Greetings, and welcome to the Couchbase Second Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Edward Parker, Head of Investor Relations. Thank you, Edward. You may begin..

Good afternoon, and welcome to Couchbase's second quarter 2024 earnings call. We will be discussing the results announced in our press release issued after the market close today. With me are Couchbase's Chair, President and CEO, Matt Cain; and CFO, Greg Henry.

Today's call will contain forward-looking statements which include statements concerning financial and business trends and strategies, market size, our expected future business and financial performance and financial condition and our guidance for future periods.

These statements reflect our views as of today only and should not be relied upon as representing our views as of 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.

For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today's press release and our most recent annual report on Form 10-K, our quarterly report on Form 10-Q filed with the SEC.

During the call, we will also discuss certain non-GAAP financial measures which are not prepared in accordance with Generally Accepted Accounting Principles.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, as well as how we define these metrics and other metrics, is included in our earnings press releases, which are available on our Investor Relations website. With that let me turn the call over to Matt..

focus on top-line growth; increase the mix of Capella; drive further sales and marketing efficiency; and accelerate the pace of leverage in our model. Before handing the call over to Greg, I want to emphasize one of our core values that I've repeated many times before. At Couchbase, we attack hard problems, driven by customer outcomes.

With that, I'll hand the call over to Greg to walk you through our results in more detail.

Greg?.

Thanks, Matt, and thanks everyone for joining us. We had another strong quarter, as we beat guidance across all key metrics.

Despite the elevated level of deal scrutiny that Matt mentioned, we are pleased with our execution, our dedication to delivering value to our customers, and our ability to navigate the environment, while driving healthy outperformance in our operating loss guidance.

I'll now walk you through our second quarter in more detail, before providing our guidance for the third quarter and full year. Total annual recurring revenue, or ARR, was $180.7 million at the end of the second quarter, representing 24% growth year-over-year, or 23% growth year-over-year on a constant currency basis, and 5% sequentially.

Revenue for the second quarter was $43.1 million, an increase of 8% year-over-year and 5% sequentially. Recall that revenue in the year-ago quarter benefited from strong subscription revenue growth as well as outperformance in our on-demand business and strength in professional services, both of which are non-recurring.

Subscription revenue for the second quarter was $41 million, an increase of 11% year-over-year and 6% sequentially. Professional services revenue for the second quarter was $2.2 million, a decline of 20% year-over-year and 11% sequentially, consistent with our expectations following outsized strength in professional services in fiscal 2023.

We continue to expect contribution as a percentage of revenue in fiscal 2024 to be below recent levels. Our ARR per customer performance in the second quarter was $261,000, up from $254,000 in the first quarter, up 14% year-over-year, and indicative of the growing wallet share we have with large customers.

As a reminder, as Capella continues to grow in revenue contribution, we expect ARR per customer growth could moderate or decline in future quarters. Our dollar-based net retention rate, or NRR, continues to exceed 115%, driven by strong renewal and upsell activity across our base of larger enterprise customers.

Our NRR has been steadily improving, thanks to Capella and our in-quarter NRR was the highest in the last three years. We exited the quarter with 691 customers, an increase of 12 net new customers from the first quarter.

As Matt mentioned, Capella, once again, represented the majority of new logos in the quarter, and we grew our Capella customer logo count by more than 20% from the first quarter.

We're encouraged by the strength of our new logo pipeline and remain confident in our ability to reliably expand logos, as evidenced by our consistent ARR growth and our strong retention metrics against a more challenging spending environment.

In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, results of operation and share count are on a non-GAAP basis. In Q2, our gross margin remained strong at 87.2%. This compares to a gross margin of 88.7% a year ago and 86.4% last quarter.

As a reminder, as Capella mix increases, we expect gross margin will decline over time. Turning to expenses. We continue to invest to capture the generational opportunity we see in front of us, but are focused on improving the efficiency of our growth.

We are pleased with our execution on this front as our expense discipline and early benefits from our cost saving initiatives resulted in us outperforming our operating loss outlook. Our sales and marketing expenses for Q2 were $28 million, or 65% of revenue, compared to $24.9 million, or 63% of revenue, a year-ago.

Research and development expenses for Q2 were $12.6 million, or 29% of revenue, compared to $12.2 million, or 31% of revenue, a year-ago. We continue to thoughtfully invest in our as-a-service offering as well as in additional features to bolster our platform.

General and administrative expenses for Q2 were $6.3 million, or 15% of total revenue, compared to $6.5 million, or 16% of revenue, a year ago.

Non-GAAP operating loss for Q2 was $9.2 million or a negative 21% operating margin, 4 percentage points higher than the midpoint of our guidance, compared to an operating loss of $8.4 million or a negative 21% operating margin a year-ago. Non-GAAP net loss attributable to common stockholders for Q2 was $8 million, or negative $0.17 per share.

Turning to the balance sheet and cash flow statement. We ended Q2 with $165.8 million in cash, cash equivalents and short-term investments. We remain well capitalized to execute against our long-term growth strategy. Our remaining performance obligations, or RPO, totaled $170.6 million at the end of Q2, an increase of 2% year-over-year.

We expect to recognize approximately 67% or $114.4 million of total RPO as revenue over the next 12 months, which represents 11% year-over-year growth. Operating cash flow for Q2 was negative $500,000, and free cash flow was negative $1.6 million, or negative 4% free cash flow margin.

We are pleased with the progress we have made in our free cash flow profile and remain committed to driving further improvement. Now, I will provide guidance for Q3 and the full year fiscal 2024. As Matt discussed, we continue to see solid momentum and our pipeline remains strong.

Furthermore, we anticipate that our investments in our product capabilities, partner ecosystem and go-to-market motion will complement our momentum in fiscal 2024.

That said, we are mindful of the macro headwinds and continue to carefully monitor their impact on our business, including bookings, pipeline conversion, retention and expansion rates, deal sizes, sales cycles, logo acquisition and sales productivity.

As such, our outlook maintains a consistent degree of conservatism across all of those metrics to account for the uncertainty, as well as the lack of visibility into how the macro may impact consumption trends for emerging as a service offering.

With these factors in mind, for the third quarter of fiscal 2024, we anticipate ARR in the range of $185 million to $188 million, which represents 23% growth year-over-year at the midpoint. We expect total revenue in the range of $42.7 million to $43.3 million, or year-over-year growth of 12% at the midpoint.

We expect a non-GAAP operating loss in the range of negative $9.9 million to negative $9.1 million. For the full year of fiscal 2024, we are raising our ARR outlook and now expect ARR in the range of $195.5 million to $199.5 million, or 21% growth at the midpoint.

This compares to our prior outlook of $191.5 million to $195.5 million, or 18% growth at the midpoint. We continue to expect total revenue in the range of $171.7 million to $174.7 million, or a year-over-year growth of 12% at the midpoint.

As a reminder, we've historically seen variability with respect to the implementation timing of certain enterprise deals, which impacts our revenue visibility, along with new or migrated Capella customers. We, therefore, continue to view ARR as a better indicator than revenue of the strength of our business.

While we anticipated that contribution from services revenue in fiscal 2024 would be below recent levels, we now expect this dynamic to be more pronounced this fiscal year due to customers electing fewer services as a result of macro-related budgetary pressures as well as the naturally lower services attach rate with Capella.

And finally, we are decreasing our operating loss outlook and now expect a non-GAAP operating loss in the range of negative $42.5 million to negative $38.5 million. With that, Matt and I are happy to take your questions.

Operator?.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Matt Hedberg with RBC Capital Markets. Please proceed with your question..

Great, guys. Thanks for taking my questions. Congrats on the results here. Matt, I want to start with you. I think the way you outlined kind of the four ways you're thinking about Gen AI was super helpful. And I think in your script, you mentioned you plan to monetize it with sort of increased Capella adoption and consumption.

But I'm wondering, for some of the other products like Capella iQ, is there an additional monetization strategy with that?.

Matt, good to hear from you. Simple answer is that will be part of the Capella offering and we expect to monetize it with additional consumption, more developer reach, better go-to-market efficiency. So, we think there is a compelling impact to the business, but as far as, the service itself is will be part of again part of Capella..

Great. That makes lot of sense. And then, I know on the hyperscaler front, I know you've had a lot of progress with AWS. It was great to hear your comments on GCP this quarter.

I'm just sort of wondering when you're seeing deals come in through partners like that, what is the profile of those customers look like? And how would you talk about sort of the pipeline for those hyperscaler-type deals?.

Hey, Matt. So, we're excited about the ongoing momentum with AWS, obviously, the bar that we got over with GCP and their premier program, the announcement with our AI specific partner program and the benefits that are going bringing there.

Investing in the ecosystem and thinking about our customers and developers and the total tools they want to use, partnerships are going to continue to be a big part of our business.

Quite frankly, we're seeing success with partners across all deal types, up to and including our very largest customers that are working on Capella migrations, all the way to our [$5,000] (ph) starter packs and relatively new regions for us. We think a lot about not just partner source, but partner influence.

And you can appreciate that all of the partner that we work with have tremendous reach and credibility with customers.

And the extent to which we can build joint solutions, and have strategic account plans, and do territory planning with them, all of which we're seeing across the business really beneficial to us and a big part of that go-to-market efficiency that we've been talking about for some time..

Thanks a lot, Matt. Well done..

Thank you. Our next question is from Ittai Kidron with Oppenheimer. Please proceed with your question..

Thank you. Greg, I wanted to ask you about revenue, ARR and cRPO. So, looking at your revenue growth, I think it's the fifth quarter in a row where it's declining, decelerating from over 30% to now under 10% on a year-over-year basis. Your ARR, however, is holding quite firm at the 23%, 24% range. And you're cRPO is in the teens, in the low-teens.

So, help me reconcile the three, how should I think about the evolution of these three key metrics going forward and why are they so far apart, I guess?.

Yeah. Hey, Ittai. Good to hear from you. Yeah, well, first I'd point out just ARR, obviously, does not include services or any of our on-demand business, whereas revenue and RPO, cRPO would pick all that up. So, there is a little bit of sort of apples and oranges there.

And again, just for the revenue perspective, particularly for this quarter, there was a couple of things. Our subscription business continued to do well. Services, as we talked about it in our script, has been more impacted because of the macro, and so the demand is less. So, we're seeing that.

And obviously, last year at this time, just from a year-over-year comparison, we sort of peaked from both subscription revenue and services revenue. And that's not repeating.

I think the subscription revenue -- software revenue has been reasonably constant and we think we will continue to see an improvement on the subscription revenue as we go forward.

On RPO and cRPO in particular, when we get towards some of the later stages of our contracts, whether their one-year or multi-year, that's when they sort of less in the performance -- remaining performance obligations.

So, we have a couple of our largest customers that are up for renewal between now and Q1, and we think that we will see -- start seeing an improvement on the RPO as well..

Okay. And just to be clear, you said Capella is not part of ARR..

No, Capella is part of ARR. What's not part of ARR is professional services, any on-demand business..

Got it.

And is it common to see Capella on demand, or it's mostly one-year contracts?.

I'm sorry.

Could you repeat that?.

Capella is it common to see consumption there on demand or is it mostly one-year contracts or one or three year?.

The largest majority of the Capella business today is our annual credit model, which would fall into ARR..

Got it, okay. Matt, one for you on the competitive side of the equation. Help me understand what you're seeing out there and what is changing for you. Some of your competitors are doing very well in the marketplace. I'm just trying to think about where do you see your place in the market.

And then, on the competitive front, anything from a win rate standpoint, would greatly appreciate it. Thank you..

Look, Ittai, generally speaking, I'm pleased with how competitive we are. If we think about the nature of applications that we serve, the demand for high-performance and scalability and cloud to edge architectures have never been more prevalent than they are today.

I think what's exciting to us is the additional, what I would call, at-bats that we're getting with Capella and moving down market and bringing the full power of the Couchbase platform and all those benefits with the consumption model that is often preferred by customers, certainly, a majority of them.

But when we get into competitive situations and we do proof of concepts and show the power of the platform and the integration of the services, the value proposition, the TCO dynamics, the do more with less, I would say, in some ways, those value propositions have never been more relevant than they are now.

And I think it increases the value that people see in our platform both existing and new customers. So, I'm pleased with how we compete. We wake up every day with the appetite to do more and do better. But we're well positioned with dynamics like migration to cloud, modernization and many other things that we've talked about before..

All right, good. Thank you. Appreciate it..

Thanks, Ittai..

Thank you. Our next question is from Sanjit Singh with Morgan Stanley. Please proceed with your question..

Great. Thank you. This is [Dion] (ph) for Sanjit. I first have a higher level question sort of on the AI strategy that you laid out. I mean, it really resonates.

And the way that we trying to you sort of think about these impacts are mostly in two ways, right, the new workloads related to AI apps, and then the migration which, in many cases, gets accelerated through AI.

When you're thinking about kind of those two opportunities and I think you spent lot time talking about the first one of those two, where do you see kind of the big opportunities one or two years out? And then, what are you doing today to position for both or maybe for the bigger ones more so than the other ones? Anything that you can kind of share around your strategy, both on the migration side as well as kind of the new workloads side that you already talked about?.

Yeah, look, I appreciate the question. I think if we step back and say why is -- why we are all so excited about AI, we think it's the next great catalyst for applications, both existing and new. And we talk a lot about the demand for rich, personalized, customized applications that we use in our personal and professional lives.

And the demands on the database to be able to bring all that data to light, combine operational and analytical capabilities, leverage services like indexing, eventing and search in a single platform, that's never been more relevant.

And if you think about the amount of data that's going to need to be processed to further bring light with even more personalization and customization for future applications, that lends itself very well to the Couchbase platform that was built for scale and performance from cloud to edge with TCO benefits.

We're spending a lot of time with large customers today on their future plans of AI, and us being a platform that is strategic to them for their existing applications.

At the same time, as we mentioned in the prepared remarks, we had a net new customer in an emerging geography that is an AI company for smart cities that realized the Couchbase was the platform that they needed to process all their data and enable the application that they're building.

So, as we have always done, we take an architectural approach to the data layer. And then, upon a solid foundation, integrate services in a compelling way for both customers and developers.

You combine all that with the Capella consumption model, and we're really bringing a lot of capabilities together in a seamless way that quite frankly other vendors just aren't architected to do, certainly at the scale and performance. And so, I think we're going to be able to get at both migrations and new workloads.

As we look at the effect on our business, because of the size of some of our existing customers, when we monetize a migration that can be a little bit of a bigger contribution out of the gate, but we certainly spend a lot of time and attention on new logos. So, we'll be able to track the trending of which one is a bigger impact over time.

But you'd be hard-pressed to find any customer that is thinking about a future data platform strategy that isn't inclusive of AI. And we think an integrated platform is the winning strategy and we're excited about our path forward..

Makes a lot of sense. And then maybe just one quick follow-up question.

Just when I'm thinking about reconciling the customer numbers, I think you have 12 customers this quarter, which was a step up from last quarter, but still maybe compared to your commentary around pushing down market around kind of view customer momentum, particularly around Capella, seems still a little bit low compared to some of the levels that you put out last quarter.

Is there any way that you can help us think about sort of the new customer signings piece versus the customer churn piece? Is that churn piece still kind of weighing down that net add number? Or any kind of more granularity you can share on that, that would be super helpful..

Yeah, happy to give some color there. So, to your question, yes, we are still seeing a bit more churn on our smaller customers like we did last quarter, which are macro impacted. They do not have a big dollar impact. Our gross ads are performing well and in line with what we've seen historically.

And as we mentioned in the script, Capella logo count actually is up 20% quarter-over-quarter. So, we're actually very pleased with how Capella is performing. We're still working through some of that smaller business churn.

But overall, we think that we're going to start seeing sort of more favorable impacts to the customer count as we move forward through the second half of the year..

Great. That makes sense. Thank you..

Thank you. Our next question is from Raimo Lenschow with Barclays. Please proceed with your question..

Perfect. Thank you. Can you speak a little bit to what you see in terms of pipeline and how pipeline is evolving? It looks like this quarter things continue to improve for you. But like if you think about like early stage pipeline as you think about the back part of the year, what are you seeing there? And then, I have one quick follow-up..

Raimo, the simple answer is we feel really good about it.

And hopefully, you've come to appreciate the level of detail that we have in how we measure that, everything from expansions in the back half, how we expect those to grow migrations to Capella, new logos and understand the dynamics that are different there, the early stage Capella progression in terms of trials into active deals.

And so, I think as we look across the entirety of the pipeline, both in terms of size, scale, velocity, those metrics look really good. And we feel confident about the demand of the product, and quite frankly the execution of the go-to-market team to continue to grow and nurture the pipeline for the back half and beyond.

But overall, I think it's an exciting mix of opportunities and indicative of the optimism we have in the business as we go forward..

Yeah. And then, as we think about the professional services going forward and when you speak about revenue, subscription revenue was obviously better. Like, how do you think about the glide path there in terms of -- that professional services obviously then going to be a little bit of a headwind all the time.

Like, how do you think about managing that journey, Greg? Thank you. Congrats from me as well..

Yeah, thanks Raimo. Look, we obviously think professional services is key to our business. We believe it actually generates more software sales, long-term for us.

But right now, what we're seeing is customers when they're budget-constrained due to macro, they are opting to continue and grow on the software side, but a little bit less on the services side. So, services as we talked about at the beginning of the year would be slightly down versus last year.

Given we outperformed last year, there's probably little slightly a bit more of a headwind than we expected. The second part of that is, as we get more and more into Capella, given that it's a service in to itself that the customers are going to have a less smaller attach rate to the Capella business from a service perspective.

So, I think both of those things are starting to play right now. But look, we still think services are important for customers and we'll continue to push them, but we're very pleased at how the software part of the business is outperforming while services is a slight offset to that..

Yeah. Very clear. Thank you very much. Congrats..

Thanks, Raimo..

Thank you. Our next question is from Rob Oliver with Baird. Please proceed with your question..

Great. Good afternoon, guys. Thanks for taking my question. I had two. Greg, I'll start with you since there was one earlier on customer count. So, the 20% growth in Capella customers, certainly sounds great.

And then just from some of the other commentary you guys made, trying to triangulate it, feels like the contribution might be about half new logos and half existing customers on Capella. Is that right? And how should we think about that going forward? I know you guys have said Capella is going to be the single best source of new logos for you.

But sort of in the coming quarters, how should we think about that split?.

From a new logo perspective, Rob, is that....

Yes. Yeah, like, I'm thinking more Capella adds. It seems like -- because you guys had 20% growth of Capella customers, but based on your customers added and the commentary around that, some of them aren't new logos. So, I just wanted to get a sense of how that split is..

Yeah. I think -- so couple of things. One is we do expect that Capella will continue to be the majority of new logos, as we go forward into the second half of the year and into next year. That's just where we're seeing the most momentum. I would remind you that we do have customers that have both enterprise, Couchbase enterprise and Couchbase Capella.

And so, in the total customer count, we only count them as one, but obviously when we give you the Capella customers, everybody who's got Capella, but some of them also have enterprise. So, just when you're trying to sort of reconcile the math, just to be aware of that.

But again, we expect there to be the majority of that being Capella, but we're still obviously, as Matt was talking about the pipeline, we still have a good pipeline around enterprise business, too. So, we still plan on driving new logo business there.

In terms of, if you think about ARR and revenue, clearly the migrations will be the larger, because given our enterprise nature and the large customers, that will make up the bigger amount in the near term until the newer customers get ramped up..

Okay, helpful, thanks. And then, Matt, you've gotten a couple of questions on AI and some of the macro already. So, I guess I'll ask about, Capella consumption trends intra-quarter, kind of what you're seeing in terms of customer usage for those that adopt Capella? Any color there would be really helpful. Thanks, guys..

Rob, we said a couple of times that we have really high expectations for Capella and we're pleased with the momentum. In terms of consumption, I would say that's meeting, if not exceeding, even our internal expectations.

I think it's proving the value proposition of do more with less, getting people focused on application development while we run the database. I think they are realizing the benefits of the underlying Couchbase platform, faster, with more efficiency.

We've talked about the -- driving the majority of net new logos, we're also seeing improvement on net retention rate, driven by the success of Capella. Your comment on balancing migrations in new logos is really important to us.

While we are certainly focused on and excited on new logos and the area that we will do better, we see some really healthy migrations on Capella.

In addition to the ones we provided, one of the largest hospitality companies in the world that's been an existing customer of ours, aggressively pursuing next-generation apps with Capella for the value proposition of scale and performance and cost effectiveness. And that's just one example.

As we look at the pipeline and the planning that we're doing with existing customers, while managing the pipeline of new. We're looking at consumption dynamics in both cohorts, if you will. And my comment on exceeding expectations actually pertains to both, which is something adding to our excitement about Capella overall..

Great. Helpful color. Thank you very much..

Thanks..

Thanks, Rob..

Thank you. Our next question is from Jason Ader with William Blair. Please proceed with your question..

Yes, thank you. Good afternoon, guys. Just wanted to ask about the go-to-market side. I know we talked a lot about Capella here on this call.

But are there any specific initiatives on the go-to-market side that are helping you get in front of new enterprise customers, which still seems to be like a challenge for you guys to get in front of -- to get the ad-bats and to get in front of those prospects?.

Yeah, Jason, I would say there's probably not a thing that we're doing on the go-to-market side that isn't focused on getting in front of new customers, everything from demand, announcing new capabilities, building our pipeline, establishing channel programs, investing in geographies that are relatively new to us where we are seeing disproportionate demand and faster return.

I think one of the things that we're very mindful of is, you need a compelling event for an application to be developed. And for the applications that we serve and a lot of cases they are truly mission critical, and there is a time element to that initial land. We've talked about shortening that quite a bit with Capella.

But our teams are maniacally focused on new customer acquisition and managing the pipeline and there's not an hour that goes by at Couchbase that we're not thinking about how to get better there. So, as Greg mentioned, we expect that to improve. We're seeing the leading indicators that we would want.

And I think it's an area that I would say unquestionably we can and will do better as we go forward..

And just following up on that, Matt, can you talk about how any geographies? You mentioned sort of disproportionate success in certain geos.

Anything that you can expand on there?.

Yeah. Hey, Jason, it's Greg. I'll add it. I mean look, there's a couple of regions in particular. So, we actually broke out are sort of EMEA region and we run it as Europe and then to TIMEA, which is Turkey, Israel, Middle East and Africa, and we're seeing very good activity there. We have a great leader there.

And then the other one, which we've been investing in the last couple of years, is Asia Pacific, which has also been doing very well. And as you can imagine, because we're newer there, newer technology, we're seeing a lot of Capella activity and a lot of new logo activity coming out of Asia Pacific.

So, those regions are really starting to become much more impactful to the business, as we've invested there over the last few years..

Thanks, guys. Good luck..

Thanks, Jason..

Thank you. Our next question is from Brad Reback with Stifel. Please proceed with your question..

Oh, great. Thanks very much.

Matt, any reason you wouldn't break Capella out next year?.

In what sense, Brad, like, reporting-wise?.

Yes..

We expect to break that out when we're ready and are excited to be at the point that we can do that..

Okay. Switching gears, thoughts around using M&A to gain scale? Thanks..

Yeah, Brad, I mean I think we pride ourselves at being agile with our strategy and we're always doing build by partner analysis. It's something that would be an ongoing consideration for us. And as we think particularly about M&A, there is benefits beyond scale, like an improving the platform in a particular area.

So, I'd say it's part of what we do, but I'm not prepared to make comments beyond that..

Great. Thanks very much..

Thanks, Brad..

Thanks, Brad..

Thank you. Our next question is from Taz Koujalgi with Wedbush Securities. Please proceed with your question..

Hey, guys. Thanks for taking my question. One for what [indiscernible] Greg. Greg, I mean you don't focus on billings as much, focus mostly on revenues and ARR. But if you look at the billings number this quarter, looks a little bit light. I think seasonally down sequentially, which is I believe never happened before.

So, anything to call out there on the billing metric, any headwind on the invoicing or duration front?.

No, not really, I would say, Taz. I mean, again, we've tried to say that billings for us is a bit noisy. We don't focus on that too much. We think ARR is a better measure, and a lot of it had to do with the timing of some of the renewals. Because we are still -- the predominant part of our business is the enterprise business.

And the renewal timing or annual upfront when we get those billings is when we do the renewal. So, no, I wouldn't read into anything about the billings. Durations are steady, if not slightly improving from sort of the lows we saw in the sort of worst of the macro..

Got it. Then just one follow-up for Matt. Matt, you've seen strong strength in Capella in the last few quarters.

On the go-to-market motion for Capella, is there a self-service element where people are signing up Capella without requiring a field guy or a sales rep to get to them? If you could just comment on any self-service motion with Capella traction versus direct sales selling Capella to your customers?.

Yeah, Taz, it's certainly part of the Capella value proposition. What I would say, complementing our more direct, highly instrumented, go-to-market model, enabling developers to come to us in their evaluation initial purchase, et cetera. So, it's certainly something that we're actively building as a complement to the overall business.

And one of the benefits that we see there is, not just for new logos, but expansion activity where people within our existing accounts can get at new applications faster. So, we're focusing a lot on what we call the developer experience and getting into product-led growth.

All of which is possible with the Capella offering and we're excited about the instrumentation and we have in place and the leading indicators of what that will do to the overall business..

Got it. Very helpful. Thanks, guys..

Thanks, Taz..

Thank you. Our next question is from Howard Ma with Guggenheim Securities. Please proceed with your question..

Thank you. Greg, ARR guidance assumes that you add about the same amount of net new ARR in the second half of the year as the $17 million added in the first half.

Can you remind us if new bookings is normally more back-half weighted? And if so, are there any offsetting factors this year that would make the two halves more equal?.

Yeah. Hey, Howard. Appreciate the question. Look, obviously we feel good about the ARR performance and even the ARR guide and the outlook we have in the second half. To your question about the bookings, yes, there is slightly more weighted towards the bookings in the second half, particularly Q4 tends to be our largest bookings quarter.

Again, this is the guidance which we feel good about it. As we've stated before, we set up guidance to hopefully at a minimum meet that, if not beat it. And again, we feel good about the momentum we have heading into the second half..

Okay, great. Thanks.

And for Matt, do you think new Gen AI capabilities could accelerate your new customer acquisition engine near term? For instance, do you have any evidence that Capella customer prospects are placing more weight on capabilities, such as coating co-pilots when choosing a database management system, or is Gen AI more of a mechanism to drive expansion among existing customers? Thank you..

Howard, I think the simple question -- simple answer to the question is, yes. And we were excited to announce Capella iQ. I would tell you that the early sign-ups for private preview have exceeded my expectation, which I think is indicative of new customer activity.

And if you think about the value proposition of Capella and just making it so much easier for developers, so much more efficient to get the full benefit of Couchbase, that's really important to us. And quite frankly something that we think is going to add a lot to how people think about and then directly and quickly experience Couchbase.

So I think it's going to be an accelerant on both sides, new and migrations..

Great. That's encouraging. Thank you..

Thanks, Howard..

Thank you. Our next question is from Rudy Kessinger with D.A. Davidson. Please proceed with your question..

Hey, thanks for taking my questions.

On Capella, I know I speak for everybody in this call [regularly] (ph) awaiting further metrics you can share, could you at least comment maybe directionally just how Capella has trended as a percentage of new bookings over the last several quarters? Any increase you've seen? I know you said it's been the majority of customer signings.

But how is it trending as a percentage of new bookings or total bookings? Anything you can share?.

Yeah. Hey, Rudy. It's Greg. Good to hear from you. Yeah, look, again, Capella every quarter becomes a larger percentage of pretty much every metric, whether it's bookings, revenue, ARR or customer accounts. It just, it continues to grow. And so, which is what we expected.

So, yeah, it just becomes a bigger component every quarter, because it's growing faster than the rest of the business..

Okay, fair enough. And on the ARR outperformance in the quarter and the $4 million raise for the year, what's the primary driver there? It sounds like that is primarily consumption exceeding expectations, but I know FX also flipped to a 1% tailwind in the quarter.

Did that have any impact on the $4 million raise for the year?.

A little bit, not as much. I think it was two things. I think it's the Capella acceleration we talked about the net retention rate continuing to improve and it being the best in three years. So that was -- part of it driven by Capella. But, Matt, also referred to some large enterprise deals we closed in the quarter with some very material expansion.

So it's really -- again, it's a combination of both, I see it as sort of just broad-based performance in the quarter, quite honestly in terms of where we had set guidance and the pipeline strong. So, we're again excited for what we did here in the second quarter and the second half outlook..

Thank you. There are no further questions at this time. I would like to hand the floor back over to management for any closing comments..

Thanks, operator. To recap, we had another strong quarter. We remain excited about our opportunity with Capella, due to some very big trends in our favor. The rapid adoption of cloud, desire for greater cost efficiency, IT modernization and of course AI.

We are cognizant of the macro environment and are sharply focused on execution during times like this, while also building for what we believe will be a very exciting future. Thank you all for joining us, and we look forward to speaking with you next quarter..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..