Cloud infrastructure automation platform HashiCorp beat analysts' expectations in Q2 FY2024, with revenue up 25.8% year on year to $143.2 million. The company also expects next quarter's revenue to be around $143 million, in line with analysts' estimates. Turning to EPS, HashiCorp made a GAAP loss of $0.34 per share, improving from its loss of $0.40 per share in the same quarter last year.
HashiCorp (HCP) Q2 FY2024 Highlights:
- Revenue: $143.2 million vs analyst estimates of $138.2 million (3.65% beat)
- EPS (non-GAAP): -$0.10 vs analyst estimates of -$0.15
- Revenue Guidance for Q3 2024 is $143 million at the midpoint, above analyst estimates of $141.8 million
- The company lifted its revenue guidance for the full year from $567 million to $573 million at the midpoint, a 1.06% increase
- Free Cash Flow was -$36.6 million, down from $744 thousand in the previous quarter
- Net Revenue Retention Rate: 124%, down from 127% in the previous quarter
- Customers: 4,217, down from 4,392 in the previous quarter
- Gross Margin (GAAP): 79.5%, down from 81.1% in 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.
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 $75.1 million in Q2 FY2022 to $143.2 million this quarter.
This quarter, HashiCorp's quarterly revenue was once again up a very solid 25.8% year on year. On top of that, its revenue increased $5.26 million quarter on quarter, a very strong improvement from the $2.2 million increase in Q1 2024. This is a sign of acceleration of growth and great to see.
Next quarter's guidance suggests that HashiCorp is expecting revenue to grow 14.1% year on year to $143 million, slowing down from the 52.4% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 13% over the next 12 months before the earnings results announcement.
Customer Growth
HashiCorp reported 4,217 customers at the end of the quarter, a decrease of 175 from the previous quarter. That's slower customer growth than what we've observed in past quarters, suggesting that the company's customer acquisition momentum is slowing.
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's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 124% in Q2. This means that even if HashiCorp didn't win any new customers over the last 12 months, it would've grown its revenue by 24%.
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 79.5% in Q2.
That means that for every $1 in revenue the company had $0.80 left to spend on developing new products, sales and marketing, and general administrative overhead. Despite the recent drop, HashiCorp still has an excellent gross margin that 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 burned through $36.6 million of cash in Q2 , reducing its cash burn by 38.1% year on year.
HashiCorp has burned through $54.9 million of cash over the last 12 months, resulting in a negative 10% free cash flow margin. This low FCF margin stems from HashiCorp's poor unit economics or a constant need to reinvest in its business to stay competitive.
Key Takeaways from HashiCorp's Q2 Results
Although HashiCorp, which has a market capitalization of $5.59 billion, has been burning cash over the last 12 months, its more than $1.24 billion in cash on hand gives it the flexibility to continue prioritizing growth over profitability.
It was good to see HashiCorp beat analysts' revenue and non-GAAP operating profit expectations this quarter. We were also glad that its full-year revenue guidance was raised and came in higher than Wall Street's estimates. On the other hand, its new large contract wins slowed and its net revenue retention decreased, missing estimates. Also, full year non-GAAP operating profit guidance was lowered despite the revenue outlook increase for the full year. Overall, the results were mixed. The stock is flat after reporting and currently trades at $29.16 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 exceptional, though we don't expect it to maintain historical growth rates. But while its customers are increasing their spending quite quickly, suggesting that they love the product, the downside is that its customer acquisition is less efficient than many comparable companies and 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 9.2x. We can find things to like about HashiCorp and there's no doubt it's a bit of a market darling, at least for some. But we are wondering whether there might be better opportunities elsewhere right now.
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