Software development tools maker GitLab (NASDAQ:GTLB) reported results ahead of analysts' expectations in Q2 FY2024, with revenue up 38.2% year on year to $139.6 million. Guidance for next quarter's revenue was also better than expected at $140.5 million at the midpoint, 1.67% above analysts' estimates. Turning to EPS, GitLab made a GAAP loss of $0.33 per share, improving from its loss of $0.40 per share in the same quarter last year.
GitLab (GTLB) Q2 FY2024 Highlights:
- Revenue: $139.6 million vs analyst estimates of $129.8 million (7.56% beat)
- EPS (non-GAAP): $0.01 vs analyst estimates of -$0.03 ($0.04 beat)
- Revenue Guidance for Q3 2024 is $140.5 million at the midpoint, above analyst estimates of $138.2 million
- The company lifted its revenue guidance for the full year from $542 million to $556 million at the midpoint, a 2.58% increase
- Free Cash Flow of $26.8 million is up from -$11.2 million in the previous quarter
- Net Revenue Retention Rate: 124%, down from 128% in the previous quarter
- Gross Margin (GAAP): 89.5%, up from 87.1% 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.
As you can see below, GitLab's revenue growth has been exceptional over the last two years, growing from $58.1 million in Q2 FY2022 to $139.6 million this quarter.
Unsurprisingly, this was another great quarter for GitLab with revenue up 38.2% year on year. On top of that, its revenue increased $12.7 million quarter on quarter, a very strong improvement from the $3.97 million increase in Q1 2024. This is a sign of acceleration of growth and great to see.
Next quarter's guidance suggests that GitLab is expecting revenue to grow 24.4% year on year to $140.5 million, slowing down from the 69.1% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 22% over the next 12 months before the earnings results announcement.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 89.5% in Q2.
That means that for every $1 in revenue the company had $0.89 left to spend on developing new products, sales and marketing, and general administrative overhead. Trending up over the last year, GitLab's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. GitLab's free cash flow came in at $26.8 million in Q2, turning positive over the last year.
GitLab has burned through $138 thousand of cash over the last 12 months, resulting in a negative 0.66% free cash flow margin. This below-average FCF margin stems from GitLab's poor unit economics or a continuous need to reinvest in its business to penetrate the market.
Key Takeaways from GitLab's Q2 Results
With a market capitalization of $7.52 billion, GitLab is among smaller companies, but its more than $273.2 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.
We were impressed by how strongly GitLab blew past analysts' revenue expectations this quarter. We were also glad its adjusted EPS and full-year revenue guidance came in higher than Wall Street's estimates. On the other hand, its net revenue retention fell. However, this declining retention isn't unique to GitLab. We've observed these declines in many software companies this quarter. Zooming out, Gartner (a widely recognized technology advisory firm) recognized GitLab as a category leader in the DevOps space. Lastly, the company appointed Chris Weber, a long-time Microsoft executive, as Chief Revenue Officer. The stock is up 6.35% after reporting and currently trades at $52.97 per share.
Is Now The Time?
GitLab may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity. We think GitLab is a good business. We'd expect growth rates to moderate from here, but its revenue growth has been exceptional over the last two years. And while its customer acquisition is less efficient than many comparable companies, the good news is its impressive gross margins indicate 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 12 months of 12.5x indicates that the market is certainly optimistic about its growth prospects. There's definitely a lot of things to like about GitLab and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.Wall Street analysts covering the company had a one year price target of $55.7 per share right before these results, implying that they saw upside in buying GitLab even in the short term.
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