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HashiCorp (NASDAQ:HCP) Q3 Sales Beat Estimates But Stock Drops 16.2%


Full Report / December 07, 2023

Cloud infrastructure automation platform HashiCorp announced better-than-expected results in Q3 FY2024, with revenue up 16.6% year on year to $146.1 million. Next quarter's guidance of $149 million was in line with expectations. It made a GAAP loss of $0.20 per share, improving from its loss of $0.38 per share in the same quarter last year.

HashiCorp (HCP) Q3 FY2024 Highlights:

  • Revenue: $146.1 million vs analyst estimates of $143.3 million (2% beat)
  • EPS (non-GAAP): $0.03 vs analyst estimates of -$0.04 ($0.07 beat)
  • Revenue Guidance for Q4 2024 is $149 million at the midpoint, roughly in line with what analysts were expecting
  • Free Cash Flow of $5.72 million is up from -$36.63 million in the previous quarter
  • Net Revenue Retention Rate: 119%, down from 124% in the previous quarter
  • Customers: 4,354, up from 4,217 in the previous quarter
  • Gross Margin (GAAP): 82.5%, in line with the 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.

Developer Operations

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 impressive over the last two years, growing from $82.22 million in Q3 FY2022 to $146.1 million this quarter.

HashiCorp Total Revenue

This quarter, HashiCorp's quarterly revenue was once again up 16.6% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $2.88 million in Q3 compared to $5.26 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, HashiCorp is guiding for a 8.9% year-on-year revenue decline to $149 million, a further deceleration from the 40.7% year-on-year decrease it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 14.4% over the next 12 months before the earnings results announcement.

Customer Growth

HashiCorp reported 4,354 customers at the end of the quarter, an increase of 137 from the previous quarter. That's a little better customer growth than last quarter and in line with what we've seen in past quarters, demonstrating that the company has the sales momentum required to drive continued growth. We've no doubt shareholders will take this as an indication that HashiCorp's go-to-market strategy is running smoothly.

HashiCorp Customers

Product Success

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.

HashiCorp Net Revenue Retention Rate

HashiCorp's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 119% in Q3. This means that even if HashiCorp didn't win any new customers over the last 12 months, it would've grown its revenue by 19%.

Despite falling over the last year, HashiCorp still has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great to see.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 82.5% in Q3.

HashiCorp Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.82 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, HashiCorp'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. HashiCorp's free cash flow came in at $5.72 million in Q3, turning positive over the last year.

HashiCorp Free Cash Flow

HashiCorp has burned through $31.27 million of cash over the last 12 months, resulting in a negative 5.5% free cash flow margin. This below-average FCF margin stems from HashiCorp's poor unit economics or a continuous need to reinvest in its business to penetrate the market.

Key Takeaways from HashiCorp's Q3 Results

With a market capitalization of $4.83 billion, HashiCorp is among smaller companies, but its more than $729.8 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.

We enjoyed seeing HashiCorp materially improve its gross margin this quarter. We were also glad it had many new large contract wins. On the other hand, its net revenue retention fell and its remaining performance obligations (RPO) came in below Wall Street's estimates. RPO is a leading indicator of demand and can be used as a proxy for the company's backlog. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. Investors were likely spooked by the RPO miss, however, and the stock is down 16.2% after reporting, trading at $20.89 per share.

Is Now The Time?

When considering an investment in HashiCorp, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

Although HashiCorp isn't a bad business, it probably wouldn't be one of our picks. Its revenue growth has been impressive over the last two years, though we don't expect it to maintain that historical pace. And while its impressive gross margins indicate excellent business economics, the downside is that its customer acquisition is less efficient than many comparable companies. On top of that, its cash burn raises the question if it can sustainably maintain its growth.

The market is certainly expecting long-term growth from HashiCorp given its price to sales ratio based on the next 12 months is 7.5x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that HashiCorp doesn't trade at a completely unreasonable price point.

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