Thank you for standing by, and welcome to HashiCorp's Second Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session.

[Operator Instructions] I would now like to hand the call over to VP of Investor Relations and Corporate Development, Alex Kurtz. Please go ahead..

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

At the close of the market today and in conjunction with our earnings lease, we have published an earnings deck that contains additional financial information pertaining to our quarter. We encourage you to review the decks in advance of our calls. You can access the decks on our investor website at ir.hashicorp.com.

Today's call will contain forward-looking statements that 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 third quarter of fiscal 2023 and the full fiscal year 2023.

These statements may be identified by words such as expect, anticipate, intend, plan, believe, seek or will or similar statements. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements.

Forward-looking statements, by their nature, address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. During the call, we will also discuss certain non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles.

The financial measures presented on this call are prepared in accordance with GAAP, unless otherwise noted.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures as well as how we define these metrics and other metrics is included in our earnings press release, which has been furnished to the SEC and is also available on our website at ir.hashicorp.com.

Finally, we will be hosting a Financial Analyst Day at our HashiConf Global User Conference on October 5 in Los Angeles. We will also be live-streaming this event. Details will be available at ir.hashicorp.com. With that, let me turn the call over to Dave.

Dave?.

Thank you, Alex. Welcome, everyone, to our second quarter earnings call. We are excited to share with you that Q2 was a strong quarter for HashiCorp as we exceeded our guidance with revenue of $113.9 million, representing year-over-year growth of 52%, along with the trailing four-quarter average net dollar retention rate of 134%.

Current non-GAAP remaining performance obligations reached $498.4 million, representing 48% year-over-year growth. And we added 30 customers with greater than or equal to $100,000 in annual recurring revenue, reaching a total of 734.

Our HashiCorp Cloud Platform offerings reached $10.6 million in revenue, representing 9.6% of subscription revenue in the quarter.

We're very pleased with the performance of our HashiCorp Cloud managed offering in Q2, and as we look out to the remainder of the year, are excited about adoption trends as we continue to roll out new features and new capabilities.

Before diving into more details about the second quarter, I'd like to take a few minutes today to outline how we help enterprises transition to and operate in the cloud, and inevitably multi-cloud, by delivering a suite of cloud infrastructure and security automation products that provide a consistent cloud operating model.

As enterprises look to standardize their approach to cloud, they require a system of record for each layer of their infrastructure stack. Our product portfolio provides that system of record across each of those layers. And that's why organizations use HashiCorp. Our products are built with a cloud-first and cloud-agnostic approach.

And as multi-cloud is becoming the standard, our suite of products becomes even more valuable to our customers as they enable the adoption of a consistent operating model. We recently released our second annual HashiCorp State of Cloud Strategy Survey, which highlighted these observations.

First, according to the survey, multi-cloud is now the standard way that most organizations build and operate their infrastructure, and nearly all respondents who have adopted multi-cloud say it's helping them to advance or achieve their business goals. Second, organizations are hyper-focused on cloud security.

Respondents said that the leading factor in determining the success of their cloud strategy is, in fact, security. This reinforces the value of our foundational security offering, HashiCorp Vault. Third, nearly all respondents said that they rely on a centralized cloud platform team.

As you've heard from us before, we've seen this trend emerge over the last few years and believe it is becoming the norm for organizations finding success with their cloud adoption efforts. I want to underscore the importance of the central cloud platform teams and the maturity level it signals with customers.

We see the typical journey to cloud following a very predictable path. A team or a business group tasked with building something new, decides to build that application on a cloud platform. This is what the first phase of cloud adoption looks like for nearly every organization. It's what I'd call tactical.

It is at this stage that they utilize the open source version of our products. As these organizations shift to the next more mature phase of cloud adoption, we're seeing a centralized cloud platform team function emerge.

As these projects proliferate, operations, security and networking teams realize that they must become prescriptive, leading to the creation of a platform team to enable standardization and best practices to industrialize their cloud operations. It's this second phase of cloud that sets up the basis for successful cloud adoption.

And this is when we see governance, security, collaboration and the high-value enterprise capabilities of the HashiCorp commercial product is becoming a requirement and being managed by that platform team. Importantly, this platform team represents a common buying center for our entire product portfolio.

I'd like to share an example of what the central cloud platform team looked like within one of our customers. We're a strategic partner to one of the largest global financial institutions in the world who's in the early stages of a mass migration from private data centers to one of the big public clouds.

This transition began about two years ago, and their team realized early on that if they were to succeed, they needed to establish a cloud platform team and fundamentally change how they approached infrastructure operations. Their cloud platform team is tasked with delivering cloud throughout the organization.

They required a frictionless workflow to enable 15,000 developers to safely provision infrastructure for over 275 apps that underpin their business. To do this, the cloud platform team selected Terraform Enterprise because it offered the ability to manage both their policies and their actual infrastructure as code in a self-service manner.

We're proud to partner with this financial institution and just completed a major renewal and expansion with them for both Terraform and Vault. Now I'd like to turn your attention to notable second quarter transactions.

I want to highlight just a few examples of the strategic deals that we completed during the quarter that demonstrate our execution in the marketplace and show our adopt, land, expand, extend and renew motion in action. First, a land deal.

An e-commerce company in Indonesia began using Consul open source in 2015 and is now standardized on the Consul platform with plans to scale to 20,000 nodes.

They are one of the fastest-growing technology companies in Indonesia and requires service discovery and service health solution that is able to scale and support the momentum of their expansion plans.

The high resiliency and availability afforded by Consul has enabled this company to scale operations to millions of users, and at the same time, are working with our products to reduce their operational spend by at least 10%. Next, an expand deal. A banking-as-a-service provider that was already using Nomad, Consul and Vault.

During the quarter, the company expanded with a three-year contract that gives them a predictable migration model for moving Consul and Vault to the HashiCorp Cloud Platform, our HashiCorp managed cloud offering by the end of 2025.

This customer is in year two of a five-year aggressive growth plan, so they plan to bring in new business units and scale the existing environments to build out new services for their growing customer base. And third, an extend deal with one of the largest global insurance providers in the world.

This customer initially landed with Vault Enterprise in fiscal year 2022 and extended to Terraform Cloud in the second quarter. Terraform Cloud is the underpinning technology as they embark on a full cloud migration, a $50 million project, which consists of migrating over 1,000 applications to AWS.

This customer previously had limited governing standards for the initiative, and they have now deployed on Terraform Cloud to enforce policies and governance to support this migration. We are proud to count companies like these as our customers and are deeply committed to continuing to earn their trust.

Finally, I'd like to briefly highlight several product updates that were introduced in the quarter. In June, we hosted our HashiConf Europe Community Conference featuring customer speakers such as Swiss Railway, Booking.com, Deutsche Bank, TomTom and others.

The in-person experience was sold out and we had thousands more practitioners join us virtually. We made multiple product announcements at the conference, showing both our continued push towards building robust cloud versions of our products as well as our ongoing innovation focused on delivering high value for our customers.

First, we announced the private beta of HCP Boundary, our secure remote access offering, which we're incredibly excited about. I'm thrilled with the team's progress and the speed with which we delivered a HashiCorp managed offering of Boundary to customers, and we are particularly encouraged by the high level of interest in our private beta.

Second, we announced and subsequently delivered HCP Consul on Microsoft Azure. With this release, we now have cloud-based offerings of Consul, our service networking product, for both AWS and Azure environments.

Third, we introduced the Drift Detection capability for Terraform Cloud, which continually checks the state of infrastructure, looking for errors or drifts in configuration. This is a high-impact feature that provides immediate value for Terraform Enterprise customers.

Finally, Vault was evaluated as conformant with the Federal Information Processing Standard 140-2, also known as FIPS 140-2, achieving FIPS 140-2 compliance, an important milestone for our public sector customers. Thank you all for joining us today.

I look forward to seeing many of you at our Investor Day taking place at our HashiConf Global Conference on October 5 in Los Angeles. And with that, let me turn the call over to Navam..

Thank you, Dave, and thanks again to everyone for joining us today. Turning your attention to the top line financial results. We produced strong results in our second quarter of FY '23.

We grew our total revenue by 52% year-over-year, and our trailing four-quarter average net dollar retention rate reached 134%, which was over our 120% long-term target rate. Looking at our geographic segments, approximately 78% of our revenue came from the Americas, 15% from EMEA and 6% from the APAC regions.

The Americas region remains the largest contributor to our revenue. We expect an increasing percentage of revenue from the rest of the world over the long term. Moving to the expense side. HashiCorp continues to prioritize resource allocation efficiency in the business.

Doing so allowed us to come in ahead of our non-GAAP gross margin, non-GAAP operating income as well as our GAAP and non-GAAP net income plans. As we have previously discussed, after our IPO, we entered into an investment cycle where we aggressively invested in the areas of customer success, sales coverage and ongoing product innovation.

Starting in Q4 this year, as planned, we moved from an investment cycle to an operating leverage cycle, with the goal of improving operating margin on an annual basis while continuing to invest in the long-term growth of our business.

With our continued focus on operating efficiency, we came in ahead of our expectations on EPS, incurring a net loss of $0.40 per share on a GAAP basis and $0.17 per share on a non-GAAP basis. We track several key business metrics, which we believe help in understanding our business and financial performance in our journey to deliver durable growth.

You will find a lot of our KPI detail in the accompanying investor deck published today on our ir.hashicorp.com site. I encourage you to review this deck in detail. Focusing on one of our core business metrics, the greater or equal to $100,000 customer cohort, our progress continued during the second quarter.

On a trailing 12-month basis, we added 176 $100,000 or greater customers and grew the revenue per $100,000 or greater customers from $128,000 to $149,000 per customer in the quarter, a 16% year-over-year increase. The continued growth of these large customers is the foundation of our durable growth model, which remains on track.

Our HCP business continues to show positive momentum. We grew our HCP revenue by 183% year-over-year. We launched several new HCP products and features this past quarter, such as HCP Boundary public beta and HCP Consul on Microsoft Azure.

Finally, before moving on to guidance, I wanted to provide some context about how we are looking at the current macro environment. While digital transformation and cloud transformation initiatives are long-cycle investments by our customers, we expect to see some macro headwinds in the upcoming quarters.

We saw increased scrutiny on spend from several customers this quarter and we expect that to continue. The continued scrutiny on spend may have some impact on the timing of when we can close our contracts.

While it is difficult to predict the impact of macro on our close rates, we have estimated an approximate $4 million to $6 million headwind impact to our revenue in FY 2023, which we have incorporated into our guidance.

Given the expected macro impacts, we have moderated some of our forward investment spend levels in the business to focus more on operating efficiency this year. We will continue to increase or decrease spend accordingly as we gain clarity.

Outside of macro, I'd like to also remind everyone that our business is subject to enterprise buying patterns that result in seasonality during our quarters. Historically, Q3 has been a seasonally slower purchasing quarter by customers, particularly due to the summer months, and we expect to see the same seasonality this quarter.

Despite some macro adjustments, we are extremely encouraged by the overall market interest in our products, the partnerships we are forming with the largest institutions in the world and the progress we are seeing with our new HCP products. Now let's move on to our guidance.

For the third quarter of fiscal 2023, we expect total revenue in the range of $110 million to $112 million. We expect a Q3 non-GAAP operating loss in the range of $66 million to $63 million. We expect non-GAAP net loss per share to be between $0.32 and $0.30 based on 187.4 million weighted average basic and fully diluted shares outstanding.

For the full fiscal year 2023, we expect total revenue in the range of $442 million and $448 million. We expect FY 2023 non-GAAP operating loss in the range of $198 million and $194 million.

We expect non-GAAP net loss per share to be between $0.97 and $0.95 based on 186.2 million weighted average basic and diluted shares used in computing non-GAAP net loss per share. Finally, we will provide more detail on our outlook for the company's medium- and longer-term operating model at our upcoming Analyst Day in October.

But I wanted to provide our initial view for non-GAAP operating margin for FY '24. Driven by increased focus on spending efficiencies, we are targeting a range of 5 to 10 percentage points of improvement to non-GAAP operating margin for FY '24 compared to our FY '23 full year guidance level. We're pleased with our Q2 results.

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

Alex?.

Thanks, Navam. During the quarter, we will be attending the Citigroup Global Tech Conference, the Goldman Sachs Global Tech Conference and the Piper Sandler Growth Frontiers Conference. With that, operator, let's go to our first question..

[Operator Instructions] Our first question comes from the line of Ittai Kidron of Oppenheimer & Company..

Congrats, great quarter, and Navam, thanks for the macro color on how you're incorporating that. Very helpful. I have a question and a follow-up. The question is on the net dollar retention rate. Continues to move up, quite impressive.

Can you give us a little bit more of a breakdown of the drivers behind it? How much of this is a footprint increase of customers, upsell of new solutions? Any vertical color -- regional color where this is taking more hold versus others? That will be great..

Thanks, Ittai. Yes, this is Navam.

Q2 was a strong quarter in terms of the net dollar retention rate, as I mentioned, 134% net dollar retention rate, which is a tick-up from where we saw last quarter and was driven mainly by reaffirmations of our $100,000 customer group and our general customer group, right? And we're very pleased with the success we have with our customers who are continuing to adopt our products, expand into the usage they have and also expand into the secondary products.

So you break it down into basically the expand, extend cycle. It's -- our pricing is based on usage. The more customers use or move to cloud, you get to see expansions and that's 1 big component of our net retention rate. And also secondarily, you'd see customers moving on to their second or third product purchases, which also contributed.

So overall, Ittai, I think it was both and we're very pleased with that number..

This is Dave. I also think that it's worth noting, just stepping back a little bit, I talked a little bit about this notion of platform teams. Note that we have a single buying center for our product portfolio, which is very unique, and certainly, the design principle of what we've been trying accomplished for quite some time.

So it is both the expansion of existing product and extension to next product. But I just underscore that, that is the philosophy that we built as a company. And I think what you're starting to see is really some of the benefits of that manifest in the math..

Okay, great. And then as a follow-up on HCP, another good quarter there. But when I look at the quarterly net adds there, a decline from the first quarter. You've added less this quarter than you did in the last.

What can you tell me about the drivers there? And did this perform to your expectation in the quarter? And how do we think about the addition of other cloud partners, the inflection point in this? Not that it has grown slowly, but we'd like to see more as they say..

I'll jump in real quick before handing it over to Dave, so just a quick point. Our customer -- our revenue is predominantly focused on the $100,000 customer group, which represents about 88% of the total. And that group has been very strong in the second quarter.

We've been aiming to add 80 to 100 customers and we came in well ahead of that, which was the basis of sort of the durable growth model we have of continuing to expand and extend into that customer base..

Yes. Just to underscore that, Navam, the 80 to 100 customers per year was our guidance framework and we added 30 in the quarter. I think what you're alluding to is sort of the specifics on our HCP offering.

When you look at the total customer count, obviously, some portion of that is predicated on new adds on our cloud offering and some of that is on the self-managed products. I think as Navam was pointing out, predominantly, our revenue is driven by the self-managed products today.

I would say HCP is a new distribution channel for us, as we've talked about. It has affinity towards the longer tail of our customer base. And I think certainly, there's probably some macro impact there of the smaller companies that you see reflected in that math. But that number is going to move around a bunch in terms of the customer count.

So yes, I would attribute some of it to the longer-tail SMB. But overall, super, super encouraged by both the velocity of sign-ups of the free tier of our cloud offerings as well as sort of growing enterprise interest in the cloud-managed offering to settle up all the noise. Hopefully, that makes it clear..

Our next question comes from the line of Sanjit Singh of Morgan Stanley..

Maybe a question for Dave or Armon can make a jump on. Wanted to get a little insight around Drift Detection.

How did that feature capability? Where did that idea generation come from? And more broadly, as we think about adding more value, particularly on your paid enterprise offerings, how much -- is there a list there or a set of features and capabilities that you guys can roll out over the next several years to continue to add that value? Is this sort of the start of something? I just want to get a sense of what you could be preparing for from a feature monetization perspective..

Great. Yes. Thanks, Sanjit. This is Armon. I'm happy to take that one. The way we kind of think about it is, ultimately, going back to the open source model, it's about winning the practitioners first and sort of getting them to standardize around a workflow based on our products.

Then as Dave mentioned, really the enterprise need is how do I build a system of record ultimately to help with my governance challenges, my compliance challenges, my security challenges on top of that practitioner-oriented workflow. And so that's what sort of manifests in our product strategy.

So if we think about something like Drift Detection, it starts by saying, great, we want the practitioner at Terraform open source. They start using our Terraform Cloud or Terraform Enterprise in their free tier capacity. But then the enterprise capability is really about great as a day 2 challenge.

I really worry about security issues or compliance issues introduced by drift, right, where that might be caused by manual reconfiguration and/or someone logging into the Consul or other changes taking place outside of Terraform.

And so you start to see this almost split of our road map between what are the capabilities designed around the practitioners, which is really workflow orientation that we want to drive standardization and in these higher-value commercial features like Drift Detection, which is really about extending into the day 2 concerns that the platform team has, whether around security or operations at scale.

So kind of long story short, yes, it's part of the sort of longer track where we think about investing across those two different sort of parts, right? One is around workflow and winning the practitioner.

And then the second piece is around building those systems of record, right? And those are the capabilities that we're really focused on from a monetization perspective, Drift Detection being a major new capability and at our upcoming conference in October sales release new capabilities to build on top of that..

That's a great perspective and looking forward to the upcoming conference. And Navam, a follow-up question for you. Thank you for the framework. The $4 million to $6 million on the size of your business is actually -- and sounds quite encouraging because it's relatively minimal impact from a revenue perspective.

I'm sure there's maybe a little bit higher bookings impact. In terms of that $4 million to $6 million, can you sort of explain how you sort of got to that framework? Whether it's assumption around different customer cohorts, whether it's different conversion rates on the pipeline. Just any sort of clarity to unpack that $4 million to $6 million.

Would appreciate it..

Sure, Sanjit. So this is Navam. The way we -- Q2 played out was, it was a very strong quarter in terms of the actual performance and momentum we saw but what we did see was scrutiny from customers on spend. And I think you're seeing that across the board from most customers, most people out there and we're doing the same.

So what we're expecting is more scrutiny in Q3 and Q4, and the impact of that is essentially the deals we have, we tend to get, but the timing of that is a little uncertain.

So we factored the elongation of close cycles into the back half of the year, and the back half of the year impact is essentially that $4 million to $6 million that we've provided to you. Obviously, the bookings, given that we're a mostly ratable revenue company, is higher than that.

But despite all that, we think we're still going to have a very good year and that gave us confidence to raise the outlook for the year in this guidance..

Our next question comes from the line of Alex Zukin of Wolfe Research..

I guess if you think about the scrutiny, you have a pretty diverse customer base.

But is it possible to maybe just drill in? Is it -- were any of the macro or longer sales cycles, were there any specific verticals that were incrementally stronger or incrementally weaker? And that's just got to -- and maybe for Dave, are you starting to see that some customers are looking to deploy multi-cloud or get more efficient as a result of incremental cost-cutting initiatives and moves to get more efficient and optimize? And then I've got a quick follow-up..

Let me comment on the -- what we're seeing from customers. I think the reality -- I kind of just want to reframe exactly how that line in the opening remarks, how adoption happens and how that relates to our product portfolio.

So every cloud journey begins with some practitioner saying, "I want to build something net new in cloud", and that is where they use our open source products. As companies mature, right, they adopt our commercial products because now it's a central team wants to apply policy and governance, something else associated with that usage of cloud.

That cloud, V1 cloud, V2 is very, very typical, very, very repeatable. The value proposition of our products, whether it's single cloud or multi-cloud, is actually for the use of that platform team so they can reduce the cost of what's getting provisions. They can reduce the risk of what's going to provision.

They can accelerate the time to market without getting in people's way for those developers. So actually irrespective of whether it's single cloud or multi-cloud, that value proposition is the basis of our commercial offerings. And I just want to tease it apart. Our open source products are designed for use by the practitioner.

Our commercial parts are used by that core IT buyer, which is the platform owner. So in that sense, that secular trend towards cloud adoption continues unabated. If anything, there's more heterogeneity than less over the course of time. We think that puts us in a really, really positive position relative to the market.

Obviously, we're aware of the macro but that value proposition is very, very, very strong. And I don't really see that having changed. The question was around where we're seeing some impact..

Yes, Alex, so I'd say that the impact was relatively broad-based but I'd say more SMB than enterprise. So that's 1 area of higher focus of scrutiny on the SMB side. Secondarily, geographically, I would say it was a little bit more EMEA-focused than Americas-focused.

So the good news for us is that being focused on $100,000 customers and predominantly Americas, there's a moderated impact, which gave us confidence in the full year..

Perfect. And then maybe just as a follow-up. With respect to some of the metrics, if I look at RPO versus cRPO, it looks like it slipped a little bit with RPO strength this quarter maybe versus last and so RPO bookings looked really strong.

And then from a duration perspective, is there any changes that you're factoring in, maybe less upfront revenue because customers want to do more one-year deals over three-year deals? Any of that kind of more complex math fact that we should factor into the -- some of the forward-looking metrics?.

Sure. Yes. I'd comment on Q2 first. I'd say Q2 was a normal quarter for us in terms of duration where there was a reversion to the mean on the duration side and it ended up being roughly what we normally see with 90%-plus ratability in the business.

In Q3, we take our normal view of how we look at a quarter forecast, and there's a wide range of outcomes. We take a measured view around the middle and a solid execution side. And we -- the timing of large deals are typically unpredictable. Larger long duration deals are unpredictable. So we take a more measured view of how that comes in.

But overall, strong -- we feel confident about Q3 and the full year..

Our next question comes from Jason Ader of William Blair..

My first question is, how often are you guys in enterprise deals where the main competition is your own open source and how has that trended over time? And then do you think there's more risk now, given the environment that customers could choose, kind of opt for open source?.

Yes. So I'll go back to -- just to reiterate the point a bit earlier, thanks for the question, which is there's a phase at which open source is used and there's a phase which that inevitably converts to a commercial problem domain again.

So our model, as we stated from the beginning, is around building as large of a market as possible and proliferating our open source everywhere. So candidly, it's atypical for us to enter any company that's not already using our open source technology because that is the basis of the model. But that is brought in by the practitioner.

As the central platform team starts to understand it now, this product is now a tier zero service that is supporting the entire organization, it is a different set of concerns completely, which is how do I apply policy and governance, how to run as a shared service with zero downtime? That dynamic is the basis of our model, open source for the users, commercial for those core platform teams.

And that is really no different today than it has been. I would say anybody that is running our products service is benefiting from lower risk, lower cost and faster time to value for all those teams, and I certainly wouldn't expect that to change in any environment. So net, no change.

And in fact, given the dynamic of increasingly foundational usage of our tech, I'd be surprised if there were any change..

Great.

And then on that topic of open source, Armon, can you give us an update on Consul? Are you guys feeling good about winning that category as well?.

Yes, great. Thanks for the question, Jason. Yes, I think we feel pretty good about Consul generally. I think this quarter, we continue to land that new major customers that were expanding from existing usage of either evolved so we're continuing to see that extend motion work for.

Again, going to Dave's point, it's about winning the trust of that central platform team, typically with either Terraform or Vault first. And then once we have that sort of position of trust, it's really extending into the Consul use case around additional challenges, around network governance and moving to a Zero Trust posture.

So continuing to feel good about Consul there and optimistic about the traction, as Dave mentioned, releasing net new products like HCP Consul on Azure, so continuing to bring the cloud service on to additional regions and additional clouds, which is expanding the surface area of customers we can address..

I'll just add on the point just as a reminder, we -- one of the customers we called out in the prepared remarks was, in fact, a net new Consul land. It's indicative we continue to add new Consul customers at a healthy clip. I would -- as we shared previously, that market is still relatively immature in terms of its evolution.

But certainly anticipate that, that will continue to be a meaningful part of our business..

Our next question comes from Mark Murphy of JPMorgan..

Dave or maybe Armon, do you see mounting evidence in Q2 of Hashi's products being used synergistically in concert as a suite or seeing kind of connected multi-product usage? And are there any metrics or anecdotes you can share along those lines? And then I have a quick follow-up..

Yes. Thanks, Mark, for the question.

Yes, I think we're seeing this in a number of different dimensions, right? And I think particularly within the cloud portfolio, right, within HCP, I think the core design has been that we want that to be a common chassis so as customers come in, it's seamless for them to expand from one product to multiple products.

So I think there, we're already seeing that impact. And certainly, it's been a big focus for us in terms of having unified approaches to identity and billing. So the customers can start with product A, move to product B and do all of that kind of seamlessly within the platform. So already seeing good examples of that.

Actually, in quarter, a customer out of Asia Pacific region, signing up on cloud product with one initial product and then in quarter during an expansion to two additional products, I think, is a great example of that kind of motion working particularly well in cloud, where there's lower friction to it.

Then within our sort of self-managed enterprise customer base, continuing to see it. I think that's reflected, as Navam mentioned, in the NDR number as well.

And again, it goes back to that extension motion where it's really, for us, the core motions about winning the trust of that platform team, landing with one product and then doing an expansion and extension play. And I think you see that reflected in the NDR..

And then Navam, I'm looking at the 6% sequential growth in support revenue, which is the major revenue stream, and that one slowed a bit. That had been trending 10% to 12% sequentials in the prior quarters.

Just wondering, what is the underlying driver on that piece of it? Is that reflecting some of the macro or the deal scrutiny? And could -- is that something that we could perhaps see stabilize or rebound a little bit in Q3 or in Q4?.

Yes. Thanks, Mark. In terms of the revenue lines, I'd say product and cloud are the main revenue lines of focus for us. Support is essentially being sold to accelerate expansions and extensions. And we don't expect that to be a very large percentage of our total. So it's bouncing around the sub-5% mark is essentially where we're aiming for.

So this quarter, I'd say the support line didn't show any meaningful uptick or downtick. It was as expected and certainly within normal bounds. So I don't think that the services -- I'm sorry, the services line was any -- was anomalous in any way..

Our next question comes from the line of Fatima Boolani of Citi..

Dave, I'll start with you. You kind of alluded to the observable changes -- or rather, Navam, the observable changes in some buying patterns and some budgetary decision-making around the edges.

But I want to go back to the example that you shared in the prepared remarks with that Indonesian e-commerce customer who immediately realized a 10% reduction in their operating costs vis-à-vis their use of the public cloud using your product.

And so I'm curious, why hasn't that necessarily counteracted or overcompensated for some of the budget scrutiny? And then I have a follow-up for Navam, if I may..

Yes, I'll answer that one. Thanks for the question. So yes, I think I pull it back to sort of this transition from private data center to cloud is underpinning all of this, and those are both -- transitions that are taking some period of time to play out, but they're also deeply considered decisions by customers.

And I think that is just the reality of infrastructure. These are markets that are deeply considered and cost is one aspect of the decision criteria. So I would actually refer to that as sort of indicative of just how serious these decisions are for people. These are, in a sense, decisions that are difficult to undo.

And in periods of caution, those things sometimes come up with greater scrutiny. That being said, you saw that reinforced in our outlook for the year but also in our ability to raise the guide for the year, which sort of does indicate that there's a good balance between the risks and the positives..

And Navam, just some additional color from you on the guidance and outlook and some of the philosophy here that you fleshed out for us. So maybe a two-parter on this. You've had sort of the experience of going through the COVID pandemic where you did see some similar dynamics.

I'm curious if you can compare and contrast sort of, again, buying posture now and in this environment versus what you saw in COVID.

And then to your commentary on being proactive around titrating the hiring and expense envelope in response to the changing macro, where exactly do you feel that you can pull back a little bit without really sacrificing the momentum that you're seeking to execute on?.

Yes. Thanks, Fatima. Great questions. In terms of cycles, every cycle is different from each other. The COVID cycle certainly saw some lengthening of deal cycles. And I'd also say that the foundational aspects of cloud transformation and digital transformation was very much intact then and it continues to be very much intact now.

So it's slightly different. It's less uncertain, I would say, at this point in terms of how we sell. That was a very uncertain point where our enterprise field sales team had to adopt very different behaviors. And this time around, we don't have that additional headwind.

So we feel that there's some scrutiny in spend, but obviously, it's a different cycle. And the impact we've talked about during prepared remarks, we're comfortable with and feel that it's been reflected in the full year and we're confident about the full year.

In terms of the spend, we've always been an efficient company in terms of resource allocation. During the IPO, we made a conscious decision to spend ahead of plan for the first three quarters as we go into this investment cycle. And the fourth quarter continues to be -- the fourth quarter is the end of that investment cycle.

So we're going to move into a normal operating leverage cycle beyond that point. So all this is saying that we're going to continue to focus on investing into the long term of the business. And we're not essentially pulling back.

We're just investing less further ahead and we think that the investments made in the first three quarters are adequate for this year and next year's performance..

Our next question comes from the line of Jim Fish of Piper Sandler..

Any change to what customers are prioritizing in terms of the main product sets? And I'll take the bait this quarter and even ask, is there a rough contribution of revenue change in the quarter between the main solutions? Really just trying to understand if we're starting to shift more towards Consul and Nomad and Boundary as opposed to Terraform and Vault?.

Yes. Thanks. I'll take those. This is Dave. I think in general, the pattern remains consistent. And it speaks really much more to the market maturity, honestly, than anything else, which is the provisioning problem, the security problem are the first ones people went into. So Terraform and Vault continue to be where people are landing.

I think what we shared at sort of depends on the accounts to which 1 it tends to be. That being said, this notion of a single buying center is how we view our opportunity. And so certainly, we view the adjacent products as natural items actually adopted over the course of time.

The reality is it will be different depending on which company that is in terms of which one they prioritize. We're certainly excited about Boundary. Boundary's not currently generally available yet. I would say more common is the expansion into a Consul as a third product. So net, market maturity remains about the same.

These things are taking a while to play out, less about us and more about just market maturity. But overall, I think this idea of kind of the single buying center and a common distribution channel is the essence of how we think about the opportunity. And we do think that's the virtue of being a multi-product company..

That's really helpful.

On the go-to-market side of things, has there been any kind of underlying development with either system integrators or even -- obviously, we talked about the strength of Azure with Consul here, but how that can kind of evolve your go-to-market process by working more with hyperscalers despite kind of this positioning around being able to help automate multi-cloud?.

Yes. I mean, Armon will have a point of view. I'll start, this is Dave. Yes, I think our proposition has always been about the ability to accelerate cloud adoption, and that has made us an excellent partner for the cloud provider, certainly won Partner of the Year from Azure several times and Google as well, et cetera.

So overall, our go-to-market motion is very much in concert with the cloud providers. And then there's typically to support from the cloud providers and are slowly growing our partner SI ecosystem. As you know, the skills gap is probably the biggest challenge in cloud computing, irrespective of us, and that is why that trifecta works.

Armon, any differences?.

No. I think Dave captured it. I think the only thing I'd add is, by and large, our SI community is there to provide services that sort of accelerate the adoption and help customers realize the value of it. They tend to be less of a traditional resell channel.

So I think while we have a very large and extensive investment in the SI community, I think by and large, that's how we sort of focus is engaging directly with the customers and then bringing in our SI partners to help accelerate their adoption of the product..

Our next question comes from Derrick Wood of Cowen..

Dave, first question. I wanted to go back to the central cloud platform team subject. I mean, it seems like once companies get to this kind of strategic makeup of a centralized buying center, that's really where you start to see inflection not only on a core product but driving extension in other products.

I think this formation of these kinds of teams are pretty early still. So I'm just curious what verticals stick out as being kind of early in this positioning forward thinking. I mean, you called out a large financial services win. You called out a large insurance win.

Has been served the vertical that's really starting to see this and any other ones that you'd flag?.

I'd say, yes. Generally, it's those verticals that are good at software delivery historically is what it is. So that has historically been financial services. Certainly, there are telcos. There are some health cares that are good at this. But yes, it's early is a short version.

I think it actually underscores how early the cloud opportunity is in the Global 2000 because this construct is how it has done successfully. So yes, financial services, yes, the big verticals we expect, generally those that are good at software development. But certainly, we see it over time.

And I think if you look at the virtualization as an example, the VI admin role became ubiquitous over time. And I think there's some -- there's an analog here..

Got it. Navam, one for you. Just wanted to drill down on the Q3 guide. I think at midpoint, it's got revenue down a few points sequentially. The last couple of years, you'd seen kind of Q3 up 9% sequentially.

Is this just extra conservatism? Or is there something in the pipeline that makes you think it's more Q4 weighted or something in the model that we should be considering in terms of why we're going to see some kind of extra seasonality this Q3 versus past years?.

Yes. Thanks for the question. So yes, Q2 was very strong and it was a very -- it was still a very ratable quarter with 90%-plus ratability. But as we move from Q2 to Q3, you have to refill the non-ratable components.

So when we think about the Q3 guide, we look at the way we normally do things, which is a solid execution quarter and large deals are inherently unpredictable. So we take a measured view on how those come in. And we've factored in seasonality. So all those things considered are what we're looking at for Q3.

All that being said, we're very optimistic for the full year, as I mentioned and Dave mentioned before, guiding up the entire year in the back half. So regardless of the Q3, Q4 split, I think we're very optimistic about how the year is going to turn out..

Our next question comes from Brad Sills of Bank of America..

Okay, great. Sorry about that. Yes, I just wanted to ask a question about ASP. One of the metrics that stands out to me is that cohort of greater than $100,000 customer accelerating to [16%] on ASP off a tougher comp. So my question is, if you could unpack that a little bit.

Is that acceleration due more to expansion versus extension, customers expanding what they already have, or are they extending in these other categories like Vault, Consul, Packer?.

Yes, got it. The customer journey is an inherently predictable one. You land then the next thing you do is you expand as usage increases. And then extension happens to be sort of a day 2 concern, so Terraform to Vault, Vault to Consul, so on and so forth.

So as you think about a cohort maturing, it's more expansion in the beginning, with extension coming later and then expansion on those extended products. So that's generally how you think about the journey of a customer within our product set.

The ASP growth is within our durable growth framework, which is continued expansions and extensions within those $100,000 customer cohort. And we're very pleased with the reaffirmations we're seeing from those customers continuing to buy our software..

Wonderful. Great to hear. And then one more, if I may, please. You talk about this concept of a centralized buying center. What does it take for a customer to get to that point? Is it simply, we now have a big enough multi-cloud deployment. We need the standard Consul to manage provisioning, security, networking, et cetera, with Hashi.

And what can Hashi do to move customers along to get to that point?.

Yes, it's a great question. I think we've seen this play out a number of different times, and so we sort of jokingly call it Cloud 1.0, 2.0, 3.0. And I think what we often see is in the sort of initial adoption phase.

What happens is an organization maybe signs an agreement with 1 or more cloud providers and sort of opens up the floodgate to their internal development community. And so you have this very sort of tactical ad-hoc approach to cloud adoption.

Inevitably, what happens 12 to 18 months later is those teams are all doing it in sort of an inconsistent way, right? There isn't a centralized approach that's driving common compliance, common security, common controls across it. And so very quickly, it becomes unmanageable.

And so either it triggers a cost concern because you have overruns of spend, or it triggers security and compliance concerns because you're running into some of those issues.

And so oftentimes, organizations then realize that they actually need to have a stronger, more consistent approach to how they do cloud, and that's the catalyst for them to then create that central group, right? And so that tends to be the shift where they go from a 1.0 to 2.0.

I think the pattern tends to be most of the time, you have organizations that run into the problem and then that is the catalyst for it. Rare is the people who see it in foresight. And so certainly, we try and encourage customers, but sometimes you have to feel the pain first..

Our next question comes from Brad Reback of Stifel..

Navam, as we think about the leverage commentary for next year, is that going to be fairly split evenly between R&D and sales and marketing? Or will it trend one way or the other?.

Yes. Thanks, Brad. It will be evenly split across the board in all three segments, sales and marketing, R&D and G&A. We've invested ahead in all three of those segments, and the leverage cycle will prove out in all three as well..

Our next question comes from Michael Turits of KeyBanc..

My question is on our margins because last a couple of times, but congrats on the 5 to 10-point increase for next year. So the question for Navam or Dave. There was a lot of evidence of some slowing cloud deployments this quarter from the hyperscalers down to people who are migrating their own businesses to clouds.

Did you see any of that impact at all, seeing that kind of action at all? And so since typically, people frequently adopt Terraform in particular when making that cloud migration, did you not see it? Did -- you were able to just execute well against it? What did you see?.

Yes, this is David. I think I would say in general, it's hard to see that sort of thing at the macro level. I would attribute it to strong demand and good execution from our side, candidly. And our teams did a phenomenal job during the quarter. I don't think we saw anything specific as it relates to what you're describing..

And then Armon, if you could drill down a little bit more on Consul. Great to see that you had a major win in Indonesia. You've remarked in prior quarter calls that you've seen a maturation, earlier adoption of Consul.

So what are the use cases? You mentioned service mapping, service discovery are the use cases around service mesh and what, if anything, is driving the growth?.

Yes, great question. I think there's two -- effectively two primary use cases. The first one is, I think, as organizations are adopting cloud, there's a greater mix of technologies at play, right? They have some mix of virtualized workloads, some mix of containerized workload. Increasingly, we see more serverless application.

So the basic initial problem they have is one of simply source discovery or enabling the workloads running on those different platforms to connect to one another, right? So that tends to be the first kind of use case that we lead with.

With Consul, it's really more of a discovery one, solving the fact that you have multi-platform, multi-cloud workloads that they need to interoperate with one another. Then I think the day 2 concern really is around the security of that.

And so as organizations sort of invest in a Zero Trust posture and think about how do I protect those different applications talking to one another, that's really the service mesh use case, right? So that's where we really see Consul come in, focusing on sort of enabling the security of those service-to-service communication.

It's more of a day 2 concern, right, versus service discovery, which is more of a day 1 enabling concern.

And then I think more on the sort of kind of day 3 cost optimization, process optimization is our investment in network automation, right? So how do I then look at connecting Consul to Terraform to actually automate how my network functions rather than have through manual processes where I'm filing tickets and humans have to intervene to update the network.

So that tends to be the kind of core proposition is day 1, enablement of multi-cloud and multi-platform; day 2, security; day 3, sort of cost and process optimization..

[Operator Instructions] Our next question comes from the line of Pat Walravens of JMP Securities..

And let me add my congratulations. I'm curious how the macro progressed through the quarter. So one big cloud company said that May and June were actually quite strong. July was a step-down of the problem. And then when they reported pretty late in August, they said August hadn't gotten any better.

So I'm just wondering, what was your experience like in the quarter and how has August been so far? Or I guess August is done.

How was August?.

Pat, it's Navam here. So the buying cycle for us is very enterprise-heavy. So what that ends up -- what that means is that it's a tail-end weighted quarter for us in terms of how the contracts come in. So you generally don't see it as much in the beginning of the quarter and you see it closer to the contract ends.

So that's essentially how we saw -- the increased scrutiny of spend starts manifesting towards the back half of the quarter, and that's generally the timing of when you said. All that being said, Q2, we managed to execute very well despite the increased scrutiny..

And August, what would you say? I guess that it's back end weighted, but any difference so far that you.

I don't see any difference in the August time frame compared to the beginning of last quarter or towards the middle of last quarter. It's really no difference.

Now note that there's vacation time in the summer that impacts the third quarter, and that's the seasonality comment I made and that's been pretty consistent in terms of how it's been from the previous years as well..

Thank you. At this time, I'd like to turn the call back over to Dave McJannet for closing remarks.

Sir?.

Yes. I'd just like to express my thanks for the participation. Appreciate you dialing in and for the questions and look forward to speaking to everybody soon. Thank you..

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