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HashiCorp Inc
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Ladies and gentlemen, thank you for standing by and welcome to HashiCorp’s Fiscal 2023 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded.
I would now like to turn the conference over to your speaker today, Alex Kurtz, Head of Investor Relations. Thank you. Please go ahead.
Good afternoon, everyone and welcome to HashiCorp's Fiscal 2023 first quarter earnings call. This afternoon, we will be discussing our financial results for the first quarter announced in our press release issued after the market close today.
With me are HashiCorp's CEO, David McJannet; CFO, Navam Welihinda; and CTO & Co-Founder, Armon Dadgar. At the close of the market today and in conjunction with our earnings press release, we have published an earnings deck that contains additional financial information pertaining to our quarter. We plan to do this each quarter before our earnings call, encourage you to review the deck in advance of our calls. You can access the decks on our Investor website at ir.hashicorp.com.
Today's call will contain forward-looking statements which are made under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements including statements concerning financial and business trends are expected, future business and financial performance and financial condition and our guidance for the second quarter of fiscal 2023 and the full fiscal year 2023. These statements may be identified by words such as expect, anticipate, intend, plan, believe, seek, or will, or similar statements.
These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date and we do not undertake any duty to update these statements. Forward-looking statements by their nature, address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations.
During the call, we will also discuss certain non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles. The financial measures presented on this call are prepared in accordance with GAAP, unless otherwise noted. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, as well as how we define these metrics and other metrics is included in our earnings press release, which has been furnished to the SEC, and is also available on our website at ir.hashicorp.com.
With that, let me turn the call over to Dave. Dave?
Thank you, Alex, and welcome everyone to our first quarter earnings call. We're excited to share with you that Q1 was a solid quarter for HashiCorp as we exceeded our guidance with revenue of $100.9 million, representing year-over-year growth of 51%, along with the trailing four quarter average Net Dollar Retention rate of 133%. We're also pleased to announce that during Q1, we had our second customer reach $10 million in annual recurring revenue. The most recent transaction by this global financial institution with a new commitment to console during the quarter, one of our largest console transactions ever. We will discuss the strategic customer in a few moments.
Also in Q1, current non-GAAP Remaining Performance Obligations reached $305.2 million, representing 64% year-over-year growth, and we added 49 customers with greater than or equal to $100,000 in annual recurring revenue, reaching a total of 704. Our HashiCorp Cloud Platform offerings reached $8.8 million revenue, representing 9% of subscription revenue in the quarter. We're very pleased with the performance of HCP in Q1 and as we look out to the rest of the year, are excited about adoption trends as we continue to roll out new features and capabilities.
I thought it would be helpful to briefly reiterate what we see as our unique approach to the marketplace as we help customers navigate this once in a decade architectural shift that is recasting enterprise applications to the cloud. As a reminder, we help enterprises with their transition to cloud and inevitably multi-cloud by delivering a suite of products that provide a consistent cloud operating model. As enterprises look to standardize their approach, they need a system of record for each layer of the infrastructure stack and that is what our portfolio provides.
Why do organizations choose HashiCorp? Well, first, our products are designed with a cloud first and cloud agnostic approach, using infrastructures code for provisioning, identity as the basis of security, and service and service name as the basis of networking. Each of these represent the core paradigms of the cloud model.
Second, our global footprint of practitioners using our open source tools and the free-tier of our cloud offerings makes our products the de facto standards in the marketplace for cloud provisioning, infrastructure as code, managing secrets in the cloud, and increasingly for the still developing cloud service networking market. We are convinced that for most companies the practitioner will decide how they approach cloud, which is why we focus on the practitioner experience above all else.
Finally, we have developed a rich ecosystem of technology integrations and partners around each of our products, which further accelerate adoption and standardization. Our products are designed to enable third-parties to easily integrate their services into Vault, Terraform, Consul and our other products. And as we shared last quarter in our 10-K, we now stand at over 2050 providers in our Terraform ecosystem alone and 900 partners in total as of the end of last year. With over 3,000 paying customers, using our software today, we believe all three of these differentiators have created a significant barrier to entry around our offerings.
With that background, I’d like to take a few minutes today to highlight important trends that we're seeing for our products and the broad demand for cloud and multi-cloud adoption that is fueling our business. Specifically, I'd like to highlight the continued emergence of central platform teams within large enterprises that we touched on briefly last quarter. During the quarter, our field teams were able to travel more freely to meet with customers. And Armon and I spent much of the quarter having in-person meetings with members of the Global 2000.
In those meetings, we've been hearing a consistent theme around the emergence of centralized cloud program offices or what they often called platform teams within these accounts. The technology that underpins the transition to cloud and the growth of multi-cloud environments is fairly well known at this point. What is less well understood is the importance of the teams that are managing this transformation.
As companies undertake cloud migrations or digital transformation, CIOs often find themselves in a difficult position of sifting through the disparate pieces of infrastructure and cloud resources that their various teams have deployed in the past, usually with little or no coordination. This has cost implications, but also efficiency applications, siloed teams with siloed infrastructure and little strategy underlies at all.
When developers want to develop and ship a new product to serve customers, they often encounter constraints and delays from their Ops, security and networking teams who would like to place some level of governance. HashiCorp is sold to these various silo teams to help them with their immediate cloud infrastructure issues for years, helping them with provisioning, security, networking, and application delivery. However, we are now being brought into help companies standardize their cloud infrastructure across teams. In many instances, in fact, those early adopters of our products are now being assigned to be the platform teams for their organizations as a whole.
The Platform team is the group to consolidate and standardizes cloud infrastructure for an entire company. It controls cloud infrastructure as a single cost center, great standard processes, and establishes compliance protocols for applications and infrastructure. With this central team in place, companies can control costs and enforce consistent security policies allowing developers to deploy applications with wireless friction. Our cloud operating model with an integrated stack of products, including Terraform, Vault, Consul and others enable to these platform teams to succeed.
We are seeing success in our larger deals each quarter being driven by these dynamics. We also believe that part of the success we are seeing a larger accounts is driven by our programmatic approach to selling, what we call ALEER, adopt, land, expand, extend and renew. This motion happens initially in a single business group and its ultimately mimicked at a larger scale as platform teams are created to drive standardization across the organization. We believe that this methodology coupled with our product innovation can lead to durable long-term growth. We continue to see ourselves as uniquely positioned to enable the largest of enterprises in their decade long move to multi-cloud across what 650 Group has estimated as a $73 billion TAM through 2026.
We saw these concepts play out in Q1. And now I'd like to turn your attention to notable first quarter transactions. I'd like to highlight a few examples of strategic deals we completed that demonstrate our execution in the marketplace and show our adopt, land, expand, extend, renew motion in action. First a land deal. Our global insurance and financial services organizations landed as an enterprise Vault user in Q1 after adopting Vault open source in 2019 for a small departmental use case.
Vault combined with our residential solution architect services is enabling this customer to address audit findings and a global security mandate to address the management sensitive credentials. By centralizing the end-to-end process aligned to our jointly developed multi-cloud architecture, Vault will address significant worldwide risk of exposure for this company, while providing cost efficiencies by automating the management and creation of globally secure credentials.
Next, an expand deal with one of the largest global financial organizations in the world. This customer expanded with Terraform enterprise to standardize its infrastructure provisioning approach to bring secure applications to market more quickly. This will also enable them to reduce the operational costs of their state by preventing the over provisioning of resources. Terraform involved to replacing home-grown and self-supported open source solutions enabling the customer's business groups to deploy new applications and multiple cloud platforms in a consistent manner.
And third, an extend deal example. An energy company extended and became a Consul customer during Q1, after recently becoming a Terraform customer. The customer recognize that Consul was an agnostic platform that provides a consistent approach to service networking across multiple clouds. The customer chose Consul because it enables them to accelerate the time to market for new applications, which are being migrated from private data centers to AWS. As an added benefit Consul allows the customer to extend the life of their existing networking hardware via the Consul-Terraform-Sync capability.
And finally, I'd like to spend a minute on HashiCorp’s second $10 million ARR customer that I mentioned earlier. This organization is also an example of a customer who started working with us around a single product and expanded and extended over time to include Terraform, Vault, and Consul. This global financial institution began its journey using Packer one of our open source products in 2017. It expanded Terraform and then Vault enterprise after that.
As its cloud journey matured, it faced heightened scrutiny and complexity across disparate networking control plans. These challenges led the organization to add Consul enterprise this quarter. Consul enterprise provides a cloud agnostic approach to service networking that allows the customer to link a variety of infrastructure platforms from private data center, to cloud, to the edge. All of this enabled application teams to embrace these new platforms without compromising security, resiliency or agility. We're proud to count companies like these as our customers and are deeply committed to continuing to earn their trust.
And with that, let me turn the call over to Navam.
Thank you, Dave, and thanks again to everyone for joining us today. Turning your attention to the top line financial results, we produced solid results in our first quarter of FY ‘23, which exceeded the guidance from last quarter. Our total revenue increased 51% year-over-year and our trailing four quarter average Net Dollar Retention rate reaching 133%, which was over our 120% target rate.
Looking at our geographic segments, 78% of our revenue came from the Americas, 16% from EMEA, and 6% from the APAC regions. The Americas region is the largest contributor to our revenue, but we are sequentially increasing the percentage of revenue from the rest of the world. As you know, on average, we have a high-level of visibility into our revenue due to its recurring nature. This quarter, we saw more of our subscription revenue come in as recurring revenue, approximately 96% of our subscription revenue was recurring.
Moving to the expense side, HashiCorp continues to prioritize resource allocation efficiency in the business. Doing so allowed us to come in ahead of our non-GAAP gross margin, non-GAAP operating income, as well as our GAAP and non-GAAP net income plans. We incurred a net loss of $0.43 per share on a GAAP basis, and $0.17 per share on a non-GAAP basis. We track several key business metrics, which we believe help in understanding our business and financial performance in our journey to deliver durable growth. You'll find a lot of our KPI detail in the accompanying deck on our ir.hashicorp.com site. I encourage you to review that in detail.
Focusing on one of the core business metrics, the greater or equal to 100K customer cohort, we made solid progress during the first quarter. We continue to execute our adopt, land, expand, and extend, and renew model as highlighted in the customer activity in the quarter, which Dave just spoke about. On a trailing 12-month basis, we add 181 of these customers and grew their revenue from 124,000 per customer to 141,000 per customer in the quarter, a 14% year-over-year increase.
Our HCP business continues to show strong momentum. We grew our HCP revenue by 255% year-over-year. We launched several new HCP products and features this past quarter, as we continue to invest in the platform. We are excited about the adoption trends we see with our cloud products.
Now I want to provide our guidance for the second quarter and the full year of FY ’23. For the second quarter of FY ‘23, we expect total revenue in the range of $101 million to $103 million. We expect Q2 non-GAAP operating loss in the range of $59 million to $56 million. We expect a non-GAAP net loss per share to be between $0.32 and $0.30 based on a $184.3 million weighted average basic and fully diluted shares outstanding.
For the full fiscal year 2023, we expect total revenue in the range of $422 million and $432 million. We expect FY 2023 non-GAAP operating loss in the range of $224 million and $216 million. We expect non-GAAP net loss per share to be between $1.19 and $1.15 based on a $184.9 million weighted average basic and diluted shares used in computing net -- non-GAAP net loss per share. We are pleased with our Q1 results.
And with that, Dave, Armon and I are happy to take any of your questions. Alex?
Thanks, Navam. As a quick note during the quarter, we will be attending the Bank of America Global Technology Conference and the William Blair Annual Growth Conference.
With that, operator, let's go to our first question.
Thank you. [Operator Instructions] Our first question comes from Jason Ader with William Blair. You may proceed.
Yeah. Thank you. Hey, guys. Did you pick any macro pressures into your guidance? And then, how resilient do you think your business might be, if we do enter some type of a recession or downturn?
So, Jason, thanks for the question. This is Dave. Let me answer the first and then ask -- let Navam and Armon weigh in as well. I think generally speaking, what we saw -- what we have seen in Q1 is pretty consistent with prior quarters in terms of front-end demand of the year of the pipeline build side. Then maybe I’ll let Navam comment specifically on that – the guidance question.
Yeah. Thanks, Jason. So in Q1, we're seeing some pretty solid demand signals, so we're comfortable with our Q2 and FY ‘23 guidance that we provided. We're aware of global macro realities that are out there in the marketplace, with the rising inflation, interest rates and the conflict in Europe. So as always, we're taking a measured view towards the back half of the year. But that -- all that being said, the fundamentals of digital transformation and cloud adoption are very much intact and these are very long cycle markets, right. So we're encouraged by the year.
Yeah. Then maybe I'll just add anecdotally, I've spent the last few weeks visiting customers and across North America, Europe and Asia-Pacific regions. And I think what we've seen is, it's a pretty consistent trend across customers regardless of region they’re continuing on their journey to cloud, continuing on their journeys to digital transformation. I think almost all of those customers see that as a long-term secular transition for them, realizing there might be some macro factors along the way. But most of these customers are sort of deeply committed to that journey. And I think for many of them, they've already made multi-year commitments to their cloud partners as well.
And Jason, I’ll try to -- may just the second implicit question is around the durability part, our products go to market around a very simple value proposition of cost reduction, risk mitigation and time to market, right. Think about Terraforms as an example. One of the core value propositions of Terraform is allowing you to not overprovision compute resources, lots of cost savings. The Vault is allowing you to save cost and automation by rotating certificates around it, it could be a 10,000 machine of state than a script rather than average people do it. So, the value proposition is actually very clearly aligned to risk cost and time to market. And I think, we're pretty fine-tuned on that. So net is, I think that actually plays really well despite the environment.
The second bit, when we think about the role that our products play, unlike say a database, which is tied to a specific application. Our products are more can do to a utility once deployed, right. Vault underpins all the applications in your state. And so as a result of tends to bit, you tend to see that in our NDE numbers naturally. So, both on kind of the new business side as well as their ability for existing customer relationships are generally in a compelling spot.
Thank you.
Thanks, Jason. Next question.
Thank you. Our next question comes from Mark Murphy with JPMorgan. You may proceed.
Yes. Thank you very much. Hey, good afternoon. It feels like this is going to be a pretty amazing year for the cloud platform. You're going from one product to I think five or six. You're extending some of those to Azure. Is it reasonable to think that, that's going to propel the customer adds pretty robustly or even just maybe start to influence some incremental migrations from self-managed to cloud, if you could just help us maybe sketch that out? And then, I have a quick follow-up.
Yeah. Hey, Mark. It's Dave. So yeah, I think your observation is correct. Like, this is a very new effort for us, as a net new audience that we're targeting. In terms of, its tends to be the longer tail of the customer base that are big users of the tech sort of who tend to attract with that aspect of our offering as the hosted offering. The second thing I'll just underscore is, just to your point out early this is, I think we ended the year with really a couple of products running on HCP and to your point, we have a few more to rollout and in the short-term, you will see an output to that end.
So I think we're pretty bullish on it. But it is a net new business for us, it's really a net new channel. So yes, I think what you'll see reasonably is continued adoption as we -- I mean people on the free-tier of those platforms, they do convert to paid customers it's slightly less friction. So certainly it's compelling in that respect. So I think we're optimistic. I would say, we are really looking, this is a net new thing. We are not yet into position where we are flipping existing customers to renew onto HCP and that's not a motion we've begun just to be clear, so it's really just net new.
Okay. I think once would you got [Multiple Speakers].
Maybe it will be different.
Yeah. I'm sorry I didn’t mean to interrupt. We [Multiple Speakers] follow up.
Go ahead.
Okay. Yeah. So Navam, it's great to see the increase in guidance and the overall traction. I'm just, I'm trying to connect the dots on, this is tremendously large volume of customer at this quarter. It's kind of an explosion debate (ph) it didn't translate maybe as much to the license revenue or the RPO growth or is that -- or just kind of the sequential revenue growth. And I'm just wondering, should we interpret that as more, it was more kind of smaller cloud customers it'll scale later, maybe a little less of the longer-term kind of larger deals that drives some of the other metrics or how do we connect the dots on some of that?
Yeah. Thanks, Mark. So, I think to your first point and to your earlier comment about HCP very encouraged by that momentum and a strong customer net, net customer additions that we're seeing there. So we're encouraged by that momentum and we're encouraged by the volume of customer additions we signed in Q1. Specific to Q1 subscription revenue, one point to note is that, this was a very high recurring revenue quarter, which is great because that gives us visibility into the forward quarters that we're seeing. So that's what you saw in Q1. High subscription recurring revenue business out there that came in Q1, which is obviously great for future quarters. To your point earlier on the RPO side, we saw high RPO growth in the 50% plus than CRPO (ph) side, high CRPO growth in the 50% plus, which shows the volume of growth of sort of our contracts that are coming in the quarter.
Thanks, Mark. Next question.
Thank you. Our next question comes from Ittai Kidron with Oppenheimer. You may proceed.
Thanks, guys. I did want to focus on HCP, perhaps you can talk about the customer adoption there and what way is a different today than it was perhaps two, three quarters ago and I know you don't have that much of a track record there. But maybe you could talk about the changing patterns of customers and how they use this? And in the past, you've talked about HCP as a way to go more lower end, open up the market more on the low and mid-tier are those really the customers that you see coming in or is it really still large customers that are just given their hybrid deployments are also considering and deploying HCP?
Yeah. Great question, Ittai. I think as Dave mentioned, just sort of reiterating it is a -- it is sort of a blend of what we're seeing. On one side, it is opening up a new channel for us. So it is a new audience and is that kind of long tail that he mentioned. So these are customers that we would not have historically engaged with sort of our outside field motion that are now coming in, obviously, driving lower ASP more of a transactional business. At the same time, we are seeing some of these larger enterprise organizations that are engaging with HCP at more of a departmental or project level where great, I have a project that's being built in native cloud rather than trying to operate it themselves, they're going directly through to HCP.
I think the by and large most of where we're seeing sort of the net new logos, is the sort of long tail. And we expect to see more of sort of those they kind of enterprise customers and they continue to gain comfort with the idea that core infrastructure is going to be provided as a managed service. And I think that is probably the biggest question mark for us, is just the comfort of those customers as they migrate to the notion of, hey, this is Tier-1 critical infrastructure being provided as a managed service.
Got it. Very good. And maybe as a follow-up, Navam, on gross margins. Good start for the year, you've talked about I think last quarter about 80% gross margin target for the year. With the strong start that you have, would you care to revise that up perhaps?
Thanks. Thank, Ittai. Always making me revise up. So we're pleased with beating the gross margin plan. There is obviously three constituents to gross margin. There is the self-managed margin, the cloud margin and the professional services margin. The mix of that impacts the margin. So the good news that we are seeing is, we beat our plan on cloud margins and it's coming in ahead of what our expectations were. So we're comfortable with where we're landing at the 80% mark, and over time, we should see as cloud takes a bigger share. We should land towards the long-term targets. All that being said, we are a very high gross margin company and we're pleased with that.
Very good. Thanks, guys.
Next question.
Thank you. Our next question comes from Brad Sills with Bank of America Securities. You may proceed with your question.
Great. Thanks guys for taking my question. I wanted to ask a question about HashiCorp Cloud as well please. Is there something about these customers that are opting for the cloud option that you think there is a different profile and trajectory of expand. In other words, do you think that those customer cohorts might have a higher propensity to add more over time if they're committing infrastructure to the cloud here with HashiCorp? Is it a different, different profile of customer?
Yes. Thanks. Yeah. This is Dave. I would say, yes, it is to a degree. I think it's kind of, it's kind of two categories. I think one is that sort of the perhaps a longer tail customers have indicated. But number two is the departmental user inside of these larger organizations, which in some respect lack the expertise of running the stuff, even though they know they need it, so they almost that enables us in a sense to be their platform team for them. The implication for those people that they're on board, may it really at the departmental level is they get up and running far faster.
So yes, you can infer that I would expect those customers on board and get to their expansion and extension to cross product faster and that's certainly the design principle of why we've created HashiCorp cloud not as just a cloud version of one of our products but rather as a single common chassis towards all our products drop that allows us to then encourage that motion. So, yes, that is two audiences. Yes, I think I certainly believe I'm optimistic that at least to adoption faster.
I would also -- maybe the last thing I think generally we're surprised at the growing appetite for people to consume HCP in the larger customers. And I think the operational reality of infrastructure products, it makes people slower to adopt but also once they start running them themselves realize how critical they are, and so I think we're certainly optimistic and harmonized travel certainly last quarter, you saw that expressed more often than I would have expected, hey, can you run the stuff for us and so we need that market as it comes super optimistic.
Great. Thanks, Dave. And then one more if I may please. The NRR acceleration here last several quarters, where would you say that incremental expansion is coming from? Is it more on the expand side or more on the extend side as customers go from category to category? Or is it more just the expansion within whatever product they're running whether it's Terraform or Vault or Consul?
Yeah. The short answer is, it's both. I'll just sort of recall that sort of our pricing model is aligned to as more applications go to cloud more, more usage of our products results. So for each part of our products has that natural motion to it. So what you're seeing is people's cloud estates (ph) grow, we are in some sense a portion of that spend category and certainly the fact that we can procure that through the marketplaces and those cloud providers makes that relatively friction less.
And then number two, there is the extend cross product opportunity. I think as we said before, there's just a maturity journey that people go on. They sort of start with the Terraform problem or the Vault problem and then they realize they have the other problem and they sort of naturally extend and that is just the journey. So it's almost inevitable that one customer becomes an extend customer and I think what you're seeing as this cohorts go, that just is what's happening, so it's really both.
Thanks. Thanks for adding here. Thanks.
Next question.
Thank you. Our next question comes from Michael Turits with KeyBanc. You may proceed.
Hey, guys. Nice quarter. First is sort of an extension macro question and -- but did you see as a result of macro inflation recession fears, et cetera. Any change in people's attitude to a, towards cloud migration and two, although clearly wouldn't see it in your numbers for big deals, for big deals for good. Any change in their willingness to do larger projects?
Armon, do you have a point of view on that probably?
Yeah. No, I think a great question. I think in general, what we've seen is most of these large enterprises have embarked on their cloud journey several years ago and I think they see it as a transition that's going to take them five, 10 years to really complete. In many ways, I think we look back on things like the hypervisor transition and that was a decade long transition for a lot of those customers and there's going to be a lot of macro bumps in the decade long period. So I think that's kind of the attitude of the customers. They realize that inevitably they have to do these transitions. They have to sort of innovate and drive the sort of transformation of their digital estate. So although, yeah our European customers very aware of obviously ground conflicts there, customers around the world are aware of the macro environment. I don't think we've seen much impact to their plans around their adoption of cloud just significant extent.
And on the large deal sizes, are people chunking up and doing smaller projects again obviously look you're big deal numbers are great, you signed another 10 million. So the numbers you wouldn't think so but anecdotally any reluctance to get involved in larger and say longer implementation time type of projects?
Now, I'll say, I think it's pretty consistent. I think the constraint is more around expertise in their particular region truthfully like that as with any platform transition that occurs, there is a skills challenge around people's understanding of that new platform. Just like when we went from the mainframe world to the client server world it took some time for the skills in the marketplace to merge. I think that's the bigger constraint than anything else.
Okay. Fine. Thank you very much.
And maybe the peers I would add here is, just talking about that sort of second $10 million customer. I think what's clear to our customers as they get to sort of a critical scale with us as they realize we will be a strategic partner to them. We are not a point vendor solving one problem, we offer sort of a suite of solutions we're going to solve multiple problems for them. And so I think there is a natural comfort with the idea that you guys are going to be a generational partner to me as I'm going through this transition and they want to have a deep relationship and sort of plan over a multiyear horizon because we impact their strategy over a multiyear horizon.
Yeah. I'm just going to echo that point because, because Armon is exactly right. That is what we hear over and over again. If you think about the customer, it is generally a platform team inside of a large organization, they -- in these kinds of environments their bias is to consolidate the relationships not expand them. The fact that we have many products that address many of their problems from a single buying center single vendor is actually very compelling and that term strategic partner is the one that gets used over and over and over again like we're now certainly of significant material portion of Global 2000 as in that seat. And I think that's the basis of our growth opportunity from here.
Thanks, Michael. Next question.
Thank you. Our next question comes from Alex Zukin with Wolfe Research. You may proceed.
Hey, guys. Thanks for taking the question. So not to kind of beat the dead horse on macro, but maybe asked this a different way, how should we think about the -- as you looked at your pipelines and you evaluated them. Any change in the length of the sales cycles, the velocity of pipeline conversion or any elements there that make you have an added level of conservatism into the guidance. And then I got a quick follow-up.
Yeah, Alex. Thanks for that. Look, in Q1, we're seeing consistent and solid pipeline and we're comfortable with what we're looking at Q2 in terms of what the guidance number is. For the back half, where we're of macro, so what we've taken is a wait and see additive there on the guide. So at this point, demand remains pretty strong and we're encouraged with how the year is looking.
Perfect. And then I guess is there, was there anything in terms of the duration that was either different or nuance this quarter. I look at the total dollars added on total RPO and sequentially, they were a little bit lighter than maybe this time last year. But then in current RPO was actually really strong. And then the logical question we're going to get is kind of to bridge the, if I look at current RPO change for subscription revenue, it looks like it's over 50% and then the guidance for Q4, I believe just implies a topline growth number. It starts with the two for subscription revenue. So just how do we bridge that?
Yeah. Good observation Alex. So the CRPO number is a good proxy as to what the one-year remaining revenue could be, not including the renewals. So that's the number that you looked at -- look at on an apples-to-apples basis for year-over-year. The duration did come down slightly and that's what you're seeing on the total RPO growth line. So it is reflected in the total RPO growth which is subject to duration. Also on the revenue line, you're seeing more ratability of revenue. So all those things are connected.
Understood.
Thanks, Alex. Next question.
Thanks. Our next question comes from Brad Reback with Stifel. You may proceed.
Great. Thanks very much. Navam, on the OpEx guide for 2Q fairly significant step up after two quarters of basically flat. Just trying to figure out the degree of conservatism versus seasonal aspects that might be impacting it? Thanks.
Yeah. Thanks. And maybe a step back to talk a little bit about the OpEx, the loss of the year which we touched on last call as well. The plan is relatively consistent. We have a very high net dollar retention rate, high gross margin and a very solid balance sheet. So we made a decision to invest in the company. And starting Q4 to show leverage in the business on an annual basis as we move forward beyond Q4. So that's sort of the shape of the operating income line that you're seeing in the guidance.
Now that being said in Q1, we're very encouraged by delivering the top line performance with better-than-expected operating income. And that's just part of our DNA at being a company that's very focused on efficiency. So we're looking forward to delivering more, more of that in the future and sticking to our DNA of being an efficient company.
If I just could make -- perhaps just a matter point to echo to Navam’s point. We've been a very efficient company historically, if you look at our cash consumption relative to our scale today all through our life because of a design principle around efficiency. We have -- on top of that a high gross margin business with strong NDE. That being said, we're constantly looking at investment efficacy opportunities and you certainly saw that in Q1, but we also think there is an opportunity cost to not investing aggressively given the Blue Ocean around us in this market and the buttress balance sheet that we have to work with. So that's sort of underpins our philosophy, hopefully, it gives a sense.
That's great. Thanks very much.
All right. Thanks, Brad. Next question.
Thank you. Our next question comes from Derrick Wood with Cowen. You may proceed.
Hi. This is Carson on for Derrick. Thanks for taking our questions here. So security seems to be one of the strongest spending priorities in software, right now. Can you give us a sense on how Vault is performing relative to the broader portfolio? What kind of trends you're seeing around initial deal sizes and expansion?
Yeah. I'll make the comments. This is Dave. Appreciate the question. Yeah, I think honestly, it's very, very consistent with what we've seen before. Our business remains relatively balanced across the different aspects of our portfolio. In terms of deal sizes, again, very, very consistent. I think what you've seen from us is, concerted push for higher velocity lands at a lower cost and that's certainly the instruction to our sales team. So let's land the smaller transaction faster is about to larger one. And I think that holds true across our portfolio. So what you've seen is actually an increase in the customer count and a slight drop in the ASP corresponding to that which is on purpose.
As you know, when you're talk infrastructure people tend to say okay, hold on let's prices across the entire state and that tends to slow things down. The more we can constrain that to a starting point to grow from that's what we're trying to do. So net, no real change in the dynamics across products, or across deal sizes truthfully, but yes, security involved as the broker of identity across your machine estate is one of the fundamental investments. I think most companies are making.
Yeah. And I think the piece I would add to that is just from sort of a tailwind perspective certainly customers are cyber security is very, very top of mind. And I think for us having a zero trust narrative and a story around a portfolio of products rather than just Vault, clearly Vault is sort of our anchor play there, where we tend to sort of land and customers. But then being able to tell a compelling story around, great, how can we extend that to service networking and really do bring a zero trust approach network segmentation with Consul, right and I think you saw that in our second $10 billion customer where they're really looking at great, how do we embrace those zero trust primitives and really extend that beyond just identity with Vault and application security into the networking aspect. And then looking beyond into our portfolio with foundry as we think about extending that further into privileged access management. I think that has been very compelling for our customers because we can present that kind of end to end zero trust architecture and certainly very top of mind for customers.
Got it. Thanks.
All right. Thank you. Next question.
Thank you. Our next question comes from James Fish with Piper Sandler. You may proceed.
Hi, guys. Thanks for the questions. One of the items we've heard over the last few weeks is just the strategy around the premium model. How are you looking to better monetize some of the core offerings and in particular Terraform, does it makes sense longer term to put a limited timeframe for the free version or put in a few versions behind a paid offering?
Yeah. Go ahead, Armon.
Yeah. Great. Thanks for the question. I think we've had a very consistent approach to how we monetize our open source and its premise around the idea around standardization of a whole market. And so I think we invest genuinely in the success of our open source practitioners and really focus on how do we solve the technical problem for the individual users, whether that might be provisioning with Terraform whether that's secret management will all, et cetera. So the open source is really meant to be unallocated in that sense to really drive practitioner bottom up adoption, drive market standardization, and I think you see that with Terraform now having 2000 plus integrations.
And then ultimately the commercialization is driven by a differentiated commercial product that's all of the organizational challenges of using those products at scale. So we're not trying to monetize as the loan individual users. It's as you go from a single-user to a team great, that's where our entry level commercial products are focused. And then as you move from a team, so maybe a broader department level or platform level is how do you move from collaboration at the lower end to really around multi-tenancy, governance, security, policy, operations at scale at the upper end. And that's really where we focus on it rather than trying to create sort of a second-class experience around the open source.
Got it. And just circle back on the pipeline part that you mentioned, Dave, as you were talking about the pipeline here being pretty consistent in terms of the front end of the pipeline, what are you seeing in terms of the lower part of the pipe and specifically, on the large deals that could become plus $10 million contributors as it sounds like your focus more on the low-hanging fruit, the smaller customers at this point just as you kind of save some OpEx here?
No. No at all, I would say, I would say, I think we have a segment view of how we cover the market and what is referred to previously was really the cloud offerings have a natural affinity to that lower end segment and that's certainly has its own unit economics that we manage separately. The influence on the restaurant business, no, that's really unchanged. What I was referring to is that the pipeline build in the other segments continues to be strong. I think the guidance that Navam shared is reflective of just been awareness of the macro towards the end of the year that which will become more clear or close to it, and that's really the visibility we have today, which is we see a lot of positive signs in the pipeline.
All right, Thanks, James. Next question.
Thank you. Our next question comes from Sanjit Singh with Morgan Stanley. You may proceed.
All right. Thank you for squeezing me in and congrats on the really -- on the touch on the metrics this quarter, but on the interface side and on the total customer base that was really nice to see. And Dave, I wanted to pick up on a comment you made on the earlier question around the multiple sources the multiple value propositions at the platform provides. And I guess the spirit of my question is the ability to hone in on maybe the cost efficiency, cost savings, TCO aspect as part of the sales playbook. Is there an opportunity here to go into the customer base and say, we can dramatically lowering the hardware spend by consolidating firewalls or your what your load balancers as a -- as you think about in 1Q combination of Consul as well as Vault in a potentially tougher spend environment. It's that a playbook that can be used to certain degree and how effective that has that message been in the past during prior periods of uncertainty?
Yeah. Thanks, Sanjit. I'd say, yes. And I think my core view is that there is heterogeneity to infrastructure and the apps that are running at private data center being orchestrated by say a firewall and a load balancer generally are going to stay there. So our value proposition is really about providing that bridge to the new world for your new applications. I think one of the real benefits actually I talked about in the prepared remarks was the Consul-Terraform-Sync capability, which basically allows you to update the configuration of legacy networking gear as part of your new application deployment.
So I think the cost savings comes -- these are very, very easy value proposition around extending the life of your existing investments for maybe the three year view to the five-year view, in that sense, not having to replace that legacy year because we are providing the bridge to the new world. So I think that's actually closer to how the conversation goes. We don't generally go in and talk to you, say, hey, you're running firewalls, now replace firewalls because it would require you to rebuild the applications. It's more, hey, for your new applications you probably don't need that firewall approach, but it's help you provide a vehicle to bridge to keep your old firewalls relevant and in so doing, save the cost of having to upgrade those to something newer. But the cost value proposition is really, really strong honestly across all of our products and in combination even stronger. What you described is certainly a play, but it's probably not the one we leave it.
Understood. And then a sort of another product and the topic I wanted to revisit again, I’ll get what we think is part of all of your earlier question which is around sort of monetization triggers, and it's a topic, but I think we get quite often with respect to Terraform, but also with respect to Vault, I think you sort of mentioned your strategic customer wins. You landed an enterprise Vault win, that customers started an open source in 2019. So I was wondering, if you could sort of, is there any sort of narratives to draw between a customer landing with open source or starting with open source 2, 2.5, 3 years ago, and ultimately, on the or becoming enterprise paying customer. Both on the Vault and the Terraform side, what is sort of that journey that they're going through on, help us understand how these modernization triggered evolve over time.
Yeah. I think that -- So I'll talk about the Vault one first. The idea, this one might be using Vault to basically authenticate the identity for a particular application and open source is how it begins, but it's sort of the minute that, that gets sort of established as a central shared service that is a Tier zero applications to your company. It's sort of an immediate trigger. Right, it was, okay, that was just running on one machine previously, but now you have to run it as a central shared service there's redundancy, the replication if that thing goes down, it's like the power being turned off for all the apps that speak to it and once that realization is made to hold on a second, this is not just underpinning at single thing, this is actually a strategic Tier zero application. It's a very simple conversion and that's what is happening there. So this natural maturation through that organization and that's very, very consistent.
On Terraform, it's a slightly different transition. It is someone to Armon’s point, our first priority was around market standardization to the greatest degree possible by making that ubiquitous. And then we built Terraform cloud use that as an example to provide a broader workflow around people using Terraform provision infrastructure. So where someone may have initially adopted Terraform just as a provisioning tool on their laptop, when it gets establishes that Tier zero application that is underpinning the entire organization's provisioning process, now you need audit trails and policy and governance. And it's that notion of a single platform team ultimately, we need to run something as a service for the organization, maybe as an easier way to envision the value proposition, because to be clear, these are Tier zero applications that no that cannot go down and that sort of underpins the overall value proposition of the commercial products.
All right. Thanks. Sanjit. All right. Next question, please.
Thank you. Our next question comes from Pat Walravens with JMP Securities. You may proceed.
Great. Thank you. Here is a different perspective on all the stuff. So David or Armon, is there a way in which a tighter capital market, tougher venture financing environment will help Hashi. Are you getting emails from interesting private companies or like, you know, we'd like to talk about selling you, or you seeing less crazy pricing behavior from some competitors there seeking to conserve cash or anything else like that?
Yeah. I would say on that, maybe the two things separately, I think it's still early, it’s short version, I think the private markets taken a while to react. So I think we'll certainly be disciplined and aware of what's happening in the private markets, but it's early. Number two, in terms of the market dynamics in truth the competitive environment is not necessarily. There are not a lot of smaller companies that we compete with truthfully. I think it's generally more of the market standardization round open source and the engagement commercially is much more common for us. So, that long-term goal of driving standardization in order to drive an opportunity to be the partner of choice, a commercially is really more our modeled and competitively. But, yeah, if there are other start-ups trying to enter these markets. It certainly feels like it's gotten more difficult.
Yeah. Maybe, the one thing I would add is, certainly, we felt a bit of a tailwind on the recruiting side and just because I think organizations and people looking around see that, hey, how should I just went through the IPO, we have a fortress balance sheet. We definitely are in a different stage relative some of these folks that maybe had stratospheric valuations that are on the way back down to earth.
Great. Thank you.
All right. Thanks, Pat. Next question, please.
Thank you. Our next question comes from Fatima Boolani with Citi. You may proceed.
Hi. This is Joe on for Fatima. This one is just on Consul. Are you able to share with us how budgetary and competitive dynamics are evolving here, particularly as we see larger cyber vendors become more vocal about the Service Mesh opportunity? And then also related to that, given your recent announcement of the SVP for networking. I was just wondering if you could update us on engineering product design, where that stands as well as the R&D roadmap and sales roadmap? And then I have a quick follow-up. Thank you.
Sure. Yeah. Great question. I think in general what we feel optimistic about is that I think the market awareness and maturity around Service Mesh has evolved significantly, right. I think certainly 18 months, 24 months ago relatively limited awareness and I think now, I think we're seeing that we're moving out of just the bleeding edge of early adopters into the early majority really starting to think about it and prioritize it as an infrastructure project. So that's certainly encouraging for us and now we feel like there's sort of a broader market that sort of aware and starting to go through that conversation.
From an R&D investment perspective, yeah, we announced Gurpreet Singh joined as our new SVP running our networking group very excited for him to join and lead that certainly an area where we are very deeply invested, both with Consul as a Service Mesh. We had some updates to our API gateway capability in the quarter as well. And then obviously our HCP Consul offerings as the managed service. So we're continuing to invest deeply across all of those fronts. And I think again pointing to some of these customers that are now extending from Terraform and Vault only to bring Consul and really speaks to, I think our platform opportunity and really the chance to be a strategic vendor.
Just one point I'll add because your question around the dynamics, I think we have learned that before you can tackle the Service Mesh problem, you have to generally solve the provisioning and security problem, right, because to the move to the notion of service-based identity, it's hard to move to service based orchestration just to double-click on it a little bit. So that's sort of underscores Armon’s point as our focus is are building the trust of the platform teams Terraform, and Vault and then that, in a sense, makes us the incumbent for the Service Mesh opportunity because Vault at that point is the identity broker.
Okay. Great. And then just a quick follow-up here on consumption models. So many of these outlook peers have been alluding to moderating usage or consumption patterns. Are you seeing a similar dynamic develop across certain customer cohorts and end markets or if not, what is keeping your adoption or pricing model more insulated? And that's all from me. Thank you.
Yeah. Thanks. Why don't I take that quickly. From a results perspective there really is no impact on consumption on our revenue. It's mostly entitlement subscription base. So over time, you'll see more of that but at this time, we're mostly subscription revenue that has entitlements.
Okay. Great. Thank you. Next question.
Thank you. Our next question comes from Kash Rangan with Goldman Sachs. You may proceed.
Hey. Thank you very much. Congrats on the quarter. I'm curious to get your perspective on two things. One is that HCP, are we at a point where the service is poised from primetime inflections? Are there certain things where product quality perspective that that you're looking to invest in that could enable HCP to really inflect? And that's one. And number two, with respect to cloud migrations vis-à-vis we expanding [Technical Difficulty] enterprises. At what point do this Hashi get typically involved in, is it at a fairly mature phase of the cloud migration process or at the front. The reason to ask the question is due to the economic uncertainty people stop for a little at pause the cloud migration does that impact Hashi at all or are you getting involved in a later stage of the migration process that at the front end even if things slow down a little bit that provisioning net-working security standpoint, you get involved much farther along and maybe that could help you. I'm not sure how exactly to think about it but wanted to get your thoughts? Thank you.
Yeah. Great question, Kash. Yes. So let me take the first question, in terms of sort of the momentum on cloud, I think we feel good that there is strong consistent delivery from an R&D perspective. I think there is a lot more we can do that will continue to accelerate that, right. Again, if we look at the beginning of last year, we entered with effectively one cloud products we exited last year with three on a single cloud provider. We are now at five of cloud products across two providers. So I think what you're going to continue to see from us and we have our upcoming user conference in the next three, four weeks here, as you'll see more momentum in terms of adding additional support for net new products. You'll see additional cloud providers, additional cloud regions and so I think each one of those continues to make that a little bit easier and expand the opportunity ahead of us. So I don't think there's going to be a particular inflection moment, so much as we continue to deliver, it will just continuously improve.
And on your second question, if you think -- we think about the usage of our products in two phases, in which step one is around our focus on practitioner adoption and open source when people very much begin their cloud programs they use our products in open source, because that's what the practitioners use. And then the Phase 2 is when they step back or hold on a second, I need to systematize this and that's the platform team creation. So that's the motion in the first instance you're using our open source products and that's where these numbers come from. And then in the second phase is when they become our commercial customers. And I think irrespective of where you are in your journey you are going to go through that, those two processes. So I certainly optimistic about the tailwinds around secular cloud adoption and whether it's early stage, just open source usage or later stage commercial usage one leads to the other. So, certainly the opportunity is a very durable, one, it's not a, it's not a one-time thing for us.
Super. Thank you very much. Appreciate it.
Thanks, Kash.
Thank you. I would now like to turn the call back over to Mr. David McJannet for any closing remarks.
I would like to express my thanks for the participation for everyone here. We appreciate you dialing in and for all the questions and look forward to speaking with everybody soon. Thank you.
Thank you, ladies and gentlemen. Thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.