Software development tools maker GitLab (NASDAQ:GTLB) reported results ahead of analysts' expectations in Q3 FY2024, with revenue up 32.5% year on year to $149.7 million. On top of that, next quarter's revenue guidance ($157.5 million at the midpoint) was surprisingly good and 5.4% above what analysts were expecting. It made a GAAP loss of $1.84 per share, down from its loss of $0.33 per share in the same quarter last year.
GitLab (GTLB) Q3 FY2024 Highlights:
- Revenue: $149.7 million vs analyst estimates of $141 million (6.1% beat)
- EPS (non-GAAP): $0.09 vs analyst estimates of -$0.01 ($0.10 beat)
- Revenue Guidance for Q4 2024 is $157.5 million at the midpoint, above analyst estimates of $149.4 million
- Free Cash Flow was -$6.70 million, down from $26.83 million in the previous quarter
- Net Revenue Retention Rate: 128%, up from 124% in the previous quarter
- Gross Margin (GAAP): 89.9%, 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 $66.8 million in Q3 FY2022 to $149.7 million this quarter.
Unsurprisingly, this was another great quarter for GitLab with revenue up 32.5% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $10.09 million in Q3 compared to $12.7 million in Q2 2024. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Next quarter, GitLab is guiding for a 22% year-on-year revenue decline to $157.5 million, a further deceleration from the 58% year-on-year decrease it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 23.1% over the next 12 months before the earnings results announcement.
One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.
GitLab's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 128% in Q3. This means that even if GitLab didn't win any new customers over the last 12 months, it would've grown its revenue by 28%.
Significantly up from the last quarter, GitLab has an excellent net retention rate. This data point proves that the company sells useful products, and we can see that its customers are satisfied and increasing usage over time.
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 89.9% in Q3.
That means that for every $1 in revenue the company had $0.90 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 burned through $6.70 million of cash in Q3 , reducing its cash burn by 125% year on year.
GitLab has burned through $3.85 million of cash over the last 12 months, resulting in a negative 1.1% 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 Q3 Results
With a market capitalization of $8.12 billion, GitLab is among smaller companies, but its more than $285.3 million in cash on hand and near break-even free cash flow margins put it in a stable financial position.
We were impressed by GitLab's revenue guidance and rosy outlook for the next quarter, which blew past analysts' expectations. We were also excited this quarter's revenue and free cash flow outperformed Wall Street's estimates, driven by extremely convincing beats in dollar-based net retention (128% vs estimates of 119%) and new large customer additions (874 total customers paying over $100k compared to estimates of 752). It's rare to see beats of this magnitude for those KPIs. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The stock is up 16.4% after reporting and currently trades at $61.57 per share.
Is Now The Time?
GitLab may have had a favorable 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. On top of that, its customers are increasing their spending quite quickly, suggesting they love the product.
GitLab's price to sales ratio based on the next 12 months of 12.4x 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.
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