GitLab Inc

NASDAQ:GTLB

Earnings Call Transcript 2022-Q4

[Operator]

[Call starts abruptly] [Operator Instructions] This meeting will be recorded. GitLab's Fourth Quarter and Fiscal 2022 Year-End Financial Results Presentation. GitLab's Co-Founder and CEO, Sid Sijbrandij; 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 panelists' 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 that 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, we encourage you to refer to our earnings release distributed today and our SEC filings, including our most recent quarterly report on Form 10-Q. 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 do not undertake any duty or obligation to update or release any revisions to any forward-looking statements or to report any future events or circumstances or to reflect the occurrence of unanticipated events. In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with U.S. generally accepted accounting principles referred to by the Securities and Exchange Commission as non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for our GAAP results. We believe that these non-GAAP financial measures assist management and investors in evaluating our performance and comparing period-to-period results of operations as discussed in greater detail in the supplemental schedules to our earnings release. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release submitted to the SEC. These reconciliations, together with additional supplemental information, are available at the Investor Relations section of our website. A replay of today's call will also be posted on the website. I will now turn the call over to GitLab's Co-Founder and Chief Executive Officer, Sid Sijbrandij.

[Sid Sijbrandij]

Thank you for joining us for our 2022 fourth quarter and fiscal year-end earnings presentation. And before discussing the quarterly results, I'd like to begin by saying we remain deeply saddened and concerned with the unprovoked and unjustified Russian military invasion of Ukraine, the horrific acts of violence against a sovereign nation and it’s people and the terrible impact to all of those in the region, including our GitLab team members, family and friends. I'm heartbroken by what I'm seeing. We've been in constant contact with all our team members in the region. Before the military invasion, we had 13 team members in Ukraine, some of whom are still there. We've been working directly with those impacted. We will provide ongoing assistance and economic support. Now turning to the results. We had a great quarter and are excited to share today that we exceeded our own expectations for the fourth quarter of fiscal year 2022 with revenue of $77.8 million. This represents a revenue growth of 69% year-over-year. Our dollar-based net retention rate exceeded the 152% we reported in our S-1 filing and it's primarily driven by more users at existing customers which we believe demonstrates the significant return on investment we provide. This acceleration in growth was broad-based, driven by strong customer additions across all company sizes: enterprise, mid-market and SMB. In addition, we continue to achieve success in both upgrading and signing new customers to Ultimate which remains our fastest-growing tier. We believe these results demonstrate the market is moving from DIY DevOps that is composed of different tools to a DevOps platform. This shift enables organizations to accelerate the time to market of their most important software and applications, providing them with a distinct competitive advantage. The Gartner Market Guide for value stream delivery platforms further supports our view. It states that by 2024, 60% of organizations will have switched to a platform approach. This would represent 300% growth from a 20% adoption rate in 2021. There are three main topics that we will cover today. First, I will explain the core aspects of our product differentiation. Second, I will discuss how this differentiation is translating into success in the marketplace by solving critical customer problems. And third, Brian Robbins, our Chief Financial Officer, will summarize how our unique value proposition translates into a strong financial profile. First, we believe the source of our product differentiation is our platform approach to DevOps. DevOps is a set of practices that allows development, security and operations teams to collaborate and work together to shorten the software development life cycle, typically from months to hours. But there's a problem for the IT and engineering teams responsible for building these applications. Their do-it-yourself DevOps tool chain which we call DIY DevOps, has evolved into something that can no longer serve their business-critical mission. Most companies are juggling many different tools, plus homegrown integration scripts related to code development, deployment and operations. And the more point solutions there are, the harder it is to integrate them all. You not only get a disjointed tool chain but you also get a disjointed organization which constrains your ability to deliver software innovation. This, we call digital duct tape. GitLab is the DevOps platform, eliminates this problem of digital duct tape and moves organizations out of DIY DevOps. It allows these teams to collaboratively and efficiently plan, build, secure and deploy software in one single application with one user interface and a unified data model. GitLab replaces the need for teams to switch between tools, allowing companies to cut their complex point solution tool chain. We believe our single application helps companies to deliver software faster, improve organizational efficiency and reduce security and compliance risk. The DevOps platform also enables our customers to manage and secure the entire DevOps workflow across any hybrid and multi-cloud environment. This enables our customers to select the best cloud provider for their applications and it allows our customers to avoid vendor lock-in and overreliance on any single cloud provider. We believe this provides us with a competitive advantage to help empower our customers to embrace the full benefits of a multi-cloud strategy. At GitLab, our platform-first approach enabled us to be extremely effective at rapid innovation. That's super important because the faster we innovate, the more mature the different stages will be and maturing features will continue to drive positive business outcomes for our customers. We're able to innovate faster because of the contributions from our users and our customers. Every quarter, hundreds of improvements in GitLab come from the people using the product. We are able to partner effectively with a wider community and help them get their contributions over the finish line, increasing the pace of innovation while also increasing the vested interest they feel in the product. We call this our dual flywheel strategy that creates a virtuous cycle where more contributions lead to more features which lead to more users leading back to more contributions. Another reason for our fast innovation is our value of iteration. Iteration means reducing the scope of the next piece of work with the smallest valuable thing possible, so it can be delivered fast. Our innovation is also predictable as we shipped on the 22nd day of every month for 124 months in a row as of January. This allows our customers to benefit from new innovation every month and it allows us to get feedback very rapidly. To provide some examples of this innovation, in the fourth quarter, we delivered enhancements in the following areas. First, software supply chain security continues to be a key focus for enterprises and providing controls that empower teams is critical as this helps everyone be more secure. With this in mind, we improved fine-grained security approval controls and merge request approval controls by enabling every software change to be reviewed by at least two people. This allows organizations to better manage their security risk. Second, digital transformations continue to drive cloud-native adoption and we see this as a key enterprise initiative for quite some time. To support this, we are continuing to expand our cloud-native capabilities, including improving the user experience for a GitLab agent for Kubernetes and infrastructure as code security scanning capabilities. Third, we recognize that GitLab is a critical business application for our customers, whether they are new start-up with a small team or enterprise customers with tens of thousands of users. Thus, we continue to invest in improving both the performance and scalability of our DevOps platform. We recently made improvements to our GitLab container registry to enable better performance while also reducing storage costs. Additionally, we made sure that our geo capabilities work seamlessly worldwide with better performance. Fourth, we improved our core functionality, including source code management, CI/CD and security features. These investments support our typical customer journey. As to date, our customers tend to start with source code in CI, then expand to use secure package and release. We also continue to invest in adjacent markets to expand what customers can do with GitLab. I'd like to share two examples of this expansion. The first example is our acquisition of Opstrace, a pre-revenue open source observability solution. With this acquisition, we endeavor to offer robust monitoring and observability capabilities that will enable organizations to lower incident rates, increase developer productivity and reduce mean time to resolution. The second example of this is our expansion of the DevOps platform to include data science. We are meeting data teams as well as ML and AI engineers where they are today. An example of this has been our focus on improving the GitLab user experience when rendering Jupyter notebook bits. Jupiter notebooks are key to data scientists and ML and AI engineer workflows. But the file structure makes code reviews challenging. This improvement makes it easier to review the substance of changes. Next, I will discuss how this differentiation is translating into success in the marketplace by solving critical customer problems. Every company must become a software company to remain competitive. Enterprise companies are being asked to modernize their applications and move them to the cloud and small businesses are building cloud-native applications. We believe our DevOps platform is addressing a $40 billion market opportunity. To support our view regarding the early-stage nature of this market, according to a recent Bain & Company study, 90% of companies have stated that DevOps is a priority but only 12% believes their DevOps practices are mature. GitLab helps companies mature their DevOps practices faster which, in turn, enables them to translate their business' vision into a reality, innovating faster, scaling more easily and serving and retaining customers more effectively. Our DevOps platform delivers positive business outcomes for a very wide range of customers, from single users to tens of thousands of users, from small organizations to Fortune 500 companies. GitLab's user base is spread across a large number of geographies and across a wide number of verticals. Given the successes, customers are achieving by leveraging GitLab. Many of them have expanded their usage. We saw a continued increase in Ultimate adoption as customers want security and compliance capabilities built into their DevOps platform. This is also evidenced by the continued growth of our quarterly cohorts from over six years ago. This value proposition translated into a number of strong business highlights. I'm proud to share that in the fourth quarter, we added over 500 net new base customers. Some of our new logos are major expansions include U.S. Army, Deutsche Telekom and Travis Perkins. We continue to see increasing returns with our channel partners. From a qualitative perspective, we are pleased with the increasing number of strategic conversations happening at the C level which is also resulting in an increasing pipeline of opportunities moving forward. Please let me give you three examples of customer expansions. First, Travis Perkins is the U.K.'s largest distributor of building materials and leading partner to the construction industry. The team at Travis Perkins has accelerated their migration to the cloud using GitLab Premium by consolidating their software to it. Doing so increased their velocity, cut down overall cost by 20% and it allowed their team members to focus on building new customer-facing digital services and capabilities instead of managing their tool chain. This quarter, they upgraded from Premium to Ultimate licenses and more than doubled the number of users on the system. This will expand usage of GitLab to their security teams and allow development operations and security to collaborate on a single DevOps platform. Second, a world-leading German multinational automotive corporation expanded it’s use of GitLab from 3,000 to 10,000 seats by upgrading from Starter to Premium this quarter. The business challenges faced by this customer where they need to migrate their complex monolithic CI pipelines from a competitor solution to a modular GitLab CI pipeline library. These changes have unlocked increased efficiency and scalability of their CI workloads while creating an improved, more consistent developer experience. This customer is now consolidating their supply chain management on GitLab as their internal DevOps platform. Third, a leading provider of mortgage financing in the U.S. expanded their investment in GitLab Ultimate this quarter. The company wanted to change their development culture to improve the way their security and development teams work together. With GitLab Ultimate, the company is now able to perform security tests earlier in the DevOps life cycle. The company anticipates that developers will be able to immediately address security vulnerabilities, instead of waiting for days or weeks in the prior approach. The company expects to increase deployment frequency by 25% and reduce deployment's failure rate by 25% as well. As we look forward, we are seeing continued strong momentum from customers adopting our DevOps platform and we feel we are still early in a large and growing market. I will now turn the call over to Brian Robbins, GitLab's Chief Financial Officer.

[Brian Robbins, Chief Financial Officer]

Thank you, Sid and thank you again to everyone joining us today. Before I begin, I would like to echo Sid. I'd like to take a moment to acknowledge what's happening in Ukraine. We are devastated by what has transpired and are supporting team members who are impacted by this terrible situation. I want to spend a moment summarizing how strong demand for DevOps platform translates into a strong financial profile, then I will quickly recap our fourth quarter financial results and key operating metrics and I'll conclude with our guidance. We believe that our revenue growth, our dollar-based net expansion rate and our gross margin all served to highlight a strong financial profile, underlying our strong business momentum. At GitLab, we use revenue as our key metric to evaluate the health and performance in our business. Because approximately 90% of our revenue is ratable, it serves as a predictable and transparent benchmark for how we are growing. What makes GitLab unique is how we both sustain the growth in our cohorts over a long period of time and also expand the size of our cohorts. To illustrate this, cohorts from six years ago are still expanding today. This is a testament to how we're constantly adding value to our customers. Most of our customers start using GitLab with small teams with just one to two stages of our platform. From there, they typically increase their spend with us 2x over the first year as our platform has adopted across multiple teams. Customers then continue to increase their spend as our platform expands to more teams across their organizations or they upgrade to a higher paid tier. We are also effective at retaining our customers. When our customers deploy the DevOps platform, it becomes a central platform from which all their DevOps workflows originate from, making it sticky and difficult to replace. The result is that we ended our fourth quarter with a dollar-based net retention rate exceeding 152% which is higher than the disclosure we provided in our S-1 at the time of our IPO. Moving forward, we anticipate disclosing a tighter threshold for this metric on an annual basis each fourth quarter as we believe this will allow our investors to fine-tune their models. Next quarter, we will revert back to reporting this as a threshold metric using 130% as a threshold. GitLab is a highly strategic platform for our customers. Our platform is offered with a free version and two paid subscription tiers which we call Premium and Ultimate. Our paid tiers are priced per user with different features per tier. Every user within an organization is on the same plan which helps keep our business model transparent and easy to understand. The Ultimate tier is our fastest-growing tier, now representing 37% of our annual recurring revenue for the fourth quarter compared with 26% of annual recurring revenue in the fourth quarter of FY 2021 and growing in excess of 100%. In FY '22, our non-GAAP gross margin held steady at 89%. Over time, we expect this to compress as our SaaS offering becomes a larger portion of our business and associated hosting costs will increase. On the operating expense side, we are committed to investing in growth. However, we will do this responsibly. We believe that the investments we are making in our business will enable us to sustain significant revenue growth rates for the next several years while continuing to improve our margins to ultimately drive long-term profitability. Finally, because GitLab operates as a fully remote workforce, this ensures that we have minimal capital expenditures which produces a cash-efficient business. Now let me turn to the quarter. Revenue of $77.8 million increased 69% organically from the prior year. As of quarter end, we had over 4,500 customers in ARR of at least $5,000 per customer compared to over 4,000 customers in the prior quarter and over 2,700 customers in the prior year. This represents a year-over-year growth rate of approximately 67%. Currently, customers with greater than $5,000 in ARR represent approximately 95% of our ARR. We also measure the performance and growth of our larger customers, who we define as those spending more than $100,000 in ARR with us. For this quarter, we had over 490 customers with ARR of at least $100,000, up from 420 customers and over 280 customers compared to the prior quarter and year, respectively. This represents a year-over-year growth rate of approximately 74%. At the end of FY 2022, we had 39 customers with ARR of at least $1 million compared to 20 customers at the end of the prior fiscal year which represents a year-over-year growth rate of 95%. As many of you know, we do not believe calculated billings to be a good indicator for 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 provided an excellent example of this as we saw strong revenue growth acceleration and even stronger billings growth acceleration. Total RPO grew 95% year-over-year to $312 million. Non-GAAP gross margins were 89% for the quarter which compares to 90% in the immediately preceding quarter and 89% in the fourth quarter last year. As we move forward, we're estimating a moderate reduction in this metric due to the rapid year-over-year growth rate of our SaaS offering. We saw improved operating leverage across the business this quarter, largely driven by revenue outperformance. Non-GAAP operating loss was $27.4 million or negative 35% of revenue compared to a loss of $22.2 million or negative 48% of revenue in Q4 of the last fiscal year. Q4 includes $5 million of expenses related to our JV and majority-owned subsidiary. Operating cash was $1.1 million in the quarter compared to $7.4 million used in the same quarter last year. We performed well during the quarter and year on both the top and bottom line and believe our business is set up for continued strength. Now let's turn to guidance. For first quarter of FY 2023, we expect total revenue of $77 million to $78 million, representing a growth rate of 54% to 56% year-over-year. We expect a non-GAAP operating loss of $38.5 million to $37.5 million. And we expect a non-GAAP net loss per share of $0.28 to $0.27, assuming 147 million weighted average shares outstanding. For the full year FY 2023, we expect total revenue of $385.5 million to $390.5 million, representing a growth rate of 53% to 55% year-over-year. We expect a non-GAAP operating loss of $142 million to $138 million. And we expect a non-GAAP net loss per share of $1.02 to $0.97, assuming 148 million weighted average shares outstanding. We recognize that it's important to exercise a disciplined approach to investments and note that our operating expenses are anticipated to rise in FY 2023 due in part to the resumption of travel and in-person customer and marketing events as well as new public company costs which, combined, we anticipate will be approximately $20 million. In addition, we also are forecasting approximately $30 million of expenses related to our joint venture and majority-owned subsidiary, up from $12 million in FY 2022. Of this $30 million, we expect approximately $6.5 million of expenses in Q1. Nonetheless, despite these added expenses, we believe improved unit economics in our business are already becoming apparent. Our annual FY 2023 guidance implies non-GAAP operating margin improvement of almost 300 basis points year-over-year at the midpoint of our guidance ranges. Over the longer term, we believe that a continued targeted focus on growth initiatives and scaling the business will yield further improvement in unit economics. With that, we will now move to Q&A. To ask a question, please use the chat feature and post your question directly to IR questions. Kristy, we're ready for the first question.

[Operator]

Our first question comes from Sterling at JPMorgan.

[Sterling Auty, JPMorgan]

Yes, thanks. Hi, guys. So maybe to get us kicked off, can you give us a sense of -- looking at that greater than 152% net dollar retention, how much of that is actually coming from more users of source code in CI versus kind of upsell for more products and modules?

[Sid Sijbrandij]

Yes, Auty, thanks for that question. I think what's really important to understand about our pricing is that we don't price per stage. So we don't know exactly what is driving it. We do know that a lot of our upsell is being driven by Ultimate. And the most common reason to buy Ultimate is the security capabilities, especially the advanced security capabilities. So that -- And we know that's driving a lot of -- Ultimate is doing great, over 100% growth year-over-year. It's 37% of our revenue right now. So secure is super important. Create and verify are used heavily; so they are important too. Apart from create, verify and secure, we see growth in packaging and release. So packaging, for example, is replacing JFrog Artifactory at more and more customers. Does that address your question?

[Sterling Auty, JPMorgan]

It does. Thank you. I appreciate it.

[Operator]

Karl from UBS, you have the next question.

[Karl Keirstead, UBS]

Okay, great. Maybe I'll pose this to Brian. Brian, I think the number that we're most impressed by on this print and I think a lot of people listening are, is the guidance for 55% at the high-end revenue growth for fiscal '23. Can you maybe just elaborate on what you and the team are seeing to give you confidence in that number? And to what extent is there a good leading indicator metric that we can look to as sort of evidence of that momentum? Is it RPO? Or would there be another number you'd encourage us to look at?

[Brian Robbins, Chief Financial Officer]

Yes, thanks, Karl. Appreciate the question. The market is still early. Us and our largest competitors still have less than 5% of the market overall and I think it's just really the business outcomes that we're driving for our customers. And so every company today has to become a software company and we're helping them do it better, faster and more secure. And so I think that is really the sum of it. Cohorts that we've had six years ago are still expanding with us today and we talked about the net dollar retention of greater than 152%. RPO for the quarter was 95% and calculated billings was 93%. So we had a great quarter and we put out the guidance that we have.

[Karl Keirstead, UBS]

Okay. Much appreciated, Brian.

[Operator]

Kash from Goldman Sachs, you have the next question.

[Kash Rangan, Goldman Sachs]

Hi, thank you very much. I hope all is okay [ph]. Congratulations on a spectacular finish to the year. So curious, you talked about the multi-cloud neutrality advantage that GitLab has. Can you talk about how that might have had a role to play in securing a beachhead at some of your largest customers? And also, if you could quantify how much was SaaS as a percentage of your business, that will be great. And I have one for Brian after that.

[Sid Sijbrandij]

Yes, thanks for that. So customers find it really important that they can measure productivity, security, irrespective of which cloud they are using. They -- many of them are using multiple clouds. What we're also hearing is that customers and our system integrators are saying, "Hey, I'm already really dependent on a certain cloud. I don't want to increase my dependency." And then from the side of AWS and GCP, the first reason they partnered with us is that we drive great outcomes. Customers are able to move to the cloud faster with GitLab. But the second reason is that we're a neutral party. We're not going to push people to use more of Azure. So all of those are coming together. That's irrespective of whether people are using SaaS or self-managed; those advantages exist with both.

[Kash Rangan, Goldman Sachs]

And one for you, Brian. Billings rebounded very sharply from Q3 to Q4. I know that the company has been deemphasizing and issuing longer-term contracts moving towards one year. So again, can you talk about how the billings growth rate was particularly as strong as it was considering the shift to one year which looked quite surprising?

[Brian Robbins, Chief Financial Officer]

Yes. Thanks, Kash. I appreciate it. We did a change in our sales compensation plan. And the reason why we -- during the Analyst Day and during the last call, we told people not focus on billings is because it's going to be lumpy in nature. And so last year, we did a change in our compensation plan and we deemphasized multiyear billings. And so two years ago, it was about 25% of the total billings and last year is about half of that. This quarter, we had a really strong quarter across the board on sort of larger deals that were multiyear as well as single-year deals and so that's why our RPO came in at 95%.

[Kash Rangan, Goldman Sachs]

Thanks so much.

[Operator]

Koji from Bank of America, please verbalize your question.

[Koji Ikeda, Bank of America]

Yes. Hey guys, thanks for taking my questions. I echo the sentiment, great quarter here. Question on Opstrace, the pre-revenue open source application in the category of observability, definitely a topical category right now. So I guess, maybe Sid or Brian, could you walk us through the process of why acquiring Opstrace? What could this mean for the platform? And maybe how does this pull forward or accelerate the Dev process for observability to GitLab?

[Sid Sijbrandij]

Yes. Thanks for asking. So observability kind of let you close the loop. You plan to make something, you make it, you roll it out and then you see how it does. So it's a really important element of a DevOps platform and we're really early. But because it's so important, we wanted to accelerate how fast we got there and we love the team and the product that Opstrace already built. So we acquired them to rebuild that inside GitLab and we think that closing that loop will help our customers achieve better business outcomes. If you get feedback faster, you reduce your cycle time and you get better outcomes. And it's really important to note that we'll do it in an iterative fashion. So in the beginning, our solution will not so much compete with existing vendors but with nonconsumption. People haven't set up monitoring yet and we'll start from a simple product and work with our users and customers contributing to expand the functionality over time.

[Koji Ikeda, Bank of America]

Sid, if I could just dig in with one follow-on there. You did mention the competition there, you're thinking a lot of green space or white space that you're going after. But as this becomes more of a product for you, who do you think you might anticipate seeing more on the competitive front with this observability product that you have?

[Sid Sijbrandij]

Yes. It's the same as it is for all the other products. We're competing with point solutions that get integrated by the customer in DIY DevOps. So any of the regular monitoring vendors come to mind. But we're competing with like customers having to do a lot of effort and we make that easier by giving them one interface, one single product. So it's not that we have just a better product but that because it's part of a platform, the customer gets more value out of it.

[Koji Ikeda, Bank of America]

Got it. Thanks, guys. Thanks for taking my questions.

[Operator]

Michael from KeyBanc, you have the next question.

[Michael Turits, KeyBanc]

Thanks, guys. Congrats on the quarter. So maybe to keep with that theme, I'd like to ask a very similar question but on the security side. So when you think about expanding into secure, specifically around things like static application security testing, where do you think -- I understand the platform and commercial advantages in one UI, et cetera. But where do you think your specific technical advantages or, if you will, disadvantages will come and providing that and building that versus some companies that are focused exclusively on application security?

[Sid Sijbrandij]

Yes. We believe that our security solution can compete with the best point solutions. We've invested heavily in it over the last few years. On top of just being able to hold it’s own against point solutions, it also allows our customers to shift it less, right? The security testing is not something you do when you're done writing your code but it happens immediately as you're writing your code. It's also nicely integrated in GitLab that allows you to do better compliance. In GitLab, you can set for every project, this is the security framework it needs to comply with. These are the implications, improve for every environment that we comply with everything. So when an auditor comes, you have that at the ready. So that's kind of the upside above a point solution, having it part of the DevOps platform.

[Michael Turits, KeyBanc]

And then I wonder whether it's -- and maybe, Brian, I mean, I think earlier on, you were able to stack rank for us the priority of investment in terms of these -- the ancillary the noncore of your system, not SCM, not CI and perhaps not CD. So has that changed any? Or how would you stack rank in sort of an investment priority, whether it's further to the right in ops or further to the right in prevention or further to the left in planning? How would you stack rank those investment priorities?

[Sid Sijbrandij]

Yes. We're very much investing in managing sort of compliance features in create, in verify and in secure. If you look at the next two, it's wholly package and release which are seeing a lot of growth. Secure is also kind of early in adoption but it's driving more revenue, as you can see by the growth of Ultimate. That's primarily driven by secure. And then all the other areas, we're very early in investing there and we'll do -- we'll push them -- we'll push for them but we are going to be very thoughtful with our spending there.

[Michael Turits, KeyBanc]

Thanks, Sid. Thanks, Brian.

[Operator]

Next question comes from Joel with Truist.

[Joel Fishbein, Truist Securities]

Hey, good afternoon and congrats on a great quarter. I just had a question around go-to-market. Brian, maybe you could let us know how you've been growing your sales capacity and how sales efficiency has been running. That'd be really helpful.

[Brian Robbins, Chief Financial Officer]

Yes. Thanks, Joel. There's been really no change in where we're investing in sales capacity. We're investing most in enterprise. Enterprise makes up greater than 60% of our total ARR and we've had a lot of success there. The second area is in mid-market, then very little in SMB. And so when we're on the road, we talked about some new go-to-market motions that we're doing and so we've launched a channel program. We're partnered with the hyperscalers and doing a number of different things. And those, albeit still early, the results are extremely promising and so win rates, really happy with pipeline coverage. Win rates remain really strong. And the sales force just from an attainment productivity standpoint, we're happy with the quarter and how things are looking.

[Joel Fishbein, Truist Securities]

Thanks.

[Brian Robbins, Chief Financial Officer]

Yes. Thanks, Joel.

[Operator]

Rob from Piper, please ask your question.

[Rob Owens, Piper Sandler]

Great. Thank you guys for taking my questions. Curious around true-ups and I know that was a little bit of a headwind last quarter but just understanding the dynamic as it played out here this quarter. And any difficult comparisons we're looking forward?

[Brian Robbins, Chief Financial Officer]

Thanks, Rob. Glad we don't have to talk about true-ups or billings this quarter. Thanks for bringing it up. And so true-ups were less this quarter than they were a year ago. They are about $600,000 less, so they still were a year-over-year decline. Just to remind everybody, a true-up is something that happened in the past. And when we come up for renewal, it's when our customers actually use more licenses than they actually purchased. And so we're in the process of putting in a cloud licensing system where true-ups will eventually go away over time but I don't think that there will be a tough compare like there was in third quarter of last year.

[Rob Owens, Piper Sandler]

Great. And then second, can you touch a little bit on the federal opportunity? I think it was about a year ago, you got SOC Type 2 and Type 3. Just maybe expand on where you are in terms of federal sales and where that could go.

[Brian Robbins, Chief Financial Officer]

Yes. So I'm happy to take that. So we just recently have invested over about two, three quarters ago in our federal team and really happy with the progress that they've made. As you know, our third quarter is a big quarter for PubSec sales and we're happy with where they're at and so continuing to build pipeline, team is doing well and working on fed rent.

[Operator]

Derrick with Cowen, please ask your question.

[Derrick Wood, Cowen & Co.]

Great. Good to see you guys. Congrats on a strong quarter. I wanted to ask about your hyperscaler relationships, particularly, I know you're tight with GCP and I think AWS is ramping. So can you just give us a sense for how those trended throughout this past year and what you're thinking about the opportunities in the year ahead?

[Sid Sijbrandij]

Yes. This was a great year for building a stronger relationship with the hyperscalers and we see that -- we believe it might go in the future. We're very bullish because it makes sense. They see that when they bring us into a deal, the customer moves to the cloud faster and they really want a neutral party to -- for all the DevOps tooling for the DevOps platform because if it's a nonneutral party, they're at risk in the future. So it makes a lot of sense from both sides. And we are investing there and we expect it to grow in the future.

[Derrick Wood, Cowen & Co.]

Makes sense. If I could get a quick follow-up. I mean hearing that you guys are engaging more at the C level, it's pretty interesting, what do you think is driving that? What are the ingredients that really take that engagement all the way up to an executive level?

[Sid Sijbrandij]

There's a couple of things. Every company needs to become a software company, so it's higher on the radar of the executives. Security is getting more important, right? If you get breached, you're in the newspaper, so that's driving the priority. It's also because it needs C-level involvement sometimes because companies are stuck on DIY DevOps and there's people in the company working on that. And it's -- if you make something, it's harder to realize it's not needed. So sometimes we have to go beyond. And as we grow bigger, it's easier to get an audience with the C level. We've been trying to do that for a long time but we're getting more successful at it.

[Derrick Wood, Cowen & Co.]

That’s great. Thanks.

[Operator]

Jason from William Blair, you have the next question. Or if someone from his team would like to verbalize, you may do so. All right. Well, we'll move on then to our final question from Matt at RBC.

[Matt Hedberg, RBC Capital]

Hi guys, thanks for taking my question. There's been a bunch of questions on go-to-market. And I guess, I'm curious, you guys have several markets -- several ways to market, including GSIs and hyperscalers. I'm curious, can you remind us what percentage of your business is sort of partner-influenced today? And where might that go in the next several years?

[Brian Robbins, Chief Financial Officer]

Yes. Great question, Matt. We don't -- so we don't give out sort of the sources of go-to-market and how each one is actually doing. We've been primarily a direct go-to-market motion up until about 1.5 years ago, a little over 1.5 years ago and so all the different go-to-market motions that we've implemented is just helping us expand our reach and actually get to market quicker with relatively the same economics. And so as Sid said earlier, every company has to become a software company. The business outcomes that we're driving for our customers is really high. And so the REITs that we're trying to get, we're doing that through GSIs, through the hyperscalers, through our channel program and so forth.

[Matt Hedberg, RBC Capital]

Got it, that makes sense. And then maybe just one last one. NRR was obviously stellar this quarter and thank you for that disclosure. I know you're not going to be giving that precise numbers on a quarterly basis in the first part of the year. But Brian, I guess, in your guide, any sort of like directional view on sort of what's embedded in the guide, something closer to 130%? Or just sort of how you thought about that in the computation before you got revenue guidance?

[Brian Robbins, Chief Financial Officer]

Yes. So we haven't guided specifically to a net dollar retention rate. We thought it was important to give that as an annual disclosure to help you sort of tighten up your model to see where it's at and was happy to say that it was higher than 152%, what we reported in second -- the disclosure that we had in the S-1. And so all I can say is the cohorts that we've landed six years ago are still expanding. Our customers are seeing a lot of benefits such as security and portfolio management and so forth with our Ultimate feature and so we're continuing to see expansions either through seats or up-tiering. And back in second quarter, when we talked about our logo retention, it was extremely high and so the contraction is relatively low. And so I can't give a specific number but I can tell you the elements and how that's been trending.

[Matt Hedberg, RBC Capital]

Thank you. Congrats on a strong end of the year.

[Brian Robbins, Chief Financial Officer]

Thanks, Matt. Really appreciate it.

[Operator]

And with that, I'll turn things back over to Sid for closing remarks.

[Sid Sijbrandij]

Thank you for your time today. I'd like to thank our customers for trusting GitLab to help them achieve their business objectives. I'd like to thank our partners, the wider community and GitLab team members, for all their contributions. You all had a big part in our continued success. Thank you.