GitLab (NASDAQ:GTLB) Exceeds Q4 Expectations But Stock Drops 30.8%

Software development tools maker GitLab (NASDAQ:GTLB) reported results ahead of analyst expectations in the Q4 FY2023 quarter, with revenue up 58% year on year to $122.9 million. However, guidance for the next quarter was less impressive, coming in at $117.5 million at the midpoint, being 7.04% below analyst estimates. GitLab made a GAAP loss of $42.1 million, improving on its loss of $46.8 million, in the 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 two years, growing from quarterly revenue of $46.1 million in Q4 FY2021, to $122.9 million.

This was another standout quarter with the revenue up a splendid 58% year on year. But the growth did slow down a little compared to last quarter, as GitLab increased revenue by $9.93 million in Q4, compared to $11.9 million revenue add in Q3 2023. So while the growth is overall still impressive, we will be keeping an eye on the slowdown.

Guidance for the next quarter indicates GitLab is expecting revenue to grow 34.4% year on year to $117.5 million, slowing down from the 75.1% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $531 million at the midpoint, growing 25.1% compared to 68% increase in FY2023.

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 88.4% in Q4.

That means that for every $1 in revenue the company had $0.88 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is 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 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. GitLab burned through $12.8 million in Q4, increasing the cash burn by 176% year on year.

GitLab has burned through $83.5 million in cash over the last twelve months, a negative 19.7% 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 Q4 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 $6.64 billion and more than $936.7 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by the revenue growth GitLab delivered this quarter. And we were also glad to see the improvement in net revenue retention rate. On the other hand, it was unfortunate to see that GitLab's revenue guidance for next quarter and the full year missed analysts' expectations by a significant amount. Additionally, the revenue guidance for next year indicates quite a significant slowdown in growth. Overall, this quarter's results could have been better. The company is down 30.8% on the results and currently trades at $30.86 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. We think GitLab is a good business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. 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 customers are increasing their spending quite quickly, suggesting that they love the product.

GitLab's price to sales ratio based on the next twelve months of 11.4x indicates that the market is certainly optimistic about its growth prospects. There are definitely things to like about GitLab and there's no doubt it is a bit of a market darling, at least for some. But when considering the company against the backdrop of the tech stock landscape, it seems that there is a lot of optimism already priced in and we are wondering whether there might be better opportunities elsewhere right now.

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