GitLab Inc. Class A Common Stock 2027 Q2 Earnings Call

Good afternoon and welcome to GitLab's second quarter 2027 financial results earnings call. I'm Nick Edwards, VP of Finance, Strategy, and Operations, and with me are Bill Staples, our CEO, and Jessica Ross, our CFO. During this afternoon's call, we will provide an overview of the business, commentary on our second quarter and full year results, and guidance for the second quarter and fiscal year 2027. In addition to our prepared remarks on this call, additional information can be found in our shareholder letter, press release, and investor presentation, and SEC filings on our investor relations website at ir.gitlab.com. Before we begin, I'll cover the safe harbor statement. I would like to direct you to the cautionary statement regarding forward-looking statements on page 2 of our presentation and in our earnings release issued earlier today, both of which are available under the investor relations section of our website.

The presentation and earnings release include a discussion of certain risks, uncertainties, assumptions, and other factors that could cause our results to differ from those expressed in any forward-looking statements within the meaning of the Private Securities Litigation Reform Act. As is customary, the content of today's call and presentation will be governed by this language. In addition, during today's call, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures exclude certain unusual or non-recurring items that management believes impact the comparability of the period's reference. Please refer to our earnings release and presentation materials for additional information regarding these non-GAAP financial measures and the reconciliations to the most directly comparable GAAP measure. I will now turn the call over to Bill.

Bill? Thanks, Nick, and good afternoon, everyone.

Q2 was an exceptional quarter. Let me start with just some of the highlights. Revenue was $286.3 million, up 21% year-over-year, and non-GAAP operating income was $42.6 million, representing a 15% operating margin. Our sales team delivered the largest gross bookings quarter in company history, and net ARR grew more than 40% year-over-year, our highest in several years. We also beat all of our targets on first orders, which grew more than 100% year-over-year. Underneath those highlights, I'd like to share a brief update on each of the five growth initiatives that we laid out for this year. First, we told you it was important that we accelerate first orders. Q2 was our largest first order quarter in three years. First order count grew more than 100% year-over-year, and first order net ARR increased nearly 40%.

Our dedicated first order organization is building more repeatable sales motions while our product-led investments are widening the top of the funnel. The combination is bringing significantly more new customers into GitLab. It is important to win customers of all sizes, including AI startups and others with small orders to begin with, because more than half of our current 1 million-plus in run rate revenue comes from customers whose first order was less than $5,000. Our strategy is to land customers wherever they are ready to start and grow with them over time. Second, we said increased productive sales capacity would be an important driver of re-acceleration, and in Q2, we saw that thesis begin to pay off. Account executive capacity increased approximately 30% year-over-year, while productivity per rep improved approximately 10%. Attrition also improved year-over-year for the second consecutive quarter.

Adding capacity while simultaneously increasing productivity is difficult, and we believe it demonstrates that the investments that we have made into our sales organization are beginning to compound. The result was the largest gross bookings quarter in GitLab history and net ARR growth of more than 40%. Third, we told you it was important for us to expand our monetization vectors. Our seat-based business continues to grow, and AI is creating an additional opportunity for GitLab to monetize an increasing amount of work happening across the software lifecycle. Flex is an important enabler of that strategy. After only six weeks in market, more than 130 customers committed more than $20 million to Flex. That early response reinforces our belief that customers want a simpler way to allocate their GitLab spend across seats and new consumption products as their needs evolve.

Prior to Flex, customers committed dollars to fixed quantities of seats for Premium or Ultimate access to our platform. Flex changes that. Customers now make a dollar commitment, and each month they could decide how to put it to work across seats and all of our consumption products. The commitment is fixed and can be used for any product in the platform. With work accelerating due to agents and more builders coming into the picture, we have a tremendous opportunity ahead to create and capture value. Anything we can do to shorten the time between customer interest and realized value is good for customers and is good for GitLab. Flex was designed to do this in three important ways. First, it helps customers get more value from every dollar they commit to GitLab.

Instead of leaving unused capacity stranded as shelfware, customers can redirect dollars toward products creating the most value for them. We believe better utilization should strengthen our already healthy retention profile by reducing the potential for churn and contraction driven by unused spend. Flex also reduces sales and procurement friction because once the financial commitment is in place, customers can allocate dollars across existing and new products on their own timing throughout the year without requiring a new commercial agreement each time. We have already increased sales capacity and productivity. Flex should help us make that capacity even more productive by allowing our teams to spend less time on incremental contracting and more time helping customers realize value. Third, it lets usage expand seamlessly as customer needs grow.

Customers can consume any eligible product on demand above reserved capacities, including Premium and Ultimate seats, and any usage above their commitment or reservation is billed in the month it occurs. That removes many of the true-up and contracting cycles that are required today to capture that incremental usage and gives customers more flexibility. It creates another potential growth tailwind for GitLab as usage expands. Paid CRR ended the quarter above $40 million, up from $15 million existing in Q1, thanks to the introduction of Flex. As a reminder, paid CRR is a point-in-time annualized measure that includes GitLab Credit commitments, Flex commitments, and paid on-demand consumption. It excludes trials and promotional credits. We believe paid CRR gives investors a useful way to track the dollars moving through our consumption model as it scales.

Our objective is to exceed $100 million of paid CRR by the end of this fiscal year. We entered this year with a business monetized entirely through seat subscriptions, and we now expect to exit it with seats continuing to grow alongside a meaningful and scaling consumption business. Fourth, we need to improve our performance in our price-sensitive customer segments. I am pleased to report that we now have seen stabilization in SMB and mid-market this quarter, with performance ahead of our targets for both of those segments in both expansion and first orders. Our thesis with increased focus and investment in this segment could improve performance, and this quarter's results are encouraging. We want to see that performance sustained over the next few quarters, but we are increasingly confident that we are on the right path. Fifth, we are executing a bold AI strategy.

This quarter, Duo Agent Platform CRR grew roughly 50% quarter over quarter, inclusive of credit commitments, paid on-demand credits, and Flex reservations. We also broadened adoption geographically after a more U.S.-centric first quarter, and one top 20 U.S. commercial bank expanded its AI credit pool nearly tenfold this quarter. I think the broader AI story is even more important. For more than a decade, GitLab has brought together the context of how software is built, secured, and shipped across source code, issues, merge requests, pipelines, vulnerabilities, policies, approvals, and deployments. As AI becomes more capable, we believe that connected context becomes even more valuable, and we are seeing early evidence of that with GitLab Orbit, our context graph for the software life cycle. Since opening the beta in June, more than 2,200 organizations have enabled Orbit indexing, an increase of 70% in four weeks.

Customers have generated more than 170,000 queries, and roughly 80% of customer query volume comes from customers connecting Orbit to external agents, such as Cloud Code and Codex. We are also beginning to see evidence that better context improves agent performance. Compare the Market tested Orbit against traditional RAG with 79 real merge requests and saw accuracy improve from 58% to 70%. The same dynamic is visible across our platform. Year over year, secure repositories grew 60%, code pushes grew 50%, CI/CD pipelines grew 40%. Among some customers moving aggressively into AI-assisted development, we have seen code bases grow as much as 500%. The pattern is increasingly clear. As enterprises adopt more AI development tools, they use more of GitLab. That matters because our core business remains very strong. Ultimate now represents 59% of ARR and eight of our top 10 deals this quarter.

Premium and Ultimate are the foundation of a business now exceeding $1 billion in trailing four-quarter revenue, and we continue to see significant opportunity ahead. AI gives us the opportunity to build on top of that foundation with new products, new consumption, and entirely new kinds of work flowing through GitLab. Before I turn it over to Jessica, I want to recognize two important groups. First, Ian Steward, our CRO, and the entire sales organization. Ian has now been with GitLab for five quarters. The results we are seeing today reflect many quarters of disciplined work, building the fundamentals, sharpening our strategy, and creating a team capable of executing against it. I especially also want to recognize the entire GitLab team, because at the beginning of this quarter, we made the difficult decision to restructure the company. Many people chose to stay and help build GitLab's next chapter.