2023-04-17 13:51:59 ET
Summary
- Couchbase, Inc. has a lot of room to expand, especially considering the stability provided by long-term trends like digital transformation and the exponential growth of data.
- The company is succeeding with its cost-cutting initiatives, and management emphasizes its ongoing success with Capella, which is a promising sign of increased cloud usage.
- Couchbase, Inc. recent track record suggests that the guidance is likely to be exceeded.
Summary
In my opinion, Couchbase, Inc. ( BASE ) remains a promising company because it competes in a highly lucrative segment of the enterprise software industry. Strong secular drivers, such as digital transformation and rapid data growth, should keep the database market expanding at a healthy clip for the foreseeable future. As a result of their superior scalability and flexibility, I believe non-relational databases will likely gain market share at the expense of legacy relational databases. As such, I anticipate that Couchbase, Inc. will continue to drive sustainable growth as the company builds a list of referenceable, large enterprise customers and exploits expansion opportunities within existing accounts brought about by new use cases and relational database migrations.
In a similar vein, I believe that the focus of investors will be on the company's ability to grow rapidly through the addition of new customers, as it only has around 600+ paying clients. Similarly, Capella is still in the early stages of adoption compared to competitors like MongoDB (MDB), whose product Atlas accounts for 60%+ of revenue.
Based on management's commentary that there has been no improvement or even a decline in key inputs such as close rates, pipeline conversion, and NRR, I believe that investors may view the guidance as overly cautious and anticipate potential improvements in the near future. In relation to these KPIs, I would like to draw attention to the decrease in net customer acquisitions in comparison to the corresponding quarter of the previous year. However, it is worth noting that most of these customers were acquired through Capella, which indicates a positive trend towards cloud adoption. Moreover, the NRR has shown a consistent increase of over 115%, whereas the RPO has slowed down to a growth rate of 3%, because customers are favoring contracts with shorter time frames in response to the current uncertain economic conditions. Based on Couchbase's -24% operating margin guide, I do not anticipate any major changes in the profitability timeline. However, I am optimistic about the increasing de-risking of FY24 revenue.
To sum up, I stand by my recommendation to purchase Couchbase, Inc. because I firmly believe it is one of the leading providers of NoSQL databases for enterprises. Since they only make up a small fraction of the database market, they have a lot of room to expand, especially considering the stability provided by long-term trends like digital transformation and the exponential growth of data.
Updates
Couchbase, Inc. produced a strong Q4 2022 despite macro weakness, and I believe management is taking the right approach to FY24. Management noted a 24% increase in ARR after adjusting for FX, with net new ARR increasing by 13% year over year. Revenue recognition also surpassed the $162.5 million high end of guidance. Operating margins of came in 1,500 bps ahead of consensus and improved by 200 bps y/y, demonstrating that BASE is succeeding with its cost-cutting initiatives. Importantly, management emphasizes the company's ongoing success with Capella, which I take to mean an increase in customer migrations. The majority of new customers opted for the cloud offering for the first time, according to the company's management, which is a promising sign of increased cloud usage. Nevertheless, it should be acknowledged that Couchbase, Inc. is not impervious to the challenging market conditions, as the management highlighted increased difficulties in the fourth quarter of 2022, such as prolonged sales processes, heightened demands for deal approvals, and reduced deal sizes.
Guidance
The 11-13% revenue growth, 16%-19% ARR growth, and -24% operating margin forecast for FY23 seems dismal at first glance. However, I think management was purposefully being conservative, since it counts on zero growth in sales productivity and zero gain from Capella migrations. Pipeline generation and conversion, sales cycles, deal sizes, and net growth rates are all treated with greater caution than is typical in the guidance. For some perspective, in spite of increasing macro headwinds, Couchbase, Inc. has consistently outperformed revenue and ARR projections over the past four quarters. Therefore, I believe it is highly likely that FY23 guidance will turn out to be conservative.
KPI to monitor
Even though I believe the guidance to be conservative, it is still something to keep an eye on so that you do not become complacent in the expectation that Couchbase, Inc. will always exceed guidance. If the guidance is accurate, it would indicate a slowdown in revenue growth to 12% y/y at the midpoint, which could make the story of BASE negative if it were to "meet" or "fail to beat" expectations. At that point, the story that BASE growth will remain lower in the near future will begin to take shape, having an effect on stock performance in the near term. Another point to note is that bookings based on cRPO were $54.3 million in 4Q22, down 4% year over year, a slowdown from the 20% y/y growth seen in the previous quarter. Customers preferring shorter contract terms in the face of macro uncertainty and BASE's lessening of incentives for booking multi-year contracts both contributed to a decline in billings for the company. Finally, BASE lost ground during the quarter, adding only 17 net new customers compared to 26 during the previous quarter and 22 during the same period a year ago.
While all of these are not a clear red flag today, they could be early indicators. As such, I would advise to continue monitoring over the next few quarters.
Conclusion
I maintain my recommendation to invest in Couchbase, Inc. Management's conservative guidance for FY23 may be an attempt to temper expectations, but I believe it is likely to be exceeded given BASE's track record. Nevertheless, there are some KPIs to monitor, such as revenue growth, bookings, and net customer acquisitions, as they could be early indicators of a slowdown in the future. Overall, I am optimistic about Couchbase, Inc. prospects and believe that it will continue to drive sustainable growth by building a list of referenceable, large enterprise customers and exploiting expansion opportunities within existing accounts.
For further details see:
Couchbase: Promising Business Over The Long Term