2024 for Couchbase where we achieved important Capella milestones, accelerated our net new ARR growth, increased the cadence of innovation with multiple enhancements and new capabilities on our platform and enacted initiatives that drove increased leverage and efficiency across the business.I'm pleased to report that we've made continued progress on our growth, inflection and efficiency in Q1, delivering revenue and operating loss results that exceeded the high end of our outlook. Annual recurring revenue, or ARR, was $207.7 million, up 21% year-over-year, inclusive of a definitional change noted in our press release that Greg will discuss in more detail in a moment.Revenue in Q1 was $51.3 million, up 25% year-over-year, $2.4 million ahead of the high end of our guidance range. Non-GAAP operating loss in Q1 of $6.7 million was also ahead of the high end of our guidance range, which represented a negative operating margin of 13%, 3.5 percentage points above the midpoint of our implied operating margin guidance range.We added 19 net new logos, and Capella now represents 29% of our customer base and 11.5% of ARR. This quarter, we saw new customer wins across a variety of industries, including manufacturing, fintech, healthcare, retail, telco and gaming. Customer interest in and uptake of Capella continues to grow, and feedback on our newest capabilities and enhancements has been very positive as customers are looking to Couchbase to enable the next generation of adaptive applications.Last quarter, I discussed the leverage that I saw building across our business as a result of our efforts to improve operational rigor and efficiency, and we made further progress on this front in Q1. Our first quarter Rule of 40 score improved by over 12 points year-over-year and 23 points from Q1 of fiscal 2023. This was also our first quarter of free cash flow positivity, and we remain on track to deliver on our profitability commitments we made at last December's Analyst Day. Driving efficiency across go-to-market, R&D and all aspects of our operations will continue to be one of our highest priorities for fiscal 2025.Despite these achievements in the quarter, our ARR performance was impacted by more pronounced timing dynamics than we anticipated. As we've often discussed, given our customer base of large enterprises, the mission-critical nature of many of the applications we support and the sensitivities that our renewals, upsells and Capella migrations have on our reporting metrics, including ARR, quarterly timing is always an important element of our business.Now, we pride ourselves on focusing on what we can control while also accounting for a variety of uncertainties that are not always in our control, including deal timing. However, these dynamics in combination with the ongoing macroeconomic headwinds, including longer deal cycles and elevated budget scrutiny, had an outsized impact on our ARR balance at the end of the quarter due to several deals which pushed beyond Q1. That said, we don't see any change to the momentum in our business or our ability to achieve our full year objectives. Adding to our confidence is that several of these slipped deals have since closed and several more are expected to close this quarter.More broadly, I continue to be very encouraged with our progress across many aspects of our business, including our strengthening pipeline, the growing relevance of our foundational technology and architecture, increasing demand for Capella, the strong interest in our new platform capabilities, the momentum building behind our go-to-market motion and especially the aforementioned efficiency improvements. As such, we believe that our ARR results in the quarter doesn't fully reflect the momentum we are seeing in our business and the trajectory of our business going forward.Now turning to product. I'm excited to share customer feedback on some new features we've announced over the past few quarters. These new innovative capabilities further enhance our ability to enable the building of adaptive applications alongside an evolving AI landscape. The first of these features was our Copilot capabilities, Capella iQ, now in GA, which allows developers to interact with Capella using natural language. Feedback on Capella iQ has been positive and customers are seeing results. A leading European travel comparison and booking website is leveraging Capella and the iQ Copilot to power development for their search engine and e-commerce platform for storing user data related to bookings and payments. They have migrated these apps to Capella to automate more of their operations and significantly reduce their maintenance and administration investment.Next, we announced our Capella Columnar Service, which converges operational and analytic workloads in real time on a single platform. Customers who are using Columnar in private preview are valuing its ability to connect to multiple data sources, driving real-time insights using the same familiar SQL++ query language for both query and analytics workloads and are benefiting from the simplified architectural approach of having their operational and analytic infrastructure tightly integrated.In Q1, we delivered the general availability of Vector Search to help businesses bring to market a new class of AI-powered adaptive applications that engage users in a hyper-personalized and contextualized way. Couchbase now supports retrieval augmented generation techniques or RAG in the cloud and the data center with mobile and edge Vector Search in public beta. Initial feedback on our Vector Search capabilities has been very positive. Customers appreciate having access to this feature across our entire platform and like the architectural simplicity inherent in not having it as a separate component within their infrastructure. Our customers are envisioning a range of use cases, including adding hyper-personalized content generation into their applications and enhancing applications with hybrid search, which combines traditional search and similarity search all at once.We also remain focused on adding capabilities that make it easier for developers to rapidly create applications and increase developer engagement with Couchbase. Recent enhancements include the release of a new AI-powered documentation chatbot built on AWS Bedrock and adding social sign-on for Google and GitHub. The introduction of social sign-on for Capella has contributed to significant growth in Capella sign-ups. In fact, the number of trial sign-ups per day more than doubled since the introduction of social SSO.Our foundation will always be our ability to support mission-critical workloads with our leading performance and scale, and we continually add new features and services that enable our customers to power the applications they use to run their businesses. We've extended our alert notification capabilities so that external monitoring systems such as ServiceNow can receive alerts from a Capella cluster further integrating Couchbase in the enterprise. We also added simple graph traversals using recursive common table expressions in SQL++, meaning developers can easily navigate relationship hierarchies like org charts within their applications, unlocking new workloads. And we introduced customer-managed encryption keys to elevate customers' control over data security.These capabilities enable organizations to use Couchbase for new mission-critical workloads. For example, Couchbase powers Verizon's ThingSpace, an innovative end-to-end IoT development platform that helps enterprise customers build and deploy IoT solutions. Verizon originally needed a database with high availability and superior performance to provide real-time visibility and status of the IoT devices to customers. Verizon is planning to consolidate multiple databases into Couchbase to simplify database administration and further reduce TCO. Verizon is not alone. While customer needs can vary from company to company, a common trend we see across industries is the desire to lower TCO.Couchbase sets itself apart due to the features and dependability that I've already discussed, but it's also our proven ability to lower customers' overall costs. Best-in-class price performance isn't just about delivering lower costs. It's also about helping organizations reduce or eliminate existing costs by delivering incremental opportunities for efficiency. This can include cost savings from database consolidation. Customers like Broadjump, Talentsky and Rakuten, all selected Couchbase for our extensive features and exceptional price performance.Rakuten is a global technology leader in services that empower individuals, communities, businesses and society. Leveraging Couchbase to power its programmatic advertising systems, Rakuten was able to reduce its total cost of ownership by 20% through database consolidation using Couchbase's easily scalable platform.On the go-to-market side, we are continuing to make enhancements to our go-to-market motion in order to fully capitalize on our opportunity with our continued focus on operational discipline and gaining sales efficiencies. We're creating more intentionality on how we qualify new logos, migrations and opportunities for expanding the use of Couchbase for existing applications while bringing new applications onto our platform. This includes driving improvements in how we identify prospects and compelling events that necessitate a fresh and modern approach that Couchbase offers. We're also placing more focus on strategic account teams that are supporting our largest customers while allocating an increase in dedicated resources focused on generating new business. We can make further progress on these efforts throughout fiscal 2025, which we believe will enable greater efficiency in our customer success and upsell motions and ability to win new applications, both of which will contribute to sustained growth.Finally, this quarter, we announced the appointment of Julie Irish as Couchbase's first Chief Information Officer. In this role, Julie's driving Couchbase's global IT strategy in alignment with our key business objectives. She's leading the global IT and security team and setting the strategy for systems and IT to position Couchbase's internal infrastructure and product security for future growth and effectiveness. We're thrilled to have Julie as part of our world-class team.As we look toward the rest of fiscal 2025, I remain confident in our mission, our strategy and our ability to achieve our objectives. While I am not satisfied with the full extent of our results in Q1, we made progress on our strategic priorities, and I believe that we have everything we need to make this year another exceptional one for Couchbase. 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 increasingly AI-powered world. We will continue to work tirelessly to support our customers and acquire new ones, enhance and extend our technology leadership, deliver new capabilities and services, drive increased Capella adoption and will do so in a more efficient manner and with a maniacal focus on our Rule 40 trajectory. At the same time, we will prepare and manage against the things we cannot control, the macroeconomic environment and timing dynamics that are not always predictable. As I've said many times, at Couchbase, we attack hard problems driven by customer outcomes. With that, I'll now hand the call over to Greg to discuss our results in more detail. Greg?

[Gregory Henry, executive]

Thanks, Matt, and thanks, everyone, for joining us. We entered fiscal 2025 with significant momentum, and I am pleased with our top and bottom line performance in the quarter. Our dedication to delivering value to our customers and our ability to navigate the challenging environment while driving very strong outperformance in our operating loss guidance. That said, our ARR result was not what we had expected, impacted by several deals that did not close on time in the quarter as planned. However, given the momentum we see in our business, we remain confident in our ability to achieve our priorities for fiscal 2025.Before I turn to the first quarter financial results, I want to share an update to our ARR methodology. Beginning this quarter, we adjusted our ARR calculation to include the on-demand portion of our business. Under our previous calculation, ARR excluded revenue derived from the use of both Capella and enterprise based on on-demand arrangements as well as services revenue. In some cases, we have begun to see some Capella customers who bought the annual credit model go on demand. These shifts can be temporary or longer term. However, if customers oscillate between these 2 models, ARR under our prior methodology will not completely reflect how our business is actually performing. As such, we believe that including on-demand on our ARR calculation more accurately reflects our business, is more closely aligned to how we look at ARR internally.The impact on our first quarter ARR was an addition of $1.5 million. This change is reflected in our Q1 results, along with our future guidance and reporting but will not be retroactively adjusted in our previously reported results given its relatively immaterial impact. Additionally, we will now also include on-demand customers in our customer count. This onetime adjustment to our customer count was an additional 39 customers in Q1. Similarly, this will be included in our prospective results but will not be retrospectively adjusted.Lastly, we will continue to not include services in ARR or customer count. Unless otherwise stated, all references to ARR and customer count are reflective of our updated methodology.I'll now walk you through our first quarter financial results in more detail. Total ARR was $207.7 million, representing growth of 21% year-over-year and 2% sequentially. Foreign currency fluctuations since we provided our Q1 guidance in March resulted in an approximately $350,000 headwind. We ended the first quarter with $23.9 million of Capella ARR, representing 11.5% of our total ARR. Revenue for the first quarter was $51.3 million, an increase of 25% year-over-year and 2% sequentially. Capella consumption continues to be a tailwind for revenue growth. Professional services revenue was $2.3 million in Q1, a decline of 7% year-over-year, an increase of 13% sequentially. As a reminder, we continue to expect professional services to remain normalized at current levels throughout this fiscal year following declines in fiscal 2024 and outsized strength in fiscal 2023.Our ARR per customer performance in the first quarter was $257,000, roughly flat from Q1 2024 and down from $273,000 in the fourth quarter. As a reminder, ARR per customer growth could moderate or decline as our Capella mix continues to grow in contribution. Our dollar-based net retention rate, or NRR, continues to exceed 115%. We exited Q1 with 807 customers, an increase of 58 net new customers from the last quarter. Under our prior customer count methodology, we added 19 net new customers in Q1. Once again, Capella represented the majority of new logos. This quarter, under our prior customer count methodology, we grew our customer count logo by 26, an increase of 13% from the fourth quarter. Our strong retention metrics and steady Capella ARR growth continues to give us confidence in our new logo pipeline and our ability to consistently expand new logos.In discussing the remainder of the income statement, please note that unless otherwise stated, all references to expenses, results of operations and share count are on a non-GAAP basis. Our Q1 gross margin was 89.9%, benefiting from sustained enterprise gross profit margin strength and lower services revenue mix, offset by growing Capella mix, which inherently carries a lower gross margin. This compares to 86.4% in Q1 of last year and 90.4% last quarter. As a reminder, we expect gross margin will decline as Capella mix increases.We remain focused on balancing leverage across our business while investing in areas that help us capture the massive opportunity in this space. I'm pleased with our expense discipline and cost savings initiatives, once again resulting in outperformance against our operating loss outlook.Turning to expenses. As Matt discussed, increasing our sales and marketing efficiency with an area of focus in Q1, our sales and marketing expenses were $31.9 million or 62% of revenue compared to $29.2 million or 71% of revenue a year ago. Research and development expenses were $13.5 million or 26% of revenue compared to $12.5 million or 31% of revenue a year ago. General and administrative expenses were $7.4 million or 14% of revenue compared to $6.7 million or 16% of revenue a year ago.Operating loss for Q1 was $6.7 million or a negative 13% operating margin. This compares to a loss of $12.9 million or negative 32% operating margin in Q1 of last year. Net loss attributable to common stockholders was $5.2 million or negative $0.10 per share.Turning to the balance sheet. We ended the first quarter with $160.2 million in cash, cash equivalents and short-term investments. We continue to remain well capitalized for executing against our long-term strategy. Our remaining performance obligations or RPO was $220 million at the end of Q1, up 33% year-over-year. We expect to recognize approximately 62% or $137 million of total RPO as revenue over this fiscal year, representing growth of 22% year-over-year. As a reminder, we experienced fluctuations in our RPO balances due to a host of factors, including renewal timing as well as changes in contract duration.Operating cash flow for the first quarter was $1.6 million. Free cash flow was approximately $560,000 or a positive 1% free cash flow margin. As Matt noted, this was also our first quarter of free cash flow positivity and a significant milestone towards achieving our commitment of being free cash flow positive for fiscal 2026.Now I will provide our guidance for Q2 and the full year fiscal 2025. As Matt discussed, we entered Q1 with strong momentum across our business and our pipeline remains strong. Furthermore, we anticipate that Capella will continue to be an important driver of all aspects of our business, while investments in enhancing our product capabilities, partner ecosystem and go-to-market motion will continue to complement our ARR momentum.We will continue to invest in our strategic priorities. However, we are highly focused on continuing to drive rapid progress in increasing our Rule of 40 metric as we remain dedicated to increasing our efficiency, growing our free cash flow and operating margin and driving leverage across our business. We remain confident in the massive opportunity in front of us and the ability to achieve our financial objectives for the year. In addition, we are highly focused on our execution, in-quarter linearity and visibility into factors not in our control, such as deal timing.Finally, we remain mindful of the macroeconomic headwinds and continue to carefully monitor their outlook to our business. As such, our outlook maintains a consistent degree of conservatism to account for these variables as well as lack of visibility into how the macroeconomic environment may impact upsell and migration timing as well as consumption trends for emerging as a service offering.With these factors in mind, for the second quarter of fiscal 2025, we expect total revenue in the range of $50.6 million to $51.4 million or a year-over-year growth of 18% at the midpoint. We anticipate ARR in the range of $212.5 million to $215.5 million, representing 18% growth year-over-year at the midpoint. We expect non-GAAP operating loss in the range of negative $5.7 million to negative $4.7 million.For the full year of fiscal 2025, we are raising our revenue outlook while maintaining our ARR guidance and decreasing our operating loss. We note that despite the timing dynamics we experienced in Q1, there is no material change to our pipeline opportunities and overall business momentum. As such, we remain confident in our ability to achieve our full year ARR guidance. We now expect total revenue in the range of $204.5 million to $208.5 million or year-over-year growth of 15% at the midpoint. We continue to expect ARR in the range of $235.5 million to $240.5 million, representing 17% growth at the midpoint. And finally, we expect a non-GAAP operating loss in the range of negative $26.5 million to negative $21.5 million.With that, Matt and I are happy to take your questions. Operator?

[Operator]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] And our first question will come from the line of Matt Hedberg with RBC.

[Matthew Hedberg, analyst]

So maybe I'll start with Matt. First of all, congrats on the cash flow generation in Q1. I know that's been a huge focus for you guys. Based on your commentary, I mean, it seems like the macro has deteriorated a little bit from Q4. I guess, was there any commonality to the deals that pushed. And is there any way to quantify the dollar value just roughly speaking, deals that sort of you thought may have closed, but didn't?

[Matthew Cain, executive]

Matt, good to hear from you. And I appreciate the comment on cash flow. I'm sure that will be something we come back to throughout the call. Look, we've been talking for some time about macro headwinds, longer deal cycles, higher levels of approval. In certain cases, customers deciding to start smaller or shorter deal terms. And we've talked about how that's continued to persist for some time. Now as we evaluate our business, not all industries and verticals and geographies are affected in the exact same way. And so what we typically do is look at the overall pipeline against those dynamics and determine what we think we're going to be able to get done. Macro continues to be a factor. Is there a slight uptick on things like focus on budgets and approval cycles? Probably. But quite frankly, there was business there for us. And any time we fall short of my expectations, my job and the job of the leadership team is to evaluate and really understand what happened and then not overreact and not underreact. And that's exactly how we've looked at things. We've studied extremely closely the specific deals that went over the quarter boundary, and as you know, our business is driven by renewals with large expansions, new logos and more and more Capella migrations. As we got out of the gates with Q1, we did not have the same level of really big renewals with expansions as we have in previous Q1. So that was always a factor. And the push from Q1 to Q2 was not one big deal, but it was more a collection of really good opportunities. And we've studied those and subsequently, we've had many of them closed. Some of them, in fact, Matt, that went over the quarter boundary, had increased in size. They go up to a different level, and we benefit from a more strategic view and some of them are looking really good to bring in. So macro is a factor. Our job is to understand that and overcome it. We continue to believe in our value proposition and have confidence in the business moving forward. So no change on our overall momentum.In terms of the dollar impact, Greg, I don't know if you'd...

[Gregory Henry, executive]

Yes. I mean, again, as Matt said, it was several deals that several of which have closed. So again, it's all baked into the guidance as we go forward, and we don't see it being an impact on the year. It's just a timing dynamic for us.

[Matthew Hedberg, analyst]

Got it. It looks great that there are a lot of them are closing already. Maybe just a quick follow-up for you, Greg. Maybe just a little bit more on why customers choose on-demand pricing? And is it fair to assume given the $1.5 million Q1 impact that it's kind of like a $6 million impact to full year? Is that kind of the right way to think about it?

[Gregory Henry, executive]

Yes. I appreciate that. Let me start with the end of the question. No, it's not a $6 million impact. It's a onetime $1.5 million pickup, and the on-demand business could grow from there, but it is not a revenue type thing where you can annualize it. It's a onetime ARR balance item. So think of it as $1.5 million, not $5 million or $6 million for the year at all. I mean, look, we've talked about in the past when I've met with you folks in the investor community that at the time, at the right time, we would include on-demand. We felt it was the right time. It was the beginning of the year. To be honest with you, it's more about if you look at the materiality, it's less than a percent of ARR. It's 5% of customer accounts. So we were doing it more for the customer account fluctuation than the ARR per se. And then also on your question about the impact, I mean, look, we think the on-demand makes sense to be in the number. Customers can run out of annual credits at any point in time. They can go on demand for a period of time and then come back and rebuy the annual credits. But if that happens to be over the quarter point, based on our definition, they would be on-demand customers and thus impacting customer count and ARR. So we wanted to include those to really be consistent with others and not have to have this dynamic of whether they're going to be in or out at a quarter point timing.

[Matthew Cain, executive]

Yes, Matt, the other thing I would add is we're working really hard to build up the consumption side of our business. And as we go down market, we want to make sure customers have the flexibility of just how they want to consume. And so I think this is additive to our business. It removes friction from the sales teams on getting them going with Capella. We want to enable that to the fullest extent possible, and we actually see some healthy movement from a starter pack to on-demand or on-demand into credit. So we think it's a good time for it and it's more natural and indicative of how we're driving the business and customer relationships on a go-forward basis.

[Operator]

Our next question comes from the line of Howard Ma with Guggenheim Securities.

[Howard Ma, analyst]

I want to dovetail on Matt's question before. And so with respect to the slipped deals, when you're talking to the decision-makers and Matt, you just said based on your own analysis, if you were to kind of rank order the top 3 reasons, I mean, is it tighter budget constraints relative to the start of the year? I mean, would you say, is it increased competition? Or maybe it's something more benign, like Couchbase is offering more capabilities now. So you're being evaluated as part of a broader strategic decision and that can require more approvals. So if you were to kind of rank order it, what would you say to that?

[Matthew Cain, executive]

Yes, Howard, I think you nailed it. I think there are 2 big factors. One of them is just higher levels of approval. And I think sometimes even organizations may not understand exactly what approvals are going to be required, so they may think they have everything they need, and it gets down at the end, and it gets elevated. And we just have a little bit more work to do. And I think that's the biggest dynamic that we've seen. And the good news is the value proposition holds true, and we're able to do that work. The other dynamic that you touched on, and I'd say this is particularly relevant with Capella migrations, which is going to be a big driver of ARR for us. The consideration is a little bit different than would be the case with a big enterprise deal. How are they rationalizing cloud spend? How does that factor into the overall TCO? What kind of calculations are in there for developer productivity or operational savings? And again, that value proposition is there. But what we're learning is each and every one of those has unique dynamics. What software version are they running? Where are they deployed? What's the complexity of the application? What's their cloud provider? And so as we go through this inflection in Capella and we continue to learn, I think that's a dynamic that continues to play out. And the fact that a bigger percentage of those are showing up to me is indicative of the product market fit that we have with Capella and the path that we're on. But it adds complexity and you combine that with the higher levels of approval and the people that are asking those questions, I'd say those are increasing factors in how we're managing our business. And the thing that gives me comfort is we're leaning into investments and capabilities to drive that into the organization and ensure that we're able to act with better efficiency as we manage those. So I'd say those are 2 factors that played out in the quarter.

[Howard Ma, analyst]

Matt, that's really good color. And I just want to ask a follow-up on IT optimization. So in light of that, I want to better understand how your customers are consuming, how they're choosing to consume Capella? Is the dynamic more so that your Capella customers are choosing not to renew their commitments? And then therefore, they're moving completely to on-demand or PayGo? Or is it just that they're keeping the size of their commitments unchanged, but they're just over consuming more on-demand?

[Matthew Cain, executive]

Yes. So Howard, I'm going to take a crack at it, and then I'll let Greg pile on. When we see the fluctuation for Capella customers between credit and on-demand, I would say, generally speaking, that's smaller customers with smaller applications. with larger customers that have more significant Capella deployments, they're buying credits and we're managing their consumption, and those metrics continue to look very positive. And then we get into rebuys and providing them with more credits and sizing and understanding the pace of their growth of initial applications or applications that they're adding. We spent a lot of time studying that and making sure that we have a healthy relationship, quite frankly, with the customers that they're not getting ahead of themselves, and we're providing value as a strategic vendor. So the overall consumption that we're seeing in Capella, we're really excited about that shift to on-demand, again, smaller customers. And Howard, as an example, we may sell a fiber 10-K starter pack, the customer gets going, and they choose to move into that on-demand as they're building out the application. We may very well move them back at the right time. But I'd say it's a different part of the pyramid than where the bulk of the Capella ARR is.

[Gregory Henry, executive]

Yes, I agree with everything Matt said. And again, you can have these dynamics where even a large customer will say, "Hey, you know what, I'm going to buy more credits. But for some reason, there's a timing element." And they will say, "I'll go on demand for a couple of weeks, and I'll come back and place my rebuy." We do not see the larger scale Capella customers at all going to on-demand for any extended period of time. But there could be these windows. And what we don't want to have to see happen is have that window across the quarter point and based on our definition, not be able to report them as a customer or potentially ARR.

[Howard Ma, analyst]

Got it. It sounds like you're managing it really well.

[Operator]

Our next question comes from the line of Austin Dietz with UBS.

[Austin Dietz, analyst]

Matt, let me your latest thoughts on Columnar Service. Obviously, the [Technical Difficulty] take more analytics just exciting. Can you just unpack this opportunity a little further? Is this potentially going to pick up wallet share from existing analytical applications today? Is this more about net new applications? Do you mind just unpacking that opportunity further for us.

[Matthew Cain, executive]

When we think about the role that we play at Couchbase, we're very focused on enabling a very rich data platform to help enterprises build truly mission-critical applications. And our job is to enhance our platform with additional capabilities that make those applications that much more sophisticated, that much more personalized, that much more real time for the enterprises that are deploying them. And a lot of that is bringing multiple data repositories into the database that the application then can drive performance and insights from. And clearly, we have access to a lot of data for the applications on the operational data side, but the addition of Columnar allows us to ingest data from other sources and then unlock real-time insights while the application is being performed that makes the application perform that much better. So this is not about moving into nonreal time operationally performing applications, but it's how do we bring the analytical capabilities with more and more data sources to make that application that much more sophisticated, that much more complete.Now as we think about the world of AI and what we call adaptive applications, we think it's going to be really critical, particularly for business-critical applications that multiple data sets are brought to bear for applications that analytics and AI capabilities can then enhance. And that's structured data, unstructured data, data that we hold in the cloud, at the edge and Columnar is a big advancement on ingesting, manipulating, understanding data alongside the operational data store itself. In terms of how we will monetize this, I think it really enhances the strategic value of our platform. It's a major extension. We have architectural advantages and a unique approach to how we're managing JSON and other capabilities. And it's a really powerful addition for developers that allow them to, again, build more and more sophisticated applications. So the feedback so far with customers has been really, really positive, as they are mapping out their strategic initiatives on a go-forward basis when we can sit down and show them this capability along with other services in the platform, and I think they really see the value and how they can leverage it on a go-forward basis.

[Operator]

Our next question comes from the line of Raimo Lenschow with Barclays.

[Raimo Lenschow, analyst]

Can I go back to Matt's question at the very beginning and just maybe to clarify one more time. So if you think about the ARR shortfall a little bit, like did the macro get worse? Or was it sales execution that kind of caused it when you looked at the deal afterwards? Because that's the big question we are asking for the whole sector, like not just you, like everyone. Did it get incrementally worse because we've all been working in that kind of tough environment for quite a while. So the question is, is it actually changing from here? Or was it more like deal specific? And I had one follow-up.

[Matthew Cain, executive]

Raimo. Look, I think the 2 are interrelated, right? And again, we've been talking about macro for some time. We've spoken with you about that many times. And our job is to articulate our value proposition despite macro and a big part of that is TCO. I think our business is built to sustain the environment that we're in. And people need to invest and drive digital transformation and deploy platforms that are relevant and are going to unlock applications in an AI-powered world, and none of that has changed. As I mentioned, we had the business there, and that business, some of it is subsequently closed, as I've articulated. If we go and spec each and every one of those, are there questions on, are we extracting the right amount of value? Are the questions that delayed things macro related? Yes. Should we have executed and gotten more of them across the line? Yes. And so then we study those to say, well, has macro gotten worse and is it going to impact the go-forward business? Or do we believe if we get further ahead of those and we have a little more time, and we're spending time with the next level of approvers, are we going to get those over the line? And that's where we have confidence where we sit. And there's a lot of learning, particularly with Capella and migrations and the different types of questions that are coming with the different clouds. So I'd say macro persists. We're certainly very aware of it. Our value proposition is well aligned with enterprise and Capella, and we know we can do better.

[Raimo Lenschow, analyst]

Yes. Okay. Perfect. That's very clear. And then, Greg, one follow-up for you, like well done on the positive cash flow outcome this quarter. I know you're not guiding for cash flow, but how do you think about cash flows going forward for the rest of the year and from an annual perspective?

[Gregory Henry, executive]

Yes, we're very proud, obviously, of getting to cash flow positive in Q1, particularly coming off the large Q4, which helps that. I think, again, we will probably remain cash flow negative for the rest of the year. But I think you'll see by the time we get to the end of the year, we will have made significant progress again versus what we did last year. So, as I said in my remarks, we're still committed to being free cash flow positive next year in fiscal '26, but you should still see cash flow negative for the remainder of the year. And I'd say, general same seasonality you've seen historically.

[Operator]

Our next question comes from the line of Sanjit Singh with Morgan Stanley.

[Sanjit Singh, analyst]

My congrats on the free cash flow positive quarter this quarter. And just a general improvement in operation of businesses on a year-over-year basis. I wanted to talk a little bit about the migration opportunity. I was wondering, Matt, it seems like a cohort of customers that migrated last year and sort of in that sort of year 2 of that ramp. And what sort of trend lines you're seeing from those customers that have migrated in terms of their usage growth? And if I look at the pipeline of opportunities after fiscal year '25, how much of migration playable in that pipeline if you can give some color on the migration opportunity.

[Matthew Cain, executive]

Sanjit, look, I feel pretty good, quite frankly, about the whole dynamic of Capella migrations, both in the ones that we have migrated over and the monetization, quite frankly, but equally important, the customer feedback as well as the number of opportunities that we have lined up and the advanced level of discussions that we're having with them on when is the right time for them to move and when do we create a compelling event. Customers understand the value proposition of TCO. They understand that they're able to go focus on building applications and we can run the database. We had one of our largest migrations, Sanjit, stand up in front of a large group and say, I've hit euphoria with Capella. And I've been working on databases for my entire career, 25 year, and I never thought that I would get to the point where a database would just run on its own. Now this is a customer that's had a very long journey with us, starting with enterprise, some of our very early versions of our as-a-service offering, and it hasn't always been perfect to be frank, but they've stuck with us because the power of the Couchbase platform is so critical. Now we've gotten them migrated over and they're using the word euphoria. We have worked relentlessly to ensure that the customer experience is world-class, and we continue to get amazing feedback. And so the pace of it is going to depend on when customers are ready with that compelling event. Do they have other projects in line? Are there things they need to do with their software version to get moved over, just the business side of the equation. So there's many factors that we're leaning into, but the pipeline has never been healthier. Our understanding of the variables that are important for us to address and for them to address to get things over the line and get up and running in a healthy way, we've never been better at that.Now we're not always going to be able to control the moment at which they go, but I'm comfortable with the fact that we look at Capella in a lot of different ways. If you look at the customer count number, that's gone up faster this quarter than the ARR percentage, and that's just a function of when those migrations are going to happen. So again, there's a lot of things that I'm excited about as it pertains to the go forward, but Capella migrations is at the top of the list.

[Sanjit Singh, analyst]

That's super interesting to hear, Matt. The other question, a follow-up I had was put it around, you mentioned a couple of times, it's on this for about [Technical Difficulty] supporting mission critical applications and driving digital transformation. I'm kind of wondering, in the context of that, we have macro,but we also have just a lot of stuff being brought to market on the Gen AI side. You guys just released Vector Search [indiscernible] quarter. So I'm wondering about the customer perspective, the ability to digest all of this new innovation in the sort of data infrastructure side. And then there's a lot of proof of concept [indiscernible], is that slowing the ability to restart that digital transformation initiative or build that net new mission clinical application in your view?

[Matthew Cain, executive]

Yes. Sanjit, I think it's a sophisticated point. And if we think about the world's mind share, which is inclusive of our customer base, the amount of time that we're spending on AI compared to any point in the future is higher. And so if there's a certain allocation of digital transformation versus AI, there's been some focus on AI, not always at the expense of digital transformation, but it's been certainly a topic that everyone is talking about that we need to factor into our sales cycles and customers need to factor into their initiatives. I do think the distraction is larger, the more simple the app is. I think when you get into mission-critical high-performing applications, it's an and, not an or, and you still need operational data stores, you still need to ingest other data sets. It's going to be really important that you have the edge capabilities. And so as we're articulating Couchbase in an AI world, that's a pretty natural discussion when we're thinking about and it's not, oh, it's this or some other tools. So I think it's a factor. We're having to arm our sales teams and spend time with customers, but we're still able to get things done, and that includes migrations as well as new logos.When we do have those conversations, we feel really good about what we can articulate because of all the capabilities we have and our multipronged approach with respect to AI, which isn't just the platform, but unlocking improvements for developers which is an area that's quite frankly, only an accelerant, not slowing things down with iQ and our Copilot. So I'd say those are factors that we're weighing into how we go to market and how we message, but all things considered because of our strategic position, I think we can use that to our advantage.

[Operator]

Our next question comes from the line of Ittai Kidron with Oppenheimer.

[Ittai Kidron, analyst]

Greg, I wanted to dig again into your confidence around the ARR target for the year. I understand that you have another $1.5 million of on-demand. That's a little bit of a buffer there. But I'm kind of wondering the fact that deals get pushed out, ultimately, that means you do need to spend more time on those things in the quarter when you didn't expect it, which means ultimately sales bandwidth is not allocated to deals. And why isn't there like a rolling effect of this going forward? Why do you think you can catch up, especially since you're highlighting what is clearly a very still complicated, not easy backdrop?

[Gregory Henry, executive]

Look, we feel confident in the guidance. The reality is the way this year is set up was going to have a larger amount of the renewals on the enterprise side of the business, which is still approximately 88% of our business in the second half of the year. And those are all still tracking. I've also had the ability to have May close now and see how we're performing in terms of having closed those deals we talked about from Q1 as well as what the pipeline and the deal activity is. So as Matt mentioned, most of the deals particularly on the doorstep, we are one signature away in most cases. So that's why we still feel good about what we're able to deliver not only for Q2 but for the full year and really don't see Q1, which is typically, as you know, a small quarter really dictating how the rest of the year is going to perform.

[Matthew Cain, executive]

Ittai, if I could provide some additional context. When we moved into the year, we talked about driving efficiency and leverage and getting more out of our investment. And on the go-to-market side, there were probably 4 levers that we felt really good about, new capabilities, new investments. That's really understanding how we qualify our opportunities and align our sales motions. A lot of tools and capabilities for Capella migrations, as we've mentioned, more focus on strategic accounts with dedicated teams and then things that we're doing around the developer experience. And as we analyze when we expect to see the impact of that, the reality is it's not going to happen out of the gate in Q1. We're going to see that above and beyond contribution, more back-end loaded. We're starting to see a little bit in Q2, but certainly in the back half. And so we feel really good about the operational improvements that we've driven there. We can see the leading indicators and I expect those to have an impact as we go through the year as we plan for them to be. So that, in addition to the renewal base, I think leads to our confidence on how we've laid things out.

[Ittai Kidron, analyst]

Okay. Maybe as a follow-up then on this, Matt. I'm just trying to want to make sure I get your perspective on the big picture on the macro, is the macro unchanged from your perspective versus a quarter ago? Or has it become slightly more difficult, more negative? And if it did get a little bit more difficult, how is this informing the pace of your investment in the business between now and year end?

[Matthew Cain, executive]

Yes. Look, I'd say on the margin, it's hard to argue that it hasn't softened a bit. Now, again, we've been talking about these factors for some time. And there's multiple factors, approval cycles, size of deals, starting smaller. I wouldn't say that every one of them was a factor in Q1. It's probably, again, as I've talked about, those migrations and approvals. But we've thought about that for the year. And again, the pipeline is there, and we're in a good place to go execute. All that said, we remain very committed to driving leveraging in the model, and that's not about spending less. That's about doing things better. We're very proud of the Rule of 40 improvement over the last year and certainly the last 2. And we've been talking about the foundation that we've built and now being a part of this Capella inflection, which is allowing us to just be better in how we develop product, how we support our customers, how we take things to market, the impact on the business with the monetization of Capella. So we remain very convicted on delivering what we articulated at Analyst Day. And as we've talked about, there are factors outside of our control like macro and then there are factors inside of our control and efficiency and leverage and being smart about how we do things is directly in our control, and I'm very proud of the results that the team delivered and confident on the ones we're going to continue to put out.

[Operator]

The next question comes from the line of Andrew Nowinski with Wells Fargo.

[Andrew Nowinski, analyst]

Okay. Can I ask a question just broadly on Gen AI. And has the focus on the training phase of Gen AI and perhaps the slower start of the inference phase had any impact on your growth either with new logos or migrations?

[Matthew Cain, executive]

I don't think so. I think, again, it's part of the dynamic and part of the discussion that we're having as customers evaluate AI in general, but not going to slow down the evaluation of Couchbase and Capella as an important data platform.

[Andrew Nowinski, analyst]

Okay. And then I wanted to ask about the go-to-market changes you're making. It sounds like you're having your sales team focused on the larger strategic accounts. I'd assume those workloads are larger and presumably have more predictable consumption patterns. But are they also more competitive? Some of the other larger vendors are also targeting those same strategic accounts?

[Matthew Cain, executive]

Look, so I think this is an and, not an or. And it's about really understanding the unlocked potential of some of our really large enterprises. And if you look at the makeup of our business, we have some massive customers that are investing in Couchbase as a true, true strategic platform. We've unlocked a few of those that get us into some very significant deal sizes, and they start to standardize on Couchbase for certain applications. The idea is that with more of that understanding, we can unlock these massive opportunities with dedicated teams and that selling motion and how you go to market is very different than engaging in a developer on a 5-K starter pack and getting them to build a net new application for their company. And so it's about focus and ensuring that if we're expanding the use case at that size or working on a replacement of a legacy database, who we're talking to and how we're talking and what kind of proof of concept versus trial they're doing, those can be different. And with the specialization in certain areas, we're going to be that much more efficient and unlock opportunities. So it's about go-to-market motions, aligning to who we're talking to in those accounts, giving them what they need to advance through their either building or buying cycle and just bringing the right resources to bear for the customers in mind.So look, we see leading indicators. But as Greg mentioned, just the way the renewal base is built up, some of that activity is going to be more back-end loaded, but we're pretty excited about what we see so far.

[Operator]

Our next question comes from the line of Rudy Kessinger with D.A. Davidson.

[Rudy Kessinger, analyst]

And I appreciate the candor here and sort of pointing the finger more to yourself instead of just playing into macro. I want to dig in again on just this $1.5 million of ARR that came from the reclassification because I guess one way you could look at it, if we exclude that $1.5 million, your ARR would have been below the low end of your guidance range. And so how much of that $1.5 million ARR that you're now including came from customers who intra-quarter in Q1 switched from credits to on-demand versus how much was from customers who have been on-demand for a while now?

[Gregory Henry, executive]

Rudy, it's Greg. Look, again, as I stated, we didn't do this, I would say, from an ARR perspective, we did it more from a customer count perspective because of the significant impact on the customer count. The movement that you talked about was probably generally immaterial in the quarter. So it's not driving that big a thing, but we have seen this. And what we don't want to do because it's the beginning of the year, we thought it was the right time to put this out here that we would be sort of clean for the year because we have seen some of that. We just don't want to get caught at a later point down the road where our definition would have had us reclass that out of customer or out of ARR. And then just for clarification on your point. Yes, if you remove this on-demand, but I did mention that there was $350,000 of FX headwinds. So we would have landed within the guidance range, albeit on the low end, as you noted, but not outside of it.

[Rudy Kessinger, analyst]

Okay. That's helpful. And then I'm curious, some other competitors out there have called out kind of slowing consumption growth trends. Just curious what you guys have seen. And in particular, with some of your customers where they're on commitments, how are they tracking in their consumption growth towards those commitments? And do you see any risk of maybe some downsizing later on throughout the year once customers get to that renewal point and maybe they're not quite up to their commitment level on consumption.

[Matthew Cain, executive]

Yes. We have not seen any material what we call breakage where they're not using their credits at all. In fact, most are using them early. So we still see very positive consumption trends throughout Q1. And even with the benefit of now having May, we've still seen another increase in consumption even in May. So because we're still in this early phase of this consumption model as compared to some of the other companies that are sort of more mature and have been doing this for a lot longer. We're still in this early phase of adoption. So we are still seeing positive consumption trends. We have not seen this optimization that is being spoken of. We're still seeing healthy growth, and we're seeing customers like the one we talked about in Q4, which is a multi-million dollar account, it's 6 months in, they're now consuming at the level that they bought into. So it's not taking us even a full year to get them up to the full consumption level. So we feel pretty good about the consumption trends we're seeing at current time.

[Operator]

Our next question comes from the line of Taz Koujalgi with Wedbush Securities.

[Imtiaz Koujalgi, analyst]

I had a question, again, just a follow-up on the $1.5 million I just meant, Greg. So when you give us a guide for ARR last year for the full year, I guess you're not assuming to include the on-demand portion in the ARR. So now that you're adding that on-demand piece. I guess we got an uplift of $1.5 million in Q1. But shouldn't that be passed on to the full year guide as well because that uplift was not factored into the initial guide? Or is it are you effectively, I guess, lowering the guide by $1.5 million?

[Gregory Henry, executive]

Yes. So Taz, we introduced this methodology change in Q1. It was not previously contemplated in the guidance. It is now contemplated in the guidance that we've reiterated for the year. But yes, it is in there now, and it will be going forward.

[Imtiaz Koujalgi, analyst]

Got it. And then secondly, on the guide, I know you guys feel good about the second half of the year given the renewal base. But my question is about the guide for Q2. When I look at the guide to the midpoint for ARR, you're expecting, I think the net new ARR implied is about $6 million. You added about $2.5 million in Q1. And when you compare that to the [indiscernible] now, they look a little bit aggressive, right? I mean, typically, you add Q2 net ARR, which is almost in line with your Q1 net ARR here. I guess your guide is implying a big jump in the net ARR you are supposed to add in Q2. So just in terms of guidance, I guess, [ financial year ] framework, are you assuming that whatever that picked out is closing in Q2, nothing else is getting pushed out from Q2? How do you feel about that guide being, I guess, conservative or aggressive versus what you guys did in Q1?

[Gregory Henry, executive]

Yes, we're both comfortable with the Q2 and the full year guidance. And as we've always said, we set that up, taking in all the factors, including what Matt talked about in terms of the macro changes that we saw. So that's all factored into both Q2 and full year guidance. And we obviously, as we said before, we always attempt to, at a minimum, meet it, if not beat it. As we sort of alluded to several of those deals from Q1 have now closed in Q2. We've had the benefit of seeing May. So we feel very comfortable with both the Q2 and the full year guidance in terms of our ability to execute and deliver on that.

[Imtiaz Koujalgi, analyst]

Got it. One last one, if I may, guys. Just on the mix of new business between upsell and new logos, it looks like new logos are very strong this quarter. So is it fair to assume that majority of the pushout and whatever weakness you saw was in renewals and upsells and new logo momentum seems pretty healthy this quarter?

[Matthew Cain, executive]

Taz, I think it was the mix in terms of what went over the quarter boundary. And as we've said, new logos has been and continues to be an area of focus for us. So we are relatively pleased with that performance. And if we look back last year, we're off to a very nice start with respect to net logos. We think that's indicative of what we can do on a go-forward basis.

[Operator]

We have reached the end of our question-and-answer session. And with that, I would like to turn the floor back over to Matt Cain for any closing comments.

[Matthew Cain, executive]

Thanks, operator. We started this year with continued progress following our historic 2024. I remain confident in our ability to drive leverage across our business and capture the generational opportunity in front of us. Thank you all for joining us, and we look forward to speaking with you next quarter.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.