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GitLab (NASDAQ:GTLB) Surprises With Strong Q2 But Stock Drops


Full Report / September 06, 2022
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Software development tools maker GitLab (NASDAQ:GTLB) reported Q2 FY2023 results topping analyst expectations, with revenue up 73.8% year on year to $101 million. Guidance for next quarter's revenue was $105.5 million at the midpoint, which is 1.74% above the analyst consensus. GitLab made a GAAP loss of $61.4 million, down on its loss of $40.7 million, in the same quarter last year.

GitLab (GTLB) Q2 FY2023 Highlights:

  • Revenue: $101 million vs analyst estimates of $94.4 million (6.99% beat)
  • EPS (non-GAAP): -$0.15 vs analyst estimates of -$0.23
  • Revenue guidance for Q3 2023 is $105.5 million at the midpoint, above analyst estimates of $103.6 million
  • The company lifted revenue guidance for the full year, from $400 million to $412.5 million at the midpoint, a 3.13% increase
  • Free cash flow was negative $37.6 million, compared to negative free cash flow of $30 million in previous quarter
  • Net Revenue Retention Rate: 130%, in line with previous quarter
  • Gross Margin (GAAP): 87.1%, in line with same quarter last year

Founded as an open-source project in 2011, GitLab (NASDAQ:GTLB) is a leading software development tools platform.

As businesses across all sizes and industries are increasingly seeking the cost savings and improvements in customer engagement that Digital Transformation provides, this means that all companies are becoming software companies. Today, many software developers prefer to use reusable components that provide functionality so they don’t have to recreate the wheel for each new app. Traditionally, developing software meant costly internal or third party best-of-breed tools, all internally integrated, which only increased complexity, particularly when the frequency of updating / upgrading services has increased.

As a result, software development or DevOps has evolved to become more centralized, whereby all developers in a given organization use the same tools from the next gen software stacks: containers and microservices, which are modularized components of applications that allow a quicker pace of development. The second trend in modern software development is the adoption of best in class platforms rather than using a disparate collection of tools that need to be integrated with each other.

This is where GitLab comes in, its platform is a one stop shop for a huge range of DevOps tools with a single code base that is meant to address every stage in the lifecycle of software development. Two key differentiations versus other DevOps platforms are its breadth of tools and its ability to be deployed across AWS, Azure, Google Cloud Platform, which customers appreciate as a means of avoiding vendor lock-in.

As Marc Andreessen says, "software is eating the world" which means the volume of software produced is exploding. But building software is complex and difficult work which drives demand for software tools that help increase the speed, quality, and security of software deployment.

GitLab’s competitors are Microsoft’s Github(NASDAQ: MSFT), JFrog (NASDAQ: FROG), Atlassian (NASDAQ: TEAM), along with private competitors like Sonatype.

Sales Growth

As you can see below, GitLab's revenue growth has been incredible over the last year, growing from quarterly revenue of $58.1 million, to $101 million.

GitLab Total Revenue

This was another standout quarter with the revenue up a splendid 73.8% year on year. On top of that, revenue increased $13.6 million quarter on quarter, a very strong improvement on the $9.61 million increase in Q1 2023, and a sign of acceleration of growth, which is very nice to see indeed.

Guidance for the next quarter indicates GitLab is expecting revenue to grow 57.9% year on year to $105.5 million, in line with the 58.4% 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 46.3% 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. GitLab'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 87.1% in Q2.

GitLab 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. Despite the recent drop that is still a great gross margin, that allows companies like GitLab to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Cash Is King

If you follow 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. GitLab burned through $37.6 million in Q2, increasing the cash burn by 95.1% year on year.

GitLab Free Cash Flow

GitLab has burned through $82.4 million in cash over the last twelve months, a negative 24.7% free cash flow margin. This low FCF margin is a result of GitLab's need to still heavily invest in the business.

Key Takeaways from GitLab's Q2 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on GitLab’s balance sheet, but we note that with a market capitalization of $7.13 billion and more than $930.1 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by the exceptional revenue growth GitLab delivered this quarter. And we were also excited to see that guidance outperformed Wall St’s revenue expectations and retention rate stayed strong. Zooming out, we think this was a good quarter. But the market was likely expecting more and the company is down 6.28% on the results and currently trades at $44.6 per share.

Is Now The Time?

When considering GitLab, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are a number of reasons why we think GitLab is a great business. First, its revenue growth has been exceptional. And while its growth is coming at a cost of significant cash burn, the good news is its impressive gross margins are indicative of excellent business economics, and its very efficient customer acquisition hints at the potential for strong profitability.

GitLab's price to sales ratio based on the next twelve months is 14.5x, suggesting that the market is expecting more measured growth, relative to the hottest tech stocks. Looking at the tech landscape today, GitLab's qualities as a business really stand out and we still like it at this price.

The Wall St analysts covering the company had a one year price target of $72.7 per share right before these results, implying that they saw upside in buying GitLab even in the short term.

To get the best start with StockStory check out our most recent Stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds from the data being released, and especially for the companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.