GitLab Inc

NASDAQ:GTLB

Earnings Call Analysis

GitLab Posts Strong Growth and Profitability

In the final quarter of FY '24, GitLab experienced significant achievements, with a 33% quarterly revenue growth, customer growth, especially those with Annual Recurring Revenue (ARR) over $1 million increasing by 52%, totaling 96 customers compared to 63 the previous year. Non-GAAP gross margins remained impressive at 92%, with a notable 130% dollar-based net retention rate. For the full year of FY '24, revenue grew 37% to $580 million, with a commendable free cash flow of $33 million. GitLab's future outlook is positive, with Q1 FY '25 guidance projecting 30-31% revenue growth and full-year guidance expects 26% growth with total revenues reaching between $725 million to $731 million. They plan to remain free cash flow positive, excluding non-recurring tax payments, while non-GAAP operating income is forecasted at $5 million to $10 million for FY '25.

Robust Customer Growth and High Retention Rates

The company's strength is evident in its customer base, experiencing significant growth with 955 customers contributing annual recurring revenue (ARR) of at least $100,000, marking a 37% increase year-over-year. Even more impressive is the leap in customers contributing over $1 million in ARR, which soared by 52% to 96 customers, underscoring the company's ability to attract and further penetrate high-value accounts.

Strong Financial Health Highlighted by Gross Margins and Retention

Financially, the company's health is highlighted by a robust dollar-based net retention rate of 130%, indicative of a strong customer-base expansion. Furthermore, impressive non-GAAP gross margins remained at 92%, despite the typically higher costs associated with SaaS delivery, revealing the company's ability to maintain profitability while scaling its service offerings.

Operational Efficiency and Profitability

Operational efficiency has shown remarkable improvement, with the company realizing greater efficiencies as it scales. This is reflected in a significant turnaround in non-GAAP operating profit, which was reported at $13.2 million or 8% of revenue, compared to a loss of $13.8 million in the same period last year. These numbers are compelling evidence of the company's enhanced leverage and operational excellence.

Substantial Free Cash Flow Generation

The company's commitment to responsible growth is validated by its notable generation of free cash flow, which stood at $24.5 million in the fourth quarter of FY '24, a sharp contrast to a negative free cash flow in the previous year's corresponding quarter. This marks a significant milestone and a testament to the company's prudent capital management and accelerating business operations.

Forward-Looking Guidance Signals Healthy Growth

Looking ahead, the company expects a continuation of its positive trajectory. The first quarter guidance for FY 2025 anticipates total revenue between $165 million and $166 million, translating to a year-over-year growth rate of 30% to 31%. For the full year, the expected revenue is forecasted to be in the range of $725 million to $731 million, with growth around 26%, along with a non-GAAP net income per share of $0.19 to $0.23. These projections reflect the company's confidence in its strategy and market position.

Strategic Initiatives and Upcoming Opportunities

Key strategic initiatives include GitLab Dedicated, which caters to the specialized needs of highly regulated industries, a segment that has recently seen a seven-figure deal with a leading U.S. airline in Q4. In addition, the company is focusing on monetizing new AI capabilities, introducing GitLab Duo Pro to the market, positioned at $19 per user per month. These developments are promising drivers for the company's future growth and diversification.

Prudent Fiscal Management Amid Expansion

The company is mindful of expenses, particularly with its joint venture in China, JiHu. It forecasts roughly $15 million in related expenses, down from $18 million the previous year, demonstrating a cautious approach to international operations and financial commitments.

Earnings Call Transcript 2024-Q4

[Sharlene Seemungal, executive]

[Audio Gap] Founder and CEO, Sid Sijbrandij; and GitLab's Chief Financial Officer, Brian Robbins, will provide commentary on the quarter and the 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 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 had a strong fourth quarter with 33% revenue growth. We now have 96 customers with ARR over $1 million, up from 63 1 year ago. And we continue to see that large enterprises, like Barclays and Blue Halo, are standardizing on GitLab. Speed, productivity and security are critical for our customers. With GitLab, customers see 7x faster cycle times with 80% fewer code defects.

Today, I'd like to discuss our progress this quarter in 3 key areas. First is our security and compliance capabilities. From secure source scope management and security scanning to GitLab Dedicated, our platform helps customers establish more secure and compliant software development practices.

Second is our AI offering, GitLab Duo, which integrates AI throughout the software development life cycle. And third is our Enterprise Agile Planning offering, which expands our platform to users outside of software engineering.

Let's start with security and compliance. These are at the heart of our platform and set us apart from the competition. This quarter, we released Remote Development Workspaces into general availability. These workspaces are consistent, reproducible environments that help developers get started faster. This also increases security because it limits the need to clone code to end-user devices.

Customers come to GitLab to replace security point solutions. With most point solutions, code isn't scanned at the time it's written that causes friction for developers and increases the time required to find and fix vulnerabilities. T-Mobile recently moved 25,000 projects into GitLab over just 2 months and increased their security scans to hundreds of thousands per month. Now that they are integrated into GitLab, T-Mobile is looking forward to leveraging GitLab Duo to increase engineering efficiency even more.

Oxa, a global provider of autonomous vehicle software, upgraded to GitLab Ultimate in the quarter. The company wanted to modernize multiple developer and security tools, including version control, CI/CD and more. With GitLab Ultimate, Oxa is now able to detect potential security issues earlier in the development process, which is a major game for Oxa, which works in a complex and safety-first environment.

Another example is CACI International, a national security company and a leader in agile software development. GitLab allows CACI to deliver more efficiently in an agile development environment and makes it easier to comply with emerging federal regulations. GitLab Dedicated is our single-tenant SaaS solution for customers who need to comply with data isolation and residency requirements.

I'm excited to see adoption grow since we made it generally available last year. Organizations like Southwest Airlines are choosing GitLab Dedicated to get the best of both worlds: the security of a single-tenant environment plus the benefits of a SaaS offering that's updated and backed up by GitLab.

On to AI. Secure AI is a core part of our platform vision. We enable our customers to adopt AI responsibly. AI helps teams write more code faster. But more code isn't better if it's not secure and high quality. That's why GitLab Duo helps teams not only write code but also understand code and fix vulnerabilities more effectively.

Having the broadest DevSecOps platform allows us to add more AI features and deliver more value to our customers. In a recent Omdia Market radar report on AI-assisted software development, GitLab Duo had the most currently available features of any DevOps platform. Organizations like NatWest, Ultra Gas and Magic Leap have invested in GitLab Duo to help them drive efficiency while also ensuring robust security and code quality.

Another example is a major telecommunications company in Asia that was looking to boost productivity with AI-powered features, not only in coding but across the entire software development life cycle. After testing Code Suggestions for 1 month and seeing positive results, in Q4, the company invested in thousands of GitLab Duo licenses to improve engineering productivity. After releasing GitLab Duo Code Suggestions into general availability last quarter, we recently released the beta of GitLab Duo Chat.

GitLab Duo Pro now also includes organizational controls that help companies adopt AI responsibly, and we are now selling GitLab Duo Pro for $19 per user per month. We recently launched the GitLab AI Transparency Center to enable our customers to confidently harness the potential of AI with GitLab. The AI Transparency Center documents have we built GitLab Duo Pro to accommodate the right model for the right use cases. It also demonstrates our commitment to transparency and protection of customer data and intellectual property.

I'd now like to discuss our improvements in Enterprise Agile Planning. We're hearing from more and more customers who want to rethink how they do planning. They want to plan in the same platform where the engineering work to deliver on the planning is happening. Early in Q4, we launched a new Enterprise Agile Planning SKU. Now customers can get even more value out of GitLab by bringing everyone into a single secure platform.

For example, a leading 3D modeling our company upgraded to GitLab Ultimate in Q4 and purchased additional Enterprise Agile Planning seats so they can move their sales team out of Jira and on to GitLab.

Finally, on the leadership side, we're excited to welcome to Sabrina Farmer as Chief Technology Officer. Sabrina has 25 years of experience and joins us from Google, where she was directly responsible for the reliability and performance of Google's products and infrastructure. I look forward to the impact Sabrina will have across the company.

In closing, we're well positioned to win in the estimated $40 billion market opportunity in front of us. I'd like to thank all our customers, partners, team members, community members and investors for their support.

And with that, I'll 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. I'll start with a brief recap of our full year and quarter results. In FY 2024, total revenue grew 37% to $580 million. Our growth continues to be driven by our land-and-expand motion. Our dollar-based net retention was 130% in Q4. We delivered on break-even free cash flow a year ahead of our commitment with free cash flow of $33 million in FY '24.

In addition, on a stand-alone basis, excluding the impact of JiHu, our JV and majority-owned subsidiary, we recorded our first year of non-GAAP operating profit. We are thrilled to have achieved these milestones. These are a testament to our philosophy for responsible growth.

Our fourth quarter revenue grew 33% year-over-year, and we delivered over 1,900 basis points of non-GAAP operating margin expansion. Looking back at the quarter, I want to share some of the areas we've been closely monitoring. These include customer buying behavior, contraction and Ultimate performance.

In comparing Q4 with Q3 of FY '24, we've seen improved buying behavior across all customer sizes. In particular, performance with our enterprise customers exceeded expectations. We had a record quarter for $100,000 ARR and $1 million ARR customer net adds. While the spending environment remains cautious, we believe we are starting to see buying behavior normalize with accelerated adoption of our DevSecOps platform.

Churn and contraction during Q4 also improved for the fourth consecutive quarter and is even better than levels we saw 6 quarters ago. And finally, we continue to see strong growth in Ultimate, our top tier. Ultimate represented over 50% of Q4 ARR bookings driven by customer wins for security and compliance use cases.

Now turning to the numbers for the quarter. Revenue of $164 million this quarter represents an increase of 33% organically from Q4 of the prior year. We ended Q4 with over 8,600 customers with ARR of at least 5,000 compared to over 8,100 customers in the third quarter of FY '24. This compares to over 7,000 customers in Q4 of the prior year and a year-over-year growth rate of approximately 23%.

Currently, customers with over $5,000 in ARR represents 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 and $1 million in ARR with us. At the end of the fourth quarter of FY '24, we had 955 customers with ARR of at least $100,000 compared to 874 customers in Q3 of FY '24. This compares to 697 customers in the fourth quarter of FY '23, a year-over-year growth rate of approximately 37%.

At the end of FY '24, we had 96 customers with ARR of at least $1 million compared to 63 at the end of the prior year, which represents a year-over-year growth rate of 52%. 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 55% year-over-year to $674 million. cRPO grew 40% to $430 million for the same time frame.

We ended our fourth quarter with a dollar-based net retention rate of 130%. 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. Non-GAAP gross margins were 92% for the quarter. SaaS represented 25% of total revenue and grew 52% year-over-year. We have been able to maintain a 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. Q4 non-GAAP operating profit was $13.2 million or 8% of revenue compared to a loss of $13.8 million or negative 11% of revenue in the fourth quarter of last year. This includes an operating loss of $2.1 million for JiHu. On a stand-alone GitLab basis, Q4 non-GAAP operating income was $15.3 million or 9% of revenue.

Cash from operating activities was $24.9 million in the fourth quarter of FY '24 compared to a $11.7 million use of cash in operating activities in the same quarter of last year. Free cash flow was $24.5 million in the fourth quarter of FY '24 compared to negative $12.8 million in the same quarter of last year. Free cash flow is defined as net cash from operating activities less cash used for property and equipment, excluding nonrecurring items.

Turning to guidance, I'd like to make a couple of comments. First, we are entering our third year as a public company. As I mentioned, we are seeing normalization buying behavior as a result. I expect our guidance philosophy to be less conservative this year than in the first 2 years. We want to communicate the right expectations and are sharing guidance accounting for the current environment.

Second, as a reminder, every year, we evaluate our stand-alone selling price or SSP, which determines our upfront revenue recognition rate for license revenue. We have not finished our SSP analysis for the new year so we have not factored any change to SSP in the FY '25 guide. We will share an update at the next earnings call once we have the results of the SSP analysis.

With that said, our guidance for first quarter of FY 2025. We expect total revenue of $165 million to $166 million, representing a growth rate of 30% to 31% year-over-year. We expect a non-GAAP operating loss of $13 million and $12 million. The loss includes an approximately $15 million expense related to our in-person company-wide Summit. As an all-remote company, we're thrilled to bring team members together in the same location for the first time since 2019. And we expect non-GAAP net loss per share of $0.05 to $0.04, assuming 158 million weighted average basic shares outstanding.

For the full year FY 2025, we expect total revenue of $725 million to $731 million, representing a growth rate of approximately 26% year-over-year. We expect a non-GAAP operating income of $5 million to $10 million, and we expect non-GAAP net income per share of $0.19 to $0.23, assuming 168 million weighted average diluted shares outstanding. We believe that our continued focus on responsible growth will yield further improvements in our unit economics. We plan to be free cash flow-positive again in FY '25, excluding any nonrecurring cash tax payments related to the bilateral advanced pricing agreement.

There are a number of drivers we believe will fuel our business in FY '25, which we have included in our guidance. At our core, we see that continuing to deliver customer value with our DevSecOps platform aligns our success with our customer success. Additionally, in April last year, we raised the price of our Premium tier for the first time in 5 years. Thus far, customer behavior has been in line with our expectations, and we expect to be $10 million to $20 million of incremental revenue in FY '25.

Another driver is GitLab Dedicated. GitLab Dedicated allows us to serve companies in highly regulated industries with complex security and compliance requirements. We continue to sign large enterprises on Dedicated. For example, a leading U.S. airline expanded on Dedicated with a 7-figure deal during Q4. The final driver for FY '25 is the monetization of our AI capabilities. GitLab Duo Pro is now in the market at $19 per user per month.

Separately, I'd like to provide an update on JiHu, our China joint venture. Our goal remains to deconsolidate JiHu. However, we cannot predict likelihood or timing when this may potentially occur. Thus, for modeling purposes for FY '25, we forecast approximately $15 million of expenses related to JiHu compared with $18 million 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. We hit major milestones for free cash flow and non-GAAP operating income profit while growing the business. I'm proud of the consistent execution of FY '24.

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

[Sharlene Seemungal, executive]

[Operator Instructions] Our first question comes from Rob at Piper Sandler.

[Robbie Owens, analyst]

I'll ask the kind of the broader economic outlook question right now because, Brian, you did indicate improved buying behavior, record deals above $100,000, above $1 million. And we have seen some unevenness out there. There's still some layoffs happening in high tech. And if I look at your open reqs, it does appear you have somewhat accelerated hiring over the last couple of months. Maybe frame for us, is this your view that things have bottomed in the economy? And maybe provide high-level thoughts around just planning for the upcoming fiscal year relative to sales capacity or other functional areas that you're putting these bodies into.

[Brian Robbins, executive]

Yes. Absolutely, Rob. Thanks for the question. We are seeing customer buying behavior normalize with particular strength in enterprise. This showed up in our numbers this quarter. A couple of examples I'll go through. One is we're seeing strong expansion within the existing customer base. With dollar-based net retention, we had an uptick up to 130% from 128% last quarter.

Churn and contraction also continues to improve. It's even better than rates that we saw 6 quarters ago. In terms of investing in the business, as we said, we're long-term focused as a business, and we plan to continue to grow responsibly. The areas that we're adding new head count in the company are sales capacity and key R&D roles.

[Sharlene Seemungal, executive]

Next, we'll move on to Koji from Bank of America.

[Koji Ikeda, analyst]

I wanted to ask a question on operating margin guidance. You finished the year here in the fourth quarter at 8% operating margin, guiding the full year next year at 1%. And then, Brian, given your comment on maybe a little bit less conservative in the guidance for next year, can you maybe walk us through some of the upcoming levers to drive operating margin expansion from here?

[Brian Robbins, executive]

Yes. Absolutely, Koji. We mentioned in the prepared remarks, we're having our in-person summit this year. That's in first quarter. The estimated expense for that is $15 million. We haven't had an in-person event at the company since 2019. Being all-remote company, it's really important that we have that. Also in the guidance numbers, we have JiHu, which is roughly $15 million as well. And so for the full year, we guided positive $5 million to $10 million, and that includes the $15 million for JiHu as well as the $15 million for the in-person event.

[Sharlene Seemungal, executive]

We'll now move to Kash at Goldman Sachs.

[Kasthuri Rangan, analyst]

Great finish to the fiscal year, sort of reversal from how we started out ending on a very strong note. So nice to see the net expansion metric rebound. I think you're one of the very first in software to see the rebound in net expansion rates. cRPO or RPO, all this looks good. Sid, with your -- I shouldn't say new head of sales, but you have a new head of go-to-market. For this full fiscal year, what are the changes we should be expecting as a result of the introduction of new products, quotas, competitive win rates new product contribution, pricing? There's so many things that are happening at GitLab that are all quite positive, right? How should we rank order the impact of those things in your growth algorithm for this year?

[Sytse Sijbrandij, executive]

Yes. Thanks, Kash. We're super excited that Chris is doing so well. His -- him joining is evolution, not revolution. So he is continuing the line. We continue to focus on the customers where we can have the most impact, which are typically the largest customers in regulated industries. And we're super excited about the things you mentioned, all the extra things that we now have that we can start selling.

Duo Pro, we introduced but also the planning features that allow customers to put their planning in the platform as well the Enterprise Agile Planning SKU and GitLab Dedicated. I think all these extra offerings we can have are a great addition on top of Ultimate, which is more and more important to us and which resonates more and more markets.

[Kasthuri Rangan, analyst]

So Brian, one for you and I'll finish up. All these levers that Sid is talking about, why is the guidance seemingly conservative? Or is it just that discounting these -- the effects of these new features and products because we just don't have enough data, are you waiting for it to play out? How should we characterize the guidance?

[Brian Robbins, executive]

Yes. Thanks, Kash. Yes, we do have a number of growth drivers for FY '25 and beyond. I think you've named a number of them. It takes a while to build pipeline and close deals on new products. And so the total number of revenue that we have for next year for it to make a meaningful impact in a ratable business model is going to take a little while for that to come to fruition.

And so we've put all the new products into the guidance. They're relatively new. And so didn't want to put a lot in right now. With the Premium price increase, we're still saying it's roughly $10 million to $20 million of incremental revenue in FY '20. And then we have Dedicated, Enterprise Agile Planning and Duo Pro as well. So lots of new growth vectors for next year. It'll just take a little while for them to impact the top line.

[Sharlene Seemungal, executive]

We'll now move to Ryan at Barclays.

[Ryan MacWilliams, analyst]

One for Sid and one for Brian. Sid -- and guys, thanks for the continued partnership with Barclays. Look, just on the early indications of Duo Pro, still a lot to hear how demand has trended there. And then how do you think about monetizing AI outside of Duo Pro? Like are you seeing customers who are interested in AI, also more interested in your security features or up-tiering to Ultimate? And then for Brian, just really quick, would have to hear what the incremental price increase contribution was to the fourth quarter.

[Sytse Sijbrandij, executive]

Yes. Thanks for that, Ryan. So Duo is resonating in the market, and we were really pleased with the Omnia report that we had more AI features than any other platform. We could add value in more cases. And you talk about security and Ultimate, we have the most comprehensive security offering of any DevOps platform that allows us to also release more AI features. And some of these features are not in Duo Pro, but they're part of Ultimate. So Ultimate now has more and more AI features.

So AI is helping to drive Ultimate as well because Ultimate -- #1 reason why people by that is because it helps them get more secure and every feature that is in Ultimate and that is now getting enhanced with AI that AI we give to the customers of Ultimate by default.

[Ryan MacWilliams, analyst]

Then Brian, just real quick, if you could have the incremental price increase contribution to the fourth quarter?

[Brian Robbins, executive]

We haven't broken out towards the fourth quarter. We just said for next year, it will be roughly $10 million to $20 million in incremental revenue is what we included in our guidance.

[Sharlene Seemungal, executive]

Next, we have Joel at Truist.

[Joel Fishbein, analyst]

Congrats on the great execution. Sid, just one for you on -- are you seeing any increased conversions around agile planning with the Atlassian surround of life of Bci?

[Sytse Sijbrandij, executive]

Yes. For us, it's a new market. And Brian just talked about new markets. They start slowly and then they accelerate in the outer years. But we talked about a customer switching from Jira to GitLab again in the last quarter. So that's really exciting that we get to talk about that. And we see an increasing pipeline.

If customers are able to bring planning to the same platform, they don't have to create all these different connections between their planning tooling and their software creation tooling. With GitLab, it works by default. It's a better experience. There's less ceremony that they need to do. It is one interface, one data source, and that's appealing to customers. We're very excited about our Enterprise Agile Planning SKU that we can sell along with the rest of GitLab.

[Sharlene Seemungal, executive]

We'll now move to Pinjalim at JPMorgan.

[Pinjalim Bora, analyst]

Two-part question for Brian. How much of the RPO growth of 55% is driven by price versus any elongation in contract? And any way to kind of understand the components of that. And then on pricing, I know you're not giving up the Q4 number. But for the -- you have closed out FY '24 now. Is it possible to understand again the pricing benefit for the full year in dollar terms? Is it 1%, 2%? Any help you can provide help?

[Brian Robbins, executive]

Yes. On the -- let me start first with the RPO growth of 55%. cRPO growth was 40%. And so overall, we had a really strong quarter and happy with the performance in the quarter from a bookings perspective. As we previously stated, billings and RPO within a quarter are not good indicators of our core business momentum, that they can fluctuate relative to revenue based on the timing of invoices and the duration of the customer contracts.

We did have a number of multiyear deals this quarter, which contributed to the RPO growth. On the pricing benefit, I said $10 million to $20 million for next year. We haven't broken out what it is by quarter and don't plan to do that going forward.

[Sharlene Seemungal, executive]

We now have Nick at Scotiabank.

[Nicholas Altmann, analyst]

So you guys talked about how buyer behavior is normalizing, contractions improving. But kind of going off Pinjalim's question around the Premium price increase in that the impacts that's kind of had in the model. If you look at NRR and you sort of backed out the price increase, would that still sort of be up on a sequential basis? Or is that kind of down excluding the price increase?

[Brian Robbins, executive]

Yes. I can -- happy to go through what is the buildup in the dollar-based net retention rate. And so super happy that the dollar-based net retention rate went up this quarter to 130%. We break down between seats, price and tier. So 40% of that was related to seats, 40% was related to price and 20% was related to tier, not too dissimilar from last quarter. It was just a little bit different last quarter. Churn in contraction also continues to improve. As I stated earlier, it's even better than rates that we saw 6 quarters ago.

[Sharlene Seemungal, executive]

We now have Gregg at Mizuho.

[Gregg Moskowitz, analyst]

So obviously, it's incredibly early in your AI journey, and this isn't very applicable to the Q4. But can you tell us how the uptake for GitLab Duo has been so far in terms of the introductory price for the first couple of weeks and for the regular price that kicked in on Feb 1?

[Sytse Sijbrandij, executive]

Yes. Thanks. I think customers have been responding well to Duo. So they're mostly excited about the breadth of our GenAI capabilities, including things like vulnerability summary, vulnerability resolution, root cause analysis.

An example is a major telco in Asia. They wanted to boost their AI workflow across their entire development life cycle. And they saw positive results after testing Code Suggestions. And in Q4, they committed thousands to thousands of GitLab Duo licenses to improve engineering productivity all the way through the process.

[Sharlene Seemungal, executive]

Now we'll move to Shebly at FBN.

[Shebly Seyrafi, analyst]

So I think in prior quarters, you noted that sales cycles for the SMB end market have been elongated. And in this quarter, you said enterprise is better than expected. So did SMB continue to be more challenged? Did the sales cycles improve? Just elaborate on what you're seeing in the SMB mid-market segment.

[Brian Robbins, executive]

Thanks for that, Shebly. We're seeing customer buying behavior normalizing across the board. We didn't break out the sales cycles for SMB and mid-market in particular. But as I said, the turn in contraction, it's best that we see in 6 quarters. And sales cycles have normalized across the board.

[Sharlene Seemungal, executive]

Our next question comes from Karl at UBS.

[Karl Keirstead, analyst]

Maybe for Brian, to your comment that you're electing to take a less conservative posture on the guidance, maybe a 2-parter. Why -- what's the logic there? Is it just that GitLab is now a big organization across bigger scale and customer base? You've just got a little more precise visibility. Is that it? Or is it in reaction to the environment? And then I've got a quick follow-up on the same subject.

[Brian Robbins, executive]

Yes. Thanks for that, Karl. Going into our third year as a public company and also seeing the normalization of buying behavior, we'll just be less conservative in the guidance that we're giving out.

[Karl Keirstead, analyst]

Okay. And then I guess the follow-up would be, did you make that change for the fourth quarter such that the beat you just put up in the January quarter might -- we can look as kind of a start of this more conservative guidance posture? Or is it more going forward?

[Brian Robbins, executive]

No, it's more going forward. Very happy with the bookings this quarter. We had the largest bookings quarter in company history. There is many first within the quarter: largest hyperscaler contribution, largest first order, largest Ultimate, and we had a greater number of $1 million-plus deals. There was some linearity in the quarter. Things came more back in, in the quarter than expected.

[Sharlene Seemungal, executive]

Now move to Matt at RBC.

[Matthew Hedberg, analyst]

Congrats on the results. You mentioned a number of the drivers in the prepared remarks. One that I don't think you talked about was free-to-pay, and I know there's been an increased focus on that. Any update on on that sort of focus? Because it really does feel like that's a real long-tail opportunity, but curious if there's anything to mention there.

[Brian Robbins, executive]

Yes. Thanks, Matt. We are getting a lot of free-to-pay conversion. However, the numbers are relatively low so they don't come into the base customer count. And if you look at the overall sort of ARR that they're contributing, it's relatively small at this point.

[Sharlene Seemungal, executive]

We'll now move to Peter at Bernstein.

[Matthew Hedberg, analyst]

Congratulations on another great quarter. Really looking forward to the momentum you're seeing. Maybe I build on an earlier question around Duo. Can you help us kind of understand how the attach rate initially is working? And if you look at customers and their use of the product, are you seeing that type of thing where it's getting into people's workflows and kind of the accelerating usage? Or is it more kind of in experimental stages with customers?

And then I guess maybe the adjunct to this is if you look further forward, what do you think makes it sticky? In other words, like once people really get into there, is it going to be easy to switch away eventually? Or is there some reason why this thing like just really becomes like a tick in the system?

[Sytse Sijbrandij, executive]

Yes. To answer your -- the last part of your question first, we're excited about the amount of AI features we can add to GitLab because we have the broadest platform. We can address the most use cases. And us, according to the MD report, kind of addressing more use cases than any other DevOps platform, that's why I think it's going to be more sticky rather than less sticky.

The feedback so far has been positive. Customers like NatWest have invested in GitLab to help drive efficiency and at the same time, ensuring robust security and code quality. Our customers have reported efficiency improvements upwards of 50%. Still early in the AI journey, and we expect further durations as we expand Duo across the life cycle.

[Sharlene Seemungal, executive]

We'll now move to Gil at D.A. Davidson.

[Gil Luria, analyst]

So stepping back a little bit in terms of margins, you're going to do [ more $700 ] million of revenue this year and your 90% gross margins. At your scale, isn't there more margin upside at this scale? I think you may have gotten a little bit of a pass when you were growing more than 30%. But if we're guiding to closer to 25%, 26% revenue growth, you gave a lot of margin expansion last year, shouldn't there be more margin expansion this year?

[Brian Robbins, executive]

Yes. Gil, thanks for the question. Super happy with the operating leverage we've been able to get in the model. This is our second quarter of non-GAAP operating income-positive. If you look for the full year FY '24, we generated roughly about $33 million of cash. And even with JiHu, for the full year, we're almost non-GAAP operating income breakeven.

And so there's 2 things I talked about in the prepared remarks that go into the guidance number that we gave for FY 2025. The first thing is our in-person summit, which will be a $15 million expense in the first quarter that we didn't have last year. And then the second thing is we have JiHu that's still in our numbers, which is a noncash expense, which is roughly $15 million as well. And for the full year, $5 million to $10 million is the guidance. And there's $30 million sort of in those numbers, one is noncash JiHu and the other is the in-person summit that will happen in first quarter.

[Sharlene Seemungal, executive]

We'll now move to Derrick at Cowen.

[James Wood, analyst]

Brian, this is for you. I guess, just looking at these numbers, really impressive, 40% cRPO growth. That was an acceleration from 34%. Last quarter, you had a 2-point uptick in net revenue retention rate at 1 30. I guess in the context of this, it looks like your guidance of 25% to 26% revenue growth for fiscal '25 would be conservative.

So just 2 questions. Are there any drags in the model we should be aware of that may not be reflected in the backlog or the trailing 12-month NRR numbers? And then is it fair to say you think that growth tailwinds from pricing and from AI will be higher in fiscal '26 versus fiscal '25?

[Brian Robbins, executive]

Yes. Thanks for that, Derrick. As we stated earlier, billings and RPO is not a great indicator. They're directionally correct. Super happy with the quarter overall. The points that you made, obviously, are all all true and valid. The revenue growth of 33% are guided 26% next year. That factors in the buying behavior and the normalization that we've seen in the market.

We do have a ratable model. And then being a -- entering our third year as a public company, that's when we -- we said our guidance was to be less conservative than the prior 2 years. And so I think the setup with the new products and the normalization of buying behavior as well as the metrics that we put up this quarter is a good setup for next year.

[James Wood, analyst]

And just on the follow-on with price tailwinds, would you comment on whether they would be bigger in fiscal '26 versus fiscal '25?

[Brian Robbins, executive]

By the nature of the ratable model and then the step-up that you get, I would anticipate '26 to be bigger than '25.

[Sharlene Seemungal, executive]

We'll now move to Allan at Wolfe Research.

[Allan Verkhovski, analyst]

I want to follow up on the comments provided around normalizing trends. Looks like customers with over 5,000 ARR accelerated [ to more than ] 23%. And while you pointed out strength in enterprise, can you just kind of give us the story in the quarter with respect to enterprise versus last Q4? Was there a higher volume of smaller deals or more big deals? And can you help us think about what a good year would be with respect to net customer add?

[Brian Robbins, executive]

Yes. A couple of different points there that I'll talk about. One is the 427 that we and base customers has pretty much been our run rate. As we indicated in the past, we try to make the selling as well as the buying as friction-free as we can. And so we don't set a quota for Ultimate versus Premium nor do we say you have to sell gitlab.com versus self-managed. And so the amount of customers that come out within a given quarter is just sort of an output of how the quarter gets put together.

I did mention very happy with the bookings this quarter. We had a number of first in first order expansion, Ultimate hyperscaler contribution and really happy with the 100,000 customer adds as well as a greater than 1 million customer adds, which was up 52% year-over-year.

[Sharlene Seemungal, executive]

We'll now move to Gray at BTIG.

[Gray Powell, analyst]

So a follow-up question on the price increases that we've been talking about. You're implementing the price increases on GitLab Premium in 2 phases. The next one kicks in, in April. So just how should we think about the net benefit of this second phase versus the first phase. And specifically, is it safe to assume that the second phase has less churn, and therefore, a greater net benefit relative to what we've seen so far?

[Brian Robbins, executive]

Yes. Thanks for your question, Gray. Overall, we're pleased with the results of the price increase. The impact of the Premium price increase exceeded our internal expectations. We went through and modeled that prior to doing the price increase. And for FY 2024, it came in above what we modeled internally.

And so what we told you for FY 2025 was $10 million to $20 million of incremental contribution in revenue over FY 2024. And we've built in the benefit that you've alluded to on the churn and sort of the second tier and so forth of what the assumptions are for that.

[Sharlene Seemungal, executive]

We'll now move to Mike at Needham.

[Michael Cikos, analyst]

Brian, I think first question for you. Just with the guidance, a bit of a 2-parter here, but I know you're talking about how there's less conservatism in the guide now. And I just want to make sure I'm clear. Is that -- the first part, is that for both revenue and OpEx as far as the implied cost structure there? Or is it more just for the revenue?

And then I guess the follow-on to that, I know the company has like really beat the drum as far as profitable scale. And so even if I x out the $15 million of summit, and I'm not going to back out JiHu just because it seems like a recurring cost until you I guess, take it out as a consolidated statement. But there's still a [ move ] uptick in the implied OpEx when I think about your guidance. And that's really what I'm trying to square on my side.

[Brian Robbins, executive]

Yes. Thanks. You're correct. We have been very consistent since the IPO road show is our #1 objective is to grow, but we'll do that responsibly. The less conservative, we've if you beat the profitability pretty handedly every quarter. And so it's more directed at the top line than the bottom line. But we still want -- the #1 thing at the company is still to grow, and we'll do that responsibly. And so you can expect that from us.

[Michael Cikos, analyst]

And then just a quick follow-up, too. I know in the Q&A, I think you had called out from a linearity perspective, the quarter seemed to be a little bit more back half weighted. And so just curious, again, we're trying to get our arms around this guidance here. Was there any change in customer behavior or purchasing patterns as we moved into -- we now have, call it, a month or 2 under our belt for the current quarter? Or were things relatively unchanged as far as the spending patterns you're seeing?

[Brian Robbins, executive]

Yes. Thanks for that. We typically haven't commented sort of up into earnings. We comment sort of up until the quarter close. And we did see normalization across the entire -- across enterprise, mid-market and SMB. And I've also mentioned that we saw churn in contraction back to what we've seen 6 quarters ago. And so that obviously gave us some confidence to give the guidance that we gave.

[Sharlene Seemungal, executive]

We'll now move to Jason at William Blair.

[Jason Ader, analyst]

Brian, just trying to square, I guess, with everybody else the guidance with the less conservative posture comment. In particular, if NRR is trending up and is around 130%, doesn't this imply that NRR would have to decline from here for revenue growth to be in the mid-20s?

[Brian Robbins, executive]

There's a number of factors that go into our guidance. We build it from a bottoms-up perspective. And I would just say that what we reported was actuals and what we're guiding to is guidance, right? So it's not comparing apples-to-apples.

[Jason Ader, analyst]

Okay. Then I want to squeeze one in for Sid. Because Sid, you're just sitting there. Nobody's asking you any questions. It's not right. But really, I wanted to -- I know you've covered this, but can you just refresh us quickly on GitLab's key differentiators versus GitHub? I know there's a lot of questions always on GitLab versus GitHub, but just talk about where you are today on differentiation and where you expect to be going forward.

[Sytse Sijbrandij, executive]

Yes. Thanks for that opportunity. So we're winning deals against GitHub because we have the most comprehensive platform. In security and compliance, only we have dosed the dynamic scanning, the container scanning, the API security and the compliance management, the ability to prove that you've done all of that.

For example, T-Mobile moved 25,000 software projects to GitLab in 2 months, and then they were able to start hundreds of thousands of security scans. In planning and management, only we have Enterprise Agile Planning, value stream management, DORA metrics. And because we are better able to address those use cases, we're also able to build AI features that build on that, for example, the ability to explain vulnerabilities and to have the AI suggest a fix. So we're really bullish in competing because we have the broadest platform and because that enables us to do more with AI.

[Sharlene Seemungal, executive]

Next, we have Kingsley at Canaccord Genuity.

[William Kingsley Crane, analyst]

When we speak with customers, we hear that consumption associated with compute minutes has the potential to be a really meaningful part of the customer's total spend once they start adopting products like CI/CD. How often are compute and storage considerations factoring into their customer upselling into Premium and Ultimate? And how do you expect newer products like GitLab Duo Pro or Enterprise Agile Planning to affect these needs?

[Sytse Sijbrandij, executive]

So GitLab does have consumption pricing for that. For us, it's not a material part of our revenue yet. We do allow people to bring their own runners, so to bring their own compute to bear for CI and CD. We expect a lot out of our new SKUs, but the impact is going to be seen over time. So for Duo, the AI features for planning. For Dedicated, the biggest impact is not going to be in the coming fiscal years but in the outer years.

[Sharlene Seemungal, executive]

We now move to Fu at Cantor Fitzgerald.

[Unknown Analyst]

Congrats on a very strong finish. Questions for either Sid or Brian. There's more of a back-to-basic question. I know Sid mentioned at the beginning of the call that consolidation is very healthy, right? At GitLab, I was wondering, like can you discuss what are the legacy solutions you're consolidating? And what inning are we in now? And how much is left in the tank? And that's -- I have a quick follow-up for Brian as well.

[Sytse Sijbrandij, executive]

Yes. If you're looking, for example, at Enterprise Agile Planning, by far, the most popular incumbent is Jira from Atlassian. And we're in the very early innings. We've only just started offering this. And we're very encouraged by the progress. A leading 3D modeling company upgraded to GitLab Ultimate in Q4, and they purchased additional Enterprise Agile Planning so they could move their sales teams out of Jira and into GitLab. But it's early innings. Our market share there is just starting to ramp up, and it will take some time. Thanks for the question.

[Unknown Analyst]

And then, Brian, a quick follow-up is other cloud-native software companies, they guide based upon like what they see the last couple of quarters. Was wondering when you built your fiscal '25 guidance, how did you do so? Did you look at your trends, how it was like last year, the last couple of quarters? Wanted to get your thoughts on that, and that's it for me.

[Brian Robbins, executive]

Yes. No, absolutely. Fourth quarter of last year, there was a change in the quarter or 2 prior to that. And so we actually looked just relatively short term opposed to over 4 quarters. Since the buying behavior has more normalized and churning contraction has been back to where it was 6 quarters ago, we looked over the entire year to develop our FY 2025 plan.

[Sharlene Seemungal, executive]

Our final question comes from Adam at Raymond James.

[Adam Tindle, analyst]

Save the best for last. I wanted to talk about the growth drivers, monetizing AI and GitLab regulated were 2 things that were brought up on the call. I think we tackled profitability with Brian to death here, so let's do growth. When you think about the AI piece, you've said in the past, 25% is spent on coding and 75% is on other tasks. I think a lot of attention gets paid to coding with AI. So I'm just curious your observations and feedback, especially on the other task piece and how you built that -- or continue to build that into the product. And then on GitLab regulated, if you could just remind us of how to potentially size that and the timing for the impact of that?

[Sytse Sijbrandij, executive]

Thanks. Yes. So you're exactly right. Developers spend 25% of their time coding, and we're helping them with Code Suggestions, but there's also all these other tasks we can help them with. 75% of their time is spent elsewhere. And for example, GitLab helps you to review an issue. So if there's an issue like this is where you got to work on, GitLab will help you to summarize that issue. There might sometimes be hundreds of comments from stakeholders, and we'll help you kind of digest all of that.

And for every developer, there's a security or operations person that we can make more effective as well. For example, GitLab allows you to not only kind of see what vulnerabilities you have, but the AI will help you explain what the impact is and how you potentially remediate it.

We're super excited that the Omdia market radar report shows that we have 38 out of the 43 areas where you could have AI features in the DevOps platform. We have them covered already. That's the best coverage of any vendor. And that's possible because we have the broadest platform to build that on.

[Adam Tindle, analyst]

And then GitLab regulated was the other one, just sizing and timing.

[Sytse Sijbrandij, executive]

Brian, do you want to take that?

[Brian Robbins, executive]

I'm sorry, can you repeat the question?

[Adam Tindle, analyst]

GitLab regulated as another key growth driver that you spoke about here on the call. I was just wondering if you could maybe talk about the sizing of that and the timing for that growth driver into the model.

[Brian Robbins, executive]

Yes. No, absolutely. We talked about a number of growth drivers for this year and new products that were launched. We didn't break out the contribution by driver. And we also noted that with the ratable revenue model and how much we guided to in annual revenue for the year that it would take time for these to make a contribution to the top line.

[Sharlene Seemungal, executive]

That concludes our Q4 FY '24 earnings presentation. Thanks, again, for joining us and have a great day