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HashiCorp (NASDAQ:HCP) Delivers Strong Q2


Full Report / September 23, 2022
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Cloud infrastructure automation platform HashiCorp beat analyst expectations in Q2 FY2023 quarter, with revenue up 51.5% year on year to $113.8 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $111 million at the midpoint, 4.24% above what analysts were expecting. HashiCorp made a GAAP loss of $74.7 million, down on its loss of $24.9 million, in the same quarter last year.

HashiCorp (HCP) Q2 FY2023 Highlights:

  • Revenue: $113.8 million vs analyst estimates of $102.3 million (11.2% beat)
  • EPS (GAAP): -$0.40
  • Revenue guidance for Q3 2023 is $111 million at the midpoint, above analyst estimates of $106.4 million
  • The company lifted revenue guidance for the full year, from $427 million to $445 million at the midpoint, a 4.21% increase
  • Free cash flow was negative $59.1 million, compared to negative free cash flow of $15.3 million in previous quarter
  • Net Revenue Retention Rate: 134%, in line with previous quarter
  • Customers: 3,612, up from 3,240 in previous quarter
  • Gross Margin (GAAP): 81%, down from 82.8% same quarter last year

Initially created as a research project at the University of Washington, HashiCorp (NASDAQ:HCP) provides software that helps companies operate their own applications in a multi-cloud environment.

Deploying software across multiple cloud platforms creates a lot of complex and time-consuming issues that slow down innovative companies.

For example, if a company operates on three different public clouds they will have slightly different infrastructure, security, and processes in each one. This can make organisations so complex that they become very slow to roll out updates or onboard new developers. Organisations must devote a large amount of resources to managing their infrastructure instead of focusing on improving their products. HashiCorp helps companies refocus on their products by providing a consistent cloud foundation.

HashiCorp works through standardising application developments, automating processes to accelerate application delivery, and eliminating duplicate work with manual processes. HashiCorp integrates with over 2,000 core services which means that companies can use HashiCorp for their entire ecosystem. Within the HashiCorp Cloud Platform are the flagship products Terraform, Vault, and Consul. Terraform provides the cloud foundation, Vault helps keep your data secure, and Consul consolidates your private and public cloud providers.

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.

Other providers of tools to make software development more efficient include GitLab (NASDAQ:GTLB), JFrog (NASDAQ:FROG), Agora (NASDAQ:API), Akamai (NASDAQ: AKAM).

Sales Growth

As you can see below, HashiCorp's revenue growth has been exceptional over the last year, growing from quarterly revenue of $75.1 million, to $113.8 million.

HashiCorp Total Revenue

This was another standout quarter with the revenue up a splendid 51.5% year on year. On top of that, revenue increased $12.9 million quarter on quarter, a very strong improvement on the $4.37 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 HashiCorp is expecting revenue to grow 35% year on year to $111 million, slowing down from the 48.8% 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 23.8% over the next twelve months.

Customer Growth

You can see below that HashiCorp reported 3,612 customers at the end of the quarter, an increase of 372 on last quarter. That is quite a bit slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing a little bit.

HashiCorp Customers

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

HashiCorp Net Revenue Retention Rate

HashiCorp's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 134% in Q2. That means even if they didn't win any new customers, HashiCorp would have grown its revenue 34% year on year. That is a great retention rate and a clear proof of a great product. We can see that HashiCorp's customers are very satisfied with their software and are using it more and more over time.

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. HashiCorp'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 81% in Q2.

HashiCorp Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.81 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a great gross margin, that allows companies like HashiCorp 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 HashiCorp is doing a good job controlling costs and is not under pressure from competition to lower prices.

Key Takeaways from HashiCorp's Q2 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on HashiCorp’s balance sheet, but we note that with a market capitalization of $6.06 billion and more than $1.29 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by how strongly HashiCorp outperformed analysts’ revenue expectations this quarter. And we were also excited to see the really strong revenue growth. Zooming out, we think this was a great quarter and shareholders will likely feel excited about the results. The company currently trades at $28.9 per share.

Is Now The Time?

HashiCorp may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We cheer for everyone who is making the lives of others easier through technology, but in case of HashiCorp we will be cheering from the sidelines. 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, the downside is that its customer acquisition is less efficient than many comparable companies and its growth is coming at a cost of significant cash burn.

HashiCorp's price to sales ratio based on the next twelve months is 11.6x, suggesting that the market does have high expectations of the business, relative to other high growth tech stocks. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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