GitLab Inc

NASDAQ:GTLB

Earnings Call Analysis

GitLab Reports Strong Revenue Growth and Profit

GitLab achieved a significant milestone with its first quarter of non-GAAP operating profit, a clear sign of efficiency in scaling its business. The company reported a robust 32% year-over-year revenue increase and non-GAAP operating margin expansion of over 2,200 basis points. Continued investment in security, governance, AI, and enterprise agile planning indicates commitment to enhancing their product offerings. GitLab anticipates a revenue range of $573 million to $574 million for FY '24, hoping to maintain a 35% year-over-year growth rate, and projects a Q4 FY '24 revenue between $157 million to $158 million, marking a 28%-29% year-over-year increase.

Corporate Growth and DevSecOps Platform Evolution

Emphasizing the need beyond a mere developer platform, GitLab champions its full DevSecOps platform, which enhances security and streamlines software development workflows. The company's DevSecOps World Tour exemplified this with discussions of tangible improvements in security, efficiencies, and market speed with clients like Cataford, Deutsche Telekom, and Splunk. With eyes set on the estimated $40 billion market opportunity, GitLab appreciates its community and investor support.

Financial Strength and Strategic Investments

Financially, the third quarter was robust, with a 32% year-over-year growth in revenue and a significant 2,200 basis point improvement in non-GAAP operating margins. This impressive uptick represents GitLab's first experience of non-GAAP operating profit, marking a key milestone in advancing the business. Even as they scale, targeted investments persist in critical areas such as security, governance, artificial intelligence (AI), and agile planning. While enterprise behavior remained stable, the mid-market and small-to-medium business segments exhibited caution due to economic uncertainties. Despite this, the company's strategic shifts have yielded predictable outcomes and continued strength in their top-tier Ultimate product.

Customer Base Expansion and Revenue Growth

GitLab has surged forward with its revenue hitting $149.7 million this quarter, a 32% year-over-year increase. The customer base has expanded significantly to over 8,100 customers with an Annual Recurring Revenue (ARR) of $5,000, sustaining a growth rate of approximately 26%. Even more impressive, the year-over-year growth of customers spending more than $100,000 ARR is about 37%. Complementally, total Remaining Performance Obligations (RPO) soared 40% year-over-year, while current RPO grew 34%. Despite these achievements, the company remains cautious, suggesting billings do not sufficiently indicate business direction due to past preferences for prepaid multiyear deals.

Operational Efficiency and Market Resonance

GitLab underscores its operational efficiency by maintaining a non-GAAP gross margin of 91%, emphasizing how it continues to achieve scale economies. A marked improvement in operational leverage led to a non-GAAP operating profit of $4.7 million, a turnaround from a previous $21.6 million loss. GitLab remains intensely focused on aligning its successes with customer outcomes through its DevSecOps platform, which continues to appeal favorably to the market.

Forward-Looking Guidance and Strategic Initiatives

Looking ahead, GitLab projects Q4 FY24 revenue to be between $157 million and $158 million, indicating a growth rate of 28-29%. They expect a non-GAAP operating income of $5 million to $6 million with an income per share of $0.08 to $0.09. For the full FY24, they forecast revenue ranging from $573 million to $574 million with a non-GAAP operating loss of $9 million to $10 million. Moreover, strategic developments such as pricing adjustments, the dedicated offering for regulated industries, and AI capabilities are driving forces shaping GitLab's future. Importantly, the company aims for free cash flow breakeven in FY25 and a non-GAAP operating income breakeven in FY24 when excluding JiHu-related expenses.

Earnings Call Transcript 2024-Q3

[Unknown Attendee]

CEO, Sid Sijbrandij; and GitLab's Chief Financial Officer, Brian Robbins, will provide commentary on the quarter and fiscal year. Please note, we will be opening up the call for panelist questions. [Operator Instructions]

Before we begin, I'll cover the safe harbor statement. During this conference call, we may make forward-looking statements within the meaning of the federal securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risks associated with these forward-looking statements in our business, please refer to our earnings release distributed today in our SEC filings, including our most recent quarterly report on Form 10-Q and our most recent annual report on Form 10-K.

Our forward-looking statements are based upon information currently available to us. We caution you to not place undue reliance on forward-looking statements, and we undertake no duty or obligation to update or revise any forward-looking statement or to report any future events or circumstances or to reflect the occurrence of unanticipated events.

We may also discuss financial performance measures that differ from comparable measures contained in our financial statements prepared in accordance with U.S. GAAP. These non-GAAP measures are not intended to be a substitute for our GAAP results. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release, which along with these reconciliations and additional supplemental information are available at ir.gitlab.com. A replay of today's call will also be posted on ir.gitlab.com.

I will now turn the call over to GitLab's Co-Founder and Chief Executive Officer, Sid Sijbrandij.

[Sytse Sijbrandij, executive]

Thank you for joining us today. We delivered a strong quarter. Revenue grew 32% year-over-year driven by the continued adoption of our DevSecOps platform. GitLab is the only DevSecOps platform that brings together security, compliance and governance, AI and enterprise agile planning. Enterprises face complexity from all directions in the form of rapidly increasing user expectations, more advanced cyber attacks and more strict industry regulations. We believe they need GitLab to help them navigate this complexity and realize business value. Our platform improves engineering productivity, reduce the software spend. That's why our customers report seeing 7x faster cycle times with GitLab.

Today, I'll discuss how we are driving results in 3 key areas. First, we're adding new security and governance capabilities in our platform. Second, we integrated AI throughout the software development life cycle. And third, we added an enterprise agile planning offering to make our platform available to nontechnical users.

Let's start with our security and governance functionality. These are at the heart of our platform that set us apart from the competition. Organizations like CARFAX and Lockheed Martin trust GitLab to help them build security and compliance into their workflows. With GitLab, organizations and their engineering teams reported they can catch vulnerabilities earlier in the development process, and compliance leaders can set the right controls and governance frameworks.

In contrast, security point solutions can cause friction for developers. With point solutions, developers either have to wait on security teams to identify vulnerabilities or if they have access to a security scanner to assess their code, they need to manually copy and paste the scanner results back into their development tool. And the result is code that isn't scanned at the time it's written. This increases the time required to detect and resolve vulnerabilities. Our platform enables organizations to integrate security directly into the developer workflow.

A recent product innovation our customers are excited about is our new Security Findings Workflow extension. This extension enables developers to see and address their security findings directly in their IDE while they work without breaking their flow. Our customers see the value of bringing security and compliance into the same platform where developers work.

An example is DoubleVerify, a leading software platform for digital media measurement, data and analytics. DoubleVerify was previously using GitLab Premium alongside several point solutions for their application security needs. They recently upgraded to GitLab Ultimate to bring security findings closer to their developers. Now their developers can identify, learn about and fix vulnerabilities in the same place where they work without switching applications.

Another key differentiator for us in the security and compliance space is GitLab Dedicated, our single-tenant SaaS solution that provides customers with data isolation and residency. With GitLab Dedicated, customers in highly regulated industries could get the benefit of a comprehensive DevSecOps platform on me complex and stringent compliance and regulatory requirements.

A large telecommunications company in Asia Pacific recently upgraded to GitLab Dedicated to enhance their privacy and compliance capabilities across their software development life cycle.

In Q3, we also launched a new self-service portal where customers can configure and maintain their GitLab Dedicated instances. This product innovation will create a more effective onboarding experience for new customers.

Now I'd like to discuss our second topic, which is our unique approach to AI. We already have AI features available to our customers. That's more than any other DevSecOps platform we continue to innovate. It GitLab Duo is our suite of AI-powered DevSecOps workflows that enables customers to boost speed and efficiency without sacrificing privacy, security and compliance.

We have 3 principles in our AI strategy. First, we're the only platform that integrates AI throughout the entire software development life cycle. As developers become more effective, we enable security and operations team members to keep pace. Also, developers only spend 25% of their time writing code. AI within DevSecOps should focus on more than just code creation.

Second, we are privacy and transparency first in our approach to AI. Our customers are eager to use AI but they introduce so responsibly. To support them with this, we do not use their code to train the AI models used by other customers. Our privacy-first approach is why more than 50% of the Fortune 100 trust GitLab to secure their intellectual property.

And third, ou AI is powered by a diverse set of models from technology partners as well as our own AI models. That allows us to select the best AI model for each use case.

In Q3, we released the beta of GitLab Dual Vulnerability Summary. This is a cool feature that provides AI-generated explanations of security vulnerabilities and suggestions for how to fix them. Another example of our progress is GitLab Dual Code Suggestions, our AI-powered code-creation feature. It will be generally available in our December product release. We have been hearing from our customers that they are seeing efficiency improvements upwards of 50% with Code Suggestions.

And finally, we recently announced the beta release of GitLab Duo Chat. With GitLab Duo Chat users can quickly understand project status, get help with planning and configuration, receive explanations of suggested code and generate tests, all without contact switching. To start, GitLab Chat is available within GitLab UI, Web IDE and VS Code. We plan to add support for more additives in the future.

Our approach to AI is resonating with our customers. For example, Amado Gramaho, Vice President of Infrastructure and DevOps at Nasdaq, recently shared his excitement about how Gitlab Duo will help Nasdaq protect their intellectual property and stay in line with regulatory mandates. And presenting at this year's Gartner Application Innovation Summit, Del Kong at NatWest said, "GitLab Duo enables our developers to be more productive, efficient and successful in creating secure code. We're excited to see the benefits of GitLab's AI features across the entire value chain, and even our most seasoned engineers are seeing value."

Our next focus area is enterprise agile planning. Our enterprise agile planning offering brings portfolio and project management capabilities into the same platform where engineers work. Organizations already see our enterprise agile planning capabilities as a strong alternative to established tools on the market like Jira.

For example, Iron Mountain, a global information management service provider, are struggling to manage the points required to integrate Jira with the rest of their development process. By moving from Jira to GitLab Ultimate, Iron Mountain was able to scale their agile framework to drive more effective collaboration between enterprise IT teams and key stakeholders.

Atlassian's decision to stop support for its server offering is making customers reconsider what product they use for enterprise agile planning. We are focused on making it easier for these customers to move to GitLab SaaS and self-managed. We recently launched a new enterprise agile planning SKU. Now GitLab Ultimate customers can easily bring nontechnical users into the platform.

Security and compliance, AI and enterprise agile planning strengthened our position as the leader in the DevSecOps platform category. The breadth and depth of our platform across the entire software development life cycle differentiate us from point solutions and our main competitor, GitHub. Let me give a few examples of why enterprises choose GitLab.

First is a leading global financial platform that try to integrate GitHub with several other DevOps tools. This created a complex workflows that require time-consuming maintenance. Now the customer is moving their code repository and CI from GitHub to GitLab. And GitLab was able to replace other point solutions for automation, continuous delivery and package management as well. With GitLab, the customer is able to reduce costs and centralize their work on a single platform with 8x faster deployments and 4x faster feature delivery.

Another example is a business networking organization that initially build its software development workflows around GitHub. They began hitting usage limits when running builds and quickly realized that GitHub was not efficient enough to support their growth. They switched to GitLab Premium and saw a 7x increase in the number of pipelines drawn. They also needed a comprehensive security and compliance solution that GitHub was unable to provide. As a result, the company upgraded GitLab Ultimate this year to help them build a major new product to serve their rapidly growing customer base.

We believe that enterprises need more than a developer platform. They need a full DevSecOps platform that sales and streamlined software development workflows while ensuring robust security and compliance. And this was on full display at our DevSecOps World Tour. We recently rounded out this year's 11-stop world tour with the final event in Washington, D.C., and each event included a fireside chat where customers like Cataford, Deutsche Telekom, Southwest Airlines and Splunk shared how they rely on GitLab to improve security, drive efficiency and accelerate time to market.

We created the DevOps platform category, and we continue to set the standard. We remain focused on helping enterprises build fast and stay secure with tools that teams love to use. We are well positioned to win the estimated $40 billion market opportunity in front of us. I'd like to thank all of our customers as well as our partners, our team members, community members and investors for their continued support.

And I will now turn it over to Brian Robbins, GitLab's Chief Financial Officer.

[Brian Robbins, executive]

Thank you, Sid, and thank you again for everyone joining us today. Overall, we saw a strong performance in the third quarter. Our revenue grew 32% year-over-year, and we delivered over 2,200 basis points of non-GAAP operating margin expansion.

I'm pleased to share our first quarter of non-GAAP operating profit. This is a major milestone for us in efficiently scaling the business to address our large market opportunity. At the same time, we continue to make targeted investments in key product areas. These include security and governance, AI and enterprise agile planning.

Looking back at the quarter, I want to share some of the areas we have been closely monitoring. These include sales cycles, win rates, contraction and Ultimate. In comparing Q3 with Q2 of FY '24, we have seen overall sales cycles lengthen. During Q3, buying behavior in our enterprise segment stabilized. However, in the mid-market and SMB, we see customers continue to be cautious in an uncertain macro environment. We have adopted our go-to-market approach in this environment to deliver predictable and strong results.

In Q3, our rates have improved, signaling that the value proposition of the DevSecOps platform is resonating in the market. Contraction during Q3 also improved for the third consecutive quarter and is in line with level of Q3 last year. And finally, we continue to see strong adoption of Ultimate, our top tier. Ultimate represents over 50% of Q3 ARR bookings driven by customer wins for security and compliance use cases.

Now turning to the numbers. Revenue of $149.7 million this quarter represents an increase of 32% organically from Q3 of the prior year. We ended Q3 with over 8,100 customers with ARR of at least $5,000 compared to over 7,800 customers in the second quarter of FY '24. This compares to over 6,400 customers in Q3 of the prior year. This represents a year-over-year growth rate of approximately 26%. Currently, customers with greater than $5,000 in ARR represent approximately 95% of our total ARR.

We also measure the performance and growth of our larger customers, who we define as those spending more than $100,000 ARR with us. At the end of third quarter of FY '24, we had 874 customers with ARR of at least $100,000 compared to 810 customers in Q2 of FY '24. This compares to 638 customers in the third quarter of FY '23. This represents a year-over-year growth rate of approximately 37%.

As many of you know, we don't believe calculated billings to be a good indicator of our business given that prior period comparisons can be impacted by a number of factors, most notably our history of large prepaid multiyear deals. This quarter, total RPO grew 40% year-over-year to $548.1 million. cRPO grew 34% to $371.8 million for the same time frame.

We ended our third quarter with a dollar-based net retention rate of 128%. As a reminder, this is a trailing 12-month metric that compares the expansion activity of customers over the last 12 months with the same cohort of customers during the prior 12-month period. This quarter, we have updated our dollar-based net retention rate calculation methodology to reflect operational changes to our customer account hierarchies. The trend of declining but stabilized rate has been consistent based on both the previous and the new dollar-based net retention rate calculations.

Non-GAAP gross margin were 91% for the quarter, which is consistent with the preceding quarter. This slightly improved from third quarter of FY '23. SaaS represents over 25% of total revenue and grew 53% year-over-year. We have been able to maintain best-in-class non-GAAP gross margins despite the higher cost of SaaS delivery. This is another example of how we continue to drive efficiencies in the business.

We saw improved operating leverage this quarter largely driven by realizing greater efficiencies as we continue to scale the business. Q3 non-GAAP operating profit was $4.7 million or 3% of revenue compared to a loss of $21.6 million or negative 19% of revenue in the third quarter of last year. This includes an operating loss of $2.6 million for JiHu, our JV and majority-owned subsidiary.

On a stand-alone GitLab basis, Q3 non-GAAP operating income was $7.3 million or 5% of revenue. Operating cash use was $6 million in the third quarter of FY '24 compared to $1.2 million use of cash in operating activities in the same quarter of last year.

Since FY '23, we have been proactively negotiating a bilateral advanced pricing agreement, or APA, relating to the transfer pricing arrangements between the Netherlands and the U.S. tax authorities. The proposed agreements between the company, the IRS and the Dutch are not yet final. However, given the stage of discussions during the third quarter, we recorded an estimate of $254 million nonrecurring income tax adjustment. The adjustment does not impact our non-GAAP earnings per share.

I believe this team positions GitLab for the future by optimizing our long-term tax position. The APA will result in an exit cash tax payment to the Dutch tax authority in the future. The timing is dependent on ongoing work with both parties, and we will keep you updated on future earnings calls. Our modeling shows the exit payment should be recouped as tax savings over future periods.

Now let's turn to guidance. We are assuming that the trends in the business we have seen over the last few quarters continue. For fourth quarter of FY '24, we expect total revenue of $157 million to $158 million, representing a growth rate of 28% to 29% year-over-year. We expect a non-GAAP operating income of $5 million, $6 million. And we expect a non-GAAP income per share of $0.08 to $0.09, assuming $164 million weighted average diluted shares outstanding.

For the full year FY '24, we now expect total revenue of $573 million to $574 million, representing a growth rate of approximately 35% year-over-year. We expect non-GAAP operating loss of $10 million to $9 million. And we expect non-GAAP net income per share of $0.12 to $0.13, assuming 162 million weighted average diluted shares outstanding.

On a percentage basis, our new annual FY '24 guidance implies non-GAAP operating improvement of approximately 1,900 basis points year-over-year at the midpoint of our guidance. We believe that our continued focus on responsible growth will yield further improvements in our unit economics.

I'm pleased to guide to a profitable non-GAAP operating income in 4Q. We remain on track to achieve free cash flow breakeven for FY '25, excluding any nonrecurring cash tax payments related to the APA result I discussed earlier.

There are a number of drivers we believe will fuel our business in FY '25 and beyond. At our core, continuing to deliver customer value with our DevSecOps platform aligns our success with our customers' success. Additionally, in April this year, we raised the price of our Premium tier for the first time in 5 years. Thus far, our customer behavior has been in line with our expectations. Although as a reminder, we anticipate the real financial impact from this change through FY '26.

Another driver is the launch of Dedicated. GitLab Dedicated allows us to serve companies in highly regulated industries with complex security and compliance requirements. The largest deal we signed in Q3 was an 8-figure TCV expansion with an auto company on Dedicated.

The final driver for FY '25 and beyond is the monetization of our AI capabilities. Last month, we announced the general availability of GitLab Duo Code Suggestions is expected in our December product release.

Separately, I'd like to provide an update on JiHu, our China joint venture. Our goal remains to deconsolidate JiHu. However, we cannot predict the likelihood or timing of when this may potentially occur. Thus, for modeling purposes for FY '24, we now forecast approximately $22 million of expenses related to JiHu compared to $19 million in FY '23. Excluding the impact of JiHu, we anticipate GitLab will be non-GAAP operating income breakeven in FY '24.

In closing, I'm pleased with our business momentum driven by our market-leading platform approach and commitment to capturing our large market opportunity. Chris, our new CRO, has led consistent execution with our sales team and partners to drive a strong quarter. Looking forward, we continue to prioritize driving revenue growth in a responsible manner.

With that, we'll now move to Q&A. [Operator Instructions] We are ready for the first question.

[Unknown Attendee]

[Operator Instructions] And our first question comes from Koji with Bank of America.

[Koji Ikeda, analyst]

A couple of times in the prepared remarks, you guys mentioned enterprise agile planning. I thought that was pretty interesting that you guys are highlighting that. So curious to hear what you believe the opportunity is there. Is this a big replacement opportunity? How do we think about that? I believe it's included in the pricing model. I just want to make sure we understand the opportunity here on the planning side.

[Sytse Sijbrandij, executive]

Yes. Thanks for the question. We really feel about this market opportunity with enterprise agile planning, we bring portfolio and project management capabilities into the same platform where the engineers work. And it is included in our Ultimate pricing today, but we introduced a new SKU where we can reach a different nonengineering audience, people who will use the enterprise agile planning but not the DevSec and Ops features. And we've shown that we can migrate thousands of these planning users successfully.

I want to note, it's still very early days for this. So our guidance includes the limited anticipated impact for Q4. And this is a long-term strategy that will take some time to come to fruition. The biggest impact is not expected in the coming fiscal years -- in the following fiscal year but in the years after.

[Unknown Attendee]

Up next, we have Karl with UBS.

[Karl Keirstead, analyst]

Congratulations on the results. I'll pose this question to you. One of the interesting things I thought you said on the last last earnings call was that you suggested that we might be at the very beginning of a displacement cycle for Atlassian Jira. And you called out a large bank that was in fact beginning to do that. With the passage of another 3 months, Sid, do you mind updating us on that? Is there any further evidence that's giving you conviction that that's in fact starting to happen? Any other anecdotes or metrics you could share?

[Sytse Sijbrandij, executive]

Yes. Thanks for asking. We're very pleased with our pipeline for this enterprise agile planning in this new SKU we have. And it's being helped by Atlassian's end of support for their server product. Because of that being deprecated, a lot of customers are taking stock of where they're at. And they're not even always moving to GitLab self-managed. Sometimes they move to GitLab SaaS, but it is a time -- a natural point for them to evaluate and a CD advantage of bringing together their planning users with their engineered security people and operations people. The tighter those work to get it, the faster the cycle time.

[Unknown Attendee]

Our next question comes from Mike at Needham.

[Michael Cikos, analyst]

I did just want to double check. So the first piece here, Brian, I appreciate the update. It sounds like the Premium price Q increase is tracking in line with expectations. Just wanted to see if there was any more color you could parse out there and if that in any way or your assumptions for that Premium price SKU is -- has changed when we think about the Q4 guidance that you guys are putting out there today? Would just like to tackle that first.

[Brian Robbins, executive]

Yes. Thanks, Mike. We're happy with the performance of the Premium price SKU. It's in line with what we modeled. One of the things that we've noted is first orders, especially in SMB and mid-market, are lower than expected. And you'll see some of that in the base customers of greater than $5,000. But overall, we're happy with the Premium price impact, and it's in line with our expectations.

[Michael Cikos, analyst]

And on the SMB and mid-market as well. Is there any way you could help us think about -- I think you cited that with the elongated deal cycles we saw on a sequential basis. So can you help us think about what is the company's revenue exposure to those SMB and mid-market customers as well as when that elongation did start to show itself? And I'll leave it there.

[Brian Robbins, executive]

Yes. We've -- the enterprise percentage of the total has remained pretty consistent. It's around 60% of the total base. And then Sec is a little over 10%. So SMB and mid-market makes up the remainder.

[Unknown Attendee]

We will now hear from Ryan of Barclays.

[Ryan MacWilliams, analyst]

One for Brian and one for Sid. Brian, great to see the strong improvement in net retention. Just for modeling purposes, what was the benefit to the net retention number from the Premium price increase? And for Sid, was just wondering, when it comes to the new capabilities and interest from your customers around generative AI, has that shifted at all their calculus between choosing between like self-hosted or the cloud? Just love to see maybe how they're thinking about that decision.

[Brian Robbins, executive]

Yes, I'll take the dollar-based net retention first. And so wanted to call out, we've made a change in the way that we've calculated dollar-based net retention rate this quarter to better reflect the business itself. And so this quarter, if you did the old way, be flat, 1 24 to 1 24, but the new way basically takes into account the account hierarchies. The old way that we did it actually kept a static view of parent accounts. And if there is a merger, a new subsidiary, division being shut down or something, it actually showed a churn and then a new business.

And so the change that we made, it's important to note, doesn't change the business at all. It just shifts between growth and new to give a better reflection of what's going on in the business. This is reflected in our 10-Q for Q1 and Q2. And so you can see the disclosures there. But under the old method, it was 1 24 million to 1 24, and it's -- under the new method, it's 1 28. Sid, over to you.

[Sytse Sijbrandij, executive]

Thanks. Regarding AI and SaaS versus self-managed, you're able to do SaaS and AI self-managed with AI on SaaS. And we also plan to have some of the AI features available purely self-managed. The way to keep -- like most things will ship SaaS-first only then come to self-managed using SaaS for AI and then got to self-managed, if they go there at all.

What we are very positive about is our Dedicated offering because it combines the convenience of SaaS and then having a single-tenant installation with the increased kind of security posture that comes with that. I think that's going to be a great solve, but we want to make sure that in the interim, our self-managed customers can use the AI features on SaaS, even if they keep having their self-managed installation. So that's a priority for us.

[Ryan MacWilliams, analyst]

Excellent. Yes, we've heard really good feedback on GitLab Dedicated. Brian, real quick, on that 1 28, under the new method, what was the net retention the prior quarter? And just if you could parse out me what the contribution was from the price increase or like general range, that would be helpful just on net retention side.

[Brian Robbins, executive]

Yes. So the -- they'll be in our Q. We'll follow up later today. It was roughly about the same, flat quarter-to-quarter. And we don't break out the difference -- well, I guess, from a price increase perspective, we don't break that out in particular. But one of the things I talk about is in the net dollar retention rate, what the percentage was between seat change, price change and tier change.

Historically, seat change has been roughly about 50%. Price change and tier change have been 25%. Because of the price increase, the price change now makes up roughly about 1/3 of the total of the net dollar retention rate. The seat change is a little less than 50%, and then the tier change is a little less than 25%.

[Unknown Attendee]

We will now hear from Kash with Goldman Sachs.

[Kasthuri Rangan, analyst]

Happy holidays. It's great to see the results. Sid, a question for you. It looks like the tone -- your tone and confidence level and conviction level in going after the competitive opportunity with Atlassian and Microsoft is actually stronger than before. I'm curious, what gives you the conviction to pursue that competitiveness? And what are things that GitLab has to do from a product perspective and a go-to-market perspective to be able to take advantage of what you consider to be these nascent opportunities?

And second and final, the -- we weren't waiting for Google to more closely align or for you to closely align your generative AI efforts with Google. How close or how far are we from a full-blown integration and announcement of sorts?

[Sytse Sijbrandij, executive]

Thanks, Kash. Yes, the customer feedback on our AI functionality has been positive. And as you might have heard in the prepared remarks, customers like NatWest and Nasdaq are using it in their engineering teams and seeing the value and the productivity and efficiency that it brings.

Our customers have reported efficiency improvements upwards of 50% with Code Suggestions. We recently spoke with a leading international travel agency, and they said that the features they tested, they believe that GitLab offers a better quality there. We also spoke with a multinational financial technology company, and their team is excited about using GitLab Duo for generating configurations, test generation, book finding and automating operational work. So we're very excited that we have a broad platform so that we can do AI across the life cycle with 14 features for customers available today. You're muted.

[Kasthuri Rangan, analyst]

Sorry. The other question, the competitiveness against Atlassian and Microsoft, what are the things you have to do from a product and go-to-market perspective to really take advantage of the opportunity that you see, the replacement opportunity?

[Sytse Sijbrandij, executive]

Yes. I think apart from AI, I think it's really unique to GitLab to have better security and compliance. Our features like SaaS and DaaS, container scanning API security, compliance management are unique to GitLab. We also talked about the planning and management features, and we talked about enterprise agile planning but also think of value stream management and dorametrics that are all unique to GitLab as a DevOps platform. And for example, we had a Q3 deal at a European telecom. We partnered there with AWS, and we won against GitHub.

[Kasthuri Rangan, analyst]

Happy holidays.

[Sytse Sijbrandij, executive]

You too.

[Unknown Attendee]

Nick with Scotiabank is next.

[Nicholas Altmann, analyst]

I wanted to build on Ryan's question just around the generative AI functionality with GitLab Duo. It sounds like there's not going to be really any difference in feature functionality and sort of folding in some of the new enhancements into SaaS and self-managed. But I wanted to ask how you guys think about layering additional feature functionality into Premium versus Ultimate and whether there's going to be kind of any difference there. And then just as a follow-up to that, as you sort of layer in more functionality into that Ultimate SKU, more broadly, how do you think about pricing?

[Sytse Sijbrandij, executive]

Yes, I think the -- our Code Suggestions, I think, is very comparable to a market. But I think what's unique about GitLab is having 14 AI features in the platform available to customers today. I think that's a big differentiation. As for how do we sell it, some features will be a different SKU, for example, Code Suggestions, and that's then available not just to Ultimate and Premium but also free customers that might be not paying for GitLab today. I think that's an exciting opportunity, especially over the long term. And then some of the features we're going to put into Ultimate or Premium, and there might even be extra SKUs we introduce in the future.

[Unknown Attendee]

Michael with KeyBanc is next.

[Michael Turits, analyst]

So given some of that weakness you did call out in SMB from sales cycle and a size perspective, can you just be a little bit more specific about what really drove the upside in the quarter, so call it an enterprise and/or public? And how that might be related to some of the things we've seen more broadly this quarter with cloud optimizations seeming to stabilize and some of the cloud consumption model companies seeming to do better?

[Sytse Sijbrandij, executive]

Yes. If you look at cloud consumption, it's an increasing part of our business, but it's currently a relatively small part of our business. So we aren't materially affected by the cloud consumption stabilizing.

[Michael Turits, analyst]

Right. I guess I meant it more from a general demand perspective, in other words, people are using more cloud. Is that driving more need demand or GitLab subscriptions, seats, et cetera? And again, what's really offsetting that SMB weakness that drove the upside in the quarter?

[Sytse Sijbrandij, executive]

I think that with GitLab, it has the biggest benefit the more complex your organization is. So the more complex or security and governance, the more heterogeneity in your projects where you go from kind of having projects on mainframe to the latest agile. That is where we can really shine. By bringing that all together in one platform, we see typically see a 7x acceleration of cycle time. So give us the hardest problems, that's where we shine and the enterprises are having the hardest time of kind of having to move really fast, having all that -- all these things, they have to move at the same time, but having the most compliance and security questions to do.

We do believe if you look at the overall market, so far, it's just going to keep getting more complex. You get AI now, you'll have more regulatory friction coming for everyone. So that gives us a lot of optimism about the future.

[Unknown Attendee]

Ethan with Piper Sandler.

[Ethan Drake Weeks, analyst]

Kind of filling in here for Rob this afternoon. I just wanted to kind of talk about kind of on the same topic of cloud optimizations. And as these kind of come to maybe start to slow down, how are companies thinking about ramping the velocity of new development projects, especially as we head into 2024? I'd just be curious to hear how your customer conversations have been trending on that topic.

[Sytse Sijbrandij, executive]

I think there's a lot of focus on ROI. Like how do we do more? And what measures should we look at? One of the best practices today is Dorametrics, looking, for example, at how frequently can we deploy. Also, cycle time has become really important for customers. How fast can I go from planning something to getting it out there?

We've learned as an industry not to focus on lines of code written. It's not a good metric to measure efficiency. And with GitLab, you're able to look at those value stream metrics much more easily because you have everything in a single platform. And it's -- and you're able to say, hey, if I move to GitLab, I know I'm able to make faster progress against my most important initiatives.

[Unknown Attendee]

Our next question comes from Matt with RBC.

[Matthew Hedberg, analyst]

Congrats from me as well. Maybe for either of you. One of the drivers that we think about over the next couple of years is free to pay. I think you guys have changed slightly sort of how you think about free-to-pay usage within your base. Can you talk a little bit more about that philosophically? And are you seeing any benefit from that in the Q3 results?

[Brian Robbins, executive]

Yes, Matt, I'll take that. Thanks for the question. And so we did implement a user limit on gitlab.com, and it's led good conversion from free to paid. However, the vast majority is fall below $5,000, the base customer limit that we report. And so the impact is relatively low. We're continuing to pursue that product-led growth. We think it will be -- it's built into our guidance. And so that's on free to pay.

I'll also take this as just an opportunity. I know a lot of A lot of you have had a wide range of outputs in the model for FY 2025 related to the Premium price increase. We're halfway through our planning process right now. So we aren't giving guidance for next year. It's still a bit early. But the early work that we've done, we believe that the Premium price increase will contribute roughly $10 million to $20 million in revenue for next year. And so it should help you out from a modeling perspective.

[Unknown Attendee]

Joel with Truist is up next.

[Joel Fishbein, analyst]

Sid, you mentioned on the call the AWS deal where you beat out GitHub. I would love to get a little bit more color on the partnerships and -- with Google and AWS and how that go-to-market is working and maybe some updates from you there in terms of maybe driving some deal sizes, et cetera.

[Sytse Sijbrandij, executive]

Yes. Thanks, Joel. So we've got strong partnerships with both Google and AWS. And they're interested because we help their customers move to their cloud faster. We help them accelerate moving those workloads. And an interesting thing we did with Google recently, we announced at Google Next that they'll be integrating GitLab into their development console for GCP. I think that's a really interesting development that will pay off as many things over the longer term. I think it speaks to the strength of these partnerships together with the AWS example I mentioned earlier.

[Joel Fishbein, analyst]

Just a quick follow-up. Can you just explain to us how -- maybe Amazon Q, you may work in conjunction with that as part at being a competitive product? That would be helpful as well.

[Sytse Sijbrandij, executive]

Yes, for sure. We're going to make sure we're discussing with Amazon how we can Q work really well with GitLab.

[Unknown Attendee]

Pinjalim with JPMorgan.

[Pinjalim Bora, analyst]

Congrats on the quarter. Just one question for me. Ultimately, ARR seems like it was a big number, 50% of ARR, if I heard that correctly. It seems like a big uptick sequentially. Has the Premium price increase actually driven kind of a big upgrade cycle for you on Ultimate? Or I guess I can put the reverse as well. Has Premium seat growth slowed dramatically sequentially?

[Brian Robbins, executive]

Yes. A couple of things there to unpack. Thanks for the questions. Just for clarity, we said in the prepared remarks that Ultimate bookings were greater than 50% of the total bookings. Ultimate ARR comprises of 43% of the total. And Ultimate continues to be our fastest-growing tier primarily as it relates to our security and compliance that's found within Ultimate. And so I hope that helps out from a clarity standpoint.

[Unknown Attendee]

Next is Gregg with Mizuho.

[Gregg Moskowitz, analyst]

Regarding GitLab Duo, just wondering if there are any usage updates that you might be able to share for Suggested Reviewers or some of the other features. And then secondly, in your recent state of AI in software development report, which really is excellent, by the way, there were a lot of interesting data points. One that caught my eye is that more than half of respondents said that they think AI will replace their role within the next 5 years. And I'm wondering if that in any way changes the way in which you're thinking about the impact that GenAI could have on the number of seats over a longer-term basis, of course.

[Sytse Sijbrandij, executive]

Yes. Thanks for that. I think that another really interesting thing that was in that study is that AI needs to be throughout the life cycle and for multiple things, like only 25% of the time of a developer spend on coding, 75% is other tasks. And as developers get more productive, they write more code, you need to also increase the productivity of security and operations. So we're focused on making it work throughout the life cycle.

I think you'll see parts of roles being replaced. But what also will happen is that creating software will get more affordable. And I think that will also lead to an increase in the amount of software we're writing. If something becomes more affordable, sometimes consumption goes up and the overall number of people involved increases. We still see a lot of units being needed in even the medium term. And the productivity going up might be a good thing for the number of people in this sector.

[Unknown Attendee]

Next is Andrew with Cowen.

[Unknown Analyst]

Congrats on the quarter. It's Andrew on for Derrick. Sid, your Dedicated offering has been GA since June. Could you talk about demand trends there? You mentioned the big 8-figure deal. That's great to hear. Talk about how large of a growth driver next year this could be.

[Sytse Sijbrandij, executive]

Yes. Thanks. We're really excited about Dedicated. For everyone's -- as a reminder, it combines the best of Gitlab.com and self-managed to get -- we manage it like gitlab.com, but just like self-managed or a single tenant, you have increased isolation and increased security through that. So we believe it's a huge opportunity, especially to convert our current self-managed customers. I think it's going to play out over many years. So we're just at the starting point.

We are signing those large deals that Brian mentioned, 8-figure TCV expansion in the automotive space. We see more coming. And I think there's a huge opportunity there considering the majority of our revenue comes from self-managed today. And for the larger self-managed customers, this is a great option.

[Unknown Attendee]

Peter with Bernstein.

[Unknown Analyst]

I think over the last quarter, you talked about kind of several exciting things both with Google and AWS, specifically the integration of GitLab into Google Cloud console and AWS introducing the support for GitLab and AWS code pipeline. How can we think about the initial impact of these relationships, either being seen in new or existing customers? I mean, are we seeing more contracts through Google Cloud and AWS? Or how should we think about that?

[Brian Robbins, executive]

Yes, I'm happy to start on that. We have several ways that we go to market, and through the hyperscalers is one way. As I've mentioned before, the business that they bring us is somewhat lumpy in nature because they're selling to a wide base of customers. But I'm happy to report that they almost increased their bookings year-over-year by almost -- approximately 100%. And so we had great contributions from them this quarter. And so we continue to work with them on enablement. We're also technology partners with them as well. And so we have a pretty broad-based partnership with both hyperscalers.

[Unknown Attendee]

Our next question comes from Jason with William Blair.

[Jason Ader, analyst]

Just wanted to ask you on the single DevOps platform vision that you've been talking about for many years now. It seems that there is consolidation happening certainly from a tools perspective, Sid. But it doesn't sound like larger enterprises really want a single DevOps tool. They want -- maybe instead of 15 or 20, they want 4 or 5. First of all, do you agree with that? Do you think that could change over time.

And then for the mid-market, so under that 60% that's not large enterprise, how realistic is it for those customers? And any evidence so far that they are gravitating towards that sort of single DevOps platform vision?

[Sytse Sijbrandij, executive]

Yes. I would say like it's happening -- it's finally happening. People have gotten the message, the consolidation is happening. Some of them indeed are like, hey, we've got 15 tools. We've got to go to 5. The best ones, the most advanced ones, they get it. It's just the movement will continue. The next thing is from 5 to 1, and we have seen customers doing that and having seen customers getting amazing results. Like the more they consolidate, the more they save; the more they consolidate, the faster their cycle time.

We haven't gotten every single customer there yet. And it's going to be really important to continue to be an open platform, open to Code Suggestions everywhere in our code base, open to having great APIs and open to having very many integrations. We never want to allow customers in. But we know that the more they consolidate, the better the outcomes are. And we'll keep beating that drum, and we'll try to make sure the majority of the market gets there. I think the analysts are now also repeating the message with Gartner creating a DevOps platform category.

[Jason Ader, analyst]

Is it fair to say that -- so source code Management CI, that's sort of an obvious consolidation point. Is -- for your larger enterprise customers, is it security and compliance that's sort of next on the list in terms of putting it into that bundle?

[Sytse Sijbrandij, executive]

Yes, I think that's -- every customer is different, but people have gotten the message in dev development. The shift is now happening in security, bringing Dev and Sec together. But the writing is on the wall. Eventually, it's going to be DevSecOps all together in one platform. And that's we're kind of spreading that cost on.

[Unknown Attendee]

We have 4 minutes remaining in the Q&A. Gray with BTIG is next.

[Gray Powell, analyst]

Maybe a question on the margin side of things. So if I'm looking at the updated guidance, for every dollar of new revenue that you add this year, a little over 50% of that is flowing through to the operating income line. Can you talk about what the main drivers of leverage are this year? And then is there any reason that, that trend would not continue in the next year?

[Brian Robbins, executive]

Yes. Great. Thanks for your question. Super happy big milestone in company history. This is our first quarter of non-GAAP operating income positive. Since we were on the road show, in every quarter, we reemphasized the message, #1 goal is to grow, and we'll do that responsibly. And so we've been continuing getting -- continuing to get operating leverage out of the model.

For instance, in Q3 year-over-year, we added approximately $37 million of revenue for $10 million of additional expense, and we achieved non-GAAP operating income positive of $4.7 million. And so as I mentioned earlier, we're early in the process of FY '25. We'll give FY '25 guidance on our fourth quarter call. And so we'll continue to operate in a disciplined manner.

[Unknown Attendee]

Allan with Wolfe Research.

[Allan Verkhovski, analyst]

Just a quick last question for me. Brian, that $10 million to $20 million is the comment you made to next year's numbers from the pricing increase was really helpful. Would love to understand what gross turn or NRR has been for Premium customers renewing over the last few quarters? And what kind of rough assumptions are you using to get to that $10 million to $20 million next year?

[Brian Robbins, executive]

Yes. So similar to what we walked through before, where we took a certain amount of bookings, we saw when they're coming up for renewal what the stage would be with the 1 year for existing customers and then the price increase for new customers and then taking an average of -- our average contract term right now is roughly about 15 months and in building that waterfall model.

And so I've talked about historically that it is ratable, and you have to build the ratable sort of nature of the waterfall out. Since there's been so many estimates that have come out in the various models, we thought it would be good just to quantify what the impact for next year would be to help you with modeling.

[Unknown Attendee]

Jonathan with Cantor Fitzgerald.

[Unknown Analyst]

So I wanted to ask about the concept of software bill of materials. We've seen a lot of software supply chain attacks. I think the Biden administration's executive order really seem to elevate importance of software supply chain security. So I'm just kind of curious how you see that playing out in the market.

And then the second part of that question is Cyclo DX is an open-source tool that a lot of companies can use to create these B. So I believe you used that tool. So beyond that, where do you look to differentiate?

[Sytse Sijbrandij, executive]

So we have software bills of materials in GitLab today. It's a super important thing to know what you're using within a company. For example, in GitLab, you can also have allow list and deny list based on the licenses that software has. Of course, it also has security implications. We help customers with that too.

A feature that will be coming out from us is the ability to have a global so, kind of aggregate the Sons throughout your company, deduplicate it and get that overall view, which I think we will be one of the first with -- one of the first companies to do that.

[Unknown Attendee]

That concludes our Q3 FY '21 earnings presentation. Thanks again once more for joining us. Have a great day