Gitlab (US:GTLB)2023-12-05 00:13PART I. Financial Information Financial Statements (Unaudited) GitLab's unaudited condensed consolidated financial statements for the period ended October 31, 2023, show a 32% year-over-year revenue increase to $149.7 million, a $286.4 million net loss primarily due to a $256.8 million tax provision, and strong liquidity with $1.23 billion in total assets Condensed Consolidated Balance Sheets As of October 31, 2023, GitLab reported total assets of $1.23 billion, an increase from $1.17 billion at January 31, 2023, while total liabilities significantly increased to $633.7 million from $344.5 million, and total stockholders' equity decreased to $593.2 million from $824.7 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Oct 31, 2023 | Jan 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $1,182,336 | $1,117,962 | | Cash and cash equivalents | $285,309 | $295,402 | | Short-term investments | $704,325 | $641,249 | | Total Assets | $1,226,896 | $1,169,200 | | Total Current Liabilities | $585,922 | $306,296 | | Deferred revenue, current | $287,647 | $254,382 | | Total Liabilities | $633,714 | $344,475 | | Total Stockholders' Equity | $593,182 | $824,725 | Condensed Consolidated Statements of Operations For the three months ended October 31, 2023, GitLab's total revenue grew 32% year-over-year to $149.7 million, with gross profit increasing 37% to $134.6 million, yet a $286.4 million net loss resulted primarily from a $256.8 million income tax provision, despite an improved operating loss of $40.3 million Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 FY2024 (ended Oct 31, 2023) | Q3 FY2023 (ended Oct 31, 2022) | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenue | $149,668 | $112,981 | +32% | | Gross Profit | $134,584 | $98,417 | +37% | | Loss from Operations | ($40,267) | ($56,962) | +29% (Improvement) | | Provision for Income Taxes | $256,788 | $65 | N/A | | Net Loss | ($286,355) | ($50,465) | -467% | | Net Loss per Share | ($1.84) | ($0.33) | -458% | Condensed Consolidated Statements of Cash Flows For the nine months ended October 31, 2023, net cash provided by operating activities significantly improved to $10.2 million from $65.7 million used in the prior year, while net cash used in investing activities was $50.5 million, and net cash provided by financing activities totaled $30.2 million Cash Flow Summary for the Nine Months Ended October 31 (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $10,187 | ($65,688) | | Net cash used in investing activities | ($50,466) | ($523,888) | | Net cash provided by financing activities | $30,243 | $85,597 | | Net decrease in cash and cash equivalents | ($12,593) | ($512,503) | Notes to Condensed Consolidated Financial Statements The notes provide detailed explanations of GitLab's accounting policies and financial results, disclosing 88% of revenue from subscriptions, a significant increase in income tax expense due to a pending BAPA, details on stock-based compensation, and information on the JiHu joint venture in China - Subscription revenue (self-managed and SaaS) constituted 88% of total revenue for both the three and nine months ended October 31, 2023, consistent with the prior year45 - The company recorded a tax expense of $254.4 million in Q3 2024 related to a proposed bilateral advance pricing agreement (BAPA) with the IRS and Dutch Tax Authority, covering tax years 2018 through 2027131222 - Total stock-based compensation expense for the nine months ended October 31, 2023 was $120.0 million, a 35% increase from $88.9 million in the prior-year period104212 - The company's joint venture in China, JiHu, generated revenue of $4.8 million and had a net loss of $6.2 million for the nine months ended October 31, 2023118194 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses GitLab's financial performance, highlighting 38% revenue growth driven by customer acquisition and expansion, with a 128% Dollar-Based Net Retention Rate and a 37% increase in customers with ARR over $100,000, while noting increased operating expenses and a significant tax provision impacting net loss, yet maintaining sufficient liquidity Key Business Metrics GitLab's key performance indicators show continued growth, with a 128% Dollar-Based Net Retention Rate and a 37% year-over-year increase to 874 customers with Annual Recurring Revenue (ARR) of $100,000 or more, noting a recent methodology change for retention rate calculation Key Performance Indicators as of October 31 | Metric | 2023 | 2022 | YoY Change | | :--- | :--- | :--- | :--- | | Dollar-Based Net Retention Rate | 128% | >130% | N/A | | Customers with ARR > $100,000 | 874 | 638 | +37% | - The company implemented operational changes to its account hierarchy process, which updated the methodology for calculating the Dollar-Based Net Retention Rate in Q3 2024167 Results of Operations For the three months ended October 31, 2023, revenue increased 32% year-over-year to $149.7 million with gross margin improving to 90%, while operating expenses grew slower than revenue, narrowing the operating loss to $40.3 million, though a $256.8 million tax provision led to a $286.4 million net loss Revenue Comparison (in thousands) | Period | Q3 FY2024 | Q3 FY2023 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $149,668 | $112,981 | $36,687 | 32% | Operating Expense Comparison (in thousands) | Expense Category | Q3 FY2024 | Q3 FY2023 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $86,978 | $81,080 | $5,898 | 7% | | Research and development | $49,058 | $41,113 | $7,945 | 19% | | General and administrative | $38,815 | $33,186 | $5,629 | 17% | - The increase in operating expenses was primarily driven by higher personnel-related costs due to increased headcount and a $7.6 million increase in stock-based compensation expense for the quarter199202205211 - The provision for income taxes increased by $256.7 million in Q3 2024 compared to the prior year, primarily due to an unrecognized tax benefit related to ongoing BAPA negotiations with the IRS and Dutch Tax Authority217222 Liquidity and Capital Resources As of October 31, 2023, GitLab's principal liquidity source was $989.6 million in cash, cash equivalents, and short-term investments, deemed sufficient for the next 12 months, with $10.2 million generated from operations for the first nine months of fiscal 2024, a significant improvement from the $65.7 million used in the prior year Cash Flow Summary for the Nine Months Ended October 31 (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $10,187 | ($65,688) | | Net cash used in investing activities | ($50,466) | ($523,888) | | Net cash provided by financing activities | $30,243 | $85,597 | - The company's principal source of liquidity as of October 31, 2023, was $989.6 million in cash, cash equivalents, and short-term investments227 Quantitative and Qualitative Disclosures about Market Risk GitLab is primarily exposed to interest rate risk, where a hypothetical 1% rate change could impact its investment portfolio's fair value by approximately $3.8 million, and foreign currency exchange risk, as operating expenses are in local currencies while most revenue is in USD, making a 10% exchange rate change materially impactful - A hypothetical 1% (100 basis points) change in interest rates would result in an approximate $3.8 million change in the fair value of the company's investment portfolio243 - The company is exposed to foreign currency risk as operating expenses are incurred in local currencies while most revenue is in USD. As of October 31, 2023, $47.2 million of cash and cash equivalents were held in non-USD currencies244245 Controls and Procedures Management concluded that as of October 31, 2023, the company's disclosure controls and procedures were not effective due to identified material weaknesses in internal control over financial reporting, including ineffective IT general controls, insufficient documentation for manual journal entries, and inadequate review procedures for non-routine transactions, with remediation efforts underway but not yet fully effective - Management concluded that as of October 31, 2023, the company's disclosure controls and procedures were not effective at a reasonable assurance level247 - Material weaknesses exist in internal controls, including ineffective IT general controls (program change management and user access), insufficient documentation for manual journal entries and stock-based compensation reviews, and inadequate review procedures for non-routine transactions249 - The company is implementing remediation efforts, including strengthening IT governance, enhancing review processes for journal entries and equity transactions, and deploying training programs. These weaknesses will not be considered remediated until controls operate effectively over time251 PART II. Other Information Legal Proceedings GitLab is not presently a party to any legal proceedings that management believes would have a material adverse effect on the company's business, financial condition, or operating results, while acknowledging the inherent costs and unpredictability of litigation - GitLab is not presently a party to any legal proceedings that would have a material adverse effect on the company255 Risk Factors This section details numerous risks that could adversely affect GitLab's business, including challenges in managing rapid growth, a history of losses, the need to achieve profitability, intense competition, reliance on customer renewals, risks from its remote-only model, intellectual property protection, security breaches, international operations, and identified material weaknesses in internal controls, alongside ownership risks from its dual-class stock structure - The company has a history of losses, including a net loss of $387.7 million for the nine months ended October 31, 2023, and may not achieve or sustain profitability266 - The company faces intense competition from well-established providers like Atlassian and Microsoft, which have greater resources269270 - Material weaknesses have been identified in internal controls over financial reporting, which could impair the ability to produce timely and accurate financial statements403406407 - The dual-class stock structure concentrates significant voting control with holders of Class B stock, including the CEO, limiting the influence of Class A stockholders437438 Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities The company reported no sales of unregistered equity securities during the quarter ended October 31, 2023 - There were no sales of unregistered securities by the company in the quarter ended October 31, 2023454 Other Information This section discloses the adoption of a Rule 10b5-1 trading plan by director Mark Porter on September 15, 2023, and the modification of a Rule 10b5-1 plan by Chief Legal Officer Robin Schulman on September 29, 2023, both for the pre-arranged sale of company stock - On September 15, 2023, director Mark Porter entered into a Rule 10b5-1 plan for the potential sale of approximately 6,376 shares of Class A common stock458 - On September 29, 2023, Chief Legal Officer Robin Schulman modified her Rule 10b5-1 plan, which covers the potential sale of approximately 501,909 shares of Class A common stock460461