GTLB - NASDAQ

Thank you for joining us today for GitLab's Second Quarter of Fiscal Year 2024 Financial Results Presentation. GitLab's Co-Founder and CEO, Sid Sijbrandij; and GitLab's Chief Financial Officer, Brian Robins will provide commentary on the quarter and fiscal year. Please note, we will be opening up the call for panelist questions. [Operator Instructions] Before we begin, I'll cover the safe harbor statement. During this conference call, we may make forward-looking statements within the meaning of the federal securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussed risk associated with these forward-looking statements in our business, please refer to our earnings release distributed today in our SEC filings, including our most recent quarterly report on Form 10-Q and our most recent annual report on Form 10-K. Our forward-looking statements are based upon information currently available to us. We caution you to not place undue reliance on forward-looking statements and we undertake no duty or obligation to update or revise any forward-looking statement or to report any future events or circumstances or to reflect the occurrence of unanticipated events. We may also discuss financial performance measures that differ from comparable measures contained in our financial statements prepared in accordance with U.S. GAAP. These non-GAAP measures are not intended to be a substitute for our GAAP results. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release, which along with these reconciliations and additional supplemental information are available at ir.gitlab.com. A replay of today's call will also be posted on ir.gitlab.com. I will now turn the call over to GitLab's Co-Founder and Chief Executive Officer, Sid Sijbrandij.

Thank you for joining us today. We delivered a strong quarter. Revenue grew 38% year-over-year and we continue to demonstrate significant operating leverage in our model. We also reached a major milestone. Gartner and Forrester issued reports officially recognizing DevOps platforms. This is the category we created. And these reports validate the category's significance and importance. We also proved that the market is moving from point solutions to platforms. I'm thrilled with where these industry analysts place GitLab within the category. We were named a leader in the Gartner, Magic, Quadrant for DevOps platforms and we scored the highest in our ability to execute of all the participants. And we were the only leader in the Forrester Wave integrated software delivery platforms. These reports show significant momentum for GitLab. We also reinforced a consistent team right here. Customers want to develop better, faster and more secure software and we want to do more with less. I'd like to discuss key topics today. First, how we're innovating to create further differentiation for our DevSecOps platform. Second, how we're capturing the large DevSecOps opportunity with a strong go-to-market motion. And third, how we are continuing to drive responsible growth in the business, and Brian will cover this topic in even more detail. We help our GitLab 16 product launch event last quarter. We share new features and capabilities of our AI-powered DevSecOps platform. We'll also discussed the road map for the coming year. GitLab is uniquely able to help companies overcome the complexity of developing software. One area on which we focused was compliance. Our DevSecOps platform helps compliance leaders set the right controls and governance frameworks. We shared several new compliance capabilities. These include centralized policy management, expanded reports and controls, and compliance dashboards. Another focus area was security, GitLab enables companies to strengthen their software supply chain security. Point solutions make it difficult for teams to ship software faster while maintaining strong security. In contrast, our DevSecOps platform enables companies to shift their security practices left and do it earlier in the life cycle. It helps developers catch vulnerabilities earlier in the development process. Please let me provide a customer example. BetterCloud is a market-leading SaaS workflow automation platform. They turn to GitLab to secure their software supply chain. In Q2, they renewed their business with GitLab to consolidate the fragmented tool chain. And as a result, BetterCloud deprecated multiple security point solution providers. This strengthened data security posture while also enhancing automation and increasing developer satisfaction. GitLab enables customers to make their software more secure without sacrificing speed. This differentiated value proposition resonates across all verticals. One particular example is the public sector. Speed to mission is imperative in this vertical. GitLab customer, Navy Black Pearl demonstrates this value proposition well. Navy Black Pearl is a DevSecOps service developed and managed by Sigma Defense. This service creates mission applications for the U.S. Department of Navy. Black Pearl uses GitLab to quickly create new applications and continuously modify code in response to evolving requirements and priorities. Using GitLab, Navy Black Pearls' teams have designed and created custom operational software environments within days rather than months. Many of our customers have complex security compliance and regulatory requirements. We address these needs with GitLab Dedicated. This is a single-tenant SaaS offering that became generally available in Q2. With GitLab Gilad Dedicated, we fully managed and deploy the DevSecOps platform, and this enables customers to save on operational costs. It also provides the control and compliance of a self-hosted solution. GitLab Dedicated offers full data and source code isolation, data residency and private networking. Let me provide another customer example. One of the world's leading advisory and asset management firms choose GitLab Dedicated over GitHub in Q2. They had a SaaS first initiative. Their security teams would not allow a multi-tenant SaaS solution. They choose us because GitLab Dedicated met their security and compliance requirements. GitLab Dedicated also enabled this customer to accomplish other objectives. These include eliminating duplicate tools, increasing operational efficiency and accelerating their move to the cloud. GitLab integrates all aspects of software development into the same platform. Customers can improve their productivity and efficiency across the entire life cycle. This includes enterprise agile planning and value stream management. In Q2, we expanded business with a multinational financial services company. The customer wanted to drive greater efficiency by integrating an enterprise agile planning solution with the rest of their software development practices. They moved thousands of business users from Jira (ph) to GitLab. AI continues to be a key area of product innovation. We are developing AI-powered capabilities across the entire software development life cycle. Let me share just a few of these capabilities. Court suggestions uses generative AI to suggest code to developers, suggested reviewers leverages AI to identify the most appropriate reviewers of code. Explain this vulnerability provides details about potential security vulnerabilities in code. And code suggestions remains on track to be generally available later this year. We differentiate our approach to AI in several ways. We have a commitment to privacy and transparency in our use of AI and we also deliver AI throughout the entire software development life cycle. Today, we released the findings of our state of DevSecOps study. This study illustrates the importance of our AI differentiation even further. In June 2023, we surveyed more than 1,000 respondents. These include individual contributors and leaders in software development, IT operations and security. We found that 79% of respondents are concerned about AI tools, accessing private information or intellectual property. We also found that developers only spend 25% of their time writing code, that's why we believe delivering AI beyond just code suggestions is essential. The second topic I want to discuss is how we intend to capture the large DevSecOps market opportunity with a strong go-to-market motion. Strategic partnerships are an important part of our go-to-market execution and I would like to highlight Google Cloud and AWS (ph) as two of the most significant. GitLab and Google Cloud are strongly committed to delivering secure enterprise AI offerings across the software development life cycle. We are thrilled to be working with Google Cloud on delivering our vision of AI-powered workflows. We are leveraging [indiscernible] foundational models, including the new coding model family to deliver new AI-powered experiences to all users involved in creating secure software. Our partnership with Google extends even further. At this year's Google Cloud Next. We announced our plans to integrate GitLab into the Google Cloud console. GitLab also received the 2023 Google Cloud Partner of the Year Award for the third consecutive year. Google recognized GitLab for our achievements in application development within the Google Cloud ecosystem. Another key partner is AWS. In Q2, AWS introduced support for GitLab in AWS code pipeline. This is a fully managed continuous integration and continuous delivery service. This new AWS capability allows developers to leverage their gitlab.com source code repository to build, test and deploy co-changes with AWS code pipeline. Last quarter, we also embarked on our DevSecOps world tour. We're taking GitLab on the road to 14 cities in four countries. These events bring together developers, security and operations technology leaders. They can learn how organizations use GitLab to build more secure software faster, we're happy to feature many partner and customer speakers. Examples include Delta Airlines, Lendlease and Cisco. In Q2, we announced the appointment of Chris Weber as our Chief Revenue Officer. Chris brings more than 20 years of sales leadership experience from Microsoft. This includes building multi-billion-dollar sales organizations. Chris’ customer-first approach will be instrumental as GitLab skills in our next phase of growth. In closing, I'm pleased with our second quarter results. They demonstrate continued momentum and solidify our category leadership. With our recent analyst and customer validation, we are well positioned to win in the estimated $40 billion market opportunity. I'd like to thank our customers for trusting GitLab. And also like to thank our team members, partners and the wider GitLab lab community for their contributions this quarter. I'll now turn it over to Brian Robins, GitLab's Chief Financial Officer.

Thank you, Sid, and thank you again for everyone joining us today. I'm very happy with our key metrics in Q2 and that our revenue grew 38% year-over-year. I'd like to emphasize, it's point about driving responsible growth as we achieved over 2,300 basis points of non-GAAP operating margin expansion. We continue to find ways to become more efficient while scaling the business to address our large market opportunity. We also continue to make target investments in key product areas. These include security, compliance, AI and agile planning. Part of our responsible growth strategy is to continue to optimize our pricing and packaging. In April of this year, we raised the price of our premium SKU for the first time in five years. Over that time frame, we added over 400 new features. We believe this better aligns price with value for our customers and the investment we made over the past five years. In the first four months post-launch, customer behavior was in line with our expectations. As a reminder, we anticipate minimal impact to our financials from this change in the current year. We expect the price increase to have a much larger impact in FY '25 and beyond. Looking back at the quarter. I want to touch on customer buying patterns, contraction and ultimate trends. First, customer purchasing behavior in Q2 was consistent with Q1 of FY '24. We believe buying patterns appear to have stabilized. Second, contraction was lower than Q1 of FY '24 and appears to be stabilizing. Third, ultimate, our top tier continues to see strong adoption driven by customer wins for security and compliance use cases. Now turning to the numbers. Revenue of $139.6 million this quarter represents an increase of 38% organically from Q2 of the prior year. We ended Q2 with over 7,800 customers with ARR of at least 5,000 compared to over 7,400 customers in the first quarter of FY '24. This compares to over 5,800 customers in Q2 of the prior year. This represents a year-over-year growth rate of approximately 33%. Currently, customers with greater than $5,000 in ARR represent approximately 95% of our total ARR. We also measure the performance and growth of our larger customers, who we define as spending more than $100,000 in ARR with us. At the end of the second quarter of FY '24, we had 810 customers with ARR of at least $100,000 (ph) compared to 760 customers in Q1 of FY '24. This compares to 593 customers in the second quarter of FY '23. This represents a year-over-year growth rate of approximately 37%. As many of you know, we do not believe calculated billings to be a good indicator of our business given that our prior period comparisons can be impacted by a number of factors, most notably our history of large prepaid multi-year deals. This quarter, total RPO grew 37% year-over-year to $496 million. cRPO grew 34% to $335 million for the same time frame. We ended our second quarter with a net dollar based retention rate of 124%. As a reminder, this is a trailing 12-month metric that compares expansion activity of customers over the last 12 months with that same cohort of customers during the prior 12-month period. The ultimate tier continues to be our fastest growing tier, representing 42% of ARR for the second quarter of FY '24, compared with 39% of ARR in the second quarter of FY '23. Non-GAAP gross margins were 91% of the quarter, which is consistent with the preceding quarter. This is a slight improvement from second quarter of FY '23. SaaS represents over 25% of ARR. We have been able to maintain best-in-class non-GAAP gross margins despite the higher cost of SaaS delivery. This is another example of how we continue to drive efficiencies in the business. We saw improved operating leverage this quarter, largely driven by realizing greater efficiencies as we continue to scale the business. Non-GAAP operating loss of $4.3 million or negative 3% of revenue compared to a loss of $27 million or negative 27% of revenue in 2Q of last year. This includes an operating loss of $3.2 million for JiHu, our JV and majority-owned subsidiary. On a stand-alone GitLab basis, the operating loss was $1.1 million. We generated positive operating cash flow of $27.1 million in the second quarter of FY '24, compared to a $36.3 million use of cash in operating activities in the same quarter of last year. Now let's turn to guidance. We're assuming that the trends in the business we have seen over the last few quarters continue. There has been no change to our overall guidance loss (ph). For the third quarter of FY '24, we expect total revenue of $140 million to $141 million, representing a growth rate of 24% to 25% year-over-year. We expect a non-GAAP operating loss of $6 million to $5 million and we expect a non-GAAP net loss per share of $0.02 to $0.01, assuming 155 million weighted average shares outstanding. For the full year FY '24, we now expect total revenue of $555 million to $557 million, representing a growth rate of approximately 31% year-over-year. We expect a non-GAAP operating loss of $33 million to $30 million and we expect non-GAAP net loss per share of $0.08 to $0.05, assuming 154 million weighted average shares outstanding. Excluding the impact of JiHu, it's likely that GitLab will reach breakeven on a non-GAAP operating income basis in third quarter of FY '24. On a percentage basis, our new annual FY '24 guidance implies a non-GAAP operating improvement of approximately 1,500 basis points year-over-year at the midpoint of our guidance. We believe that our continued focus on responsible growth will yield further improvements in our unit economics. We remain on track to achieve free cash flow breakeven for FY '25. There are a number of drivers we are introducing that we believe should help fuel our business in FY '25. I touched on the first one earlier, which is the price increase in our premium tier. Additionally, in Q2, we started enforcing user limits on our free sized tier. It's early, but we have seen additional free users upgrade to premium. The third driver is the launch of Dedicated. This allows us to address new opportunity for companies with complex security and compliance requirements. Finally, we plan to monetize our AI capabilities by launching an add-on that will include co-suggestions functionality later this year. Separately, I would like to provide an update on JiHu, our China joint venture. Our goal remains to deconsolidate JiHu. However, we cannot predict the likelihood or timing of when this may potentially occur. Thus, for modeling purposes for FY '24, we now forecast approximately $25 million of expenses related to JiHu compared with $19 million in FY '23. In closing, I'm pleased with our continued business momentum. We believe the value proposition of our market-leading DevSecOps platform is resonating in the market. Looking forward, we continue to prioritize driving revenue growth in a responsible manner. With that, we'll now move to Q&A. To ask a question, please use the chat feature and post your questions directly to IR questions. We're ready for the first question.

Our first question comes from Sterling at MoffettNathanson.

Hey, guys. This is actually Billy Fitzsimmons on for Sterling Auty. I kind of say you look great, and I hope you're doing well. In terms of the question, Sid for you, obviously, a few months ago, the firm had discussion with investors to talk through the generative AI-based products and then you gave us an update on Duo in AI in the prepared remarks. But maybe double-clicking and going a little deeper, and I can imagine we're still in the early innings here. But curious if you could talk through kind of early customer feedback on these products' adoption trends, what you're hearing and seeing? And then if I could sneak another one in, maybe for you Brian. Obviously, earlier this year, you announced a price increase in the way that's structured a lot of that won't be felt until fiscal 2025 and 2026. But now that it's been several months, can you maybe give us an update on kind of what you're seeing and hearing from customers on the price increase, retention trends and stuff like that? Thank you.

Yeah. Thanks for the question. And the early feedback to Duo has been very positive. Customers get that they need AI features not just, for example, coding, but they need it throughout the DevOps life cycle. And we've just published a report actually, we're publishing it today, the state of DevOps. And even for developers, which is only kind of a third of a DevSecOps platform, only 25% of their time is spent coding, 75% of their time is elsewhere. So it's really important to have a set of features throughout the life cycle. We're really happy that we have 10 features out there already. And some of the oldest feature we have suggested reviewers has over 100,000 users today. So we're excited about progressing that further. And it's great to see that customers recognize that they need a suite of AI features, and therefore, we're excited about Duo.

And on the price increase, last quarter when we had our call, we only had a month of data. So happy to say we have three months of data this quarter and I'm happy with the results. It's been in line to slightly above our expectations. As a reminder, we implemented the price increase because we put 400 new features in the platform and we wanted that to match the value that we are providing to our customer. And so the guidance that we provided for this quarter as well as the full year includes that impact. When we went -- when we announced the price increase, we talked about just due to the ratable nature of the revenue and renewals coming up through the year, there would be very little impact in FY 2024 and the majority of the impact would come in FY 2025 with all the impact realized in the year of FY 2026.

Perfect. Thank you, both.

Our next question comes from Michael at KeyBanc.

Hey, guys. Good evening. From a macro perspective, perhaps you can talk about where we are in terms of a couple of factors. One, the pace of new application development, especially with cloud optimization seeming to slow, but still there, the application development and then also developer seats and where -- your perception where we are relative to that as a driver for you?

Yeah. I'm happy to go through the seats and then Sid, if you want to go through application development that would be great. Just on the seats in general, I would say that we've seen more stabilization in Q2 over Q1. With that said though, the buying patterns of customers has changed, right? And we talked about this a number of different quarters. And people are buying for what they have currently hired today and they're only buying for products that they have funded in the plan. And so we factor that into our guidance, the overall macro. And so that's included in our third quarter guidance as well the full year guidance. Maybe you can just repeat your question on the application development for Sid, that would be great.

Sure. Sid, the question was to the extent that we've seen cloud optimization slowing, I think, but maybe not done. Where do you think we are in terms of the pace of application development in the cloud and how that is or isn't helping to drive your business?

Yeah. I think that cloud optimization has been a lot of kind of consumption patterns that were hit. I think we were less -- much less impacted by that. We do have seen the decline of kind of the expansion of kind of hiring more developers and things like that. I think that's been a headwind for us. And I think as far as moving application development to the cloud, I think we still have a long way to go. We regularly partner with big companies, and they still have a lot of things that need to move to modern practices. A lot of things are still not DevOps. They're still not cloud native. So there's still a big shift ahead of us.

I’ll leave it there. Those are sort of two question. So thanks everybody.

Thanks, Michael

Next, we have Joel from Truist.

Thank you for taking my question. Hey, Brian, one for you. Just a great job on the operating leverage side. Just wanted to understand puts and takes in 3Q and the rest of the year on that operating margin line, notwithstanding JiHu, which I know is going to hopefully be deconsolidated at some point.

Yeah, absolutely. Thanks, Joel for the question. Sid and I have been very consistent in our messaging before we went public in every quarter since going public, that our number one goal is to grow, but we'll do that responsibly. And I'm super happy with the increased operating leverage that we continue to get in the business. This was a big milestone for GitLab this quarter. We achieved a non-GAAP EPS of positive $0.01. And so every other quarter, we've actually lost money. In Q2, just to show the operating leverage, we delivered approximately $30 million -- $39 million of incremental revenue over 2Q of last year. And we did that with $16 million of additional expense. If you look at first half of this year versus first half of last year, we've delivered approximately $130 million of revenue with only $70 million of additional expense, and both of those were adjusted for JiHu. In my prepared remarks, I did say it's likely that we'll reach non-GAAP operating income positive in 3Q. And then we also reconfirm and committed to being free cash flow positive in FY '25.

Great. Thank you.

Thank you.

We will now move to Rob from Piper Sandler.

Great. Thank you very much and thanks for taking my question. Brian, I just wanted to touch on the macro a little bit more. I appreciate the commentary and noting that NRR contracted again a little bit sequentially. So any guideposts you can put or rails around where that might go? I think you gave us a lot of indications around stabilization with behavior being consistent, some of the other metrics that you threw out. So just want to understand maybe where that NRR might bottom? And then for Sid, as you talk a little bit about the SaaS offering, noting it's still only 25% of your ARR, maybe help us understand what some of those key features might be that will drive more incremental SaaS demand. Thanks, guys.

I'll answer the NRR question first and turn it over to Sid to answer your second question. So as I mentioned earlier, we did see some stabilization in Q2 over Q1. Customers are still buying what they need. And so the fact that last year, they're buying a lot more, in this year, they're just buying what they need is why you're seeing a slight drop in the net dollar retention rate. I am happy to say that every year since we've launched is still expanding. And so customers are still buying more year-over-year than what they've bought historically. When you look at sort of -- I've talked about historically that the watch point in the business was around contraction, and that was primarily contraction expansion primarily in our premium seats. I'm happy this quarter, we actually had a very good expansion quarter. Contraction has leveled out and churn has always been much smaller. But both of those are reflected in the guidance going forward. We didn't give out sort of what a target number is, or where we think of bottom out. If you look in the business though, contraction started late in fourth quarter of last year. And so we're about three quarters into this. Average contract length is a little over 14 months. So I expect we have another quarter, 1.5 quarters ago until we work through the cycle of the new buying patterns.

Thanks for that question. Rob, I understood it as like what's going to drive self-managed revenue to SaaS revenue. And I see two big things. I see Dedicated, our new offering, which is single-tenant SaaS. We have gitlab.com, which is multiple-tenant SaaS but to address the most complex compliance requirements. We're super excited about this new offering, and it's a great way to get our biggest customers with the most complex requirements up to the SaaS platform, where we maintain it for them. Another driver of the move to SaaS can be additional functionality for self-managed. We call this GitLab Plus and for example, some of the AI features will require a connection to GitLab SaaS in order to consume them. So there's more features that we've thought about, but not yet launched, but additional features to kind of get kind of a hybrid installation. Some of it is on-prem. Some of the new features are SaaS provided in the cloud and kind of gradually move those customers over.

Great. Thank you.

Thanks, Rob.

Next, we have Koji from Bank of America.

Hey, guys. Thanks for taking the question. I wanted to ask about the analyzed category. When I looked at the investor presentation, it looks like this is a new category on the product page in the investor deck, and I really wanted to focus on the metrics logging and tracing. And I guess could you categorize what type or maybe category of vendor would you be competing with this product? And why would a customer go at GitLab for metrics, logging and traces versus maybe some of the other traditional vendors in that category? Thank you.

Yes. Thanks for the question. So specifically the metrics logging and tracing. I think that's called the APM category, application performance management and popular vendors there are vendors like Datadog and New Relic. So over time, we'll be competing with them. But in the beginning, we'll start -- the features really basic with just very early functionality. So we're not as much competing with the big vendors. We're competing with nonconsumption. The alternative to GitLab would be just not setting up logging and metrics and things like that because the features we offer in the beginning is really -- are really basic. But because of our open core model where our customers can contribute -- over time, they will start contributing. Our last monthly release, GitLab 16.3 in August, it had 237 contributions from our customers across the platform. So over time, over many years, the functionality will improve, and the goal is to become best-in-class over time and compete with those best-in-class solutions.

Just one follow-up, if I may there. You mentioned APM just thinking a little bit further out, would there be any plans to maybe go into infrastructure monitoring or log analytics too. Thanks, Sid.

Yeah. If we do logging, logging analytics makes sense to me as a category. If you look at infrastructure, we already have infrastructure scope functionality. For example, our TerraForm (ph) support. So certainly something that has our attention.

Next, we move on to Derek from Cowen.

Great. Thanks, guys. You've talked about vendor consolidation as a key opportunity for GitLab for some time. That theme has definitely popped up more across the software landscape since the macro hit over the last few quarters. Just wondering if that kind of cadence of business for you guys just picked up, if you have any metrics to share at all in terms of like a percentage of expansion business growing in terms of vendor displacement? And then I have a quick follow-up.

Yeah. Thanks for that. I'll let Brian add to my answer, but I think what we're seeing is that the market is starting to get it. And I think the introduction by Gartner and Forrester of this category of DevOps platform is going to be a real tailwind for us because it signifies to customers like this is the future. If you look at our 2022 state of DevOps report, 69% of organizations said they wanted to consolidate tool chains, but they don't want to compromise on functionality. So as GitLab gets more complete and is able to take on more point solutions, that is an amazing trend that the customers want to consolidate. Now the analysts are saying it, and we hope to go from kind of the early adopters to the early majority in that. Brian?

Yeah. And just to say a couple of extra words to what Sid said is absolutely. I think we're seeing this sort of in the customer journey, if you will. And so they're landing on premium, they're landing relatively small, they're actually then expanding to division departments within the company then ultimately upgrading Ultimate. And so the customer journey continues to show. Despite the macro when you think that people wouldn't be selecting a new technology or a new platform, this has really caused people to evaluate how they're developing software and exploring ways to make software better, faster, cheaper and more secure. And so I think what Sid said as well as what we're seeing just from a customer perspective is, we're continuing to see the vendor consolidation.

Great. And just a follow-up is last quarter, you guys talked about more C-level involvement in purchase decision-making. Just curious how you've maybe tweak the go-to-market to adopt to that environment, especially in light of kind of a new leadership in place and maybe what kind of tweaks you'd be looking in the second half of this year?

Yeah. We don't have any major disruptions plan. It's been a very seamless transition in our go-to-market. But we are focused on those C-level buyers. And 1 thing we do is a value stream assessment where we go into the customer, map all their existing tools and kind of how we can gradually replace that, so that it's not a big bank, but they get it as renewals come up as they -- as we solve their biggest problems. And their biggest problems can be like my Jenkins installation can be upgraded, and it's a problem or I'm behind on security, so I need to integrate a set of security tools. Where I have the security tools, the compliance is it there? I can prove that. I've doing. So depending on what their needs are, we make a plan with them, and that frequently goes up to the highest level in the organization. Typically, middle management is engaged with kind of keeping their DIY solution up in the kind of up and running. So it's important for us to talk to those decision makers in the top.

Perfect. Thank you.

Next, we'll move on to Karl at UBS.

Okay. Great. Maybe I'll ask one for Brian and one for Sid. So Brian, on the 3Q revenue guide of $141 million at the high end, that's only up the smidge from your actual in 2Q. It's typically up double-digit on a percentage basis. So I wanted to ask -- was there anything that felt a little one-time-ish in 2Q or that's on your mind in 3Q that you'd like to call out? And then I'll -- maybe I'll follow up with Sid.

Yeah. Thanks for that Karl. There was nothing there was, if you look at 2Q revenue and go through, there was nothing that was anomalous sick in the revenue. I would just say 2Q is an actual and 3Q's guidance.

Yeah. Okay. Makes sense. Hey, Sid, you called out a Jira displacement in a large multinational bank. You don't often hear that and I think you and Brian have often said over the last couple of years that it's very early stage for GitLab to be displacing Jira software. Is there a change in that cadence.

We're getting closer now. This was a proof point for us. The customer, as far as I know is very happy with the change. So we've gone from this just being something we hoped for to something that's happening. And what's happening is that people are moving from point solutions to a platform because you can get the cycle time up. And our enterprise portfolio management is good enough to replace Jira any instances, companies are also going from having like very complex work streams in Jira that needs lots of human sign-offs to automating more. For example, all those security scans or compliance management that, for example, you're going to force that every piece of code is reviewed by 2 people. Instead of signing off and check boxing in Jira with people you can all automate that, and that's what also enabling us to do that.

Okay. Congrats on the good results.

Thanks, Karl.

Next, we have Matt from RBC

Great, guys. Thanks for taking my questions, Sid, you look great too, so that’s -- it’s really good to see that as well. I wanted to ask about -- I think, Brian, your comment was customer behavior and the premium price increases in line with expectations. I just wanted to double click on that a bit. What does that mean? Does that mean that they're just -- they're effectively taking the price increase? Are you seeing any -- I know it's not a factor, but typically that you've talked about, but are any moving to Ultimate? Just maybe a little bit more color on what in line with your expectations means?

Yeah. Absolutely, Matt. When we did the price increase, we did an internal model that looked at bookings, churn, and we came up with what we thought our forecast would be on the overall net bookings. And so I would say overall bookings is more positive than our internal forecast and churn is less. And so we're seeing positive signs on every element of how we modeled it from a bookings and churn perspective.

Got it. Thanks. And maybe just a quick follow-up on Dedicated. I believe last quarter, did you have -- I think you had two customers, two large customers on Dedicated. I think, Sid, maybe you mentioned that -- maybe just a little bit more color on number of customers there if you're giving that? And then I know there's a hosting layer to that. But sort of like what are you seeing from a customer spend perspective when they take dedicated?

Yeah. I think we're happy with the pipeline for Dedicated. Right now, you can only get Dedicated if you go for GitLab Ultimate and there is a minimum number of seats. So the list has it that you need 1,000 seats to move to Dedicated. And that's an attractive offering for like the bigger organizations. We're happy with the pipeline. There's been demand, and that demand is coming for the people currently on self-managed. And what they like about this offering, it has the same kind of security of self-managed and that they're the only customer. They're completely separated. They can set it up in their VPC, but they don't have the operational burden. We make sure they're on the latest version and that everything runs and where the experts at get lab and they don't no longer need those people internally dedicated to that.

Got it. Thanks a lot guys.

Now we will move to Ryan from Barclays.

Thanks for the question. For Sid, for those customers who are evaluating adding large language model features to their DevOps platform today, are they still mostly focused on co-digestions or is there increasingly other considerations at play as these customers get smarter and more in the weeds (ph) on AI?

Yeah. I think as customers get more sophisticated, they're seeing that AI should be throughout the life cycle. As mentioned earlier in this call, like it's DevSec and Ops, like you need those AI features to make security more efficient. If you just produce more color, that's not going to do it. And of those developers producing more code, that's not the only thing they need. So as customers get more sophisticated, they want more AI features, and we're really happy that we have 10 features out already. The second thing they want is good guarantees of privacy that their inter like property is never going to be used to enhance other people their platform, their intellectual property. So I think in both, we have a really compelling story.

Excellent. And then one for Brian. Brian, I know billings and cRPO are not the perfect gauge of your business on a quarterly basis, just given the lumpiness in longer-term contracts. But anything to think about on those two metrics in the quarter just coming off a strong first quarter.

Yeah, Ryan. In 2Q, when large enterprise clients want to adopt the DevSecOps platform, they typically want to do multiyear deals. We talked about historically where we don't compensate for that because we didn't want to drive that behavior with such a high gross retention rate. But we did see a number of multiyear deals in I think it was said earlier, we had the largest deal in company history in 2Q. Once again, big multinational company, just a demonstration of wanting to go to a DevSecOps platform and making a long-term commitment to GitLab.

Thanks, guys.

And we'll move on to Mike from Needham.

Hey. Thanks for getting me on here, guys. I had two questions, and I'll take them separately. But if I could first go to Brian I just wanted to make sure I'm kicking the tires here. I know you're talking in some of your comments to Matt that, hey, net bookings are slightly more positive. Churn is slightly below what you guys had forecast, which is great. But to be clear, like has there been any change as far as your assumption from this price increase to the guide? And can you remind us again, what is the benefit that you are including for this year's guidance when we think about the benefit from that price increase? And I just have one follow-up for Sid, sorry.

No, absolutely. Thanks, Mike. There's been -- it's included in our guidance. And when you walk through the ratable nature of the revenue, it's very little impact this year. So where we are doing better than expected on the way that we modeled it internally from a bookings and churn perspective. it doesn't have really any meaningful financial impact this year. We'll get the majority of the impact next year and then a little the following year.

Got it. Thanks for that, Brian. And then for Sid, I just wanted to hash out. I know that we're all excited for the AI SKU launching later this year. A couple of questions here, but can you help us think about what's the expected timing? Is it more of a 3Q or 4Q event as well as I think when we've spoken about it today and last quarter as well, the main focus that we've heard externally is really around code suggestions. And I'm hoping, if you could elaborate a little bit more on maybe some of the additional features or functionality that will be added to that SKU as well or is there a potential actually to have multiple AI SKUs, almost like a good, better, best or separate AI SKUs that you are thinking about rolling out to the market. Thanks.

Yeah. Thanks for that. So it's projected to be generally available later this year. We haven't made a decision between Q3 or Q4 yet. [Technical Difficulty] It's likely will also end up coming with a different Q that includes more of the AI features although some of the AI features might be included in the existing alternate package, for example, suggested reviewers is already available to people without paying separately for it. So it's probably going to be a mix of those things.

Perfect. Thank you.

We now move to Jason at William Blair.

Yeah. Thank you. Good afternoon, everyone. I wanted to ask about the user limits on the free tier. Sid, I think you mentioned that -- or maybe Brian, you mentioned that. I'm not super familiar with what you did there. Could you just remind us what happened and what the impact has been and what it could be?

Sid, do you want that? Do you want me to take it?

I'll start off, and you can add to my answer. But the user limits, they don't apply to self-managed installations. But for people on getlab.com using our free tier, we said, hey, if you have more than five users, you got to switch to a PT (ph). And the reason for that is we have significant costs kind of hosting gitlab.com. So we wanted to be long term sustainable. It is leading to good conversion, although, the majority of those conversions are below the $5,000 base customer cutoff. Brian, anything you want to add?

Yeah. The only thing I'll add on top of that, I think you covered most of it was that the free-to-pay conversion is also built into our guidance. And once again, with the ratable nature of revenue recognition, the impact this year will be minimal.

Great. And then a quick follow-up. Just Brian, for you, on the large deal, largest in company history. Can you give us an idea of that size? And then also how big is your largest customer? How much sure they're spending annually on ARR just so we can kind of gauge what the opportunity would be with a lot of those 810, 100,000 (ph) customers 100,000-plus customers where they could potentially get to?

Yeah. So the largest deal that we signed this past quarter was over $30 million. It was a multiyear deal. And then we have several customers approaching $10 million a year.

Helpful. Thanks.

We now move to Pinjalim at JPMorgan.

Great. Hey, guys. Congrats on the quarter. I wanted to ask you on Ultimate as existing premium customers kind of look to pay the higher price, are you seeing some of the conversations lead to kind of upgrading to Ultimate, especially as you have to cape people and flow in some of the AI capabilities as well like suggested reviewers. Are those conversations from premium customers looking to upgrade starting to happen more.

Yeah. Whatever we expect is baked into our guidance, but we're seeing that it is a reason for people to reevaluate which tier am I going to be on. And we're seeing ultimate being more and more top of mind for people. We haven't decided on the packaging of the AI features yet. So although AI is a significant part of the conversation, it's not driving Ultimate per se because we're still working on our packaging for the AI features.

Got it. One for Brian. Brian, anything to call out on the DR side. It seems like the sequential build, I think, in Q2 was below that of Q1, which typically seems like does not happen, but wondering if there's anything to call out.

Nothing specific. I mean the Q2 total deferred revenue growth was 31% year-over-year. Our RPO growth was 37%, and our cRPO growth is about 34%. cRPO makes up approximately 68% of our total RPO. And so really pleased overall with the quarter.

Understood. Thank you.

Our final question comes from Allan from Wolfe Research.

Hey, guys. Thank you for taking the question. So following the appointment of Chris Weber, CRO, can you guys just talk about what he's been focused on. What’s he is looking to implement to help the company scale the next phase of growth? And how are you thinking about potential sales disruption for the year?

Yeah. Thanks for the question. So we're really excited to have Chris Weber on board. He's a very experienced sales executive. He's been responsible for multibillion-dollar sales organizations, and that's what we, as a company, want to go to hit the transition has been very seamless from our side. We spent a lot of time listening to our customers, listening to our sales team. There's no big changes in our go-to-market, so very smooth and setting us up for success in the future.

Understood. And just one quick follow-up. I noticed that you guys on your release (ph) page had a target about 1 million code suggestions users. And now it looks like it's kind of generally growing your base of code suggestions, users as a goal. Can you guys just maybe talk about the change there and kind of the background, are you guys looking to push more on the R&D side behind it before launch? Any kind of incremental color would be helpful. Thanks.

So we're an extremely transparent company that publishes our OKRs, our year lease, and we generally push people at GitLab to be extremely ambitious. For example, for our OKRs, we expect only 70% of our goals to be met. So especially in the beginning of OKR (ph) project, we set an ambitious goal. That's not something that was part of our investor communications or things like that. There's over -- there's a couple of thousand pages in the handbook. We appreciate people going through them, but they're not part of our official investor communication. I wouldn't add any weight to that. And this is a long game, and we're taking a long-term view of this.

Thank you, Sid.