Couchbase, Inc. (NASDAQ:BASE) Q2 2023 Results Conference Call September 7, 2022 5:00 PM ET
Company Participants
Edward Parker – Head of Investor Relations
Matt Cain – President and CEO
Greg Henry – CFO
Conference Call Participants
Sanjit Singh – Morgan Stanley
Raimo Lenschow – Barclays
Rob Oliver – Baird
Param Singh – Oppenheimer
Rudy Kessinger – D.A. Davidson
Operator
Thank you for standing by, and welcome to the Couchbase Second Quarter Fiscal 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today’s program maybe recorded.
And now I’d like to introduce your host for today’s program, Edward Parker, Head of Investor Relations. Please go ahead.
Edward Parker
Good afternoon, and welcome to Couchbase’s Second Quarter 2023 Earnings Call. We will be discussing the results announced in our press release issued after the market closed today. With me are Couchbase’s President and CEO, Matt Cain; and CFO, Greg Henry.
Today’s call will contain forward-looking statements, which include statements concerning financial and business trends and strategies, market size, our expected future business and financial performance and financial condition and our guidance for future periods. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements.
Forward-looking statements, by their nature, address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today’s press release and our most recent annual report on Form 10-K or quarterly report on Form 10-Q filed with the SEC.
During the call, we will also discuss certain non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures as well as how we define these metrics and other metrics is included in our earnings press releases, which are available on our Investor Relations website.
With that, let me turn the call over to Matt.
Matt Cain
Thank you, Edward, and good afternoon, everyone. On today’s call, Greg and I will provide details on our second quarter results as well as our third quarter and full year fiscal 2023 guidance. To kick things off, I want to acknowledge and thank our employees, customers, partners and shareholders as we mark the 1-year anniversary of bringing Couchbase to the public market. Your commitment to Couchbase motivates me and the entire leadership team every day. I am proud of the team’s many achievements over the past year, and I am even more excited about what our future has in store.
I’m pleased to report that we delivered another strong quarter and are well on our way to achieving what we laid out to do this year. Revenue in Q2 was $39.8 million, up 34% year-over-year. Total annual recurring revenue, or ARR, was $145.2 million, up 26% year-over-year and up 30% in constant currency. In addition to beating our guidance across all metrics, we saw another quarter of year-over-year growth acceleration from Q2 last year, and I am proud of the momentum we are seeing at Couchbase.
Our non-GAAP gross margin remains best-in-class at 88.7%. Non-GAAP operating loss was $8.4 million, well ahead of the high end of our range, driving a 17 point improvement in operating margin from Q1 and a 19 point improvement from Q2 of last year. As we scale, we will continue to complement our strong top line momentum with a focus on driving more efficient growth and operating leverage in our model.
In our emerging cloud business, we continue to see enthusiastic customer receptivity and growing transaction volume for Capella. This, in addition to strength across leading indicators continues to validate our excitement in and my very high expectations for our as-a-service offering. I’ll cover more on that in a moment.
In our core business, we continue to see broad strength, including large deal momentum, renewal and expansion activity and healthy new lands. And I’m happy to share that despite ongoing macroeconomic uncertainty, we had a record quarter for pipeline generation.
Greg will provide more detail on our results in a moment, but first, let’s discuss some highlights in the quarter. To begin, from a product perspective, we are making rapid progress with Capella. Capella offers an industry-leading price performance of our core platform in a multi-cloud database-as-a-service offering and provides built-in application services so customers can easily create always on and always reliable applications. When we think about Capella, our approach is twofold: continuing to invest significant development resources by enhancing the core database platform and delivering even more ways to consumer technology.
With respect to our core platform, customers choose Couchbase in part due to our ability to enable applications across a wide spectrum of deployment and usage models from cloud to on-premise, from the data center to the edge and everything in between. Recall that Couchbase Server 7.1, our most recent release, delivers meaningful advancements in performance, storage capacity and workload breadth, which ultimately reduces TCO. And our unique mobile and edge database capabilities round out our ability to run anywhere, further differentiating us from our competition.
Capella then offers customers the easiest way to access and consume this differentiated platform. We are innovating to extend Capella’s reach and usability, enabling customers to pick their cloud of choice to efficiently build and modernize their application. Over the summer, we announced the availability of Capella on Google Cloud as well as the addition of our unique Capella app services on both AWS and Google Cloud for mobile and edge applications. We also expanded Capella into new cloud zone regions for more global coverage.
At the same time, we are reimagining the developer experience and building one that optimizes for productivity. This capability speaks to the core of what we are, unmatched scale and performance with familiarity and ease. In a new sponsored benchmark program with global IT service provider El Toro, Capella significantly outperformed competing database-as-a-service offerings across various workloads and cluster sizes. Based on the benchmark results, Capella processed the same workloads with fewer nodes, resulting in an 81% cost reduction. This cost-effectiveness message is resonating with customers, especially at a time when organizations are looking for ways to consolidate their database investment and make more efficient use of their resources.
With Capella, we are even better positioned for a large and growing $60 billion-plus database market. We are moving fast on the innovation front, and we have an exciting road map ahead of us. We continue to believe Capella is well on its way towards becoming an important contributor to our business this year. And while it’s still early, we are already seeing the fruits of these investments, as you will see in some of the customer wins and expansions I will discuss in a moment.
On the go-to-market front, we continue to make rapid progress with enhancing all aspects of our sales motion. As you will recall, we promoted Huw Owen to Chief Revenue Officer earlier this summer, and he’s off to a great start, driving increased organizational focus and rigor and building overall momentum across our go-to-market teams.
The investments we have made in go-to-market have been especially impactful with Capella, where we are engaging and cultivating a new audience of developers. We saw another double-digit increase quarter-over-quarter in the number of Capella trial sign-ups. We also continue to execute well on our high-touch enterprise sales motion, and I’m pleased with the record quarter of pipeline generation in Q2.
On the partnership front, our partner and alliance ecosystem remains strong and continues to contribute to our go-to-market acceleration. In Q2, we saw a healthy contribution from our partner community with respect to new customer acquisition, and business bookings sourced by partners increased 38% year-over-year in the first half of the year.
In particular, our AWS co-sell engagement continues to deepen. We’re now enjoying differentiated access to several programs and incentives at AWS that support both demand generation activities with customers and prospects and also encourage and incentivize collaboration at the account level. We’ve been working with AWS to target ISV software companies that are building applications that are powered by Capella on AWS. During the quarter, we had several sourced and influenced new ISV partners that were converted from on-demand usage via public marketplace to customers with committed spend.
Our cloud partnerships remain a key part of go-to-market acceleration. We are proud of our increasingly strong relationships with the cloud providers and that both AWS and Google Cloud sponsored our global application modernization road show. Looking ahead, we remain committed to building out a targeted, scalable, world-class go-to-market motion as we prepare Couchbase for the next level of growth.
Next, I’d like to highlight some key customer wins from the quarter. Overall, I am pleased with the breadth of our customer activity across all parts of our portfolio, including mobile, server and especially Capella, which drove the largest percentage of our new wins. Let’s start there. Game developer, publisher and technology provider, East Side Games, selected Capella this quarter. This new customer is migrating from our community addition to our fully hosted offering, allowing its development team to focus on building engaging, responsive and scalable gaming experiences instead of ongoing database management. Unlocking more of these community addition to Capella migrations is an important focus of our go-to-market organization, and we expect to see many more of them in the back half of the year.
Another new Capella win was French social networking app Yubo, which allows its millions of users to create video live streams with their friends. Yubo selected Capella on Google Cloud over the incumbent cloud database for a new use case and features on the app due to the performance, ease of use and scalability that our database-as-a-service provides.
Playgon is a SaaS technology gaming company focused on developing and licensing digital content for the growing iGaming market. They were an existing Couchbase customer and in Q2, expanded their relationship with us by migrating to and expanding their investment in Capella. We support their game, player and betting data stores, and this customer selected our fully managed service for greater developer agility and better total cost of ownership.
Turning to expansions. We grew our relationship with a Fortune 50 home improvement retailer. This customer relies on Couchbase server for their main corporate order management system application as well as for their product master data management. Since becoming a customer, they have significantly grown their use of Couchbase in their cloud environment, and we have become a strategic importance to their technology stack and business.
Another significant expansion during the quarter was with the leader in fast food restaurants, which uses Couchbase mobile for their peer-to-peer tablet-based point-of-sale system at restaurants to ensure a speedy and reliable experience for customers and staff. This is an excellent example of how our unique mobile capabilities are driving a multitude of connectionless applications at the edge, all aligned towards driving a more compelling customer experience through digital transformation. With over tens of thousands of restaurants worldwide, this Fortune 500 customer will increase their Couchbase spend by more than 10x their prior purchase and they continue to see growth opportunities ahead with Couchbase.
As we look towards the second half of the year, I am as confident as ever in the long-term trends powering our growth. Couchbase is very well positioned to take advantage of the tremendous opportunity to transform the database market. Let me remind you of 4 reasons why. First, from a product perspective, we continue to differentiate ourselves by expanding our portfolio to meet the wide-ranging demands and types of applications of the largest enterprises.
Second, with respect to the cloud, industry analysts are forecasting that cloud database management service revenue will account for 50% of the total database market revenue this year. With Capella, we are well positioned to participate in this opportunity as we’ve already outlined earlier.
Third, digital transformation initiatives continue to receive the highest levels of attention and prioritization across organizations. Our conversations with customers increasingly revolve around how Couchbase can play an essential role in driving their multiyear strategic transformation.
And fourth, as CEO of Couchbase, I have the honor of leading a great team of people. I am so proud of our world-class team supported our customers and one another, adapted to constantly changing conditions and executed over the past couple of years, providing superior performance for massive volumes and scale while delivering industry-leading TCO gives me added confidence in our ability to navigate more challenging selling environments. And as you’ve heard me say before, one of our core values is to attack hard problems driven by customer outcomes. Our team is battle tested, and I am highly confident in our ability to persevere and innovate even in volatile markets.
As our results suggest, we have not seen a material change in demand for our products or in the buying behavior of our customers. And in fact, say, for a small amount of business in Russia, our EMEA business remains strong, and as I mentioned a few moments ago, Q2 was a record quarter in terms of pipeline generation. With that said, we wake up every morning with a degree of healthy paranoia, and as such, we remain cognizant of, if not resolutely focused on, the uncertainty being felt across the economy. And this focus continues to inform how we are looking at the rest of the year.
In conclusion, we continue to execute across all facets of the business and the secular drivers supporting our growth trajectory remains strong. I’m proud of our results, and we believe we can do even better. I’d like to thank our team for their tireless efforts and our customers and partners for placing their trust in Couchbase.
With that, I’ll hand the call over to Greg to walk you through our results in more detail. Greg?
Greg Henry
Thanks, Matt, and thanks, everyone, for joining us. We had another strong quarter as we beat guidance across all key metrics. Against the more challenging macro environment and despite increased FX headwinds, we saw healthy demand for our solutions and are pleased with our execution in the quarter. I’ll now walk you through our second quarter financial results in more detail before providing our guidance for the third quarter and full year.
Total ARR at the end of the second quarter with $145.2 million, representing 26% growth year-over-year or 30% growth year-over-year on a constant currency basis. Revenue for the second quarter was $39.8 million, an increase of 34% year-over-year and well above the high end of our guidance range. We estimate foreign currency had an approximately negative 1.5% impact on year-over-year revenue growth.
In addition to strong subscription revenue growth this quarter, revenue benefited from our outperformance in our on-demand business and continued strength in professional services, which we remind you is nonrecurring and does not appear in our ARR number nor our customer count.
Subscription revenue for the second quarter was $37.1 million, an increase of 32% year-over-year. Professional services revenue for the second quarter was $2.7 million, an increase of 64% year-over-year. We exited the quarter with 632 customers, an increase of 18 customers from the first quarter. Our ARR per customer performance in the second quarter was $230,000, up from $227,000 from the first quarter. Our dollar-based net retention rate continues to exceed 115%.
In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, results of operations and share count are on a non-GAAP basis. In Q2, our gross margin remained best-in-class at 88.7%. This compares to a gross margin of 88.3% a year ago and 87.3% last quarter.
Turning to expenses. We continue to invest aggressively to capture the generational opportunity we see in front of us, but are focused on improving the efficiency of our growth. Our sales and marketing expenses for Q2 were $24.9 million or 63% of revenue compared to $21.6 million or 73% of revenue a year ago.
Research and development expenses for Q2 were $12.2 million or 31% of revenue compared to $12.1 million or 41% of revenue a year ago. General and administrative expenses for Q2 were $6.5 million or 16% of total revenue compared to $4.6 million or 16% of revenue a year ago.
Non-GAAP operating loss for Q2 was $8.4 million or a negative 21% operating margin compared to an operating loss of $12 million or a negative 40% operating margin a year ago. The operating loss was well above the high end of our guidance, resulting from our strong revenue results and focus on both expense discipline and increasing efficiencies, offset by public company costs. Non-GAAP net loss attributable to common stockholders for Q2 was $8.5 million or negative $0.19 per share.
Turning to the balance sheet and cash flow statement. We ended Q2 with $192 million in cash, cash equivalents and short-term investments. We remain well capitalized to execute against our long-term growth strategy. Our remaining performance obligations or RPO totaled $166.5 million at the end of Q2, an increase of 40% year-over-year. We expect to recognize approximately 62% or $103.1 million of total RPO as revenue over the next 12 months. We are pleased with our continued strength in our RPO performance. But note that our sales plans no longer incentivizes multiyear contracts as aggressively, and as such, we may see a slight contraction in billings terms.
Operating cash flow for Q2 was negative $7.7 million, while free cash flow margin was negative $9.3 million or a negative 23% free cash flow margin.
Now to conclude the call, I will provide guidance for Q3 and the full year of fiscal 2023. As Matt discussed, despite the ongoing macroeconomic volatility, our pipeline remains strong. We continue to see solid momentum across our industry in support of broad-based digital transformation initiatives. That said, we are mindful of the macro headwinds impacting IT spending and are monitoring the environment closely. We also continue to see an incremental strengthening of the U.S. dollar, resulting in a headwind from foreign exchange exposure.
Lastly, I’d like to remind everyone that as opposed to our annual credit portion of our Capella business, the on-demand portion is not currently counted in ARR, and as such, we’re factoring this emerging dynamic in our outlook. Accordingly, we are prudently considering these factors into our guidance.
For the third quarter of fiscal 2023, we expect total revenue in the range of $36.5 million to $36.7 million or a year-over-year growth of 19% at the midpoint. We anticipate ARR in the range of $149.3 million to $151.3 million, which represents 23% growth year-over-year at the midpoint. I’d add that we anticipate approximately a 3% negative impact to our ARR growth rate due to foreign currency fluctuations. We expect a non-GAAP operating loss in the range of negative $14.7 million to negative $14.5 million.
Now turning to our revised full year guidance. We are raising our full year revenue guidance provided on our Q1 call and now expect revenue to be in the range of $149.5 million to $150.5 million or year-over-year growth of 21% at the midpoint. As a reminder, we’ve historically seen variability with respect to the implementation timing of certain deals, which impacts our revenue visibility. We therefore believe that ARR is a better indicator than revenue of the strength of our business.
On a constant currency basis, our full year ARR guidance remains unchanged. However, we are adjusting our ARR guidance to account for foreign currency fluctuations, which is resulting in an approximately $1 million incremental headwind to our full year fiscal 2023 guidance updated in June. Our updated ARR guidance for the fiscal 2023 is in the range of $159.5 million to $163.5 million or 22% year-over-year growth at the midpoint. We note that we anticipate approximately 2% negative impact to our ARR growth rate due to foreign currency fluctuations and an approximately 1% incremental headwinds since our Q1 call.
And finally, due to revenue outperformance and continued expense discipline, we are raising our non-GAAP operating loss guidance and now expect a range of negative $51.8 million to negative $50.8 million.
Finally, I want to share our thoughts on balancing growth and profitability. As Matt outlined earlier, we have a $60 billion database market ahead of us, and we are investing aggressively to become a cloud-first company. Our level of investment is informed by this tremendous market opportunity while prudently evaluating and managing our cost structure, delivering healthy revenue growth, while improving profitability is a top priority for us.
With that, Matt and I are happy to take your questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] And our first question comes from the line of Sanjit Singh from Morgan Stanley.
Sanjit Singh
Congrats on the 30% constant currency ARR growth this quarter. Matt, I wanted to unpack some of the drivers that we could see for Capella over the next year. You talked in your script about the community to serve or upsell motion for Capella. I was wondering if you could — if there’s any way to sort of quantify or give us a sense of that opportunity for the Capella business? And similarly, in terms of penetration of the cloud providers in terms of the availability zones, where do you stand today and where do we think we’ll be over the next year?
And the last one, I apologize for the multipart question, on the other part of the 7.0 release was the really great capabilities around relational migrations. And I wanted to see how you’re thinking about that aspect becoming a driver potentially going into a tougher IT budget environment and whether that gets customers to think about re-platform off of more expensive relational. So that’s kind of final question, but it’s attached to the drivers for Capella.
Matt Cain
Sanjit, great question. Let me break this down. And certainly, appreciate your acknowledgment of the 30% ARR growth. We’re proud of that and focused on how we go forward. Look, as we think about Capella, we’re first off, very pleased with the momentum we’re seeing. And as you know, this is still the early days for us, but we truly believe it’s a game changer for the company.
I think it’s safe to say that Capella is dominating conversations with our customers, both existing and new prospects. And we do believe that it is a matter of when, not if, for it being the de facto choice for Couchbase customers because of the value proposition we’re enabling and the industry-leading database that is the foundation of our offering.
When I think about the demand signals that demonstrate health of the business, I start from kind of the buyer journey. So how are they engaging with us digitally, getting on our web page, reading our documentation, getting into trials? Are they then progressing into POCs? And could we successfully demonstrate our value quickly and efficiently in those proof of concepts? That [lab] moves to lands and conversions. We got to make sure that we’re seeing positive product feedback, expanding at pace, both applications that we’ve landed and additional ones. And then ensuring that we have the ability to continuously innovate and expand our go-to-market. And across that entire value chain, we’re seeing leading indicators that are very positive and trending in the direction that we want.
Now your question on CE to Capella is a really interesting one, because one of the fundamental things that we believe Capella opens up for us that, quite frankly, we have not experienced in a material way is product-led growth. And I do really think of CE to Capella as a great demonstration of that, where a customer is experiencing Couchbase. They see the power of the database, but then they decide that the consumption model of us managing the service frees them up from running the database and allows them to focus on application development.
And we mentioned East Side games, but there are other examples of that playing out. We had another company, an American sports book and betting operator that moved from CE to Capella on AWS specifically for greater development team flexibility and agility. And we believe that’s the value proposition that is opening up. So certainly, CE is a big portion of our potential demand stream. But I think the product-led growth aspect is even more significant, quite frankly, when you look across the business.
Now as we think about the availability of cloud providers, reminder in the summer, we added GCP to our portfolio for both server as well as the addition of our mobile and application services portfolio on AWS and GCP. Azure is on the road map for the rest of the year, and we’ll continue to expand our geographic coverage with additional zones being deployed while we focus on developer productivity and reimagining that developer experience.
Now the last part of your question, Sanjit, on relational migrations, we think is a really important part of our value proposition as we’ve been talking about for some time. Companies still rely on us for mission-critical applications that often have some component of relational offload. And in today’s demand environment, I think the value proposition of total cost of ownership and database consolidation, doing more with less, leveraging our SQL compatibility for all developer productivity, all those things are more relevant than they’ve ever been. And I think it’s a big part of our value proposition that will continue to deliver capabilities in the market to make that even easier specifically for developers and leveraging Capella as the preferred consumption model.
Operator
Our next question comes from the line of Raimo Lenschow from Barclays.
Raimo Lenschow
Two questions actually. And congrats from me as well on the 30%. First one is on Capella and what you see in the market in terms of adaptability. Like the one thing that people in the past would forward you is that there is a slightly smaller ecosystem of developers there…
[Technical Difficulty]
Matt Cain
Economic value of solutions that are being deployed, and that really comes down to total cost of ownership. Our value proposition lends itself very well to that. But as we get into the Capella offering, how we articulate the entire managed service is a newer dynamic for us that we’re really leaning into. But I think those are two dynamics that I think are particularly important in today’s environment.
Raimo Lenschow
Great. And then just one really quick follow-up on the competitive side. You talked about the AWS partnership and some of the go-to-market work you’re doing there. Maybe just help us understand why AWS would not want to sell its own database relative to something like Couchbase?
Matt Cain
Yes. Look, I think the value proposition that AWS is focused on, they talk a lot about customer obsession and ensuring that they are aligning as a business partner to help customers achieve their business objectives. And to their credit, I think they’ve built a very strong program to incent ISVs like Couchbase to truly engage with them at a partnership level.
With Capella, we are able to help AWS with their value proposition to end customers and ultimately get more spend inside their cloud, but with the value proposition that they’re not able to offer fully with their embedded databases. And so we’ve been pretty excited about the productive and collaborative selling and go-to-market efforts that we have with AWS. And we find that the more we engage with them early and often with account planning, it’s actually opening up a lot more opportunities for us, which we’ve been talking about for some time, finding leverage in the go-to-market.
And it’s a testament to our teams on the field side, within our partner ecosystem of really understanding the AWS machinery leaning into incentive programs and go-to-market programs. But we’re excited about that. We think we’re going to see similar benefits with GCP and Azure when we bring that to market.
Operator
[Operator Instructions] And our next question is from Raimo Lenschow from Barclays.
Raimo Lenschow
I don’t know what happened there earlier. The — I had 2 questions. One was — and I don’t know — I got dropped, and so I don’t know if you answered it already. But I was wondering, Matt, if the cloud deployment that you have is kind of changing the whole dynamic about the developer ecosystem, because one thing the cloud should enable you is to — because it removes a lot of the friction, the extra work, et cetera, that the developer productivity should increase or it should be easier to kind of find more people and have more people working with you. So I was just wondering if you had some early experience on that already.
And then the second question was for Greg. In terms of the better profitability guidance, how did you kind of get to those better numbers, especially in light of your kind of growth versus margin discussion you had earlier? I’m trying to understand like what drove the different decisions here or what drove the changes here.
Matt Cain
Raimo, so on the developer front, I will tell you that, quite frankly, that’s an area that we know we can do better as a company. And we know that Capella is a big part of unlocking our story with developers. And the fact that we are where we are on our journey has allowed us to really think innovatively on what experience we want to create for developers. That’s everything from integration with third-party tools, reimagining user interfaces that developers are going to be working with, embedding documentation into Capella itself, just really removing friction and making it really easy to build applications on what we believe is the industry’s most powerful next-generation database.
And we’re seeing that in the strength of our leading indicators, additional significant growth in trials and POCs. But I’ll give you one additional thing that has us pretty excited, which I think demonstrates what’s in front of us. And that is shortened deal cycles. One of the new logos on Capella from the quarter was an animation studio. They wanted to fully manage database, high performance, broad capabilities. They started off with the free trial. So that’s them pursuing their buying process without us kind of actively selling to them. They then went into a POC where we were engaging with them on their particular application, which was content management. And we went from not knowing them to having them up and running on Capella in less than 2.5 months. And there are other examples where that process has moved even faster.
And so why are we able to do that? Well, we’re managing the complexity of the database. We’re driving that experience. Developers are seeing how they can be flexible and agile and productive. And so we believe that’s going to demonstrate a value proposition to developers above and beyond what we’ve already been able to do with our core platform, significantly expand our reach. And that’s going to allow us to build on that and get people who are using that solution in these ways to evangelize on behalf of Couchbase, will drive further integrations. And I think that we have an opportunity to really expand our community efforts on the other side of this. So certainly, all in on developers from both an innovation and mindset perspective as well as our go-to-market.
Greg Henry
Yes. Raimo, on your second question. Look, we obviously saw a nice revenue outperformance in the first half and some good cost control, which drove some of that bottom line profitability you saw. We are still investing aggressively to capture this once-in-generation database market. And we’re going to — we’re starting to see and we’ll continue to gain efficiency as Capella scales.
We’re going to get additional go-to-market improvements. Huw is driving some changes there that we’ll continue to see as we go forward here. As Matt talked about, the partnerships, we’re leveraging the partnerships, the cloud companies in terms of their partnership. And we’ll continue to prudently manage expenses as we go here, knowing that there’s just uncertainty in the environment. So we’re trying to balance all that at the same time. But we think we’ve started to demonstrate that in the first half, and we’ll continue to drive that in the second half.
Raimo Lenschow
Sounds really good. Congratulations.
Operator
Our next question comes from the line of Rob Oliver from Baird.
Rob Oliver
I think I missed a couple because of the technical issues. So I apologize if this was already asked. But one, Matt, for you and then one, Greg, for you. Matt, you made the comment about your record pipeline gen in the quarter, which sounds great. I was just wondering if we could get a little bit more color on that. Where that is? If that’s in Capella? If it’s conversions? If it’s more on the on-prem side? And maybe just any more color you can add on that kind of record pipeline and activity levels, that would be great.
And then, Greg, for you just a follow-up to Raimo’s question just around the expense side. Obviously, a really great job managing that. You guys did call out the macro in your prepared remarks. It seems [Technical Difficulty] outside of FX, there weren’t any actual impacts of the macro on the business. Is that correct? And if that is, then were there other signals that are flashing or anything else that you guys wanted to call out?
Matt Cain
Rob, let me unpack pipeline a little bit. So when we think about pipeline, which is something we quite candidly obsess over on a daily basis, we think about it in terms of size, shape and velocity. And when we talk about record pipeline generation, that’s something that we want to ensure that we’re not only getting to levels, but we’re doing it with the appropriate and healthy mix across geographies, across customer segments, across use cases, and most importantly, right now, as it pertains to the mix of Capella.
And the strength of the pipeline, quite frankly, is better than it has been in as long as I can remember, because of the focus on that, because of the contribution of new business. And we really think Capella is a big driving factor of that. When I say new business, it’s certainly addressing one of the areas that we know we can do better, which is new customer acquisition as well as an area that we do really well in, which is customer expansion. But being able to open up new use cases and address different personas with Capella for customers that we have, I think, is reflected in that record pipeline generation.
So we are incredibly focused on this across our go-to-market teams. That’s not just sales. That’s marketing. It’s our business development team. It’s our community efforts. It’s everything that we’re doing to ensure that we’re extending our reach and people understand what we can do for them with Couchbase as a platform and Capella in particular. But it’s a leading indicator that is really important to us and one that was a big win in the quarter.
Greg Henry
Yes. And Rob, to take the second one on the macro and the expense side. Yes, I wouldn’t say we didn’t see any macro impact in the first half. But I’d say that they were not material, and I think we just managed them very well at this point. That said, we are being obviously prudent with our guidance. We’re very mindful reading the headlines on a daily basis. Just from a pure risk management perspective, we’re trying to be just deliberate about how we go about setting guidance and make sure that, again, we’re setting ourselves up to, at a minimum, meet that guidance. And then we’ll work really hard to beat it. So that’s how we’re setting up for the second half. And we’ve been thinking about it most of the year.
Operator
Our next question comes from the line of Param Singh from Oppenheimer.
Param Singh
Great. This is Param Singh on for Ittai Kidron. So firstly, you mentioned shorter sales cycles for Capella. Maybe you could give some color on how much of that is the difference? Or will that impact RPO significantly? Also what the typical ARR per customer is for Capella versus CE? Any more granularity there would be really helpful.
Matt Cain
Param, maybe I’ll talk how we think about the dynamic, and then I’ll defer to Greg to get into RPO and ARR dynamics. Look, when we’re working on a platform at the scale we are for the nature of the applications that we support, enterprises will be prudent about evaluating that technology and ensuring that they’re making a long-term bet on us as a vendor. The difference with Capella is we can shorten all of that. They can get into trials. They can get into POCs. They can offload a lot of what they would normally have to do in a longer selling cycle because we are handling all the back-end administration and running the service.
And so when we think about shorter deal cycles, that’s really compelling to us, particularly as we open up new customer acquisition and do that at a pace that we haven’t. We’re excited about shorter deal cycles. And quite frankly, just landing customers and allowing them to expand at their pace is something that we can do with Capella much more efficiently than we would have with our customer managed server version.
And so there’s a big drive within the company to leverage this dynamic, lean into product-led growth and really participate from this as-a-service dynamic in a material way. From a financial perspective, I’ll let Greg talk about the impacts and how we’re thinking about it.
Greg Henry
Yes. So just as a reminder, we haven’t and we’re not intending to give out Capella specific metrics now. We will at the time when the business becomes — that part becomes material.
In terms of potential impact on RPO. Look, we’ll have to see as we go. Like I said, we’re not — it’s not material to the business today, so it’s not impacting the RPO per se. But that said, we obviously believe this is a massive tailwind and growth driver for us. So if the theory is that the case holds, you would obviously — that would be the driver of our RPO as well going forward.
And then on the ARR, again, we’re not giving that specifically. But as Matt alluded to, like our objective here is to get customers going on Capella as quickly as possible, which would lead to probably smaller deal sizes to start and then doing rebuys and upsells from there. So we do believe that the initial deal size for Capella will be smaller than what we experienced in the past, but then there would be more frequent buying coming after that.
Param Singh
I see. So philosophically, is it like when you reach 5% or 10% of revenue, whether on Capella or some take rate level on the app services, would you expect to disclose at that point? Is there some level of contribution that you have in mind?
Greg Henry
Yes. We — yes, there is. We aren’t talking about that specifically now. But when it does become material to the business, we fully intend to disclose the necessary Capella metrics that you’re asking and others have been asking. So things like ARR, customer count, et cetera. So that will certainly be coming in due time.
Param Singh
Absolutely. Maybe one more, if I could sneak in. Obviously, you’ve done a really good job with some of the leverage here and OpEx prudence. What is the philosophy behind getting to an operating breakeven? That’s been a bigger topic of conversation among investors. How are you seeing that now versus a year ago? And what can we expect from trying to get to a breakeven sooner rather than later?
Greg Henry
Yes. Look, I’d say we’ve always been mindful of that. Again, we’re trying to do through invest — balance the investment level to grow the business, but being mindful of the profitability at the same time, as I referred to in the prepared remarks. So I don’t think anything has necessarily changed materially at this point. We remain mindful of it, and we’re trying to find that — strike that right balance to make sure we can grow the business because we have this huge opportunity in front of us. But we absolutely intend to be moving towards profitability here over the next period — several periods here. And again, one of the things we will talk about when we get to an Analyst/Investor Day next year sometime is to lay out a multiyear view and give you insight as to the path to profitability.
Param Singh
Great job on navigating the tough macro environment.
Operator
And our next question comes from the line of Rudy Kessinger from D.A. Davidson.
Rudy Kessinger
I guess I’m curious based on your commentary on macro and the record pipeline. I don’t know if there’s a way you can maybe quantify the conservatism that you baked into the revised guidance on the macro. And just maybe, if not, what assumptions are you making? Are you making an assumption that the macro gets worse, stays about the same or — just trying to understand better what you’re flowing into that revised guide.
Greg Henry
Yes, look, we — again, as I said, we’re trying to be mindful of everything that’s going on around the world today, even beyond just the macroeconomic and try to best assess that and how we think it could impact Couchbase in the second half of the year.
So we’re again just baking in a certain level of prudence. I’m not sure we would quantify it per se. I mean, we feel good about the way we’ve guided the business. I think we’re now in our sort of fifth quarter, and I think we’re building a history of building a guidance where we can have a high probability that we’re going to at least meet that and then continue to work hard to beat it.
And so I think that’s what we’ve baked in. I don’t think it’s changed materially other than you take the pieces of information and the headline news we see on a daily basis and try to continue to factor in and adjust. And by the way, not only to adjust the guidance, but also to adjust how we’re running the business to try to offset some of that. So that’s how I would articulate it.
Matt Cain
Yes. Rudy, this is Matt. The additional commentary I would have is we’ve worked through challenging circumstances as a team before. Certainly, not all are the same. But I think one of the things that we’re very mindful of, as we believe we’re a battle-tested team and being part about — understanding deal cycle dynamics or the fact that there may be additional inspection on economic value in TCO and making sure we’re planning for that in our sales cycles, balancing our demand generation across customer segments. I think we’re really leaning into the things that we can control to take that all into account with some of the more challenging circumstances that’s maybe being felt.
Rudy Kessinger
Got it. And then, Greg, my congrats on the 30% ARR growth in constant currency. But I guess, was there anything in Q1 that drove the really strong net new ARR figure in Q1? It was much, much higher than in years past. And I guess, the ARR growth kind of came down a point from Q1. So I’m curious just was there anything in Q1 that is resulting in kind of the nonlinear acceleration trend over the last couple of quarters?
Greg Henry
Yes. So Rudy, I would say there’s nothing that really sticks out in my mind. I would say — I mean, look, we are enterprise based, and so there can be from time to time a big deal here or there that can move things a little bit. So that could be part of the driver. But there’s nothing that really stands out other than a deal here or there that could be driving the 1 or 2 point variance. Otherwise, we feel really good about being able to maintain a 30% growth over the first half.
Operator
This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Matt Cain, President and Chief Executive Officer, for any further remarks.
Matt Cain
Thanks, operator. To recap, we had a strong quarter, and I’m very pleased with the momentum we are seeing at Couchbase. I’m excited about our opportunity with Capella this year as there are some very big trends in our favor like digital transformation, acceleration of the cloud and innovation at the edge, while also remaining cognizant of the macro-related impact on visibility. Couchbase is in a great position. We’ll see you back here next quarter. Thank you.
Operator
Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.
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