HashiCorp Inc

NASDAQ:HCP

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to HashiCorp's Fiscal 2023 Third 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 first speaker today, Alex Kurtz, VP of Investor Relations and Corporate Development. Thank you. Please go ahead.

[Alex Kurtz, VP, IR and Corporate Development]

Good afternoon, and welcome to HashiCorp's fiscal 2023 third quarter earnings call. This afternoon, we will be discussing our financial results for the third quarter announced in our press release issued after the market close today. With me are HashiCorp's CEO, Dave McJannet; CFO, Navam Welihinda; and CTO and Co-Founder, Armon Dadgar.

At the close of market today and in conjunction with our earnings press release, we have published an earnings presentation that contains additional financial information pertaining to the quarter. We encourage you to review the presentation in advance of our call. You can access it 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 include statements concerning financial and business trends, our expected future business and financial performance and financial condition, and our guidance for the fourth quarter and full year for fiscal 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 the Generally Accepted Accounting Principles. The financial measures presented on the 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.

[Dave McJannet, CEO]

Thank you, Alex, and welcome, everyone, to our third quarter earnings call.

We're excited to share with you that Q3 was a solid quarter for HashiCorp as we exceeded our guidance with revenue of $125.3 million, representing year-over-year growth of 52% along with the trailing four quarter average Net Dollar Retention rate of 134%.

Current non-GAAP remaining performance obligations reached $553 million, representing 50% year-over-year growth and we added 26 customers with greater than or equal to a $100,000 in annual recurring revenue to reach a total of 760.

Our HashiCorp Cloud Platform offerings reached $12.9 million in revenue, representing 10.7% of subscription revenue in the quarter. We're excited about adoption trends as we continue to rollout new features and new capabilities.

We're also pleased to announce that during Q2 we had our third customer reached $10 million in annual recurring revenue. This global financial institution has made significant investments across our three core products, and I'll discuss this customer's journey in a few minutes.

Armon and I have spent the last few weeks meeting in-person with customers and prospects across North America, Asia Pacific, Europe, and also last week at Amazon re:Invent and I wanted to share some more insights. Regardless of location, all buyers are under increasing scrutiny and pressure to do more with less, a theme I think will continue through next year.

However, despite these pressures, for large organizations worldwide the transition to a cloud infrastructure remains a key strategic investment over the long-term. And because of the ongoing prioritization of cloud, even with economic pressures HashiCorp products continued to be a strategic investment for our customers. Our products are fundamental to running a modern infrastructure estate and conducive to cost control.

As I've said before, organizations worldwide are still very early in cloud adoption. As they continue their transitions to the cloud and multicloud becomes the standard, our products become increasingly valuable because they offer operations, networking and security teams with a consistent operating model that provides a system of record across each layer of their infrastructure stack.

During my travels this quarter, I continue to hear the most successful companies describe their use of centralized Platform Teams. Platform teams help these organizations move from tactical cloud adoption to strategic cloud programs, enabling a common infrastructure foundation for operations, security and networking. I heard many examples of how these teams prioritize the adoption of products that offer unique capabilities to help them extract more value from their cloud investments, and they continue to invest their tightening budgets with us.

Before turning it over to Navam, I'd like to briefly highlight some of the announcements we made at HashiCorp in October, which focused on product enhancements and new offerings across security and infrastructure automation.

Each of our new releases helps teams utilize automation to do more with less, which is important as skills and talent shortages threaten the bottleneck cloud programs. Many of these enhancements also help our customers with the most significant challenge, security, which is a critical component of the cloud operating model.

Platform teams under immense pressure to secure massive attack services of different clouds, private data centers and remote workforces. Just as HashiCorp pioneered the concept of secrets management, we're building on another concept to help improve the security posture of the world's digital infrastructure, a differentiated approach to Zero Trust Security.

And we are delivering the Zero Trust Security approach for the cloud. In fact, we're proud to note that AWS just named us North America's Security Partner of the Year at re:Invent last week, their Annual User Conference.

To deliver our vision for Zero Trust Security, we announced the general availability of Boundary on the HashiCorp cloud platform at HashiConf Global. HCP Boundary joins HCP Vault and HCP Consul to provide platform teams with the first Zero Trust Security solution, purpose-built for the cloud to secure applications, networks and people.

To help organizations better manage cloud provisioning and infrastructure challenges, we also announced several new capabilities for Terraform. With these enhancements we are continuing to build high-value enterprise features into Terraform, which provide greater security, compliance and operational consistency as customers standardize their infrastructure automation for multicloud.

Now, I'd like to turn your attention to notable third quarter transactions that highlight our Adopt, Land, Expand, Extend, Renew motion in action. First, a land deal, an APJ-based oil and gas corporation standardized on Vault enterprise in order to secure its configuration files. Additionally, Vault will expedite the customer's initiative to move to passwordless backend systems and improved reliability across its monolithic applications.

Next, an expand deal. An international manufacturing company expanded its Consul and Vault deployments to support a rollout of a multicloud strategy for its next-generation smart building control services. With plans to deploy across all the major cloud service providers, HashiCorp has enabled a consistent approach for its development teams and provides a single control plane for both service networking and secrets management.

And third, an extend deal. A top domestic banking company extended to use HCP Boundary to simplify, streamline and automate common developer tasks and workflows for accessing remote systems and applications, provision by Terraform, secured by Vault, and connected by Consul. This is one of our first enterprise deals for Boundary since announcing general availability at HashiConf in September. We are proud to count companies like these as our customers and are deeply committed to continue to earn their trust.

And finally, I'd like to spend a minute on HashiCorp's $10 million ARR customer that I mentioned earlier. This organization is another example of a customer who started working with us around a single product and expanded and extended over time. They became a Terraform customer in calendar 2018, then Consul in 2019, and then Vault in 2020 and 2021, starting with our Open Source products in each case.

This global financial institution began its journey with us with an initial investment around its public cloud engineering teams and how they were going to scale operations using AWS. The early days with this customer began with the philosophical conversation around the future of infrastructure as code and the value of Terraform for its independence, given the reality of their hybrid estate. This led them to adopt Terraform enterprise for their early cloud Platform team. Then, starting in 2019, they made an investment in Consul to add application resiliency that was part of their data center migration projects.

At the same time, Terraform saw massive growth across multiple units as it became the standard behind this company's cloud projects, working through platform teams as a main conduit into its global organization.

Finally, Vault was deployed in 2020 as part of this company's blockchain initiatives that are now deployed across public clouds, and that allowed to provide global namespace, performance replication and disaster recovery. We are extremely proud of this partnership as this customer has been side-by-side with us on the journey to enhance our three core products, and we look forward to our continuing collaboration.

And with that, let me turn the call over to Navam.

[Navam Welihinda, CFO]

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 third quarter of FY 2023. We grew our total revenue by 52% year-over-year. We continue to see strong expansions and extensions in our customer base, as shown in our trailing four quarter average Net Dollar Retention rate, which remained at 134%.

On the expense side, we continue to focus on resource allocation efficiency in the business during Q3. 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 achieved negative 24% in non-GAAP operating margins this quarter, and incurred a net loss of $0.38 per share on a GAAP basis and $0.13 per share on a non-GAAP basis.

Before discussing guidance, I wanted to provide some background around the macro conditions we are seeing. We clearly saw solid revenue performance during Q3 which exceeded the high-end of our guidance, as well as our own internal expectations for what is historically a seasonally low quarter. In Q3, we also saw a stronger than expected multiyear contract activity from our customer base, when our existing customers recommitted to us as a critical vendor for the long-term.

After reviewing some of our top Q3 multiyear deals with our sales teams, we believe some of this outperformance may have been related to larger customers looking to lock-in pricing with us against the volatile inflationary environment. This is a good outcome for the customer and it clearly helps us gain better long-term visibility to our business as well.

Similar to last quarter, in Q3, we continued to see high scrutiny of spend by customer procurement and finance teams causing elongation in our sales cycles. The spend scrutiny was particularly high with new contracts from first time customers. We are incorporating the macro uncertainty we are seeing into our fourth quarter guidance.

And as always, we are taking a measured approach to our revenue guidance for the next quarter. Given the macro uncertainty, we are also continuing to optimize our cost structure and being extremely considered in our head count investment plans over the next 12 months.

Now on to our guidance. Despite the macro uncertainty I have discussed, we are very pleased to raise our full year guidance. For the fourth quarter of fiscal 2023, we expect total revenue in the range of $123 million to $125 million. We expect Q4 non-GAAP operating loss in the range of negative $54 million to negative $51 million. We expect non-GAAP net loss per share between $0.23 and $0.21 based on 189.1 million weighted average basic and fully diluted shares outstanding. For the full year 2023, we expect total revenue in the range of $463 million and $465 million.

We expect our FY '23 non-GAAP operating loss in the range of negative $152 million and negative $149 million. We expect non-GAAP net loss per share to be between $0.71 and $0.69 based on 186.2 million weighted average basic and diluted shares used in computing non-GAAP net loss per share. We are pleased with our Q3 results.

And with that, Dave, Armon and I are happy to take any of your questions. Alex?

[Alex Kurtz, VP, IR and Corporate Development]

Thanks, Navam. With that, operator, let's go to our first question.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Ittai Kidron with Oppenheimer. You may proceed.

[Ittai Kidron, Oppenheimer]

Thank you. Hi guys, great quarter, great results, nice execution. I guess, Navam, I'd like to kind of perhaps try to look ahead in time you're heading into the fourth quarter. Are there any preliminary fiscal '24 thoughts and modeling points you think we need to take into account as we think about '24 right now?

[Navam Welihinda, CFO]

Hi, Ittai. Thanks. Yes, we're very pleased with how queue - the third quarter turned out. And as we mentioned, we're very pleased with being able to raise the year as well. So all things considered, I think we're on a solid execution path for the rest of the year. We're - our normal practice, which we followed last year was to give you the year guide in Q1. So we're looking forward to execute for Q4 and we'll give you the update in Q1 next year. But overall, strong performance in Q3, which we're very happy with.

[Ittai Kidron, Oppenheimer]

Okay. Very good. So maybe I'll try to kind of dig into the go-to-market approach. Clearly, your portfolio is much bigger now and adoption is broad-based on multiple products. So first of all, is there any multiproduct color you can give us adoption-wise on your customer base? And second, as you move into next year how much tweaking do you think you need to do to comp plans? Do you think the way you incentivize people is going to have to change either given environment, either given customers preference? It seems like to sign more multiyear deals or for any other reason, do you feel like you need to make any material tweaks to your comp plan sales force?

[Dave McJannet, CEO]

Hey, Ittai, this is Dave. Thanks for that. I'll maybe answer the two of them. The first one on what percentage of our customers continue to be multiproduct. I would just underscore, the $10 million customer that we talked about is probably very indicative of how the motion works. I think as you know, we have a common buying center to a large degree the cloud program owners and they essentially adopt next use-case along next product along. And I think you see that being played out pretty consistently in the cohorts of customers.

So we haven't seen a material change in that. By and large Terraform and Vault are where people start. I will say there's tremendous interest in Boundary, which is relatively newer product. And I expect this multiproduct motion to continue, but we haven't disclosed specifics of that. But I would say, subjectively, it feels very consistent.

On the - what we're thinking for next year? I think we feel good about the overall model truthfully, which is we have a multiproduct portfolio that address multiple challenges on cloud programs. And our sales organization goes - and sort of engages with those buyers in a very consistent way. I think we're pleased with the multiyear portion that we do. We're pleased with the multiproduct aspect. But the motion really continues to be very, very similar and I expect that to continue into next year.

Again, so these are long-term arc trends, these are long-term relationships we have with our customers, and we'll follow their lead in terms of what they want to buy from us. But it certainly feels consistent with what we're already doing.

[Operator]

Thank you. One moment for questions. Our next question comes from Jason Ader with William Blair. You may proceed.

[Jason Ader, William Blair]

Thank you. I got one for Navam, one for Armon. On the message you were giving on the price lock-in, Navam, is that - are you saying that there was a pull-in of demand into Q3? Or maybe just clarify what you mean by that?

[Navam Welihinda, CFO]

Yes, certainly, and thanks for the question. The price lock-in is more - there's a lot of spend scrutiny happening in the market right now, and customers want certainty on pricing. So what they are doing is reaffirming us as a critical vendor of choice for the long-term. So they're coming in and asking for commitments over the next three years on pricing and that is factoring in long-term deals being structured by mostly a lot of our existing customers and larger customers. So that's essentially what's happening from the long-term side.

On the pull-in side, no, it's a normal third quarter. There was no pull-in on - from Q4 to Q3. All said, very pleased with the revenue growth we saw in Q3 despite being a seasonal quarter.

[Jason Ader, William Blair]

Okay. Great. And then Armon, can you talk about the technical differentiation for Boundary, especially relative to your main competitor there? And what's the sales playbook?

[Armon Dadgar, Co-Founder and CTO]

Sure. Yes, happy to. So I think in some sense, the privileged access management market has - it's a very well established market. It's been around a long time. I think the shift is really happening at what are the types of applications being built in the cloud infrastructure environments that they're running in.

So I think the backdrop is that the applications have moved to a micro service architecture, there's a lot more of them. You're in a cloud environment. It's much more dynamic. The workloads are much more ephemeral.

And so I think that's the biggest opportunity as there's - Boundary was really built ground up for that cloud environment where you have these highly dynamic applications being built to manage by many application teams versus I think, the more traditional tools that assumed a relatively static workload, relatively monolithic, slow-moving infrastructure. And I think that gap has created an opportunity to architecturally solve it in a very different way that's kind of cloud native.

So that's the core differentiator between the Boundary approach and maybe the more legacy solutions that are in the market. As we're going into the commercial side of it, there will be a differentiation as well between our open source and enterprise, really focus on what are the compliance and security needs of organizations using Boundary commercially at scale versus kind of more open source practitioners.

[Jason Ader, William Blair]

When do you think you will start to monetize some of the Boundary product?

[Armon Dadgar, Co-Founder and CTO]

So one of the announcements that we made at our HashiConf event in October was the general availability of HCP Boundary. So HCP Boundary now is generally available, and we've done our first set of commercial transactions around it. That said, this is kind of late in our year. So early next year, we'll go into our sales kick-off. We'll be able to sort of really enable the field on the product. And then as you'd expect, these are kind of enterprise sales cycles around HCP Boundary. So I think it will take a little while to get the engine spinning, but it is now commercially available in op market.

[Operator]

Thank you. One moment for questions. Our next question comes from Alex Henderson with Needham. You may proceed.

[Alex Anderson]

Great. Thank you very much and outstanding results. I was hoping you could talk a little bit about what assumptions you're making in your pipeline and what you're seeing in terms of the mix in your pipeline going into the fourth quarter. There's been seemingly a divergence in some of the other companies that have reported in the security space around the mix of customers in their pipeline relative to new customers versus upsell mix. And I was hoping you could give us some sense of what your assumptions are relative to closure rates and budget flush in the fourth quarter here? Thanks.

[Navam Welihinda, CFO]

Yes. Thanks, Alex. This is Navam. Why don't I take that one? We mentioned this a little bit during the prepared remarks. We are seeing the macro impact play out in the market. And when you think about where it impacts the most, it's the Land side of the business, which is new customers doing new contracts with us. And even with those, what's happening is more of an elongation rather than a loss of that customer.

So in any given quarter's pipeline, there is a higher win rate on expand, extend and a lower win rate on Land. And we're seeing that sort of occur in Q3, and we expect that to occur in Q4. And our guidance in Q4 incorporates that elongation on the Land side as well. So that's what we've factored into our fourth quarter guidance.

[Dave McJannet, CEO]

Yes. Alex, this is Dave. Maybe just pile on - just add a bit of nuance. I think as I indicated, Armon and I in particular, have spent a lot of time in customer facing environments over the last 45 days. And I think what it tells us is the demand signals for both existing customers and new customers are relatively consistent. What is less clear is how that progress progresses its way through procurement departments as Navam pointed out and that's really what's reflected in our guidance.

So I think what we see, whether for new customers or for existing customers, our foundational role in their cloud estates is very, very clear. The procurement department is the wildcard, I think that's why our guidance is what it is, but our conviction is pretty profound for the year for the longer arc.

[Alex Anderson]

Great. And one last question along the same lines. With the availability of HCP cloud, is that something that will see acceleration as a result of the tighter budgets? Or is that macro orthogonal kind of consideration where it's not directly impacted by the macro conditions?

[Armon Dadgar, Co-Founder and CTO]

Yes, it's a good question. I think if we look at the HCP audience today, it's by and large our commercial segments or the SMB kind of long tail of customers. I think they're probably a little bit more macro sensitive than the larger enterprise customers. So I think there's always going to be a little bit of variability quarter-to-quarter for us on the HCP line.

But I think, by and large, I think the smaller customers are seeing more of that macro impact. So that translates into more of a cloud impact, I think, near-term.

[Operator]

Thank you. One moment for questions. Our next question comes from Jim Fish with Piper Sandler. You may proceed.

[Jim Fish, Piper Sandler]

Thanks for the question. More of a question for Navam here touching back on Jason's question. On those stronger multiyear activity with existing customers, can you quantify how many customers actually signed up for more multiyear, especially compared to when they were actually anticipated to, sort of refresh that term license come up for refresh?

And are you actually considering a pricing raise on your end that may have caused some of this volatility? Or why are they kind of sensitive around pricing for your solution, understanding they're sensitive around their own cloud costs, but just trying to gauge that? Thank you.

[Navam Welihinda, CFO]

Yes, sure thing. So on the multiyear, there's a range of contracts new and renew typically that we work on in any given quarter. We aren't going out and converting things that aren't up for renewals. So that's the base that we're working with and a good group of that converted into long-term contracts for us, which is, as I mentioned, very good for the customer and very good for us because of visibility into the renewal base.

So we're pleased with that, and that does have the impact of revenue that we saw and the strength that we saw on the net retention rate where most of our renewals - most of our expansions came in as multiyear expansions as well.

In terms of the, why, there's a number of factors. It wasn't driven by a price increase per se. But there's variability on the dollar on the FX side and many international customers who are seeing uncertainty there, and there's uncertainty on budgets and how to utilize the existing budget and locking in a total. So I think those were the factors at play. Overall, a very strong quarter in terms of being selected as one of the few customers of choice for a long-term.

[Jim Fish, Piper Sandler]

Makes sense. Appreciate that. License was kind of the main upside for what we were all expecting here. And it's nice to see that. But HCP, the cloud piece continues to grow nicely. But are you surprised at all by the continued preference for self-management? And as we think about next year, are you guys thinking about trying to incentivize the sales force a bit differently to drive more of that cloud adoption instead? Thanks, guys.

[Armon Dadgar, Co-Founder and CTO]

Yes. No, it's a good question. So I think we're continuing to be excited by the momentum of cloud. Certainly, we're seeing a lot of customer interest and the new announcements continue to drive a new inflow of users to it. So we're excited about the cloud opportunity.

To your point, I think there is a - the way we sort of often talk about is we're not the tail that can wag the dog. And I think what we see is given the Tier 1 nature of the fact that this is core infrastructure software, it sits at the foundation of both public cloud and private cloud infrastructures.

Many of our largest customers have a preference and continue to have a preference to self-manage it, right? And I think that's - I think it's less of a question of sales compensation or the incentive for our field team, it's ultimately a question of the preference of the customer and how they view the sensitivity of this being Tier 1 software for them.

So that said, we continue to see green shoots of very large enterprises making the choice to switch over to the cloud portfolio, right? We talked about a global bank last quarter that is adopting HCP Vault. We see - continue to see large enterprises moving on to Terraform Cloud. So there's certainly a cohort of these customers that are comfortable with it, and we're starting to see them move to cloud. But that said, I think the much larger majority of them are still building comfort with it, but we think there's a lot of opportunity ahead.

[Operator]

Thank you. One moment for questions. Our next question comes from Alex Zukin with Wolfe Research. You may proceed.

[Unidentified Analyst]

This is Ryan on for Alex. Thanks for taking the question. So I just had another one on the cohort of customers that are signing multiyear deals here in advance. On the flip side of that, you also have kind of the headwinds from the macro to the land side. I was wondering if those two cohorts, like if there's any nuance based on a vertical perspective that you're seeing or if there's any trends that are unique to specific verticals that those customers are in?

[Dave McJannet, CEO]

Yes. Thanks, Ryan. Let me just make sure it's super clear. I think what we communicated is we saw numerous multiyear commitments from our customers. These are deals that are up for renewal. They could have done a one year renewal, but instead they've done multiyear renewals, which is a really strong endorsement of the relationships. So they were not early per se. And they were not related to a price increase per se, it was more about our customers desire to lock-in a longer-term relationship for us.

I don't think there's a particular vertical, honestly. I would say, certainly, internationally, you could imply from Navam's comments that against the foreign exchange variability some customers might want to lock-in multiyear commitments because they have clarity on what that price would be. They may not know what it would be like in the year because we bill in US dollars. So certainly, that's part of it. But I think more generally, it's an endorsement of our growing level of criticality for these larger customers and how they run their infrastructure estates.

[Unidentified Analyst]

Okay. And just a second one here. As we left the Analyst Day, I think the thinking was we would see 10% op margin expansion in fiscal year '24. I think that was kind of the initial thought, not necessarily guidance. But is that - how we should continue to kind of think of expansion for next year? Or has that kind of thought changed?

[Navam Welihinda, CFO]

No. I think you're exactly right. We laid out our plan during Financial Analyst Day, and we're on track on that plan, and we'll be delivering continued leverage year-after-year.

[Operator]

Thank you. One moment for questions. Our next question comes from Michael Turits with KeyBanc. You may proceed.

[Michael Turits, KeyBanc]

Very high level question. We saw deceleration by the hyperscale cloud vendors this quarter, and that's a continuation of what we saw last quarter. Just trying to parse what's happening there in terms of customers watching their expense there and their utilization, their consumption versus possibly investing still in cloud - new cloud app development and deployment of infrastructure that may be benefiting you.

So how is that falling out? In other words, why is it that it's that cloud development still which is so tied to what you do, it still seems to be a positive tailwind even if customers are watching their OpEx spend in the cloud? How do we separate that out?

[Dave McJannet, CEO]

Maybe I'll start that one. This is Dave, and I'll let Armon comment. It's interesting, I think cloud application deployment continues unabated. Sure, that maybe its the hypervisors might be seeing a slight slowdown, but the application deployment process is remaining largely unabated.

I think there's probably a growing level of maturity in running those cloud estates is I would reflect upon. We certainly see companies using Terraform to control the over provisioning process and better control their cloud costs and their cloud spend by putting some constraints around what gets provisioned.

So in a sense, our products get used as a basis of controlling access to that cloud estate. And so as applications are going, more of your applications might be going to cloud but your overall cloud budget may not be growing as much because you're getting a little bit better operationally. And clearly, that's one of the real value propositions of Terraform and its use cases amongst our larger customers.

[Armon Dadgar, Co-Founder and CTO]

Yes. I think the other - and this is Armon. Maybe a little additional color I would add is, as we continue to travel and speak with customers, one of the trends that we see over and over is that there is a lag effect between when customers start on their cloud journey and how long it takes them to truly build maturity and start operating at scale, right? I think there's a lot of inertia as we think about it to these infrastructure transitions.

And so I think that once underway, those are pretty robust, as Dave said, I think even though the clouds are sort of slowing down near-term. I think these programs still take a lot of time to build up to maturity. And I think there's a lot of other spend, whether it's in dev test environments or data consumption or things like that, that are a bit more bursty versus core infrastructure and core applications that tend to be a few years behind when customers start their cloud journey.

[Michael Turits, KeyBanc]

Thanks very much Armon and Dave. And then Navam question for you. You talked about these longer-term deals, multiyear - but that's on a contract basis. What about the invoicing structure? Because as we know, there's - you have this arrangement, whatever standard, where the annual payments invoicing then it's licensed up-line - the license rev rec is upfront. But if it's an upfront multiyear payment, then it's ratable. So which way did that sway? And so in other words, what was the impact on rev rec of the invoicing structures this quarter?

[Navam Welihinda, CFO]

Yes, sure thing. On the invoicing side, just so you know, we have one standard contract which is, you pay annually regardless of if it's multiyear or one year. So one year paid annually or multiyear paid annually and the vast majority of our contracts were like that. So the ratability of our revenue remains at 90% plus this quarter.

[Michael Turits, KeyBanc]

Okay. So just to be clear, there was nothing in those multiyear contracts that would force say or drive a larger amount of upfront rev rec?

[Navam Welihinda, CFO]

There's nothing unusual about the way multiyear was recognized. There were more multiyear contracts, obviously, which drove strong revenue performance. But all that being said, the ratability of our revenue still is 90% plus.

[Operator]

Thank you. One moment for questions. Our next question comes from Derrick Wood with Cowen. You may proceed.

[Derrick Wood, Cowen]

Thanks and nice quarter. First question on kind of a go-to-market. It seems like you guys are really starting to build up more of a solution selling motion around kind of a complete Zero Trust platform, and that involves Vault, Consul and Boundary together. I guess, as you look at your playbook going into next year, how big of a go-to-market focus will this have kind of selling a full multiproduct suite out of the gate versus continuing to kind of tackle the market product-by-product?

[Dave McJannet, CEO]

This is Dave, Derrick. Thanks for the question. I would say, in general, we do tend to land with a single product. I think what the broader Zero Trust conversation is really part of our Expand and Extend motion. So for absolute clarity, we generally land up with a single product rather than trying to land with multiple products.

But we know that the next problem along and the next problem along is something that our portfolio addresses, which is why we have that Expand, Extend conversation and Zero Trust is a really good example. So I think that motion will continue because it is certainly working.

If I step back and just describe the requirements of having a platform approach or a cloud program approach allows you to have this consistent way to the Zero Trust. It allows you to have a consistent rate of infrastructure provisioning. So there are actually multiple Expand, Extend conversations we can have all predicated on that single cloud program office. But certainly, Zero Trust is a key part of it, having one partner of the year from Amazon this year is a really good example.

[Derrick Wood, Cowen]

Understood. Thanks. Navam, one for you. Just on the number of net new G2K - or sorry, net new 100k customers, it has been trending down this year, I'm sure it could bounce around a bit. But as this metric show that it's a little bit longer sales cycle and getting customers to expand from kind of five figure to six figure. Or also are you pushing more go-to-market investment kind of upmarket to the six, seven figure deals because that's where - there's a little bit more visibility? Just hoping to get your thoughts on this KPI.

[Navam Welihinda, CFO]

Yes, certainly. And it's an important KPI for us. But in general, there's variability on that number, right? So quarter-over-quarter, there's just going to be some movement. And as you know, this is a seasonal quarter and it's also a quarter where macro plays an impact as well. So in terms of the guidance framework, we expect 80 to 100 on a TTM basis and we're well within that.

The sales team focuses on the Global 4000, which is the prime set of those 100k customers. There was headwinds on land, obviously, due to macro this quarter. But all things being said, the expansion, extension cycle of those customers continue to be very strong. The growth in revenue per customer exceeded 18% this quarter. So we're very pleased with how that cohort of customers is growing their usage of our products.

[Operator]

Thank you. One moment for questions. Our next question comes from Mark Murphy with JPMorgan. You may proceed.

[Mark Murphy, JPMorgan]

Thank you very much and I'll add my congrats on the solid top line performance. Interested in to what extent you might be accelerating any of the monetization efforts that would help the margin profile. For instance, I think what you've been doing with Terraform drift detection. And where do you see markets that you feel as though you've saturated it enough with open source usage and that kind of the time is right to work on accelerating the monetization?

[Armon Dadgar, Co-Founder and CTO]

Yes. Thanks, Mark. I think in general, the way we think about it with every one of our products, we have a kind of, call it, a dial between how much we're invested in the open source versus how focused we are on commercialization of the product.

With our core products both Terraform and Vault, we feel like both of them are established market standards, they're sort of leaders in their category. And so we've turned that dial much further over to the commercialization side. And our focus is really at this point, building commercial differentiation and enabling our field teams and adding value to the commercial customer base.

So Terraform, you gave an example of a couple of those key capabilities. Vault, similarly, we're focused in on that side. I think our earlier products that are sort of in the emerging category for us, so Consul, Boundary is probably more of a balanced development between commercial and open source, and then we have our community-focused projects.

[Mark Murphy, JPMorgan]

Okay. Thank you for that. And as a quick follow-up, Navam, can you remind us what is it that's driving the spread where the - this quarter, the upfront license revenue grows 80% while that recurring support revenue grows 38%? And do you see a catalyst perhaps for that support revenue, which is the bulk of the revenue to reaccelerate either into Q4 or into next year?

[Navam Welihinda, CFO]

Yes. Thanks for the question, Mark. The distinction between license and software is a very 606 accounting centric view of what's happening, just as a reminder to everyone, our contracts are basically a single contract where you buy the product with embedded support. And internally, there is a disaggregation per 606 and per assigning individual values to license and support.

So the license line has a lot of variability to it, depending on which product, depending on the term of the contract and all those things impacted. So it's really hard to signal from that license line. We do expect to see sort of the license and support line continue to grow as we continue to see expansions and extensions and land customers in our self-managed product.

[Operator]

Thank you. One moment for questions. Our next question comes from Sanjit Singh with Morgan Stanley. You may proceed.

[Sanjit Singh, Morgan Stanley]

And my congrats on the very solid Q3 results as well. Dave, I wanted to get your view on to what extent the sales message is being tailored to this tougher budget environment. With respect to sort of vendor consolidation, tool consolidation, getting customers to run their cloud operations more efficiently, is the team going out with the message about displacing incumbent solutions so that the total cost to a customer may come down by consolidating more spend across the HashiCorp platform? Or is there simply an ROI argument you're making? Just wanted to get a sense of going into a tougher budget environment, to what extent the sales message is changing to speak to those broader customer budget concerns?

[Dave McJannet, CEO]

Sure. Thanks for that. I maybe think about that in three ways. I think first and foremost, just to be clear that our customer is the cloud program office by and large inside these companies. And that is actually a net new spend category, right, where they are really just trying to determine what vendors are going to be their partners for this next several decades. So it's very rare that we're displacing something because this is a net new construct.

Yes, I had a security model in the private data center, but now I have cloud. That's a different vendor set. And I would say much like Datadog, it is relatively unpopulated. Number two, when we go into - and that is a unique opportunity for us, and that is why you see the efficacy that you do of our model.

Number two, the value proposition of our products is always around reducing cost, reducing risk and accelerating time to market for new things, take Terraform, for example, are you overspending on your cloud estate, well, constrained Terraform's usage so that you apply policy and governance guardrail before you provision things and that will bring your cost down. So it's a very conducive message to the economic environment we're in, which certainly helps clearly our sales cycles. And that has always been a message and will continue to be a message.

Point number three, I think it's probably an equally important one, which is I think our $10 million customer demonstrates the growing consolidation of spend across the multiple categories that we participate in with a single vendor. And I think in some sense, we have the benefit of incumbency for one, two or three of the problems in those companies cloud programs that actually accrue benefit to us as they look to consolidate next year. So it's not - it's less of an overt message, but it's rather just the reality that gets played back to us. And I think it certainly puts us in a good position going forward.

[Sanjit Singh, Morgan Stanley]

Appreciate the color. That makes a ton of sense. And then Navam, the margin upside was really nice to see this quarter. And heard loud and clear on sort of the progress that you guys are targeting for next year. In terms of how that you're going to - in terms of how the team is going to materialize that margin improvement? Can you sort of remind us some of the levers that you're looking to pull to derive that, I think, 500 to 1,000 basis points of expansion next year?

[Navam Welihinda, CFO]

Yes. Sure thing, Sanjit. And yes, we're very pleased with the overall gross margin and operating income margin performance we had in the quarter. A lot of revenue flows directly down to the bottom line. So as we see the productivity emerge from our employees that we've hired over the past several quarters, and if that exceeds our expectations, we expect to see that drop to the bottom line and number one.

And also from a gross margin line, we remain a high gross margin company, and we expect to remain a high gross margin company despite the mix shift happening in cloud. So both those things considered as we get economies of scale from - or scale from our existing team and leverage from that team, we expect to see most of that fall down into the bottom line.

[Operator]

Thank you. One moment for questions. Our next question comes from Brad Sills with Bank of America. You may proceed.

[Brad Sills, Bank of America]

Great. Thanks for taking my question, guys. I wanted to ask a question about the net revenue retention, the $134 million holding nicely here. Are you seeing a shift towards the Extend versus Expand that's driving that? Would you say with the progress you're making in with customers kind of establishing the centralized platform teams, with that in place, does that kind of grease the skids, if you will, for more of that kind of cross-sell into other categories? Any color on just Extend versus Expand?

[Dave McJannet, CEO]

Hi, Brad. Thanks. This is Dave. I think it comes down to cohorts is probably the best way to think about it. I think we generally find in year one people adopt one product, in year two they would renew that product and look to add the second product. So there is a natural cycle to it. And I think what you're seeing is sort of a growing crop of maturing customers that are now expanding and extending fairly consistently.

But I think there's - again, these are enterprise products, enterprise cycles, deeply considered decisions that probably have a one year delay between them. So I think that cohort view is probably the way we think about it, and I think it is playing out sort of as you would expect.

[Brad Sills, Bank of America]

Understood. Great. Thanks. And then a question for you, Armon. You alluded to that dial kind of turned up more so for Terraform and Vault more mature offerings on the commercialization with some focus on added value there. Could you elaborate on what are some of those value adds that customers are kind of going for there? And what are some learnings there that you could apply to other products where we might see that in the road map?

[Armon Dadgar, Co-Founder and CTO]

Sure. Yes. I think maybe if I zoom out and share the philosophical view and then we can talk about kind of the specific capabilities just because those won't generalize across products as much. In general, the way we think about it is all of our products, there's almost two sides to it. One is, I'll call it, the kind of practitioner-oriented workflow set of capabilities. So for the end user, the developer who's adopting and pulling in the open source what are the workflow features they need to really use the tool and solve their problem in an elegant way.

Then on the other side, you have a sort of what we consider kind of system of record capabilities which is really more about a large organization thinking about how do I manage a large estate where I care about visibility, security, compliance, governance, et cetera. So that's kind of more system of record type capability.

So for any one of our products, there's a set of features that kind of fall into either of those camps. By and large, the open source tends to be more focused on those kind of workflow-oriented things because it's about enabling the user to kind of download it, use it, see the value of it quickly, where the commercial side is more focused on kind of the system of record type capabilities.

So if we talk about specific features, when we talk about Terraform, drift detection was one of those already mentioned on the call. That's a good example of when I'm managing a large day two infrastructure how do I across thousands of different applications and workspaces, I need to understand where is the drift in my environment, where do I have things that are running out of date, where do I need to apply patches.

Those are all kind of day two concerns at scale that you really care about if you're in the CIO office, you don't necessarily care about that if you're the application developer, right? So that's a perfect example of the type of capability that sits in that system of record type function.

We also announced improvements to our policy as code engine. So that's a perfect example, if you're applying that kind of policy codes either for security or compliance or governance reasons, very much sits in that second category. And maybe a third example might be our low-code framework to simplify applications for less skilled teams, right? That's kind of an at-scale use case. So there may be some specific the general philosophy. So as we turn the dial more of the development moves to the system of record and less so on the kind of open source workflow.

[Operator]

[Operator Instructions] Our next question comes from Fatima Boolani with Citi. You may proceed.

[Fatima Boolani, Citi]

Hi, good afternoon. Thanks for taking my questions. Dave, I was hoping to go a layer deeper into some of Navam's commentary on the slowdown in elongation with new logos and building upon some of the questions you were just asked with respect to the commercialization engine for some of your more mature products. So maybe to ask you more bluntly. With the new customers, what is the factor that is posing the biggest hurdle? Is it either extremely happy Terraform open source users, who just haven't gotten to that specific tipping point where you can convert them over? I just want to better understand that just because it is your most widely used and most pervasive and most mature solutions in the portfolio. And then a follow-up for Navam, please.

[Dave McJannet, CEO]

Thanks, Fatima. Sure, happy to answer to that one. The - I think it goes back to what Armon described, where people started opting cloud, it's very tactical. When they start adopting it with a more centralized cloud program, they require a different set of capabilities. I might use Terraform for all 400 of my developers in my company, but they can all provision whatever they like versus no control access to the environment so we don't overspend through a central share term from cloud accounts. And I think that's the difference between basically Phase 1 of cloud and Phase 2 of cloud.

So the adoption of the commercial version of our product is largely predicated on whether that company has matured to that moment in time where they have established a formal approach to doing this, either within their company or within their business group. So largely, that is why infrastructure markets move at the pace they do because there's an organizational reality to this.

So I think what we've seen is actually real consistent acknowledgment that using Terraform is different from the needs of a team using Terraform. So you're basically either buying our commercial product or you're having to build some kind of scaffolding around it to have people work with it.

And I think we're really, really bullish on how that market is progressing, as we've gotten larger, as our customer base has gotten larger, we're actually seeing that time to conversion accelerate at commercial products, but there is a reality of organizational constraints in our customer base that just are the way infrastructure markets move.

[Fatima Boolani, Citi]

Understood. And Navam, you called out the multiyear renewal within 3Q. I'm wondering if there is a larger body of transactions there that are perhaps from a seasonal standpoint up for renewal in 4Q? And your expectations around what type of behavior is embedded in guide, but certainly what you're seeing in customer engagements now? So basically, should we expect some of the 3Q multiyear renewals and sort of duration impacts persist into 4Q and in terms of the performance and transaction activity? And that's it from me. Thank you.

[Navam Welihinda, CFO]

Got it. Thanks, Fatima. So very pleased with the third quarter and the activity there in terms of what our customers are doing. Our fourth quarter guidance philosophy has always been the same, which is there's a range of outcomes and we take a solid execution path and we exclude from it any large transactions where timing is inherently unpredictable and sometimes those may be multiyear deals.

So our guidance in Q4 basically incorporates the macro headwinds that we're seeing here and the high levels of deal scrutiny, which may lead to Q4 sort of seasonality muting. But we're pleased with how Q4 is going to turn out or pleased with being able to raise the Q4 guidance. I don't think we're expecting any change on multiyear behavior from normal ranges in our guidance.

[Operator]

Thank you. One moment for questions. [Operator Instructions] Next question comes from Kash Rangan with Goldman Sachs. You may proceed.

[Kash Rangan, Goldman Sachs]

Hi. Thank you very much. Congrats. Dave and Armon, I saw 65,998 people at AWS re:Invent, but somehow missed the two of you. So good to see the flow you're getting there. Your booth was extremely active. And given that at AWS, we saw a bunch of announcements that were either foundational at the network layer, the chip layer or more so at the application layer, the database, data integration, AI, et cetera. There wasn't a whole lot said about the infrastructure layer, and you have cloud watch, which helps at a potentially recessionary time. AWS helping its customers to control cost. And then you have your place here. I'm wondering how much more influential can AWS be as a true partner that actually not only works with you guys from a business development standpoint, but can actually bring your leads even more actively given everything that's going on in the world going forward.

Navam one for you. I know that you said that you - that the revenue upside drop through to the bottom line. Are there any other measures fundamentally at a unit level how you're watching costs and expenses, maybe this thing blows over, maybe it's here to stay forever? But how are you managing expenses, not just managing the revenue upside to trickle through to the operating income? Thank you so much.

[Dave McJannet, CEO]

I'll take the first one. This is Dave. Yes, I think I agree with you, there were not massive announcements at re:Invent, but I think that might be indicative of having reached a state already in cloud where we've reached that comfortable stage of infrastructure where, yes, this is just the reality that everyone's working with, everybody's estate includes Amazon and Azure and a few other things. And there's some level of maturity there.

I would not conflate that with the fact that many, many companies are still haven't done that yet, but I think the notion is not very sensational any longer that should we adopt cloud. I think that's a good thing for the market. It's a good thing for us. We certainly see that reflected in our customers. We certainly see really good co-engagement with all the cloud providers. And you see that partner of the year type awards are just indicative of it across all of them.

So I actually wouldn't - I expect this to be the steady state. Multicloud is just the reality. They've all accepted. They all appreciate that everybody's estate needs connect to other things and in many instances, we're the how they do that. So actually - I'm actually very encouraged by that sort of acknowledgment of market maturity. And I think we continue to see better each month engagement from the cloud providers with us.

[Navam Welihinda, CFO]

Yes. Kash, and this is Navam on your second question on the spend side. We're absolutely pleased with what happened in the third quarter. And then we mentioned this during the Financial Analyst Day our spend envelopes or spend plans are intently predict - or are scrutinized based on the unit economics of it. So on a unit level, we're very focused on CAC payback periods, and that is the driver of acceleration or a reduction of revenue of expenses.

[Kash Rangan, Goldman Sachs]

Got it. Thank you very much. Congrats on the quarter again.

[Navam Welihinda, CFO]

All right. Thanks, Kash. So we have a couple of questions left, but we're kind of running up on time. So if we could just limit it to one question for the remaining folks that would be appreciated. Thank you.

[Operator]

Thank you. Our next question comes from Pat Walravens with JMP Securities. You may proceed.

[Unidentified Analyst]

Hi, team, it's Jeremy on for Pat. Thank you for the question. Navam, can you just remind us of the main drivers of gross margin? And then how should we be thinking about the trajectory of that metric just given the mix shift to cloud? Thanks so much.

[Navam Welihinda, CFO]

Yes, absolutely. There are three components to our revenue, our self-managed revenue, our cloud revenue and then the services and other. Services revenue is broadly held at near zero to negative margins slightly and subscription revenue is a high margin business.

So what's really pleased us is the amount of gross margin leverage we're getting on our cloud products. And we're seeing continued upticks in gross margins in cloud. And we believe that over time, as this line scales, we'd get to the 70s, high 70s margin. So as that walks up, I believe we're in a good spot from a gross margin perspective. But in Q3, it was a great outcome from a margin perspective there.

[Operator]

[Operator Instructions] Our next question comes from Miller Jump with Truist. You may proceed.

[Miller Jump, Truist]

All right. Thank you for squeezing me in here. I guess you if you can just close it out with one on the macro. So I was just hoping to get more color on maybe the change in the macro that you saw over the course of the quarter, if there was any impact between September and October in those deal cycles? And then you had mentioned last quarter a $4 million to $6 million headwind, is that still what you're baking in current guidance for the year? Thanks.

[Dave McJannet, CEO]

Yes. So Miller, I'll maybe give the view. It's certainly - the news headlines sort of bounce around a bunch in October and I think that was probably reflected in sentiment in October, in particular, felt a little different than September. But overall, I think it's pretty consistent, certainly overall.

[Navam Welihinda, CFO]

Yes. I'd add to that the same, which is originally we had $4 million to $6 million as the impact for the back half of the year, and it's playing out as expected and the - it's the same range.

[Operator]

Thank you. One moment for questions. And our last question comes from Brad Reback with Stifel. You may proceed.

[Brad Reback, Stifel]

Great. Thanks very much. Quick question as it relates to M&A. What are your thoughts here broadly?

[Dave McJannet, CEO]

Yes. I mean I think we are - we have a rich product portfolio that we're really focused on pursuing is the simple answer. And I think that's the direction that we always - we have seven or eight products that we are in the process of commercializing and we have plenty of portfolio to work with.

[Brad Reback, Stifel]

Perfect. Thanks very much.

[Dave McJannet, CEO]

So I'd just like to close by expressing my thanks for the participation from everyone here. We certainly appreciate you dialing in for all the questions and look forward to speaking with everybody soon. Thank you.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.