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Couchbase (NASDAQ:BASE) Surprises With Q3 Sales But Quarterly Guidance Underwhelms


Full Report / December 06, 2022
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Database as a service company Couchbase (NASDAQ: BASE) reported Q3 FY2023 results beating Wall St's expectations, with revenue up 25% year on year to $38.5 million. Guidance for the full year also exceeded estimates, however the guidance for the next quarter was less impressive, coming in at $38.3 million, 1.63% below analyst estimates. Couchbase made a GAAP loss of $16.6 million, down on its loss of $15.9 million, in the same quarter last year.

Couchbase (BASE) Q3 FY2023 Highlights:

  • Revenue: $38.5 million vs analyst estimates of $36.5 million (5.35% beat)
  • EPS (non-GAAP): -$0.22 vs analyst estimates of -$0.33
  • Revenue guidance for Q4 2023 is $38.3 million at the midpoint, below analyst estimates of $38.9 million
  • Free cash flow was negative $16.3 million, compared to negative free cash flow of $9.33 million in previous quarter
  • Gross Margin (GAAP): 87.3%, in line with same quarter last year

Formed in 2011 with the merger of Membase and CouchOne, Couchbase (NASDAQ:BASE) is a database as a service platform that allows enterprises to store large volumes of semi-structured data.

Databases have been in use for over 40 years to access and manipulate data to generate an outcome as simple as triggering an alarm to powering stock trading. SQL databases function like Excel on steroids, they keep information in columns and rows which can be queried and cross referenced using structured query language (SQL). This works well if you need to store a lot of data that has a similar structure, but it can create potential inefficiencies if the structure of the data you are storing varies a lot. The majority of databases today are still relational databases (SQL) that were designed for structured data and tens of thousands of users.

Today’s enterprises are going through digital transformations to deliver customer experiences through applications that respond in microseconds, requiring a modern database architecture that combines disparate data sources instantaneously and can be accessed by millions of users simultaneously.

Couchbase provides a “NoSQL" database as a service, which instead of Excel-like tables stores data in records called documents, which, similarly to a patient’s documents in a doctor’s office, have all the data for one entity in one folder, even though what is in the folder can vary a lot between entities. Couchbase’s NoSQL database allows developers to build applications that take advantage of the elasticity, scalability and flexibility of a NoSQL database while leveraging developer familiarity with SQL. Both NoSQL and SQL databases have their place, depending on what data is being stored and how it needs to be used.

Data is the lifeblood of the internet and software in general, and the amount of data created is growing at an accelerating pace. Likewise, the importance of storing the data in scalable and efficient formats continues to rise, especially as the diversity of the data and associated use cases expand from analyzing simple, structured data to high-scale processing of unstructured data, images, audio and video.

Couchbase faces a range of competitors including legacy, relational database providers, NoSQL database providers, and proprietary offerings from the giant public cloud platforms like Amazon’s DynamoDB (NASDAQ: AMZN), Microsoft Azure’s Cosmos DB (NASDAQ: MSFT) and Google Cloud SQL (NASDAQ: GOOGL). The primary legacy relational database vendors are Microsoft, Oracle (NYSE: ORCL), and IBM (NYSE: IBM), while MongoDB (NASDAQ: MDB) is the only publicly traded NoSQL database rival.

Sales Growth

As you can see below, Couchbase's revenue growth has been strong over the last two years, growing from quarterly revenue of $25.6 million in Q3 FY2021, to $38.5 million.

Couchbase Total Revenue

This quarter, Couchbase's quarterly revenue was once again up a very solid 25% year on year. But the revenue actually decreased by $1.23 million in Q3, compared to $4.93 million increase in Q2 2023.Shareholders might want to pay closer attention to this as the management is guiding for the decline in sales to continue in the coming quarter

Guidance for the next quarter indicates Couchbase is expecting revenue to grow 9.22% year on year to $38.3 million, slowing down from the 19.1% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 14.8% over the next twelve months.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Couchbase's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 87.3% in Q3.

Couchbase Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.87 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a great gross margin, that allows companies like Couchbase to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that Couchbase is doing a good job controlling costs and is not under pressure from competition to lower prices.

Cash Is King

If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Couchbase burned through $16.3 million in Q3,

Couchbase Free Cash Flow

Couchbase has burned through $37.7 million in cash over the last twelve months, a negative 25.4% free cash flow margin. This low FCF margin is a result of Couchbase's need to still heavily invest in the business.

Key Takeaways from Couchbase's Q3 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Couchbase’s balance sheet, but we note that with a market capitalization of $625.2 million and more than $177.2 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We liked to see that Couchbase beat analysts’ revenue expectations pretty strongly this quarter. And we were also glad to see good revenue growth. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, it seems to us that this was a complicated quarter for Couchbase. The company is flat on the results and currently trades at $13.96 per share.

Is Now The Time?

When considering Couchbase, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although Couchbase is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its impressive gross margins are indicative of excellent business economics, unfortunately its growth is coming at a cost of significant cash burn.

Couchbase's price to sales ratio based on the next twelve months is 3.7x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Couchbase doesn't trade at a completely unreasonable price point.

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