HashiCorp Inc

NASDAQ:HCP

Earnings Call Analysis

HashiCorp's Q4 Highlights and Fiscal '25 Outlook

HashiCorp's fourth quarter saw a revenue increase of 15% year-over-year, capping a fiscal year with 23% revenue growth. Looking ahead, they project a U-shaped revenue recovery in fiscal '25, with Q2 as the low point but aiming for approximately 20% year-over-year cRPO growth by year-end. Q1 revenue is expected between $152-$154 million with a non-GAAP operating loss of $19-$16 million and full-year revenue between $643-$647 million with a loss of $46-$43 million. The company intends to achieve non-GAAP operating income breakeven by Q4 Fiscal '25 and maintain strong gross margins in the 80% range. Additionally, a $250 million share repurchase program will commence in fiscal 2025.

Growing Strength Amidst Optimization

The company witnessed a resilient fourth-quarter performance with a notable 15% increase in year-over-year revenue. This momentum carried through their full-year results, which displayed a 23% rise compared to the previous year, culminating in another quarter of positive free cash flow. Despite certain customers continuing to optimize their expenditures, the fiscal landscape for 2025 seems more promising than the one experienced in 2024, with improving renewal rates and pipeline conversion as significant indicators of potential growth.

Anticipating a U-Shaped Revenue Recovery

The management has set expectations for a U-shaped recovery in revenue growth rates throughout the fiscal year. The second quarter is predicted to be the lowest in terms of revenue growth, with gradual improvements in subsequent quarters. The company's future expectations hinge on a similar trend in cRPO (contractual remaining performance obligations) growth rates, with an anticipated culmination of around 20% year-over-year growth in cRPO by the end of fiscal '25.

Guidance for Fiscal '25

For the initial quarter of fiscal '25, the company anticipates revenue to fall between $152 million and $154 million, paired with a non-GAAP operating loss projected between $19 million and $16 million. The full-year forecasts are also set, with revenue expectations ranging from $643 million to $647 million, whereas the non-GAAP operating loss is estimated to lie between $46 million and $43 million.

Aiming for Break-even and Maintaining Strong Margins

In line with their conservative investment strategy, the company plans to keep expenses growing at a slower rate than revenue growth, with an aim to reach non-GAAP operating income break-even by the end of the fourth quarter this year. They have maintained a strong gross margin, anticipated to evenly sustain throughout the year in the low to mid-80% range.

Shareholder Value and Capital Allocation

Reflecting on two consecutive quarters of strong cash flow generation, the company anticipates positive free cash flow for the fiscal year except in the second quarter owing to seasonal patterns. With a robust cash balance, they perceive an opportunity to deliver shareholder value by initiating a $250 million share repurchase program, signalling a potential series of buybacks in the future.

Strategic Partnerships and Sales Transformation

Recognizing a significant shift in customer demand and platform maturity, the company has adopted a cloud-first approach for its enterprise segment, particularly with Terraform Cloud. To align with this shift, sales compensation structures have been adjusted to favor cloud-based solutions over self-managed options, setting a precedent for a strategic transformation within the organization. Moreover, their collaboration with Microsoft, especially with the integration of Microsoft Entra, reinforces their strength in the partnership, rather than competition, which bodes well for future growth opportunities.

Gaining Traction with Enhanced Bookings

The company has expressed satisfaction with the accelerated pace at which bookings have grown, particularly in the fourth quarter. This is indicative of not just enhanced execution on the sales front but also a more favorable spending environment, which poses well for their strategic business trajectory moving forward.

Earnings Call Transcript 2024-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the HashiCorp Fiscal 2024 Fourth Quarter and Full year Earnings Call. [Operator Instructions] 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, Vice President of Investor Relations and Corporate Development. Thank you. Please go ahead.

[Alexander Kurtz, executive]

Good afternoon, and welcome to HashiCorp's Fiscal 2024 Fourth Quarter Earnings Call. This afternoon, we will be discussing our fourth quarter financial results announced in our press release issued after the market closed today. With me are HashiCorp's CEO, Dave McJannet; CFO, Navam Welihinda; and CTO and Co-Founder, Armon Dadgar.

In conjunction with our earnings press release, we have published an earnings presentation that provides additional financial information about our quarter. We encourage you to review that 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 first quarter and the full 2025 fiscal year. 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 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?

[David McJannet, executive]

Thank you, Alex, and welcome, everyone, to our fourth quarter earnings call for fiscal 2024. We reported solid fourth quarter results that exceeded our top and bottom line guidance, with revenues of $156 million, representing year-over-year growth of 15%, and are pleased with our current non-GAAP remaining performance obligations performance, which reached $483 million, representing 21% year-over-year growth.

I want to start today's call by thanking everyone on the HashiCorp team for the solid fourth quarter close to our fiscal year. For their hard work, we exceeded expectations in the quarter, with important new enterprise logo wins and cRPO growth that demonstrated continued demand for our products as customers trust us with their most important cloud projects.

More broadly, based on conversations we had last quarter, we believe that the optimizations that enterprises undertook over the past 18 months are showing signs of abating, and we are seeing early signs of reengagement on new cloud initiatives. Our confidence here comes from tangible proof points during the quarter, specifically improving renewal rates and overall better pipeline conversion.

This is in line with what we've expected since the start of the cycle. And while there is some ongoing consumption of historical, self-managed entitlements among portions of our customer base, the move to cloud is a secular trend with a clear business need and there is still a long runway ahead for the largest global enterprises as they mature their cloud efforts.

Today, I want to focus on our path to accelerated growth as we enter the new fiscal year. And to be direct, we are behind where we wanted the company to be at this point in our growth cycle, and we have work to do. We are on a path back to 20% quarterly revenue growth during FY 2026, and I want to outline the top 3 initiatives taking place at the company to drive this acceleration. At a very high level, we are moving quickly to improve sales execution, turning the dial even more on commercial differentiation and in Q1, rolling out a plan to reallocate more R&D resources to our cloud products.

The first initiative is simplifying our go-to-market strategy, which consists of a more prescriptive go-to-market approach and increased process rigor driven by our President, Susan St. Ledger. We began implementing these initiatives back -- in the back half of FY '24 and are completing the rollout with the field teams this week at our sales kickoff. On the first front, we are shifting from best-in-class stand-alone products to infrastructure lifecycle management and security lifecycle management. That messaging is finding early traction with our sales teams and potential customers.

On the second front, Susan will continue to drive sales process discipline, emphasizing speed, efficiency and simplification in the field, while also concentrating our sales investments on additional technical field resources. We saw some early evidence of positive results in our fourth quarter with improved field execution and improved renewals. To give you an example of these efforts, I'd like to discuss a customer that extended from a single product to include a second one of our security offerings, Vault, to Boundary in Q4. This software company initially used Vault in conjunction with a homegrown solution to manage and issue onetime credentials for developer access to cloud infrastructure.

After facing challenges enabling their R&D team to access their cloud infrastructure in a self-service manner, this customer quickly realized they needed to replace their homegrown privileged access management solution. Given the customer's existing deployment of Vault, our field teams were able to show that adding boundary would provide comprehensive security lifecycle management reducing time to value. This customer started with just 500 engineers running on Boundary and now expect to grow to over 6,000. We strongly believe the simplified multiproduct messaging will help us win more deals like these in FY '25.

The second initiative is about commercial differentiation, greater separation between our commercial and free community offerings. While the ecosystem has clearly standardized on our community issue products, we need to drive more value for our commercial customers. Our product development efforts over the past 2 years have increasingly been oriented towards enterprise capabilities in our commercial offerings. We are further turning the dial towards commercial differentiation, which we believe will have a positive impact on win rates and on renewals.

One major example of commercial differentiation is Terraform stacks. We gave a preview of stacks in HashiCorp last year, which will bring major new functionality to Terraform and the ability to manage infrastructure estates that span multiple environments. This feature is now in private beta with our commercial customers and will be made available through Terraform Cloud exclusively to our commercial customers later this year. This will drive significant differentiation, especially for our large customers with complex estates.

During the fourth quarter, one of our larger land deals on Terraform Cloud demonstrates the power of our differentiated commercial products for customers. A global pharmaceutical company opted to replace their homegrown infrastructure provisioning process built on our community addition with Terraform Cloud. They became a paying customer for the first time because of Terraform Cloud-specific features, including no code provisioning and the upcoming stacks rollout as well as our run pricing model update in Q2, which aligned pricing more closely with their cloud budgeting process.

But in addition to focusing on differentiation through new capabilities, we know enterprise customers have elevated expectations for the lifecycle of software that they deploy with a strong preference to minimize production changes. Earlier today, we introduced long-term support, or LTS, releases for our commercial customers. The LTS release has enabled customers to stay on a supported version for up to 2 years at a time with a promise to backport critical fixes, security patches and hardened upgrade paths. Prior to the LTS announcement, customers needed to do regular major version upgrades to remain supported.

This provides significant value for customers who want to manage their risk and operational efficiency, and we believe will be another significant driver to land new opportunities and strengthen renewals. The LTS releases will be available with the upcoming versions of Vault, Consul and Nomad. In contrast, users of the community additions will have access to critical updates in the latest version and will have to perform frequent updates to stay current. While we continue to offer innovative technology to the community, our outside focus is on providing value to paying customers. Our prior approach provided the same lifecycle for commercial and community versions, and we are now driving a clear differentiation.

On that note, our third major initiative is to deliver the enterprise-ready HashiCorp Cloud platform across infrastructure lifecycle management and security lifecycle management. We are seeing strong customer interest for this and are taking steps to expedite our delivery. Our new Chief Product Officer, Michael Weingartner, is focused on enterprise cloud delivery and is moving quickly to organize our product development teams to drive cloud innovation at a faster pace. We have already reallocated resources to this initiative as it is central to an overall company-wide shift to lead with our cloud offerings.

As we mentioned last quarter, we are defaulting enterprise land to cloud, beginning with Terraform Cloud in Q1. As part of the shift, incentives for our field teams are weighted towards cloud rather than self-managed software. We will prioritize enterprise land across infrastructure lifecycle and security lifecycle management with HCP. Landing our customers on cloud first with HCP enables them to realize value faster. As we deliver more cross-product experiences, it enhances our ability to drive and extend motion from our core land products as well.

As our R&D teams continue to deliver new product innovations, having customers on the cloud platform enables customers to use those new capabilities immediately in contrast to self-managed software, which requires planned upgrades. Combined, these assets will drive improved net retention rates over the long term.

To show how this works in practice, here's an example of a customer that expanded both Vault and Terraform Cloud in Q4, doubling the size of their initial land deal. This travel agency had experienced significant resource constraints that made it difficult to deploy applications on bare metal as fast as they needed. They were also dealing with subsidiaries operating at different levels of cloud maturity. As a result, this customer realized that only Terraform cloud could keep pace with their infrastructure complexity. They standardize on Terraform Cloud not just for its portability and lower operating costs, but also because Terraform Cloud enables them to deploy new applications much faster, improving their competitive positioning. To summarize, our goals for this year are to simplify our go-to-market, expand the differentiation of our commercial products and shift our business to focus heavily on our HashiCorp managed cloud products.

Now I'll turn it over to Navam to walk through the details of our Q4 and full year performance, forward-looking guidance and then we will be happy to take any questions. Navam?

[Navam Welihinda, executive]

Thank you, Dave, and thanks to everyone for joining us today. Echoing Dave's comments, I also want to thank our team for all the effort and continued focus that they have put in, which helped us close fiscal '24 on a positive note. We grew our fourth quarter revenue by 15% year-over-year, our full year revenue by 23% year-over-year and ended with another free cash flow positive quarter. More importantly, our team put in a lot of work last year to set up HashiCorp with future success and momentum.

As Dave mentioned in his remarks, there continues to be pockets of optimization among customers. But the environment in Q4 as well as the outlook for fiscal 2025 from a macro perspective, appears to be better than fiscal '24. As Dave also mentioned, while we are not completely out of the woods, on how customers are working through historical entitlements, our renewal rates improved in Q4 compared to Q3 and our pipeline conversion as well as our sales-driven customer activity also improved in Q4 compared to Q3. We believe the combination of abating market headwinds due to consumption optimization as well as the 3 operational initiatives of GTM simplification, increased commercial product differentiation and more enterprise-ready HCP cloud offering puts us in a solid position to achieve improved bookings in fiscal '25.

Given our entitlement model and as we have discussed before, there is a lag between bookings momentum and accelerating revenue growth rates. Our expectation is to see a U-shaped recovery in our revenue growth rates this year, with Q2 being the trough in our revenue growth rates, followed by progressively better revenue growth rates in Q3 and Q4 of this year. We expect cRPO growth rates to follow the trough and recovery pattern, with the lowest point of cRPO growth being in Q2, followed by improved cRPO growth rates, ending in approximately 20% cRPO year-over-year growth by the end of fiscal '25. As Dave mentioned, we also expect the momentum in cRPO to put us on a path to reach 20% quarterly revenue growth during fiscal 2026.

Let's move on to our fiscal '25 guidance notes. For the first quarter of fiscal '25, we currently expect total revenue in the range of $152 million and $154 million and a non-GAAP operating loss in the range of $19 million to $16 million. As a reminder, our business showed seasonal bookings patterns between Q4 and Q1. Q4 is a strong budget flush quarter where we see the highest number of large multiyear contracts. These multiyear contracts create a larger upfront revenue component in Q4 compared to Q1. Our Q1 guidance take into account this regular seasonality pattern.

For the full fiscal year '25, we currently expect total revenue in the range of $643 million and $647 million, and expect fiscal '25 non-GAAP operating loss in the range of $46 million and $43 million. As mentioned in my prior remarks, the quarterly growth rates in the back half of the year are expected to be higher than the full year revenue growth rate. We also currently expect our gross margins to remain strong throughout the year, in the low to mid-80% range. We will continue with the measured investment posture we've demonstrated in fiscal 2024, growing expenses slower than revenue growth. We currently expect to achieve non-GAAP operating income breakeven by Q4 of this year.

On a final note, as you know, we posted 2 strong cash flow-generating quarters in Q3 and Q4 in fiscal '24. We expect positive free cash flow results during the fiscal year, other than in Q2, which has collection seasonality related to seasonal Q1 bookings. We expect to generate cash in all other quarters.

Positive free cash flow generation combined with a strong cash balance puts us in a position of having excess cash relative to our operating needs and any potential midterm M&A expected cash needs. We believe HashiCorp has a lot of growth ahead of us and that there is still a lot of runway ahead for the largest global enterprises as they mature their cloud efforts. In addition, we're always responsible in our capital allocation and believe the best use of excess capital is to return it to our shareholders via our share repurchase program.

So as outlined in our earnings release today, the Board has authorized the $250 million repurchase program to be executed commencing in fiscal 2025. This authorized program is expected to be the first of a continuing program of share repurchases. Our full guidance numbers can be found in our earnings presentation available on our ir.hashicorp.com website under Financials, Quarterly Results. I encourage you to read through the dot for full metric disclosures, share count disclosures and GAAP to non-GAAP reconciliations.

Thanks for your attention. Dave, Armon and I are available to take any of your questions. Alex?

[Alexander Kurtz, executive]

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

[Operator]

[Operator Instructions] Our first question today will be coming from Derrick Wood of TD Cowen.

[James Wood, analyst]

Great. Wanted to just touch on the push to drive enterprises to the cloud. Can you just give us an update as to what the reception has been? Just trying to get a sense whether it's kind of too early to expect a big embracement of cloud at the G2K level, or if you think that could really start to take greater hold and maybe start to drive some higher mix in cloud as we move through the year?

[Armon Dadgar, executive]

Derrick, thanks so much for the question. Yes. So I think historically, I think we've talked about it before on the calls that predominantly, we sold cloud through our corporate segment before, and I think that was driven by both sort of customer appetite as well as platform and product readiness. I think the big shift for us this year, and in fact, sales kick off right now is that we feel like both of those have changed pretty significantly, right? We're seeing large customers want to adopt Terraform Cloud. The platform has matured pretty significantly over the course of last year, just given the investments we've made there. And so we're shifting to a default posture for our enterprise segment that's cloud first for Terraform. And with that, we've actually changed sales compensation to incentivize a cloud land over a self-managed. So yes, we're feeling very good that both of those things are sort of mature, both from a customer willingness as well as the product readiness.

[James Wood, analyst]

That's great. If I could, Armon, just a follow-up. Just had a question on the competitive landscape on the security side. Definitely, you've got -- between Vault and Boundary, you've got different competitive dynamics and Microsoft has entered the market with Entra. Just curious whether -- how you see Microsoft competitively generally how you guys are feeling about win rates?

[Armon Dadgar, executive]

Yes. I mean what I'd say is we're actually a close partner with Microsoft. We joined the Microsoft Security Alliance as well pretty recently. So we don't see Entra as a competitive offering. We partner with them pretty closely around deep integration between Entra and our products and the HCP platform as well. So certainly much more of a partner play than it is a competitive one. We feel good about our positioning. I think we haven't seen any changes really in the competitive dynamics around those. And in fact, as we're sort of building a more complete offering around Vault with our Radar product through acquisition, as well Boundary, which is an organic build, we feel like we can tell a much more complete story around security lifecycle management.

[Operator]

Our next question will be coming from Sanjit Singh of Morgan Stanley.

[Sanjit Singh, analyst]

Congrats on the accelerated bookings growth in Q4. And to stay on that point on the improved bookings performance. Dave, was that a function of just stronger execution? Or did you see a better kind of spend environment come through Q4 versus what you saw earlier in the year?

[David McJannet, executive]

Sanjit, thanks. I think it's -- I think some especially tied to the optimization cycle that I think we all been talking about for quite some time. I think we certainly felt better in Q4 than it had previously, and that translated into better pipeline conversion rates. Part of that is also execution on the part of the work that Susan St. Ledger has been doing to drive process relative to what we're doing. So I think it's actually the combination of both of those, to be honest. And I would say we're particularly pleased with the work that Susan has been doing, and I speak for the team say we really enjoyed working with them, and that is certainly helping our go-to-market motion.

[Sanjit Singh, analyst]

Awesome. And you laid out a very specific plan and outline on how to reassert 20% revenue growth in fiscal year '26. On the go-to-market side of the equation, and you guys have been talking about this for a couple of quarters now, can you give us a sense of the magnitude of changes that are being implemented as you go into sort of sales kickoff and sales process this year? And what does that sort of look like?

[David McJannet, executive]

Yes. I'll put it in maybe a couple of categories. One is around our coverage approach. And the second one is around our overall prescription of motions. On the first topic, we serve the, call it, the 4,000 largest organizations in the world, and that's who we are prioritized and that's where our focus is. And so we've reallocated our resources more specifically to cover those top 4,000. And I think I would be fair to say they were perhaps more dispersed preciously, and we certainly believe that concentration of investment will improve yield of those teams as to where we expect the revenue to come from.

Point number two is the simplification of the go-to-market narrative that we tell in a very, very consistent and simple way. We have a large product portfolio. As we've scaled, there's a challenge in enabling and onboarding reps to be able to tell all the aspects of the stories that we service,,- And so you've seen us really anchor on 2 core constructs around the prestructured lifecycle and security lifecycle. And to prosecuting that certainly through our large field organization is really the exercise in phase. So it's really those 2 things. One is coverage in the second one. It's really just the discipline and process. And candidly, that's normal for a company through this stage of the lifecycle.

[Operator]

And the next question will be coming from Nick Altmann of Scotiabank.

[Nicholas Altmann, analyst]

I wanted to circle back on the last question here just around the go-to-market. But can you maybe just talk about when sort of the go-to-market tweaks and overall simplification will be complete? And then just as a follow-up, how meaningful do you think the go-to-market changes will be versus sort of the overall macro or end market improving?

[David McJannet, executive]

Nick, thanks for that. Yes, so as it turns out, where our sales kick off right now, and there's tons of excitement about what we're doing here with the team. Obviously, it's always both of those things. The -- in terms of the completeness of our go-to-market tweaks, I think we're materially through that. I think a lot of that work was done in Q3 and Q4 of last year in terms of setting ourselves up for this. Our sales kickoff is ultimately sort of the final moment and that, obviously, from here, it's about execution, but the groundwork has been set. And then overall, in terms of where the improvement comes from both, obviously. I think we certainly saw signs of optimization abating in the fourth quarter of last year. And while there's still a big OpEx focus from all of the largest customers in the world around their overall software spend, we're optimistic that as the pipeline we're generating now yields into the second half of the year that we'll be in a good position for the second half.

[Nicholas Altmann, analyst]

Great. And then Navam, any changes to the guidance philosophy? I know historically speaking, you guys have talked about maybe being a little bit more conservative around large deal activity and maybe excluding those from the guidance. So just any updates to the 2025 guidance philosophy?

[Navam Welihinda, executive]

Relatively similar in terms of the guidance philosophy as it relates to our quarter large deal exclusion. That's what we've factored into the Q1 guide. And as Dave mentioned, we've also factored in what we saw in Q4 and from an optimization perspective and the effects of that, that will have on pipeline generation and the sales cycle associated with it, which leads to the second half acceleration, and the shape of the recovery curve that we talked about in prepared remarks, which gets us back to the 20% growth rate, which we're aiming for.

[Operator]

Our next question will be coming from Ittai Kidron of Oppenheimer.

[Ittai Kidron, analyst]

I'm trying to more clearly put the finger on the driver for the next 12 months versus the following year. Navam, when I listened to your commentary around optimization abating and pipeline improving and conversion rates improving, how much of your fiscal '25 guide is really a reflection of a better environment rather than the 3 core pillars of improvement that you're talking about? I'm just wondering if all these changes that you're making to go-to-market and commercial differentiation and cloud, are these really more of a fiscal '26 competitors rather than fiscal '25?

[Armon Dadgar, executive]

Ittai, this is Armon. Yes, I mean, I think this is a good question. The way I would think about it is the 3 initiatives that we talked about, as Dave was just mentioning, these are, in some sense, things that have been started and in progress for, some of them for quarters, some of them for years, right? So when we think about go-to-market simplification, a lot of that work started upon Susan joining us. And a lot of that foundational work was on Q3, Q4, obviously, rolling out with [ SCO ] and sort of getting finalized. When we talk about the commercial differentiation, that's a dial as we've talked about that we've been turning for a little while. I think we're continuing to feel the ability to turn that out further with the BSL license changes and other things we put in place late last year. And so we're continuing to sort of shift that dial with net new investments, things like Terraform stacks that Dave mentioned as well, obviously a major new capability. And then with the policy change today around the introduction of LTS and changes to our backdoor policy.

So again, some of these things building momentum on top of changes that were already made. And then with enterprise-ready cloud, again, that was a big focus for us last year. That's why we're feeling good about changing the default motion around Terraform Cloud. And then continuing to invest heavily in enterprise this year. So again, these are not necessarily starting from a cold start on these initiatives. A lot of these, we've been building momentum. We're continuing to put sort of wood behind the arrow. So I think that's clearly a big part of what's going to drive this year and then going into fiscal '26.

[Ittai Kidron, analyst]

Okay. And then with regards to your U-shape pattern of recovery through the year. When I look at some of the important KPIs that you provide, net customer additions, $100,000 customer additions, dollar expansion rate and even the HCP revenue growth. All of those have not been impressive in the fourth quarter, continued to show deceleration. Would the U-shape comment also apply to those metrics, meaning should we expect total customer additions to accelerate in the second half, $100,000 additions to accelerate, the dollar expansion to accelerate, cloud HCP revenue to accelerate?

[Navam Welihinda, executive]

Yes. Thanks, Ittai. I think we've commented on what the bookings recovery is expected to look like given what we saw in Q4, which was strong performance from a sales perspective in the results that we saw from a bookings and renewals perspective, right? That's what's baked in. And what will follow is obviously a recovery in all the metrics associated with bookings, revenue growth rates and $100,000 customers.

I want to make a point on the customer -- total customer count. A lot of the total customer count or a fair amount of the total customer count delta that you see Q3 to Q4 are self-managed customers -- or sorry, pay-as-you-go customers, which are very small and don't have a material impact to revenue. So the variations quarter-over-quarter on those customer counts aren't really material to our revenue.

The $100,000 customer count, there's variability quarter-over-quarter. But overall, we're at the top end of where we thought we'd be on $100,000 customer count for the year. And again, on the sales-driven customer count, we've -- we ended up pretty strong in Q4. So yes, to your questions on how the shape of the recovery and the path to 20% plays out into the underlying KPIs as well.

[Operator]

Our next question comes from Alex Zukin of Wolfe Research.

[Aleksandr Zukin, analyst]

So maybe just the first one for me. If I look kind of on Ittai's question about the $100,000 customer adds in the quarter, it felt like you had accelerating bookings but call it a weaker net new $100,000 customer headquarter adds. So was the outperformance on bookings there driven by some very large deals that -- 7-figure deals or some of the largest deals that you've seen? Or what drove that? And then kind of how to think about that?

[David McJannet, executive]

Alex, this is Dave. Sure, I can answer that one. To be clear, on the $100,000 customer adds, I'd reiterate what Navam pointed out is that $100,000 customer amount is going to move around quarter-to-quarter, we actually ended at the very, very high end of our guidance for the year in terms of $100,000 customer adds. Quarter-over-quarter, we actually saw a good number of customers landing slightly smaller than $100,000, but just below the threshold, and we fully expect those to graduate up over the next quarter and year as it progresses. So actually, I think we feel pretty good about the $100,000 customer number.

To your question on the large deal contract. No, there was no significant large deals of note that were unusual for the fourth quarter. I think it was more of a general good Q4 as we had anticipated. Also just underscore Navam's comment on the overall customer count to be super, super clear. We made a pricing change in Q2 of last year, which, call it, some of our pay-as-you-go customers. Those customers paying maybe a couple of thousand dollars a year, be able to use our free tier once the end of the year approach. And so the vast, vast majority of that customer count change comes from just the matriculation of those older pay-as-you-go customers, credit card customers into a free version of the product. And we fully expect over time they will graduate back to become paying customers as well. So I don't want to misread the customer count in terms of your overall commentary because we actually feel pretty good about it.

[Aleksandr Zukin, analyst]

Okay. Understood. And maybe just a second question. What level of visibility do you have from kind of the Q4 bookings pipeline because you're guiding to, this U-shape that you're guiding to, you're effectively guiding for growth to double in fiscal '26 based on the trajectory you laid out of reaching 20% by Q2 of fiscal '26. So like is there something that -- like how much of that is you still have to really go get versus leveraging the opportunity that you already have? And what are kind of some of the puts and takes? Is it macro stabilizing, improving because that's quite a revenue growth ramp over the course of the next 2 years.

[Navam Welihinda, executive]

Yes. Let me -- this is Navam, and thanks for the question. Let me make sure that I clarify a couple of things. So first of all, the Q4 activity is what informs our full year view, combined with the 3 initiatives that Dave mentioned, which are tailwinds to the operations, right? And the U-shape is meant to imply that there is a shallow dip in recovery, which you should take into consideration as we look into the full year. And also the back end growth rates are higher than the total year's growth rate just because of the shape of the recovery, right? And then what follows is basically progressive improvement on the growth rate until it reaches 20% in the fiscal 2026 period, not that fiscal '26 will be 20%, just to be clear. So what we're signaling is that the fourth quarter was a great quarter, and we feel like the optimization cycle is abating. There are signs of positive activity. We're not out of the woods. And we are doing a lot of work with the 3 initiatives that we outlined. That's going to have positive impacts to our operations, and that's going to result in positive momentum in terms of growth rates starting in the back half of the year.

[Operator]

And our next question will be coming from Mark Murphy of JPMorgan.

[Mark Murphy, analyst]

Navam, just to clarify, you commented that Q2 should be the trough for cRPO growth. Did you say that's also the case for revenue growth? Or are those slightly out of phase? And then just wondering at roughly what levels you see that cRPO growth bottoming out? For instance, should we project that forward at mid- to high teens? And then I have a quick follow-up.

[Navam Welihinda, executive]

Yes. Thanks, Mark. So yes, the cRPO growth rate recovery and the revenue growth rate recovery from a growth rate perspective have similar shapes. There's seasonality related to the cRPO because of booking seasonality front half versus back half. So that has a little bit to play on what the growth rate from a cRPO perspective is. We mentioned how you should think about the exit velocity of cRPO, which is 20%-plus -- approximately 20%, sorry, in Q4, which is basically the leading indicator of what we think the revenue growth rates on a quarterly basis into 2026 will be. So that's how we're thinking about the cRPO shape going into this year.

[Mark Murphy, analyst]

Okay. And so you would kind of leave us to our own, I guess, our own guesswork on where the bottom of that you will trough out for Q2. Is that fair?

[Navam Welihinda, executive]

Yes, I think the second quarter is the trough, and we expect to see, as I mentioned, the relatively shallow U-shape trough and recovery.

[Mark Murphy, analyst]

Okay. And as a follow-up, maybe for Armon or Dave, where do your customers stand on the topic of multi-cloud adoption at this point? I'm wondering if the insertion of a number of LLMs into the landscape might be causing any more dedication to Azure and OpenAI or more experimentation with Google. Anything that would signify more multi-cloud in customer road maps and then by extension that might be amplifying the HashiCorp value proposition?

[Armon Dadgar, executive]

Mark, yes, thanks for the question. I think what you sort of outlined in the question is exactly the type of behavior we're starting to see, which is a lot of customers predominantly maybe had a, I'll call it, a single primary cloud type of strategy and sort of looked at other clouds potentially secondary or even tertiary when sort of it made sense for them. I think what's changed, to your point, is they're looking at leveraging best-of-breed gen AI technology. And I think that's pulling forward a bunch of road map around how do we go from treating this secondary tertiary cloud into really a much more of a primary cloud environment. So we have access to those sort of best-of-breed capabilities. So in particular, customers who are maybe primarily AWS, looking at leveraging Google and Azure, maybe customers who are primarily Azure, looking at leveraging Google as well. So I think it's creating a bunch of that sort of pull forward in terms of customers looking at a true multi-cloud environment. And obviously, for us, this is helpful as it's driving more interest in the tools in terms of how do we have a sort of cloud-agnostic operating model.

[Operator]

Our next question will be coming from Jim Fish of Piper Sandler.

[James Fish, analyst]

Maybe first, Dave or Armon, for you. Any pipeline benefit on the security side, given we're seeing Boards essentially give the approval for security budgets and seeing strength in security budgets overall and focus on identity protection. Is that a large reason why the pipeline is as strong as it is that you're relaying to us? And when do you expect the Windows and remote functionalities to be available in order to go toe to toe with sort of the 600-pound gorilla in that space?

[Armon Dadgar, executive]

Jim, yes, thanks for the question. I think we are seeing relative robustness on pipeline in the security space. And I think even last year, I think that was probably the case that it held up better than maybe other budgets just given how top of mind cyber is for most organizations. And the other thing that's been helpful is as we're sort of filling in the portfolio and going from really sort of stand-alone to more of a true security lifecycle, as Dave mentioned, with sort of Boundary and Radar is allowing us to position a more compelling portfolio offering around sort of a full security life cycle. As to the second question around Windows and RDP, that's a big focus for us this year within Boundary. We think realistically, that's going to be more back half weighted to flesh out the capability to make sure it's fully mature.

[James Fish, analyst]

Makes sense. And Navam, for you on the guide. Can you just help us frame how you're thinking about the balance of new business here versus the recovery in your expansion rate? And are you seeing on the difference between cRPO and long-term RPO growth this quarter? Is it just you're seeing shorter duration deals with the existing base or just continued lower usage?

[Navam Welihinda, executive]

Yes. I don't think there's been a bunch meaningful change in terms of the weighted average duration of our contracts at this point in the fourth quarter. We are seeing smaller land sizes. And as we mentioned, over the last year, we saw an elongation in the land cycle leading to year-over-year declines in the absolute value of land combined with more land deals. So more contracts landing with more customers, but at a smaller size. So those expand and extend over time. So the 2025 guide is basically predicated on expand/extend versus a big land change from a revenue perspective. But we are expecting improvements in both.

[Operator]

Our next question will be coming from Jason Ader of William Blair.

[Jason Ader, analyst]

I just want to ask on the renewals. I know you made some comments on that. Are you seeing customers still being pretty cautious on renewals because they underconsumed entitlements over the last 18 months or so? And then can you just remind us what's the incentive for someone to expand on a renewal if they can just under commit and then true things up as time goes on? Is there a penalty there? Anything -- any kind of additional details on how that would work if somebody actually overconsumes relative to their entitlements?

[David McJannet, executive]

Jason, it's Dave. Thanks for the question. On the first one, yes, it's a good point. I mean you've got to keep in mind that this optimization cycle is now several quarters in and we're starting to anniversary some of the entitlements that people had already rightsized on their renewals. So yes, to a degree, I think that's one of the aspects of our point of view, which is that this optimization cycle is showing signs of abating. And certainly, that plays out in NDE over time and pure down renewal to the extent that people haven't consumed their entitlements, but there's probably a little bit of ways to go still. I think that's implicit in our guidance, but it's certainly much better and we're now lapping previous period where it starts to look more favorable.

In terms of your second question, we don't -- there was not an immediate incentive for people to true up at the moment they expand. That generally is done on the renewal of the contract. You got to keep in mind the scale of the organizations we work with is that is just the typical enterprise buying behavior. So you do not necessarily see that expansion until the renewal of that contract given the entitlement nature of things. Again, unlike the consumption models, we sell entitlement. And so there is just this natural lag as the market starts to recover.

[Armon Dadgar, executive]

Maybe the one thing, Jason, I would add there is the -- the sort of your question on what's their incentive for under committing in that sense. It's that the BDP discounts they would get committing to a lower threshold would be lower, right? So customers will realize better pricing by committing to a higher dollar amount. So that's the incentive.

[Jason Ader, analyst]

So is there a possibility that as we kind of come out of all of this, there's going to be -- on the renewals, let's say, in FY '26, there's going to be sort of a bump because there's going to be a true-up element because customers were more cautious on their prior renewal, do you see what I'm saying?

[David McJannet, executive]

Yes, I don't think we have a real point of view that far out. I do think this is implicit in the NDE rates that we've seen previously as people sort of on the renewals expanding substantially. And obviously, we've been in a period without -- been happening and at some point, it will revert.

[Operator]

And our next question will be coming from Kash Rangan of Goldman Sachs.

[Kasthuri Rangan, analyst]

I'm curious to spend a little bit of time, if you don't mind, Dave, I think you read out a bunch of things that Susan is going to be doing to the go-to-market organization. It came across as being very substantive, at the same time, it also went through very quickly. Can you expand upon what exactly is going to be the new bent to go-to-market? And the measures that Susan is adopting, what are they meant to remedy versus the approaches in the past? And how important is this? Because the product -- we've always appreciated the product strength of HashiCorp. It's been the key asset for the company. Just trying to understand incrementally the tweaks to go to market what are they really addressed? And what are they really motivated by so we can all understand the shape of this recovery.

[David McJannet, executive]

Kash, sure. Happy to double-click on that a little bit. Just to reiterate, really, the first substantive change that we introduced over the last 6 months was a refocusing of our go-to-market resources on a slightly smaller number of accounts. I think that's point number one. Obviously, we have been in a very aggressive investment phase coming out of our IPO. And as the market environment changed, we obviously had to remedy the fact that we had a lot of resources now allocated in places where perhaps we've gone through relatively quickly. So now we hold those resources back to focus on the most important accounts and that is certainly paying dividends, and it's the appropriate thing to do.

Point number two, I think it's worth actually just contextualizing where sort of as you evolve from the early adopters of the world to the early majority, how you have to engage with them in a much more prescriptive manner. Again, that's the consistent pattern of this particular arc, the growth arc of any company, to get to this kind of customer base, which is the early majority. Our go-to-market motions are now much more prescriptive in their nature, both for our customers in terms of how we engage with them, which is we go talk to about more of a solution-oriented conversation around lifecycle. And then number two, it's much more process rigor, which is, again, just the nature of scaling this the side of the organization. So I don't think -- I wouldn't say that changes are massively substantive. It's much more process-oriented to help get more consistency in growth as we hit this particular scale inflection point. And the first one is just really about reallocation of resources, which have gone slightly extended as we grew.

[Kasthuri Rangan, analyst]

Got it. And one follow-up for Navam. When I look at the sequential total subscription revenue growth rate. I mean it was the highest we've seen in several quarters. I'm wondering if you could double-click on that because if I just annualize that sequential growth rate, you get to a better growth in what you're guiding to, maybe there's some onetime effects in Q4 sequential subscription revenue.

I also look at the sequential change in current RPO, roughly $62 million or so. Again, the highest we've seen in several quarters. Can you help us understand what might be driving that Q4? It looks like some of the leading indicators look good and some don't, like customer count is a little bit on the sluggish side. But certainly, these caught my attention, I just wanted to see if you could offer more perspective.

[Navam Welihinda, executive]

Yes. Thanks, Kash. And absolutely. I mean we saw pockets up optimization, which relates to some of the $100,000 numbers and customer numbers that you saw. But from a broad perspective, Q4 was a great quarter as it related to the performance we saw from a revenue perspective and a cRPO perspective. Now it's important to keep in mind that there is seasonality in the business in the fourth quarter, particularly in the back half of the year and specifically in the fourth quarter, where these are larger quarters compared to Q1, for example. So there is a seasonal aspect to Q4 versus Q1. But for the most part, we saw positive signs, which we reflected in our prepared remarks and which also was the basis for how we were thinking about the growth recovery and our path back to sort of a 20% quarterly revenue growth rate sometime in the 2026 period. So yes, we're optimistic about the early signs we're seeing.

[Operator]

And our next question will be coming from Brad Sills of Bank of America.

[Bradley Sills, analyst]

I wanted to ask a question around the emphasis on security. You called it out a couple of times here, both as a separate -- focus on go-to-market and also on the commercial differentiation. How should we read that? Are you identifying that as kind of a core use case beyond provisioning with Terraform? In other words, our customers, do you see line of sight for customers potentially landing with security or Terraform and then the expansion opportunity kind of unfolds from there?

[Armon Dadgar, executive]

Brad, thanks for the question. As we've talked about a lot, we really have 2 core land products, obviously, Terraform, which we think about as sort of the key landing point when we talk about infrastructure lifecycle management starts with provisioning, and there's a sort of a broader portfolio around that. When you think about Vault as our sort of second land product, it's very much the beachhead within the security lifecycle story that we've held, right? So those have always been historically the land business. They make up the majority of the revenue.

I think what you're seeing is an evolution from telling sort of a point product story around those into really simplifying that solution story that Dave talked about. So that our field isn't able to go talk about we're not just solving a secret management problem while we're solving a security lifecycle. We're the beachhead, but really that brings in things like our radar product for secret scanning, detection and inventory and then brings in Boundary as well for the privileged access management for the human access. So it's really about moving from sort of telling that point product story into a broader solution, but it's not a dramatic shift. Vault has always been a land product for us and is a significant revenue contributor.

[Bradley Sills, analyst]

Understood. And then if I could also ask for a bit more detail on some of the process efficiencies that you've identified for areas of improvement. Dave, you mentioned speed in the pipeline. Velocity in the pipeline is a focus, some technical resources to kind of back that up that you're putting into play here. Would just love to get more details on how you're thinking about some of the tactical things to improve process discipline?

[David McJannet, executive]

Brad, I think this is -- I guess I'll just bring it back to just the operational opportunities for us to improve as we scale. We're here at our sales kick off again, reiterating this through our growing sales organization. And so the process is just really about process consistency and things that yield faster and higher win rates. There's a whole litany of things that are operational in their nature. And I think it's just, again, the nature of where we are, it's how do we do this consistently across the world, in every geo in the same way, and this is just normal operational day-to-day element. And I certainly feel so we're good about it. I think the fact that Susan St. Ledger has been now in place for a couple of quarters, I have to remind us that she has been part of a couple of different companies going from the $600 million scale to the $1 billion-plus, and that's certainly what it takes to do so, and we're super bullish about the work we're doing.

[Operator]

Our next question will be coming from Trevor Rambo of BTIG.

[Trevor Rambo, analyst]

This is Trevor on for Gray Powell. So I just want to circle back on Terraform stacks. Can you provide any insights or statistics on that product? And then when it goes officially GA, how should we think about that accelerating the free to pay like this year and going into next?

[Armon Dadgar, executive]

Great. Thanks, Trevor. Yes, so the way I would think about Terraform snacks is, effectively, we can almost call it the Terraform 2.0. It's the biggest enhancement we've added to Terraform since it was introduced. And effectively, what it does is enhance Terraform's ability to manage multiple environments and multiple layers of the infrastructure stack at the same time, right? So prior to the stacks, customers have to sort of manually build process around how to handle multiple environments. For example, development and testing, staging production. So there was a manual process and manual orchestration around that, versus with stack, we now have a native understanding and a native ability to orchestrate across those multiple environments. For our particular customer base, this is most impactful to those kind of 4,000 biggest customers they've talked about. They all have very large, very complex infrastructure. And so we think this is going to be a compelling set for them. And in fact, already, we're seeing great resonance with the folks in private beta that's using this capability already.

So the decision we've made is really to bring that only to the commercial customers through Terraform Cloud to begin with. And so to your second part of your question on free-to-paid conversions, effectively, it won't be available in the pure-play community addition. You will have to start on the commercial products to leverage stacks, right? So obviously, at the very bottom end, we have a free tier that allows some limited scale usage by adding substantial scale usage where you have to be on one of our commercial tiers of Terraform Cloud.

[Operator]

Our next question will be coming from Fatima Boolani of Citi.

[Fatima Boolani, analyst]

I wanted to zone in on the sales motion that will emphasize more of a cloud-first approach into your enterprise and very large customer base. I wanted to get a better understanding how much of this will involve the conversion of an existing Terraform environment into cloud form factors? And how much of this is really going to be emphasized and focused around the expansion and extension of self-managed enterprise overall Hashi footprint into the broader portfolio of solutions? And then I have a follow-up, please.

[Armon Dadgar, executive]

Yes. Thanks, Fatima. Yes, it's a great question. So effectively, the sales comp change that took place is really to emphasize land deals on Terraform Cloud. Now that said, obviously, we're engaged with customers on a renewal basis as well. It's obviously in our interest to move them to Terraform Cloud. It's also in the customer's interest. I think they realize features much more quickly. They don't have to do upgrades. They're not on the hook operationally. So there's a lot of benefits to the customer from moving from self-managed to cloud. But similarly for us, we get better visibility into the usage, lower cost of support and ability to deliver innovation to them more quickly. So the sort of process changes are really around incentivizing land, obviously, there's strong incentives on the expansion side as well. And then our view as ones people are part of the cloud platform that simplifies our ability to drive the next product along because they're already on an integrated chassis.

[Fatima Boolani, analyst]

I appreciate that. And just as it relates to one of the bundles and the more storytelling approach on the go-to-market front. So you did introduce the Zero Trust bundle last year, I'd love to get an date on how much traction that's gotten vis-a-vis maybe penetration in the base. And to the extent there are other logical bundles that you could create to build that transaction velocity and enhance that expansion and extension momentum, especially since you're incentivizing the land deals on cloud. So shortening that expansion sales cycle into other solution areas like boundary or taker and we point?

[David McJannet, executive]

Yes, it's Dave. Thanks for the question. Yes. So I think the simple way to describe it is the -- we effectively have 2 conversations we have. One is infrastructure lifecycle, one is on security lifecycle. We previously had this Zero Trust SKU bundle, which has essentially been replaced by the security lifecycle form factor, which gives you access to multiple products within the security portfolio. So yes, we have actually recognized the success of that to some degree and institutionalize that as a default selling motion for security lifecycle management, and then also introducing that infrastructure lifecycle management. So we're really trying to simplify the structure of what our field teams have to bring to bear, and we're certainly optimistic that, that simplicity will drive better yield.

[Operator]

[Operator Instructions] And our next question will be coming from Matt Dezort of Needham.

[Matt Dezort, analyst]

This is Matt on for Alex. I wanted to double-click on the HCP cloud chassis. Is Terraform still generating the lion's share of that revenue stream so far as customers move to fully managed? Or is Vault making a move? And how is that composition expected to change over the next 12 months and into fiscal '26?

[Armon Dadgar, executive]

Yes. Thanks, Matt. So today, actually, both Terraform and HCP are significant contributors to the cloud revenue line. I think what we expect this year is given the shift we're making towards providing a sales incentive around landing with Terraform cloud we expect that there'll probably be some differential increased land on Terraform and then looking at basically evaluating whether a similar thing would make sense back half of the year for Vault. But again, I think this is where we look at customer appetite and there's slight differences given the run time nature of Vault. There's a little bit more customer apprehension versus something slightly less run time critical like Terraform. So we're going to take a little bit of a wait-and-see on customers. But yes, I think near term, we'll see more Terraform.

[Operator]

And our next question will be coming from Brad Reback of Stifel.

[Marc Samuel Bachner, analyst]

This is Marc on for Brad. Want to see if you could provide a little detail on the linearity in the quarter and the macro improvement, the, I guess, optimization abatement that you guys talked about and how that's sustained through February, and how that contributed to kind of your confidence for the guide for both FY '25 and '26?

[Navam Welihinda, executive]

Yes. Just a reminder, we're subject to regular enterprise patterns, which means that there is linearities more towards the back half compared to the front half of both the year and the quarter. Q4 was stronger than expected from a linearity perspective. And as I mentioned earlier, all positive signs from a macro perspective and how the optimization cycle is playing out.

[Operator]

And our next question will be coming from Ari Terjanian of Cleveland Research.

[Ari Terjanian, analyst]

Just real quick on RPO. What percent of lands in the quarter were the cloud, HCP Cloud? And then do you think -- is there any potential pull forward ahead of comp plan changes for this year?

[Navam Welihinda, executive]

Yes. There was nothing unusual that happened in the fourth quarter compared to the other quarters. So nothing in terms of unusual activity there.

[Operator]

And at this time, I would like to go ahead and turn the call back over to management for closing remarks. Please go ahead.

[David McJannet, executive]

I'd just like to thank everyone and express my thanks for the participation for everyone who is able to attend. And we certainly appreciate all the questions. We look forward to speaking to everybody soon. Thank you.

[Operator]

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