Couchbase Inc

NASDAQ:BASE

Earnings Call Analysis

Couchbase demonstrates strong growth with Capella and positive fourth-quarter guidance.

Couchbase reported a robust third quarter, achieving $220.3 million in Annual Recurring Revenue (ARR), up 17% year-over-year. Total revenue reached $51.6 million, a 13% increase, with gross margin at 88.2%. Capella ARR rose significantly, accounting for 15.1% of total revenue. Looking ahead, Couchbase expects Q4 revenue between $52.7 million and $53.5 million, reflecting a conservative growth outlook. They anticipate ARR to be between $236.5 million and $239.5 million, approximately 17% year-over-year growth. The company highlighted a strong demand for its products and ongoing confidence in delivering substantial wins in the upcoming quarters.

Couchbase's Strong Q3 Performance

In the third quarter of fiscal 2025, Couchbase reported a robust performance that exceeded expectations across key financial metrics. The company achieved an Annual Recurring Revenue (ARR) of $220.3 million, marking a 17% year-over-year growth and highlighting the resilience of its business even in a challenging economic environment. This growth trajectory is predominantly driven by the increasing adoption of its Capella product, which accounted for 15.1% of total ARR, a notable uptick from 13.5% in the previous quarter.

Revenue Growth Driven by Core and New Customers

Total revenue reached $51.6 million, which reflects a 13% increase year-over-year. The software revenue alone amounted to $49.3 million, showcasing a consistent demand for Couchbase's core business offerings. Notably, Couchbase added 34 new customers in Q3, compared to 24 in the same period last year, indicating strong traction in customer acquisition and the introduction of innovative solutions that meet diverse industry needs such as fintech, e-commerce, and gaming.

Capella's Expanding Role

Capella has emerged as a significant growth catalyst for Couchbase. Customer adoption has accelerated, with around one-third of the customer base using this product. Capella ARR grew 15% sequentially—an almost fivefold increase over the past two years. Excitingly, Couchbase recorded its largest Capella migration to date, further solidifying its position as a trusted partner for enterprises undergoing digital transformations.

Optimistic Guidance for Q4

Looking forward, Couchbase anticipates continued momentum into Q4 and beyond. The company projects total revenue in the range of $52.7 million to $53.5 million, equating to a 6% year-over-year growth at the midpoint. ARR is expected to expand to between $236.5 million and $239.5 million, which also represents a 17% growth year-over-year. Additionally, despite a forecasted non-GAAP operating loss of between $5.7 million and $4.7 million, Couchbase is maintaining its commitment to achieving free cash flow positivity by fiscal year 2026.

Operational Efficiency and Expense Management

Couchbase demonstrated considerable operational discipline, achieving a gross margin of 88.2%. This reflects a slight decline from 89.5% in the prior year, primarily due to the growing integration of Capella, which has a different margin profile. Expense management remains a focus, with sales and marketing costs comprising 56% of revenues, indicating Couchbase's strategic investments in customer acquisition and product development.

Future Prospects and Strategic Connections

The outlook is sunny for Couchbase, with management expressing confidence in the strength of a sizable and strategically valuable pipeline of large accounts. Discussions around AI capabilities and next-gen applications are at the forefront of client conversations. Furthermore, there are plans for a more balanced renewal pool in fiscal 2026, paving the way for consistent growth moving forward. The company is committed to leveraging its strong product offerings to continue meeting evolving customer needs in an AI-driven landscape.

Industry Positioning and Innovation

Couchbase's strategic investments in developing AI services and mobile solutions are positioning it favorably against competitors. The new AI Services offering allows clients to optimize the deployment of AI applications and enhance the overall performance of their data management systems. As the demand for real-time AI applications grows, Couchbase is well-poised to capture market share through innovative and integrative technologies.

Earnings Call Transcript 2025-Q3

[Operator]

Greetings, and welcome to the Couchbase Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host, Edward Parker. Thank you. You may begin.

[Edward Parker]

Good afternoon, and welcome to Couchbase's Third 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 and development, 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 our 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]

Thanks, Edward, and good afternoon, everyone. I'm pleased with our performance in the third quarter, highlighted by strong new customer growth, continued growth in Capella consumption and ARR mix and continued progress on our full year objectives, which allowed us to deliver top and bottom line results that exceeded our outlook.

Annual recurring revenue, or ARR, was $220.3 million, up 17% year-over-year and 16% in constant currency. Revenue in Q3 was $51.6 million, up 13% year-over-year. Non-GAAP operating loss in the third quarter was $3.5 million. We added 34 new logos, up from 24 in the third quarter of fiscal 2024. Capella now represents 15.1% of our total ARR and 1/3 of our customers are now using Capella.

In Q3, we saw broad strength in both our core enterprise and Capella businesses with solid performance across renewals, expansions and new customer lands. We saw exciting customer wins across a variety of industries, including government, gaming, fintech, e-commerce, insurance, technology, communications and travel and hospitality, reinforcing my confidence in the increasing relevance of our platform and our ability to meet the application needs across a wide range of use cases and industries.

Our momentum with Capella continued in Q3, driven by both strong new logos and migrations. Notably, we had a major milestone this quarter with a multimillion-dollar Capella migration, the largest in our history. We're seeing solid customer uptake and increasing consumption of Capella, which bodes well for the long-term growth and durability of our business.

As I discussed last quarter, we've been making significant progress with a large set of key accounts where we are emerging as a strategic and long-term platform provider to enable a new generation of critical applications. This work continued in the quarter, and these large opportunities continue to represent a significant portion of our pipeline. The strength of our Q3 performance further underscores our confidence in our ability to close significant wins and expansions in Q4.

We also demonstrated our commitment to drive leverage across the business as evidenced by our excellent bottom line performance this quarter and throughout the year. In Q3, we improved our Rule of 40 score by 9 points year-over-year. As you all know, improving our operational rigor and efficiency has been a key priority, and I am proud of the progress we've made in driving efficiency across go-to-market, R&D and all aspects of our operations.

Turning to customer wins. We saw notable wins in the quarter across a variety of industries. These include a leading global insurance company, which transitioned from Community Edition to Couchbase Server to power internal applications for its property and casualty insurance and reinsurance businesses due to our leading price performance.

We also secured a global airline, which is leveraging our mobile capabilities and high-performance platform to power its in-flight entertainment system and enable custom content for passengers. Additionally, we won an emerging AI-powered cybersecurity vendor, which selected Capella for its speed, ease of development and strong search capabilities to support its real-time threat detection and remediation offerings.

Further, a multinational technology company is leveraging Couchbase to support content management for a public sector agency's railway traffic planning platform because of our superior scalability and performance. Lastly, a leading online retailer chose Capella to power its mobile app, further demonstrating Capella's versatility and appeal across industries.

Our existing customers continue to demonstrate a growing commitment to the Couchbase platform. A major Couchbase Server expansion in Q3 was a Fortune 500 global media and technology company. This customer relies on Couchbase for several use cases, including its Customer 360 application, which helps deliver enhanced customer support across multiple lines of business. By expanding its use of Couchbase, this customer was able to further consolidate its tech stack, benefiting from our platform's flexibility and performance across multiple teams and use cases.

Capella migrations and expansions were also strong in Q3. An EMEA-based airline decided to migrate to Capella due to our fully managed capabilities and enhanced features like Capella iQ to improve developer productivity. A leading online gaming company is expanding its use of Capella to power its customer personalization and content management for its cross-product promotions, where speed, scalability and resiliency during peak times is a primary requirement.

Additionally, an emerging communication software vendor is expanding its use of Capella given its low TCO in support of a variety of cloud-first initiatives. As I mentioned earlier, we saw our largest Capella migration to date with a Fortune 500 global hospitality company, where we power its mission-critical central reservation system and member loyalty program. It originally selected Couchbase to replace its legacy infrastructure in order to create personalized customer experiences, improve online reliability and release new apps faster. This multimillion-dollar ARR enterprise customer decided to migrate to Capella to further modernize its infrastructure and align with its cloud-first digital transformation initiative. And as a result, they are committed to tripling their spend with us.

As you all know, Couchbase was architected to be the foundation for critical applications, delivering one of the world's most scalable, performant and flexible modern data platforms. We've intentionally built our platform to combine uncompromising performance with the flexibility of deployment and usage models from cloud to on-premise and to the edge and everything in between.

A key component of our flexible deployment model is our native edge capability, which empowers mobile developers to move data and compute closer to where it's being used. This not only improves the speed and resilience of mobile applications, but also eliminates dependencies on distant cloud data centers. In Q3, we saw significant traction with our mobile use case as more customers recognize Couchbase as the only mobile database offering built from the ground up for these types of use cases.

Our mobile solution makes Couchbase highly embeddable and programmable at the edge, catering to a wide range of applications across industries such as retail, health care, industrial and IoTs. We believe that our platform approach is the reason why our customers continue to demonstrate a growing commitment to the Couchbase platform. As demand for hyper-personalized real-time AI applications accelerates, the core tenets of our value proposition are only becoming more relevant.

As I've mentioned throughout the year, we are seeing an increasing number of strategic projects across our customer base where organizations are evaluating, architecting and building the next phase of their data infrastructure to meet the needs of their AI and next-generation applications. It's becoming increasingly clear that many alternative approaches and solutions are failing to meet the long-term demands of enterprises looking to scale their infrastructure for their rapidly evolving application road maps.

As enterprises look to build the next generation of adaptive applications, the need to combine ever-growing volumes of data, whether structured, unstructured, Internet-based or proprietary enterprise data with extremely low latency and high performance is becoming more urgent. This is a trend that will only intensify in the coming years.

Now let me introduce you to our latest offering, Capella AI Services, which we just announced yesterday. Enterprises are facing challenges with both developing and deploying AI and with streamlining the creation of secure, agentic AI applications at scale. Our new AI Services are designed to empower enterprises to address these challenges head on and include model hosting, automated vectorization, unstructured data preprocessing and AI agent catalog services. These comprehensive services allow organizations to avoid latency issues and high operation costs, both of which are frequently encountered by application developers.

By giving developers control over data throughout the development life cycle and mitigating security and privacy issues with running LLMs outside the organization, we enable teams to bring agent-based applications into production in a safe and reliable manner. We are continuously extending our platform with new features and services, all purposely designed to empower developers in building next-generation applications.

As AI reshapes the landscape of software development, Couchbase equips developers with the developer data platform that integrates transactional, analytic, mobile and AI functionality into a unified fully managed service. Our mission is to simplify how developers and architects leverage these capabilities to create premium application experiences that push the boundaries of innovation without compromising on functionality, performance, operational costs or connectivity.

Before turning the call over to Greg, I want to take a moment to highlight the incredible momentum we've been seeing on the product front. Over the past quarter, I've had the privilege of spending significant time with our engineering leadership, and I can confidently say that the energy and excitement within the team are palpable. They're deeply inspired by what we're building and the significant impact it will have on our business. Our product teams are moving faster than ever, and the passion and commitment across the organization are truly remarkable. Looking ahead, I'm incredibly excited about the key initiatives we have in the pipeline and look forward to sharing more with you in the quarters to come.

In conclusion, I'm pleased with the operational progress that we made across the company in the third quarter. We delivered strong top and bottom line results, made progress on our strategic priorities, delivered strong new customer growth, meaningfully increased our Capella mix and continue to drive efficiency across our model. At the same time, we continue to make rapid progress with a number of high-priority accounts where we are emerging as a strategic and long-term platform provider.

Our customers and prospects are focused on building the next generation of adaptive applications while addressing the growing data challenges of an increasingly AI-powered world. This opportunity set adds to my confidence in delivering a strong Q4 and our ability to drive substantial wins and expansion for years to come. And finally, we continue to drive innovation into our leading platform, positioning us even further as a long-term strategic partner for enterprises and their most critical applications in our AI world. As always, we will attack hard problems driven by customer outcomes.

With that, I'll now hand the call over to Greg to walk you through our results in more detail. Greg?

[Gregory Henry, executive]

Thanks, Matt, and thanks, everyone, for joining us. I'm pleased with the rapid progress we made in the third quarter, including our top and bottom line performance, new logo generation, strong retention and ongoing Capella momentum. Despite a challenging environment, we continue to see strong demand for our platform and remain confident in our trajectory and ability to achieve our fiscal 2025 goals and the objectives we laid out at our Analyst Day.

I'll now walk you through our third quarter financial results in more detail before providing our guidance for the fourth quarter and fiscal year. Total ARR was $220.3 million, representing growth of 17% year-over-year and 3% sequentially above the midpoint of our guidance range. We ended the third quarter with $33.2 million of Capella ARR, representing 15.1% of our total ARR, up from 13.5% last quarter. Capella ARR grew 15% sequentially and is up nearly 5x over the past 2 years.

Turning to revenue. Third quarter total revenue was $51.6 million, exceeding the high end of our outlook, up 13% year-over-year and flat sequentially. Software revenue was $49.3 million, up 12% year-over-year and flat sequentially. Professional services revenue was $2.3 million, up 28% year-over-year and 1% sequentially. Q3 ARR per customer was $244,000, down from $246,000 last quarter and down from $264,000 in Q3 2024. 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 the quarter with 903 customers, an increase of 34 net new customers from last quarter. Our Capella customer count grew by 27 in the quarter.

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. We continue to focus on growing efficiently and in Q3, we again outperformed our operating loss outlook. Our third quarter gross margin was 88.2%. This compares to 89.5% in Q3 of last year and 88.3% last quarter, benefiting from sustained enterprise gross profit margin strength, offset by growing Capella mix, which inherently carries a lower gross margin.

Turning to expenses. Third quarter sales and marketing expenses were $28.7 million or 56% of revenue. Research and development expenses were $12.9 million, 25% of revenue. General and administrative expenses were $7.4 million or 14% of revenue. Exercising expense discipline remains a priority, and I'm pleased with our progress on this front.

Operating loss for the third quarter was $3.5 million or a negative 7% operating margin, 3.1 percentage points above the midpoint of our implied operating margin guidance range. This compares to a loss of $5 million or negative 11% operating margin in Q3 of last year. Net loss attributable to common stockholders was $2.4 million or negative $0.05 per share.

Turning to the balance sheet. We ended the third quarter with $141.9 million in cash, cash equivalents and short-term investments. We remain well capitalized for executing against our long-term strategy. Our remaining performance obligations, or RPO, was $211.3 million at the end of Q3, up 29% year-over-year. We expect to recognize approximately 61% or $128.7 million of total RPO as revenue over the next 12 months, representing growth of 15% 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 average contract duration. Operating cash flow for the third quarter was negative $16.9 million. Free cash flow was negative $17.5 million or negative 33.9% free cash flow margin. We remain committed to being free cash flow positive for fiscal 2026.

Now I will provide our guidance for Q4 and the full year fiscal 2025. As Matt mentioned, we are encouraged by the strong momentum we built across our business, particularly with a growing number of large strategic opportunities where Couchbase is being evaluated as a key component of their long-term initiatives. Additionally, we remain confident in Capella's role as a major growth driver, supported by ongoing investments in expanding our product capabilities, strengthening our partner ecosystem and refining our go-to-market strategy.

As a reminder, several dynamics that we discussed last quarter are contributing to the relative strength and visibility of our ARR outlook for Q4. These include the composition and timing of our renewal pool, which remains heavily weighted towards Q4, the aforementioned pipeline of large opportunities and a significantly higher-than-usual amount of precontracted ARR. These factors continue to play out as expected and add to our confidence in achieving our full year objectives.

That said, we remain mindful of the macroeconomic headwinds and continue to closely monitor their potential impact on our business. Given this, our outlook for Q4 incorporates a prudent level of conservatism to account for these uncertainties as well as the lack of visibility into how the macroeconomic conditions may affect upsell and migration time lines as well as consumption trends for emerging as-a-service offerings.

With these factors in mind, for the fourth quarter of fiscal 2025, we expect total revenue in the range of $52.7 million to $53.5 million or year-over-year growth of 6% at the midpoint. We anticipate ARR in the range of $236.5 million to $239.5 million, representing 17% growth year-over-year at the midpoint. We expect a non-GAAP operating loss in the range of negative $5.7 million to negative $4.7 million.

Now turning to our revised full year guidance. We are raising the midpoint of our revenue outlook and now expect a full year total revenue in the range of $207.2 million to $208 million or year-over-year growth of 15% at the midpoint. And finally, we are decreasing our operating loss guidance and expect a non-GAAP operating loss in the range of negative $20 million to negative $19 million.

With that, Matt and I are happy to take your questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line of Raimo Lenschow with Barclays.

[Raimo Lenschow, analyst]

Perfect. Congrats on the solid Q3 guys. I wanted to focus on Q4 a little bit. You kind of keep talking for like now the second quarter about like the opportunity for the fourth quarter with kind of interesting relationships evolving. How should we think about how that translates into ARR and then -- well, then eventually revenue like in terms of -- is that kind of then you signed a contract in Q4, and then we should get -- we should see it more in the numbers in the next year? Or how does that kind of translate your excitement into the numbers? Because I think that's the disconnect at the moment a little bit.

[Matthew Cain, executive]

Raimo, I appreciate the question. And I'll start off with some commentary on the opportunity set and why we remain excited about it and confident in delivering a great fiscal year, and then I'll defer to Greg on some of the dynamics on the financials. As we talked about last quarter, this year, renewal pool, the way things play out is more of a second half dynamic than has typically been the case. And certainly, we needed to execute well in Q3 to remain confident on the delivery of the back half, and we did that. Solid performance across renewals, upsells, migrations and new logos. And we did that all while progressing this pipeline of strategic opportunities in the back half. These are very large opportunities with some of the largest enterprises around the world that are making strategic long-term decisions about a database platform of choice. And you can appreciate that those are not simple decisions that they're making or processes that we are navigating.

That said, they're very exciting for us because it speaks to what we've built as a platform and the trust that we're getting from these customers and their view of us as a strategic partner on a go-forward basis. And so based on the progression of that, we are reiterating our confidence in Q4 and expect to be sharing the results of those on a go-forward basis. As it pertains to ARR and revenue dynamics, there are some differences with respect to enterprise and Capella. But Greg, why don't you take it from there?

[Gregory Henry, executive]

Yes. Hey, Raimo, so look, one of the things we've talked about is Q4 was going to be, as usual, our largest quarter of the year. We talked about last earnings that we had several million of precontracted ARR, which gave us confidence. We built that balance up slightly given what we delivered in Q3, which gives us a little bit more confidence from there. And then the majority of what will get done will translate into revenue in Q4. But as always, given that we're at January 31, there's certainly a period in January where a lot of our customers are through their -- or into their new fiscal year, budgets get released and they can start having discussions. So there could be deals from Q1 that come forward where we get some ARR, but not the revenue. But we factored all of that into our guidance and feel good about how things are laid out here.

[Raimo Lenschow, analyst]

Okay. Perfect. And then, Matt, on the AI comments that you made on the call, like what are you hearing in terms of customer conversations, how Capella kind of fits in or like Couchbase as a whole fits into that kind of AI blueprint that people are thinking about going forward?

[Matthew Cain, executive]

Raimo, we probably aren't having a single conversation with a customer or a developer or a technical team that isn't thinking about the implications of AI for their business and more importantly, for us, what that means for their database and data platform of choice as they build AI-based applications. I think one thing that continues to come through, through these strategic discussions and even when we're landing new logos is the view of these customers that Couchbase is a strategic platform for them in an AI world.

We worked very hard to add a tremendous amount of services into the data platform, while at the same time, simplifying the experience for developers. And yesterday's announcement on AI Services takes that even further, really allowing customers to combine structured and unstructured information, vectorizing everything inside of our data platform, bringing the appropriate models into Capella to simplify how developers can take advantage of AI, but do it in a secure and trusted way through the Capella platform.

So we think the future is very promising along those lines, and these capabilities further reinforce some of the platform differentiators that we've architected into our platform that we've been articulating for some time. So we are certainly excited about the release and excited about the discussions that we're having around the world with our customer base.

[Operator]

Our next question comes from the line of Mike Cikos with Needham & Company.

[Michael Cikos, analyst]

To circle up on Raimo's first question there, but maybe for Matt to start, good to hear about the progress made with that large set of key accounts. Just wanted to get a better understanding, what is the visibility that you guys have as far as time line for closing those deals? And I'm just trying to get a better sense, should we expect that in Q4? Or is there -- it's not as cut and dry as that some deals could push or some of these were expected to always be maybe more of a fiscal '26 event? Just wanted to see if we could get some greater granularity with those deals.

[Matthew Cain, executive]

Yes, Mike, it's a good question. Look, when it pertains to large opportunities, timing is a variable that we need to study very carefully. And it's about finding a great outcome for customers and when they're prepared to move forward and at the same time, finding a good outcome for us and getting started as soon as possible. Our confidence from Q4 stems in the strength of the pipeline, I would say. So having a very broad set, the broadest set of strategic accounts that are this far into their decision-making process as we've probably ever had in any given quarter and studying steps in the sales process, whether it be a technical win or understanding a particular compelling event like an application deployment schedule at a customer.

And as we examine all those variables across the pipeline, what we think about a lot is we have multiple paths to execute on a great Q4, knowing that we don't have to bat 1,000 on all those opportunities and some of them could move into next fiscal year, which we would expect a certain percentage of those to happen. So I think it's about the broad set, the level of intimacy we have with these accounts and their decision-making process, understanding where they are with their strategic projects that are dependent on Couchbase. And you put all that together, and we're a lot smarter about those based on the work that we got done over the last 90 days, which gives us the visibility and confidence to articulate the story that we have.

[Michael Cikos, analyst]

Very good. And maybe a follow-up for Greg as well. I think in the prepared comments, you had cited this greater amount of precontracted ARR that we have here today. Would it be possible to quantify or maybe provide some qualitative commentary as to how significant that is versus historical precedent?

[Gregory Henry, executive]

Yes, sure. Hey, Mike, look, there's always the opportunity for this. And so some quarters, we have some precontracted ARR and some we don't. This quarter happens to be a quarter where we have the most we probably had in company history. And it's -- we've stated before, it's several million dollars, and it's probably 2x-ish you would normally see in a quarter that was on the higher side. This is driven by some of the deals we did last Q4 in particular, plus the large Capella migration we did in Q3 is also providing some additional contracted ARR for Q4 and even for fiscal '26 as they migrate through this period. So that's a little bit of the qualitative and quantitative on how we see this. But again, it's a sizable amount that gives us confidence that looking at what we have left to do in the quarter is within a very manageable outcome.

[Operator]

Our next question comes from the line of Brent Bracelin with Piper Sandler.

[Brent Bracelin, analyst]

Matt, maybe we'll start with you here. Capella momentum building here, I think it's 70% of net new ARR coming from Capella year-to-date. But you have about 1/3 of the customers using Capella, but only 15% of ARR mix. Can you just talk through how customers are kind of using Capella? At some point, do you see that Capella activity really start to accelerate and it will be a bigger part of ARR. Just walk us through kind of customers, 1/3 of them now using it. What are they seeing? When do you think there could be an inflection point where adoption really starts to kind of even accelerate?

[Matthew Cain, executive]

Yes. Good question. Look, I think what I would tell you is we're feeling the inflection point, probably influenced as much by numbers that we put up by what we see on a go-forward basis. I'm particularly pleased with the number of customers that are using Capella. And when we step back and think about when we engage with a customer, it's not a single application. In many cases, it's tens or even hundreds of different applications. And so if we have a customer that has historically been on enterprise, what we really want them is to get started with the Capella offering because we think it's in their best interest, quite frankly, as the more optimized deployment model for developer ease in our future direction. If they start out with a single application, that moves into the customer count. It's not going to quite drive the ARR percentage as quickly.

Now what we know is the discussions that we're having with our customers on ones that are going to migrate eventually. And so between that 30% and 15% of ARR is a whole bunch of built-up opportunity where customers are evaluating the time frame for them to move even more applications into Capella and determining when it makes sense for them to drive that migration. So we've long said that the percentage of ARR is going to be really driven by the point at which some of our biggest customers migrate. We had the biggest one we've ever had happened in Q3, and we have several more opportunities stacked up in the pipeline. But I think combining that with the level of just, what I would call, healthy discussion and proof-of-concept wins and customer feedback on the utility they're seeing with the value proposition, we expect this to be a big uplift for the business for a long time on a go-forward basis.

[Brent Bracelin, analyst]

Helpful color there. And then, Greg, you got 4 years of pretty consistent 20% plus ARR growth. You flagged a few of the reasons why growth kind of moderated the last couple of quarters here. You're guiding to, I think, the second consecutive quarter of the 16%, 17% kind of ARR growth. Do you think the demand environment is kind of stabilizing for you now? And is that the right kind of ARR growth profile we should be thinking about going into next year?

[Gregory Henry, executive]

Yes. Thanks, Brent. Yes, I think the demand environment is, quite honestly, for us is good, as Matt talked about, not only for Q4, but just the building of pipeline. And look, we feel very comfortable in our guide, but we'll go back to our Investor Day a year ago. We have plans and aspirations to be a 20-plus percent grower. And so we got to get through Q4 here and see where we ultimately land for the year, but we aren't giving up on that as an objective for the company. So I'd just say like guidance is our guidance, and we'll get to fiscal '26 3 months from now. But we believe with Capella, we can be a 20-plus percent grower for the next several years.

[Operator]

Our next question comes from the line of Matt Hedberg with RBC.

[Matthew Hedberg, analyst]

Sticking on the same topic, it's great to hear the confidence on 4Q renewals and the opportunity there. And Greg, I appreciate being too early to talk about '25. But is there some way to think about the relative opportunity set for next year from that renewal or new business, could it be multiple times as big as this year? And I guess from a linearity perspective, this year was second half weighted. Is it right to assume next year will also be second half weighted in terms of those bigger renewal opportunities?

[Gregory Henry, executive]

Yes. Good question, Matt. We obviously aren't guiding to fiscal '26 as of yet. I will give you some color on how things are shaping. This year, the renewal pool is a little bit lower. It was back half weighted. Next year, we believe the renewal pool will be higher in totality and much more evenly balanced between first half and second half next year. Now again, we got to get through Q4 and see if there's some things that get done from fiscal '26 in Q4, but that's how things sit now. So I think it's going to be much more balanced like you saw probably in fiscal '24 than what you have seen in fiscal '25.

[Matthew Hedberg, analyst]

Congrats on the results and best of luck in 4Q.

[Matthew Cain, executive]

Thank you, Matt.

[Operator]

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

[Harshil Thakkar, analyst]

This is Harshil on for Ittai. Greg, I'm trying to square away the 4Q revenue growth guide with the RPO and ARR growth in the quarter. Could you maybe just shed some color on kind of what are the underlying mechanics that is causing the divergence there? And what it will take in the time line for revenue growth to kind of come back in line with ARR and RPO growth? And then with Capella becoming a larger part of the mix, is it possible that the divergence in growth will remain given the time it takes for Capella customers to kind of ramp up their consumption?

[Gregory Henry, executive]

Yes. Good question. And the last part of your question was a part of the answer to your question, which is, the more we do migrations, the further it pushes revenue out because we go to a complete consumption rev rec versus getting the upfront license. So as we talked about, we did our single largest Capella migration in Q3, which will just push out some of that revenue. And then some of it is, again, it's just timing of when deals are getting done, if they're enterprise versus Capella. So that's how we've laid it out. What I can tell you is the revenue completely jives with how we've laid out our ARR guidance for the fourth quarter based on what we know in terms of what's going to be Capella versus enterprise. And the revenue will lag, but eventually will catch up. And again, I've always said, as long as ARR is growing faster than revenue, I think we're all going to be -- we're going to be happy because we know that's going to come behind it.

[Operator]

Our next question comes from the line of Rob Oliver with Baird.

[Robert Oliver, analyst]

Matt, one for you to start. Just on the migrations, nice momentum there. And I know you guys, as you've been calling out, have been spending a lot of time with these strategic accounts. I was wondering if you could just help us understand how you think about kind of your preparedness as you head into next year with a bunch of contracts up for renewal. learnings you've had or your preparedness to migrate those customers at that time. Obviously, you guys just [ notched ] your largest migration ever. So clearly, some learnings from that. And also, I know you called out a community migration as well, which is enticing. And is there a driver out there that's sort of getting people to reconsider free versus stepping up to actually commit to Couchbase? And then I had a quick follow-up for Greg.

[Matthew Cain, executive]

Yes. Thanks, Rob. Look, as it pertains to preparation, I would say, unequivocally, we are prepared. The service that we're offering, the level of capabilities we have to watch customer deployments and help them navigate changes in their environment has never been more sophisticated and a testament to our engineering and support teams that work every day to improve that when and where we can.

You asked for learnings. I think every customer environment is different. What version are they running on? What's the nature of their application? Are they in a business where Black Friday may impact schedules. And so I think it's really about understanding the specifics of the customer environment, what they're solving for, where they may or may not be deriving the most benefits from total cost of ownership, who in the account are we talking to and who's signing off on the opportunity that has visibility across all these variables.

So I'd say most of the learning, quite frankly, has been on the important variables that dictate when a customer is ready to go or when we may have more work to do and understand those leading indicators as we're navigating the pipeline. But when customers are ready to go, the service is market-leading, and we are incredibly confident in the capabilities that we have inside of Capella. And that is as true for new customers as it is for customers that are migrating.

Look, in any quarter, we have customers that have been deployed in Community Edition that see the value in moving to a paid offering. Interestingly enough, in a lot of cases, we can prove a better TCO when people are paying for the offering because of our ability to help them with the deployment and the underlying infrastructure, Capella can be on the margin, even incremental reason for people to move from CE into that offering.

So that remains a set of pipeline for us to go after. And I think it's aligned with our overall get people using Couchbase. They see the value in the platform. They see the value in the additional services that we're bringing to market. And the land and expansion part of our business that's been so true for so long continues to accelerate.

[Robert Oliver, analyst]

Great. That's helpful. And then, Greg, just one for you. I know last quarter, you guys had called out some churn and downsell pressure. It sounds -- that was not called out this quarter. So it sounds like that was not an issue for you guys this quarter, which is great. But just particularly headed into an important Q4, which has been the subject, I think, of a lot of the questions on this call, what sort of initiatives or what you guys did internally to help to mitigate that risk as you come into some of these contracts?

[Gregory Henry, executive]

Yes. Thanks, Rob. Yes, I agree. We experienced sort of what we would consider in-range normal loss and downsell in Q3, which is continuing to point to us, which we suspected was Q2 is going to be anomalous. Look, we've done reviews of the deals. We do this weekly, and we don't believe that there's going to be an elevated amount of loss and downsell in Q4 as far as we can see now. So again, I think for us, it's pointing to that Q2 was anomalous and hoping that we can -- not have to cover this topic again just because this is -- Q2 is the first quarter we had seen that in several years. So again, I don't think this is going to be a trailing issue for us.

[Operator]

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

[Andres Miranda Lopez, analyst]

This is Andres for Rudy. I just have one at a higher level. How should we think about the conservatism embedded in your ARR guidance? I mean you guys have been sounding positive about your performance in Q3, but ARR was just a couple of hundred thousand ahead of the midpoint of your Q3 guidance, and that follows a couple of misses from Q1 and Q2. And if we go back to '23, '22 or fiscal '24, fiscal '23, I think we got more used to seeing more upside. So if anything, those -- is there anything that we should call any onetimes that we should call that happened in Q3 that maybe accounted for the conservatism going forward?

[Gregory Henry, executive]

Yes. Good question. No, I don't think we've -- or let's [ put this], we've approached our guidance the same way we do every quarter. So we haven't changed our approach. We've always said that second half and particularly Q4 was going to be the big [Technical Difficulty] because of, A, the precontracted revenue; and B, because of the size of the renewal pool. And so I don't think there's anything different.

You heard Matt talk about the size and number of strategic deals we have going on. They just are tending to want to be in Q4. Several of them have compelling events, which are renewal points, among other things. So this was always leading to be an uneven year with the back end and particularly Q4 loaded quarter. Like I said earlier on the question, fiscal '26 will get us back to sort of more sort of normal balance, but we haven't changed our guidance philosophy or approach here based on the Q3 results.

[Matthew Cain, executive]

Yes. Let me add one point that we haven't articulated so far, and I give a lot of credit to the go-to-market teams in the company on this. And that is maintaining a level of discipline as it pertains to pricing and discounting and ensuring that while we are focused on finding outcomes that are in customers' best interest that we are monetizing the growth for that in a way that our shareholders would be excited about that we're enjoying that growth as customers are deploying on more applications.

And as it pertains to deals on the margin around the quarter, there can be a tendency to want to drop discounts, pull things in and at the expense of longer-term economics. And one thing that I'm very proud of is the delivery of Q3 without doing that, which in turn could have hurt the back half. And so I'd say that's another dynamic as it pertains to guidance and actuals in the Q3, Q4 second half build and some of the tone that you're hearing from us.

[Andres Miranda Lopez, analyst]

Yes, that makes sense. And I have a quick follow-up, if I may. Understanding that you have some precontracted net new ARR contribution for Q4, the guide still implies a little -- a big net new ARR number. Could you maybe talk about the assumptions that you have around close rates, upsell, capital conversions and all of that? Just trying to understand a little bit how much risk there is still hitting that large number for Q4.

[Gregory Henry, executive]

Yes. Again, we've used the sort of the same guidance approach. So we obviously -- you see what our guide is. We know the precontracted ARR is sort of in the bank, if you will. And so we look at what's left to do in the quarter versus the deal activity in terms of renewals, opportunity to migrate new logos, et cetera, and we come up with a range of outcomes, and this is where we landed. And that's why we feel good about our guidance. And again, I'll point back to what Matt said about the pool of large strategic deals that are sitting there for us now and if not now, clearly into Q1. But again, we feel very comfortable with how we've guided for Q4 here.

[Operator]

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

[Theodor Thun, analyst]

You got Theo Thun on for Sanjit. Maybe on the exciting announcements that you made in the quarter, if you could sort of articulate on the vector search and AI Services announcements, what capabilities you are really differentiated from your competitors? And then as it relates to the momentum of those, what specific use cases or verticals are you seeing that are showing early adoption signals where you've really found an outsized opportunity? And then as a second question for Greg, just sort of double-clicking once more on the Q4 net new ARR. Anything you can sort of qualify around the mix between precontracted ARR and the composition of the renewal pool? And then in response to Raimo's question, it sounded like you were talking about Q1 early renewals being factored into the guide. Are those factored into the guide? Or are those just an area of upside that you sort of called out?

[Matthew Cain, executive]

All right. Great. Let me start with the kind of product question. So look, we are absolutely excited about the level of innovation that we're delivering to the market as we articulated. And we are building on releases that we've made throughout the year in areas like Columnar and our developer Free Tier. The announcement yesterday on AI Services, I think, is a material one that in and of itself has differentiators, but also points to platform differentiators that are critical to emerging as the developer data platform that enterprises are going to want to choose.

Step back and think we do combine operational and analytical capabilities. We have a carefully architected platform that goes from cloud to edge that's architecturally integrated for distributed applications with synchronization and data consistency technologies to support those applications. And we are JSON native, all of these embedded into the Capella as-a-service offering that in and of itself has AI capabilities to enhance developer productivity.

The announcement yesterday expands on all of that, being able to bring unstructured data like PDFs and CSVs directly into Capella in a JSON native format and combine that with the rest of your data sets, being able to vectorize the entirety of your data set and then have the scale and performance that other platforms aren't going to reach bringing open source models and embedded models directly into Capella and benefiting from the ease-of-use capabilities that we've also added to the platform.

The holistic approach of how we're thinking about architecting this data platform is different than other platforms. And it's going to come down to scale and performance and enabling large enterprises to build some of the most powerful AI applications. You'd be hard-pressed to find a database that has a combination of features that I just articulated. And that's the reason why part of -- we have the pipeline of opportunities we do in the back half and beyond because people see the value proposition in this platform that is so unique and continues to deliver for some of the most important applications in the most important companies around the world.

And there's more to come with that architecture that we have worked so hard to build and maintain and stay committed to. So the innovation engine is roaring at Couchbase, and we are excited about the AI world that's in front of us.

[Gregory Henry, executive]

Yes. Just to hit on your second part of your question. Look, the way we build any forecast or guidance is on the enterprise side of the business, which, as you can see, is still 85% of our business. We know our historical renewal rates. We know how much we can upsell at the point of renewal, how much we upsell outside the point of renewal, new logos and then we get into Capella and consumption. So we build it up from there, right, to give us a range of outcomes. After that now for Q4 because of what I've talked about is there is several million of pre-contract ARR, we layer that on top. And that balance of precontracted ARR, as I will remind you, got a bit stronger through the Q3 bookings. And so that's what gives us sort of a range of outcomes and gives us comfort in what we're guiding for, for Q4 and what we believe we can deliver.

On the Q1 and fiscal '26, it's very natural that our sales team, as they get towards the end of the year, particularly as they get into accelerators, they will look to see if there's business that they can bring forward in a high-quality way, right? So this is new business, and it always happens. We do assume some of it in our guidance, but it's pretty minimal. It's always tough to know who's going to do that or not, but we know that some of that happens towards the end of the year. And so there's a small amount baked in. But given the large set of deals that we're working with, there certainly could be more if customers are willing. So this is what gives us, again, comfort on our guidance and what provides us additional cover with the Q1 opportunities as well.

[Operator]

There are no further questions at this time. I would like to turn the floor back to Chairman and CEO, Matt Cain, for closing remarks.

[Matthew Cain, executive]

Thanks, operator, and thank you all for joining. We're confident in our ability to deliver a strong end to fiscal 2025, and we look forward to speaking with you again next quarter.

[Operator]

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.