Earnings Call
Gitlab Inc. (GTLB)
Earnings Call Transcript - GTLB Q4 2023
Operator, Operator
Thank you for joining us today for GitLab's Fourth Quarter and Fiscal Year 2023 Financial Results Presentation. GitLab's Co-Founder and CEO, Sid Sijbrandij; and GitLab's Chief Financial Officer, Brian Robins will provide commentary on the quarter and the fiscal year. Please note, we will be opening up the call for panelist questions. Before we begin, I'll cover the safe-harbor statement. During this conference call, we may make forward-looking statements within the meaning of the federal securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risks associated with these forward-looking statements in our business, please refer to our earnings release distributed today in our SEC filings, including our most recent quarterly report on Form 10-Q and when filed our most recent annual report on Form 10-K. All forward-looking statements are based upon information currently available to us. We caution you to not place undue reliance on forward-looking statements, and we undertake no duty or obligation to update or revise any forward-looking statement or to report any future events, or circumstances, or to reflect the occurrence of unanticipated events. We may also discuss financial performance measures that differ from comparable measures contained in our financial statements prepared in accordance with US GAAP. These non-GAAP measures are not intended to be a substitute for our GAAP results. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release, which along with these reconciliations and additional supplemental information are available at ir.gitlab.com. A replay of today's call will also be posted on ir.gitlab.com. I will now turn the call over to GitLab's Co-Founder and Chief Executive Officer, Sid Sijbrandij.
Sid Sijbrandij, CEO
Thank you for joining us today. In the fourth quarter of FY 2023, we continued to demonstrate our ability to grow while significantly improving margins. We generated revenue of $122.9 million during Q4 FY 2023. This represents a year-over-year growth of 58%. Our fourth quarter results also continued to exhibit improving operating leverage in our business. Our non-GAAP operating margin improved. There's no question that the past several months have represented a difficult time for many companies. Economic headwinds have resulted in budget reductions. Companies are forced to figure out how to do more with less. They must continue to deliver customer value with a need to innovate with fewer resources than before. Some of the watchpoints that we cited during our third quarter fiscal year earnings presentation became more pronounced during the fourth quarter. Being a growth company offering a mission critical platform, we saw these impacts later than other software companies. The watchpoints that played out in the fourth quarter were: longer deal cycle times; higher contraction of seats; lower expansion than historical trends. Based on this, we announced a 7% reduction in force on February 9th. We see significant opportunities ahead. We’re confident in the strong value proposition that GitLab provides to customers. And we are still in the early phases of capturing this estimated $40 billion addressable market. A market that we’ve seen evolve from point solutions to a platform. From DIY DevOps to a DevSecOps platform. A market that we created and we now have the most comprehensive offering with proven ROI. In this macro environment, it is critical for companies to show the immediate return on software investments. Forrester found that, as a result of implementing GitLab, a company generated a total return on investment of 427% over three years. Even more critical, they realized a payback on the investment in less than six months. This payback enables companies to reinvest in future innovation. Companies now need to simultaneously innovate and reduce costs. We believe this environment provides an ideal backdrop for GitLab to demonstrate significant value. They can consolidate their many DevSecOps tools, which saves costs and leads to efficiency gains. They can reduce or eliminate the amount spent on tool chain integrations. Their engineers become more productive by reducing time to deploy applications. And they can accelerate revenue by deploying their software faster. Let me provide some customer stories in Q4 that demonstrate the value of GitLab’s DevSecOps platform. Deutsche Telekom is the largest telecommunications provider in Europe. DevOps methodologies have become a cornerstone of their efforts to streamline software development, reduce manual tasks, break down silos, and increase productivity. Since adopting GitLab, Deutsche Telekom has reduced the time to release software from 18 months down to approximately 75 days. That’s a 7 times faster cycle time. And they’ve achieved this velocity while streamlining security practices and improving team collaboration. In Q4, they purchased over 1,000 additional Ultimate licenses. GitLab is also helping Mass Mutual’s subsidiary, Haven Technologies, a digital insurance leader. Using GitLab, they have cut costs, driven efficiency, and increased development velocity as they double down on Kubernetes. In Q4, the team reported a 400% increase in development cycles, from roughly two cycles per week to two per day. And they have greatly increased the number of security pipelines run on each merge request, which helped to increase developer involvement in securing applications earlier in the development lifecycle. GitLab has also helped increase productivity by automating a number of processes, especially around branching. Finally, we are excited to see the results that Grammarly has achieved with GitLab. Grammarly powers effective communication for over 50,000 teams and for over 30 million people daily. Grammarly adopted GitLab in 2019 for source code management and continuous integration. Since then, they have steadily increased their GitLab adoption, with the number of users increasing more than four times. As adoption grew, so did Grammarly’s interest in additional GitLab capabilities. Grammarly wanted to implement robust security scanning into the software development cycle, but managing numerous disparate tools became a challenge. Grammarly upgraded to GitLab Ultimate in 2021 so they could move from using GitLab for just SCM and CI to also use it for a number of advanced security capabilities, all in a single application. These include static and dynamic security scanners, secret detection, and container scans. Grammarly added more Ultimate licenses in Q4 and envisions everyone at the organization using GitLab. All of these customers, Deutsche Telekom, Mass Mutual, and Grammarly and thousands more are realizing the benefits of GitLab’s core value proposition: Software, Faster. Now, let’s turn to our product priorities. Our pace of innovation is widening the competitive moat. We’re confident that we have the right product priorities to capture even more share of this expanding market. Our platform is differentiated in a number of ways: We deliver the most comprehensive DevSecOps platform as a single application. We are open core, ensuring we are on the leading edge of innovation by building with our global community of customers and users. Over 3,000 new GitLab capabilities came from the wider community contributions in the last year alone. We have security natively integrated in our platform; it’s built in, not bolted on. We are cloud agnostic. We are not incentivized to push customers to use any cloud provider, so our customers don’t fear vendor lock-in. And we offer flexibility of different deployment options, satisfying the needs of the most complicated compliance and security requirements across all sectors. Our current product priorities are all about building on this differentiation and strengthening GitLab’s position as the most comprehensive DevSecOps platform. They are: Number one, continue integrating advanced security and compliance. This strengthens our Ultimate offering and helps customers bring software supply chain security to the forefront of software development. Number two, deepen native integration of observability, analytics, and user feedback. This gives every stakeholder in the software development lifecycle the data and insight they need to unlock the value of their software investment. And third, expand to new use cases and audiences with Artificial Intelligence and Machine Learning. Here is an update on what we’ve accomplished since our last call. In Q4, we released GitLab Remote Development, eliminating the need to configure and maintain complex local environments. This newly released Web IDE enables everyone to contribute from any web browser while reducing the need for context switching. GitLab Remote Development also creates a more secure user experience by enabling organizations to implement a zero-trust policy that prevents source code and sensitive data from being stored locally across numerous devices. In addition, organizations can adhere to compliance requirements by ensuring developers are working with approved environments, libraries, and dependencies. Security and compliance continue to be core reasons why enterprises choose GitLab over the competition, and in Q4 we continued our pace of innovation in this area. We launched new capabilities, allowing security officers to enforce policy control, compliance frameworks, and license policies for multiple development projects more easily at the group level rather than having to go project-by-project. We introduced browser-based Dynamic Application Security Testing, DAST, to authenticate, crawl, and scan web applications for vulnerabilities. The browser-based DAST significantly reduces testing time and it has the advantage of more seamlessly fitting into the software development workflow. And, we improved the accuracy of our DAST API Analyzer, reducing false positives by an estimated 78%, making it easier for customers to hone in on true security threats. We see DAST as a competitive advantage for us in the DevSecOps Platform space and I’m glad to see us continue to innovate with these types of security scanners. These are just a few of the innovations we made in Q4 to make it easier to enforce security policies across the entire organization and enable companies to secure their software supply chain. We believe that these key additions to our Security offering help our customers to build more secure software faster and more efficiently than with any other solution on the market. To bring analytics and feedback into our DevSecOps platform, last quarter, we shipped the GitLab Value Streams Dashboard. I’m really excited about this new capability. We have seen how it delivers tremendous value to our customers. This is only possible with a comprehensive DevSecOps platform built as a single application with a unified data store. The Value Streams Dashboard allows all stakeholders from executives to individual contributors to have visibility in the process and value delivery metrics associated with the software development lifecycle. Now companies can see where their roadblocks are and take steps to ship software faster. Our first iteration enables teams to continuously improve workflows by benchmarking key DevSecOps metrics. They can track and compare these metrics over time, helping teams identify and fix engineering inefficiencies and bottlenecks. One customer from a large financial services company was so excited about this new capability. He was able to use the Value Streams Dashboard to identify his best Java programmers and have them work on mission-critical projects. Another customer told me that this capability became a morale booster for all his engineers. They could now finally all rally around the same metrics to show what they were capable of doing. I believe the Value Streams Dashboard is a game changer for our customers. No other platform can give this level of visibility across every step of the software development lifecycle without needing to buy or maintain a third party tool. AI clearly represents a major technological wave. I fundamentally believe that AI will revolutionize DevSecOps platforms. However, AI isn’t a department. It’s not a stand-alone capability. It weaves through every function, every department, and every persona involved in developing, securing, and operating software. We are pursuing AI as a fundamental and integrated part of the DevSecOps platform. First, we use AI to make GitLab’s DevSecOps platform automate mundane tasks and reduce the cognitive load for our customers. We are creating AI-assisted capabilities for everyone in the software delivery workflow. These improve productivity and efficiency. Let me provide some examples: Suggested Reviewers, which we launched last September, automatically suggests the best available reviewer for code changes. This capability removes the guesswork by ensuring the right reviewer with the right contextual knowledge is reviewing code changes so that customers can deploy software more efficiently. Our customers have told us that they absolutely love this new feature because it minimizes delays and leads to better reviews. They now have more confidence in the code they deploy. Already they have leveraged Suggested Reviewers tens of thousands of times to more efficiently and securely review code on our platform. GitLab Code Suggestions, which we launched this past February, increases developer speed and productivity by providing code suggestions in their integrated development environment. We plan to add new AI capabilities throughout the DevSecOps lifecycle. For example, we are developing an Intelligent Code Security solution to reduce the risk due to insecure coding practices. We anticipate that Intelligent Code Security will automatically detect and remediate code quality and security vulnerabilities. Second, we make it easier for customers to incorporate AI into their applications faster. We are working on integrating this ModelOps solution into the GitLab DevSecOps Platform to empower customers to build and integrate data science workloads and extend DevSecOps workflows to AI and machine learning workloads. In summary, AI is going to dramatically change the way teams work and the way organizations develop, secure, and operate software. We believe we will be on the leading edge of it, applying the same value of iteration that has led to the creation of the most comprehensive DevSecOps platform. We updated our pricing to reflect the significant enhancements we’ve delivered over the past several years. On March 2nd, we announced we have increased the list price of GitLab Premium from $19 to $29 per user per month with transition pricing for existing customers. This is our first price increase in more than five years and it reflects the evolution of GitLab from source control and CI to the most comprehensive DevSecOps platform. Since February 2018, GitLab Premium added over 400 new features, leading to improved cycle times, developer experience, and collaboration for our customers. We’ve also rolled out a significant step to accelerate our product-led growth motion. This month, we will begin applying user limits to the GitLab SaaS Free tier. With this change, organizations on our Free Tier will be limited to five users. This gives them the opportunity to experience the value of a comprehensive DevSecOps platform while also driving them to more quickly convert to a paid tier if they use it with a larger team. We believe this change will drive even greater adoption of our paid tiers. In summary, I’m confident in the opportunity ahead for GitLab. We have the right product for the right market at the right time. We have the most comprehensive DevSecOps platform. And now, more than ever, companies will need to innovate faster and cut costs at the same time. On a personal note, I’d like to thank the GitLab E-group and the Board for their support as I am currently going through some health challenges. I recently had surgery for a spinal lesion and, after much consultation with medical experts in the field, I decided to undergo radiation and chemotherapy last month for Osteosarcoma. I have completed radiation and currently have 13 weeks left of chemotherapy. My scope and responsibilities as GitLab’s CEO and Chair remain unchanged. I am looking forward to making a full recovery. And I'm committed as ever to GitLab’s success. I will now turn it over to Brian Robins, GitLab’s Chief Financial Officer.
Brian Robins, CFO
Thank you Sid, and thank you again for everyone joining us today. I would like to spend a moment discussing what we are seeing in the macro environment and will review the key characteristics of our business model. Then, I will quickly recap our fourth quarter financial results and key operating metrics, and conclude with our guidance. On our last earnings call, I cited some watchpoints that we encountered towards the end of the quarter. We started seeing greater deal scrutiny on some deals, lower expansion rates than historical trends, and a slight uptick in contraction. These factors became more pronounced during 4Q FY 2023. We believe the uncertain macroeconomic environment affected us in two ways. First, we saw that some of our customers experienced changes in their businesses which led to either hiring slowdowns or a reduction in workforces. This impacted expansions, primarily in our Premium tier. It also led to an uptick in customer contractions and churn. Second, we encountered greater deal scrutiny at the end of the calendar year, as companies reevaluated their overall spending plans heading into the new year. We also saw more people involved in approval processes, which led to longer sales cycles. Moving forward, our fundamental proposition to our customers hasn’t changed. In a world in which software defines the speed of innovation, GitLab enables companies to build and deploy software better, faster, cheaper, and in a more secure manner. We are the most comprehensive DevSecOps Platform. Key aspects of our business model that enable our performance include: the predictability of a subscription, rather than a consumption model; a platform sale rather than a point solution; a diversified base of customers across industry verticals, customer sizes, and geographic regions; And, a short implementation cycle with an established and well-documented ROI. Now, turning to the numbers. Revenue of $122.9 million this quarter represents an increase of 58% organically from the prior year. We ended 4Q with over 7,000 customers with ARR of at least $5,000, compared to over 6,400 customers in the third quarter of FY 2023, and over 4,500 customers in the prior fiscal year. This represents a year-over-year growth rate of approximately 52%. Currently, customers with greater than $5,000 in ARR represent approximately 95% of our total ARR. We also measure the performance and growth of our larger customers, who we define as those spending more than $100,000 in ARR with us. At the end of the fourth quarter of FY 2023, we had 697 customers with ARR of at least $100,000, compared to 638 customers in 3Q FY 2023, and 492 customers in the fourth quarter of FY 2022. This represents a year-over-year growth rate of approximately 42%. Also, as an annual disclosure, at the end of FY 2023, we had 63 customers with ARR of at least $1 million, compared to 39 at the end of the prior year, which represents a year-over-year growth rate of 62%. As many of you know, we do not believe calculated billings to be a good indicator of our business, given that the prior period comparisons can be impacted by a number of factors, most notably our history of large prepaid multi-year deals. This quarter total RPO grew 39% year over year to $436 million, and cRPO grew 51% to $308 million for the same timeframe. We ended our fourth quarter with a Dollar-Based Net Retention Rate of 133%. For added context regarding expansion activity during the fiscal year, the metric exceeded 145% in each of the first three quarters of FY 2023. Next quarter we will revert back to reporting this as a threshold metric using 130% or the actual number if below 130%. The Ultimate tier continues to be our fastest growing tier, representing 40% of ARR for the fourth quarter of FY 2023, compared with 37% of ARR in the fourth quarter of FY 2022. Additionally, our Ultimate tier performed well in the quarter with approximately half of our bookings coming from Ultimate purchases given our strength in security and compliance. Non-GAAP gross margins were 90% for the quarter, which is slightly improved from both the immediately preceding quarter and the fourth quarter of FY 2022. As we move forward, we are estimating a moderate reduction in this metric due to the rapid year-over-year growth rate of our SaaS offering. We saw improved operating leverage this quarter, largely driven by realizing greater efficiencies as we continue to scale the business. Non-GAAP operating loss was $13.8 million, or negative 11% of revenue, compared to a loss of $27.4 million, or negative 35% of revenue in Q4 of last fiscal year. Q4 FY 2023 includes $5.9 million of expenses related to our JV and majority-owned subsidiary. Operating cash used was $11.7 million in the fourth quarter of FY 2023, compared to $1.1 million used in the same quarter of last fiscal year. Now let’s turn to guidance. First, there has been no change to our overall guidance philosophy. In light of the challenging macroeconomic headwinds, we have reassessed our near-term revenue growth outlook, assuming trends we saw in 4Q continue. Additionally, in response to our near-term revenue outlook, we have made adjustments to our expenses. We believe these actions will lead to an accelerated path to profitability. For the first quarter of FY 2024 we expect total revenue of $117.0 million to $118.0 million, representing a growth rate of 34% to 35% year-over-year. We expect a non-GAAP operating loss of $27.0 million to $26.0 million. And we expect non-GAAP net loss per share of $0.15 to $0.14 assuming 151 million weighted average shares outstanding. For the full year FY 2024 we expect total revenue of $529 million to $533 million, representing a growth rate of approximately 25% year-over-year. We expect a non-GAAP operating loss of $64.0 million to $59.0 million. And we expect a non-GAAP net loss per share of $0.29 to $0.24 assuming 153 million weighted average shares outstanding. On a percentage basis, our new annual FY 2024 guidance implies non-GAAP operating improvement of approximately 900 basis points year-over-year at the midpoint of our guidance. Over the longer term, we believe that a continued, targeted focus on growth initiatives and scaling the business will yield further improvements in unit economics. Separately, I would like to provide an update on JiHu, our China joint venture. Our goal remains to deconsolidate JiHu. However, we cannot predict the likelihood of timing of when this may potentially occur. Thus, for modeling purposes for FY 2024, we forecast approximately $33 million of expenses related to JiHu, compared with $19.0 million in FY 2023. These JiHu expenses represent approximately 6% of our total implied 12% non-GAAP operating loss for FY 2024. As Sid and I have said over the last several quarters, our number one priority is growth, but we will do that responsibly. There has been no philosophical change in how we run the business to maximize shareholder value over the long term. We continue to be focused on growth while driving improvements in the unit economics of our business. The overall fundamentals of our business have not changed. We believe we remain extremely well-positioned to capture an outsized portion of an estimated $40 billion market opportunity.
Operator, Operator
Our first question comes from Kash from Goldman Sachs.
Kash Rangan, Analyst
Hi, thank you very much. I hope you recover completely, Sid. Question for you, Brian. Regarding the outlook, you have included price increases in the model along with a recurring revenue model that would require a notable decrease in net new additions to reach your targets. I'm interested in what you are observing in early February and possibly March that would support these assumptions. Additionally, could you share your confidence that the price increases will be accepted? Have you conducted any preliminary assessments or check-ins to determine if customers will be willing to invest in the value you see in the product from a pricing standpoint? Thank you.
Brian Robins, CFO
Yeah. Absolutely. Thanks, Kash. Let me just sort of unpack what happened in the fourth quarter and that sort of will go into the guidance. In the fourth quarter up until earnings, like in November, the dollar-based net retention rate was greater than 145%. And as I stated in the prepared remarks, for the first, second, and third quarters, it was above 145% as well. There was really no meaningful changes in the sales cycle duration. However, we saw some of it increasing. In enterprise and mid-market, we saw a slight increase; nothing really that material, and SMB was holding to historicals. The pacing for the quarter was okay. Nothing was off that dramatically. First order in Ultimate, we're happy with, and we had good pipeline coverage. Month two and three of fourth quarter acted differently than month one of fourth quarter. We saw a contraction increase. As you know, it's the largest quarter that we have. And so, it was impacted related to layoffs. Deal sizes got smaller, so typically, when we go in and sell a deal, they buy a number of extra licenses for people in the enterprise, but they're buying just enough for what they needed at the time. We started to see pipeline getting pushed out. And then our dollar-based net retention decreased in month two and month three of the quarter and it increased almost equally across seats, Ultimate upgrades, and price-yield. It increased against all of them. And so, we've had really no change in our guidance philosophy. And so, we took what we saw in fourth quarter and, obviously, the month leading into the call and put that into our guidance.
Kash Rangan, Analyst
Yeah, so those price increases and your confidence that they will stick, and are they included in the guidance as well? Thank you so much.
Brian Robins, CFO
Yeah. No, thank you for that. So we did include price increase in the guidance. If you think about the price increase, it's for Premium. And so, it doesn't take effect for existing customers until they come up for renewal. And so, you have to actually roll that when the contract actually comes up and then what that revenue impact will be. We did serve as stair step for existing customers. And then when you look at new customers, the majority of our bookings within a quarter is from our existing customers, so that's a smaller amount. So we did factor that in. And then prior to implementing the price increase, we went out and did a lot of market studies and so forth on what the right price would be based on the number of features that we brought to market over the last five years.
Operator, Operator
Our next question comes from Sterling at MoffettNathanson.
Sterling Auty, Analyst
Thanks, Brian. I wanted to follow up on your mention of the pipeline. Can you discuss what you observed regarding the sales pipeline? Have you revisited it, and what kind of coverage ratios did you incorporate into the new guidance?
Brian Robins, CFO
Yeah. Thanks, Sterling. I mean, you could imagine the pipelines getting scrubbed on a very frequent basis based on what's going on in the macro. And so, we continue to see a lot of interest in the DevSecOps platform. The top of the funnel for pipe gen remains strong on both new business and growth. We believe we're in a big market. It's a $40 billion estimated TAM, and we're in the very early innings of that. And so, the pipe gen growth that we saw was more in previous quarters. Obviously, with the macro, you need more coverage and so, we took that and factored that into our guidance based on what we saw in fourth quarter and the first month of this quarter. As I mentioned, deals in month two and three of fourth quarter, deals were taking a little longer. We didn't see that in Q2, Q3, or the first month of Q4. On expansion deals, typically, we would see them buying the number of licenses in the future for projects to be started and/or team members and we're seeing them buy basically what they need, as opposed to pre-buying a lot of licenses. And so, we're continuing to focus on pipe generation and driving a positive ROI discussion and business outcome for those customers.
Sterling Auty, Analyst
Understood. Thank you.
Brian Robins, CFO
Thanks, Sterling.
Operator, Operator
Next, we have Matt from RBC.
Matthew Hedberg, Analyst
Great. Thanks for taking my questions, guys. I guess, maybe one for Sid here. You talked a little bit, in your prepared remarks about AI. I'm curious, what are the thoughts on generative AI? And I guess, specifically, GitHub with co-pilots making a lot of noise out there. A little bit of thought around that.
Sid Sijbrandij, CEO
Yeah. Thanks for that. I think AI is a really big change. It will change software and it will change GitLab as a platform. Its biggest impact is how fast people can use the platform. So our strategy for AI is more than just code suggestions. We think AI will change not just our code, but it will change how you classify issues, how you summarize suggestions, how you hand over your work to someone else. So we're going to have AI features throughout the platform, for example, AI in security with intelligent code security and workflow automation. And we're making rapid progress on that. We have the Suggested Reviewers, which will soon be generally available. We have the Code Suggestions right now in closed beta, and we are working on many more AI-powered features. Apart from that, we also want to empower our customers to add AI to their applications. So our model ops functionality already allows you to link your AI experiments to GitLab experiments. We will be expanding this further so our customers to use AI to make the applications they make with GitLab even better.
Matthew Hedberg, Analyst
Got it. Could I ask quick one for Brian then? With the pending price increase, does your Q1 guidance assume any sort of like run or push on premium tier seats in anticipation of the price increase pushed off a year? Or just your thoughts on how that might feather in?
Brian Robins, CFO
Yeah, as we look at guidance, the pipeline, conversion rates, and other factors, we took that into account.
Matthew Hedberg, Analyst
Got it. Thank you. Thoughts with you, Sid, as you go through your health challenges.
Operator, Operator
Our next question comes from Joel from Truist.
Joel Fishbein, Analyst
Thank you for taking my question. Sid, thoughts and prayers are with you as well. And Brian, a question for you just on the drivers of profitability going forward. You've made a lot of improvement on the operating margin line. I know you've talked about the cuts. But can you talk about any other levers that you have to pull in terms of driving you to free-cash-flow positive? I appreciate it. Thanks.
Brian Robins, CFO
Yeah. Thanks, Joel. Appreciate the question. Yeah, I'm happy with what we did. In our FY 2023, we increased our revenue incrementally by $172 million and we did that for $11 million less in operating loss. If you normalize the incremental public company expenses and JiHu expenses, we did that for $34 million less in operating loss. If you look at the guidance, we guided to a negative 12% operating margin for the entire year. That includes JiHu, which is negative 6%. And so, GitLab minus JiHu, we're guiding to negative 6% for the full year. And we're seeing improvements across everything, right? And so, if you look at our cost-of-goods-sold, even with SaaS revenue becoming a greater and greater portion, we've been able to maintain our non-GAAP gross margins at a very, very high level. And then if you look at sales and marketing, R&D and G&A as a percentage of revenue, despite the increased public company expenses with the growth of revenue, we're growing expenses less than that to get the leverage in the model. And so, we'll continue to look at all areas to get greater efficiency in the business, but one of the key things we'll do is grow, but we'll do that responsibly.
Joel Fishbein, Analyst
Great. Thank you.
Brian Robins, CFO
Thanks, Joel.
Operator, Operator
Our next question comes from Michael at KeyBanc.
Michael Turits, Analyst
Hi, guys. And Sid, of course, best of health to you as well.
Sid Sijbrandij, CEO
Thanks, Mike.
Michael Turits, Analyst
So for both Sid and Brian, we've discussed some of the trends observed this quarter, which align with what others are experiencing in terms of reduced expansion sales cycles. However, I would like to hear your deeper insights into what's happening in the enterprise sector. Specifically, while there are currently fewer seats, do you notice companies scaling back on new software development projects? Are they becoming more cautious in that area? Is this related to cloud optimization? What are some of the key factors at play? Lastly, Brian, could you estimate the impact of the price increase on your guidance? That information would be helpful.
Brian Robins, CFO
Sure, let me address both points. First, regarding the overall macro environment, we've seen significant interest in cloud optimization, particularly from hyper-scalers, leading to the highest number of new clients we've ever had from them. This channel continues to be advantageous for us. Although the growth in bookings hasn't matched the increase in logos, we are pleased with the logo growth since these accounts can be expanded over time. In the enterprise sector, we are experiencing varied trends. Due to macroeconomic uncertainty, companies using a seat-based model have begun feeling pressure later than those on consumption-based models. Many organizations are focused on cost-saving measures, so where we would typically approach large enterprises to sell licenses for multiple engineering projects, they're now seeking approval for just one project. As a result, they are only purchasing what they currently need rather than planning for future projects, leading to longer deal cycles and smaller deals compared to historical norms. Regarding your question about the price increase factored into our guidance, most of our bookings come from existing customers, which requires their renewals to realize the impact. We have a transition pricing model for the first year, and since we are starting two months into the year, we will only see 10 months of revenue. We've incorporated this into our bookings and revenue guidance, though we haven't specified the exact amount.
Michael Turits, Analyst
Okay. Thanks, Brian. Thanks, Sid.
Operator, Operator
Next, we have Koji from Bank of America.
Koji Ikeda, Analyst
Hey, guys, thanks for taking the questions. Sid, from all of us at BoFA, we're waiting for you. Just maybe one question from me. Brian, can you remind us, maybe how much of the business exposed to SMBs out there? And really kind of in the context of the recent developments in the financial industry over the past week, what sort of consideration that maybe the SMBs could be hindered out there was incorporated into the guidance? Thanks, guys.
Brian Robins, CFO
Thank you, Koji. That was definitely a factor we considered when establishing the guidance. The technology sector constitutes less than 20% of our annual recurring revenue, approximately 20% of it. In particular, technology startups with 200 or fewer employees account for less than 5% of our annual recurring revenue. Meanwhile, the enterprise segment remains around 60% of our annual recurring revenue. We previously mentioned that small to medium-sized businesses represent about 10% to 12% of our revenue, making the SMB portion relatively modest, at around 10% of our total annual recurring revenue. Additionally, we don’t rely heavily on any single vertical for the majority of our annual recurring revenue; instead, we are diversified across various sectors. This highlights that our business model is built on a long-tail approach.
Koji Ikeda, Analyst
Got it. Thanks, Brian. Thanks for taking the question.
Brian Robins, CFO
I appreciate, Koji.
Operator, Operator
We'll now hear from Karl at UBS.
Karl Keirstead, Analyst
Okay, great. Brian, to continue from that conversation, did you notice significant weakness in the tech sector, which you mentioned constitutes 20% of ARR? One of your comments indicated that you observed contractions due to layoffs, and since those layoffs have primarily occurred in the tech sector, I would assume that this has been a somewhat weaker area for you. Is that accurate?
Brian Robins, CFO
It's a good question. I didn't get a chance to look at each vertical in detail, but I did review the net dollar retention rate. I found it interesting that the changes we observed were consistent across seats, upgrades, and contractions, and this pattern held for the last seven years with one exception due to anomalies. Overall, they seemed to behave similarly. Further investigation would be helpful, but this suggests a broader macro impact rather than a specific vertical issue. Many companies are currently experiencing a slowdown in demand relative to purchases.
Karl Keirstead, Analyst
Okay. And maybe a second one for you, Brian. Just trying to gauge how conservative your guidance is. One way to do that is to look at your most recent cRPO guidance and your subsequent revenue guidance. The fact that you just put up a quarter with 51% cRPO growth, it's hard to think that that translates to 26% revenue growth. So at first flash, your guidance feels conservative, but I want to throw that at you. Maybe the cRPO metric is an imperfect predictor and it's only capturing a portion of the next 12-month revenue growth and you're anticipating net new bookings are weaker. Do you mind unpacking the correlation between those two metrics?
Brian Robins, CFO
Yeah. Happy to do. I mean, we've talked about historically how billings and some of the metrics weren't directly correlated, but transit, directionally correct. And so, the cRPO growth for the quarter was 51% and then we did guide to right about 25%. And so, there has been no change in our guidance philosophy and we try to factor everything that we see into that, and that's where we landed.
Operator, Operator
Next we have Rob from Piper Sandler.
Rob Owens, Analyst
You think after a couple of years, I’d figure this out, but you know me, so. Brian, could you unpack maybe gross retention rates and the trends you're seeing on that front? Trying to understand what would create a situation within the guidance that would have Q1 down quarter-over-quarter, kind of given it's a subscription model. I understand there could be some timing issues with regard to what's self-managed versus cloud. But just trying to understand, A, what the gross retention rate trend looks like, and B, what could cause that Q1 to be down? Thanks.
Brian Robins, CFO
Sure, Rob. Thank you for your question. The gross retention rate has seen a slight decline, but it's still in the low-to-mid 90s. I continue to believe that every company has become a software company, and the well-documented return on investment and payback period contribute to driving renewals and retention rates. Ultimately, I think this will lead to an increase in revenue over the long term.
Rob Owens, Analyst
And thoughts around the first quarter, what factors could lead to a negative sequential comparison?
Brian Robins, CFO
As we examine various factors like churn, contraction, and deal closure times, it's clear that if you experience higher than expected churn and contraction, it would hinder revenue recognition. Therefore, there are challenges to revenue that we are currently evaluating from a Q1 perspective, including our annual SSP analysis for 606 compliance. We incorporated all available data into our guidance based on what we understood at that time.
Rob Owens, Analyst
Great. Thanks, Brian.
Operator, Operator
Up next, we have Derrick from Cowen.
Derrick Wood, Analyst
Great. Thanks. And Sid, sending best wishes to you. Brian, I wanted to discuss the restructuring or realignment regarding some of the headcount reductions. Can you provide insight into whether there have been any changes on the go-to-market side? I understand that you have been transitioning from a bottoms-up approach to more of a top-down model as you are selling on a platform basis. Will this platform sale be significantly more challenging in the current environment? Also, have you made any adjustments from a go-to-market perspective in light of this?
Brian Robins, CFO
Thank you, Derrick, for your question. Our land-and-expand sales model remains largely unchanged. As we prepared to go public, we discussed the various strategies we were implementing to modify our go-to-market approach. Initially, we focused primarily on direct sales but have since introduced a channel program, an alliance program, and a hyper-scaler program. Recently, we achieved a record number of logos in a quarter from our hyper-scaler partnerships, which continue to serve as an effective distribution channel. Additionally, we have begun conducting value stream assessments, where we engage potential clients to analyze their operations and spending, demonstrating how GitLab can help them develop software more efficiently and reduce costs. We typically enter at the same level as the client to make our sales pitch. Overall, we are performing well in this regard. Our customers have reported positive business outcomes and ROI. For example, we helped a leading global financial services client save $300,000 annually by reducing their tool chain and minimizing developer downtime. We replaced four security tools with GitLab, boosting their development velocity by around 55% without compromising quality. This type of success is common across various industries and clients of different sizes.
Derrick Wood, Analyst
Brian, regarding the headcount restructuring, how should we view investments for the year? Will you be pausing hiring or continuing to invest in sales capacity? Any insights on that?
Brian Robins, CFO
Yeah, absolutely. So when we looked at doing the reduction, obviously, a very difficult decision to make. We looked at open headcount first and then looked at existing headcount. It was done across the company to basically align our cost model with our revenue projections to continue to drive operating leverage in the business. For the most part, based on the guidance, we have the capacity on-board today to deliver what we committed to. And so, we will continue to hire, but they will be in very strategic areas where we need to add headcount at. And so, there will be some in sales and marketing, some in R&D, but at a much more measured pace.
Derrick Wood, Analyst
Okay. Thank you.
Brian Robins, CFO
Thanks, Derrick.
Operator, Operator
We'll now hear from Ryan at Barclays.
Ryan MacWilliams, Analyst
Hey, guys. Thanks for taking questions. So, one for Brian. Do you have a sense of how many customers have more than five free users on your free version? And have you seen increased instances of customers down-tiering from premium to free?
Brian Robins, CFO
I don't have the exact number of customers with five licenses or more at the moment. Typically, aside from when we implemented the starter deprecation, we noticed that customers shifted from the $4 product to the free product. However, we haven't observed many customers moving from premium to free, primarily because of the additional features that premium offers compared to the free version.
Ryan MacWilliams, Analyst
I just wanted to follow up on the price increase. Although it’s early to see how it impacts the market, do you think that introducing a more expensive premium tier might encourage more users to consider upgrading from Ultimate? Thank you.
Brian Robins, CFO
I hope not. According to our market research and customer feedback, our platform is not seen that way. Over the past five years, we've added more than 400 capabilities, and the payback period along with the positive results and business outcomes we achieve justifies the price we set for what we deliver.
Ryan MacWilliams, Analyst
I appreciate the color. Thanks guys.
Brian Robins, CFO
Appreciate.
Operator, Operator
Next we have Jason from William Blair.
Jason Ader, Analyst
Yeah. Thank you. I guess Brian, first one for you with the 25% growth expectation for FY 2024, is it right to think that NRR will run 120% for the year? And is that about where it was in months, two and three of Q4?
Brian Robins, CFO
In the fourth quarter, we took into account everything that occurred and what we were experiencing at the beginning of the first quarter for our guidance. In my prepared remarks, I mentioned that if the number was above 130, we would continue to report it as a threshold, but if it fell below 130, we would disclose the actual figure for the quarter. Therefore, we did not provide specific guidance on the dollar-based net retention rate.
Jason Ader, Analyst
Okay. And then one quick one for Sid. Sid, how are you positioning the price increase versus GitHub?
Sid Sijbrandij, CEO
Yeah. I think what we have is a more comprehensive platform, so we do the entire DevSecOps cycle, it can replace more tools. In the end, what our customers need is to spend less time integrating tools to have fewer people, to have a faster cycle time. So it's really about having a compelling value and having the most comprehensive platform. That's what we're selling. That's what the results are showing. And of course, there is the price of the software, but if you earn it back in under six months, it's an amazing deal.
Jason Ader, Analyst
Okay, thanks. Be well.
Sid Sijbrandij, CEO
Thanks.
Operator, Operator
Thanks. Next, we have Mike from Needham.
Mike Cikos, Analyst
Hey, thanks for taking the question, guys. I just wanted to circle up and I know that you guys aren't quantifying what the intended benefit to revenue is from the announced price increase for Premium, but maybe for historical context. Can you help us think about what the deprecation of the starter package did as far as the contribution revenue, again, just to help us kind of level-set or think through how this price increase will phase in over time?
Brian Robins, CFO
Yeah. Thanks, Mike. On starter, just to update everybody, we have slightly over $1 million of ARR on starter, so we're almost completely through that transition. But the way that starter happened was about two-thirds went up to Premium and a third either went to free or churned. As you know, when we did the starter deprecation, we actually offered a slow increase of price if you met certain requirements. And so, the majority of our customers fell under that. And so it went from $4 to $6. Two customers at $6 versus $3 and $4, it was really the same revenue impact and we didn't get much of a financial lift in year one from the start of deprecation.
Mike Cikos, Analyst
And then a follow-up if I could, but I know that you guys announced the way of reductions. You made the tough decision there. Is there a way we can think about what those anticipated savings are to the company and the construct of the, call it, negative 12% operating margins you were calling out or negative 6% if we exclude the $33 million in expense from JiHu?
Brian Robins, CFO
Yeah. I guess when we take the charge for that, that would be roughly around $9 million give or take.
Mike Cikos, Analyst
Understood. Thank you.
Brian Robins, CFO
Yeah. Thanks, Mike.
Operator, Operator
We'll now hear from Nick at Scotiabank.
Nick Altmann, Analyst
Great. Thanks. Just trying to understand some of the assumptions around the guidance. Just going off of Rob's question, I think you guys said gross retention was sort of in the low to mid-90s. I guess when you look at the guide for this year, what does that sort of embed for gross retention? And then as a follow-up, historically you guys have talked about how two-thirds of expansion really comes from seat growth. And so can you maybe talk about what level of seat growth is embedded in that 26% guide?
Brian Robins, CFO
We don't provide all the specifics of the model, but I can discuss many of the factors we considered while formulating the guidance. First, let's address the net dollar retention rate. Seat growth remains the primary contributor to the net dollar retention rate, followed by tier upgrades and then price yield, and this hasn’t changed significantly. A couple of quarters ago, seat growth accounted for about two-thirds of this, but it's now around 50%, with the remaining 50% made up by other factors. As we prepared the guidance, we examined large mid-market and SMB segments, including pipeline, deal size, and conversion rates. We also assessed our contraction churn and built the model from the ground up based on the data from the fourth quarter and the beginning of the first quarter.
Operator, Operator
Next we have Pinjalim from JP Morgan.
Pinjalim Bora, Analyst
Hello, thank you very much, and best wishes to Sid for your health. Brian, I have a question regarding the price increase. I understand that you've experienced over one-third churn in the starter deprecation. Are you anticipating a similar churn level for the Premium price upgrade? Additionally, how should we view the starter deprecation plan, given the progression from six to nine to 15 to 19, with the 19 potentially increasing to 29, and the 15 going directly to 29?
Brian Robins, CFO
Yeah. So on the starter package, they go from six to nine. And I'm sorry, what was the first question? Could you just repeat that?
Pinjalim Bora, Analyst
The churn portion what was one-third. Are you assuming something similar for the Premium price increase?
Brian Robins, CFO
Yeah, churn. We've built out a model to say from new business will we have the same close rate, will it take the same amount of time for the existing clients that we have, the same thing. And so we did assume some kind of churn. It wasn't the same exact, but based on the market research that we went through, we did assume some kind of churn.
Pinjalim Bora, Analyst
But it's not as high as 33 is what you're saying?
Brian Robins, CFO
We did give out a specific number on that.
Pinjalim Bora, Analyst
Yeah. Okay, understood. One for Sid, if I can. Sid, what is your vision on kind of the monitor stage of the infinity loop? You acquired Opstrace, but we haven't heard much I guess on the observability side. How are you thinking about it?
Sid Sijbrandij, CEO
Yeah. We still believe there is a huge unmet need for observability, so observability fits in nicely with the rest of the loop. And we've been working on distributed tracing, error tracking and product analytics. Those are all shaping at GitLab. What it allows our customers to do is to identify performance issues they have with the specific services, helping them improve the user experience. You can imagine the ability to automatically correlate errors to GitLab incidents to automatically monitor GitLab deployments that is super important. So we are starting with the things that are very close to GitLab, GitLab already does incident management. GitLab already does deployments. We're focusing the observability there first and making progress there because it adds a lot of value to close that loop with the customer.
Pinjalim Bora, Analyst
Got it. Thank you.
Operator, Operator
Our final question comes from Shebly from FBN.
Shebly Seyrafi, Analyst
Yes. Thank you very much. So are you considering raising prices on the Ultimate tier as well?
Brian Robins, CFO
Yeah. All we announced was the price increase on Premium. We have a pricing group. We look our pricing all the time, but the only decision has been made is the pricing announcement that we made on Premium.
Shebly Seyrafi, Analyst
In fiscal 2025, it seems like there could be an exciting story for you because more of the existing premium subscribers are going to be moving to $29. I'm also curious whether the $33 loss from JiHu in 2024 will disappear in 2025. Any thoughts on that? You're likely to see a combination of potentially better revenue growth and improved margin expansion. I would like to hear your perspective on the opportunity for revenue acceleration in 2025, and whether the JiHu $33 loss will go away or decrease significantly.
Brian Robins, CFO
Sure, let me provide a brief overview for those who may not be familiar with JiHu. JiHu is a joint venture for which we have provided the intellectual property but not any financial investment. The joint venture has secured its own funding, and due to the variable interest entity accounting structure, we are required to consolidate our financial results. We have included the joint venture's cash and expenses in our accounts. From a guidance standpoint, we've taken a conservative approach by not recognizing any revenue while accounting for all the expenses since it is a joint venture we do not control. We are currently collaborating with our auditors to determine if any changes in circumstances may allow us to de-consolidate. If we were to de-consolidate, the impact would be clearly shown, and we would report it differently. Regarding revenue growth, we are actively acquiring new customers, expanding our services to existing customers, and entering new geographic regions where we currently do not operate. Additionally, we will benefit from a forthcoming price increase. These factors present multiple avenues for revenue growth. Lastly, during the last earnings call, we introduced Dedicated, our new single-tenant offering that we are rolling out.
Shebly Seyrafi, Analyst
Okay. Thank you.
Operator, Operator
That concludes our 4Q FY 2023 earnings presentation. Thanks again for joining us, and have a great day.