Gitlab Announces Layoffs

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Gitlab announced the decision to layoff 7% of FTEs. Management attributed the layoffs to “tough macroeconomic environment and a more conservative approach to software investments.”

In what seems not-so-coincidental, Microsoft announced layoffs of 10% of Github employees.

Understandably, Gitlab’s share price took a massive hit (-14%) given that it foreshadows a troublesome Q4 to be reported next month.

My take
While some companies are being forced to reduce their workforce to weather the difficult economic environment, others are being opportunistic and shaving the low performers. We’ll have to wait and see until Gitlab reports in March to gage what camp these layoffs fall in.

That said, it does rub me the wrong way, because management has boasted about the negligible impact being felt from macro.

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Q2
“*Despite the volatility in the macroeconomic environment, we have *not seen any impact to our business

**The current environment is not slowing down customer decisions, nor elongating our sales cycles. Buying cycles have actually sped up across all the business, and we continue to see strong win rates.”

“We monitor the key leading indicator metrics of our business and we are not seeing any softening in these indicators.”

–

Q3
“Despite the ongoing volatility in the macroeconomic environment in the third quarter, we see customers continuing to prioritize our mission critical platform”

"We view the uncertainty in the macro economy as a benefit for hiring new team members

"We’re starting to feel some impact with the macro…obviously it didn’t impact us on first order…but we aren’t seeing the sales cycle elongate - that actually shrank again this quarter. But we’re seeing more scrutiny in deals

–

Now, I understand the economy has shifted quickly, but Gitlab’s Q2 was only reported in September. They must have made the layoff decision 3-4 months from that point. There is no way management didn’t see traces of this coming. After their Q2, I noted:

At that moment, I opted to trust management’s commentary rather than my judgement - and it looks like I will be paying the price for it.

It feels premature to me to make a drastic move from a layoff announcement, but the sudden change in tone leaves me with a bitter taste and a lowered trust towards management.

-RMTZP

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@rmtzp I agreed with you on the overall tone change from Q3 CC to yesterday’s layoff letter:

  • In Q3, it was “I think right now, every company is looking at expense. And I think that this is actually impacting us a little in expansion.”, “we aren’t seeing the sales cycle elongate that actually shrank again this quarter, but we are seeing more scrutiny on deals.”

  • In the letter, it was “The current macroeconomic environment is tough, and as a result, companies are still spending but they are taking a more conservative approach to software investments and are taking more time to make purchasing decisions.”

Hence the change basically is from Q3’s “aren’t seeing the sales cycle elongate” to current (Q4 ER is not out yet so we are speculating here) “companies are taking more time to make purchasing decisions”. Well, I don’t think GTLB’s management really lying in their Q2 & Q3’s call about “not seeing sales cycle elongate” and they did admit that " we are seeing more scrutiny on deals", just that they really started to see longer sales cycle probably starting in Q4, which is 6 months later than other SaaS companies (many SaaS pairs mentioned longer sales cycle in Q2 2022) - after all, I don’t think there are any companies can immune this so what they mentioned in the letter should NOT be a big surprise. And when they started to see higher macro impact, making 7% layoff is actually a quite reasonable business decision given that they are still early in the hypergrowth journey and yet to be FCF positive.

As a side note, their only meaningful competitor - GitHub announced 10% layoffs in the same day. From this news, it tells me:

  1. GTLB’s 7% layoffs is not a company specific issue but is industry wide

  2. Their competitor is cutting more % of employees (not only absolute number) than they did, it means GTLB is actually executing better than GitHub under current macro environment and they might be continuing winning the vast greenfield DevOps enterprise market, greatly taking market shares and consolidating solutions to help customers save money

Now, let’s look at their key financial metrics in Q3 to see whether the management is tell the truth or not. @rmtzp you mentioned RPO & 100K enterprise customers, actually I am focusing more on another key metrics - total base customer (>5K ARR). The reason is - the CFO mentioned in Q3 CC: "We talked about this before as because it’s a bottoms-up land when we land a new customer, it’s typically 50 to 100 licenses. In some cases, they have thousands and thousands of engineers and expand over time. And that’s why the cohorts are still expanding. ", hence when they just land, assume it is 100 licenses, premium tier ($19/seat), it is only ~23K ARR, the RPO increase would not be significant when they do small land and expand business model, especially in the current environment when most companies have tight budget.

While the base customer (>5K ARR) growth really told us the truth - they did land well, see below, Q2 & Q3 they landed the most base customers since their IPO and still grew very fast at ~60% which I would say this did look like very minimum macro impact, especially when you compare to other companies:

                      Q3FY22  Q4FY22  Q1FY23  Q2FY23  Q3FY23
Total base customers  4057	  4593	  5168	  5864	  6469
YoY                   66.4%   67.3%   64.5%   61.5%   59.5%
New add               425     536	  575	  696	  605

Of course market is currently speculating any potential slowdown by GTLB that might be greater than previously expected and that’s why it dropped 14% yesterday but “that potential slowdown” might be priced in already after this drop. The management provided a preliminary 40%+ revenue growth for FY2023, in my opinion, would be an absolute floor (even with less beat, they would still be able to grow 60%+ coming out Q4).

Another side note, GTLB CEO Sib owned 20%+ of his company while he hasn’t sold a single share since IPO and GV (Google Ventures) still heavily invested in them, can you find a second newly IPOed CEO like this?

Any comments are welcome. I am still holding 20%+ GTLB shares at the moment.

Zoro

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Well at the moment it is just speculation. A couple of investment houses have cut their ratings or targets already but we will see.

Of course another potential explanation is that the company is looking to address the negative margin and slightly negative cash flow situation at the beginning of the year in order to accelerate the path to profitability and positive free cash flow.

There was also this part of the announcement…

  • Sijbrandji said that the company had hoped that changing its spending priorities would help it weather the uncertain economic situation affecting many tech companies. However, Sijbrandji said, “Unfortunately, we need to take further steps and match our pace of spending with our commitment to responsible growth.”

“Responsible” is the key word here so perhaps this is a pivot point for them to address the bottom line as much as the top line.

Ant

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We may be speculating regarding the exact justification. But what is clear is how drastic their messaging changed in a very short period of time. Each to their own, but to me - that is not a comforting sign.

I wouldn’t deduce that just because Github is cutting more employees as meaning that Gitlab is “executing better” and “might be continuing winning.”

We can pick any data point to tell the story we want to believe. My point is that when I first saw the report, I saw an amber flag with those two metrics that told a different narrative than the one management indicated on the earnings call.

–

I’m not trying to be negative Nancy here, I’m holding my shares until we hear the complete picture during next month’s earnings call. It’s always good to exchange our points of view where we interpret the same piece of data in different ways!

-RMTZP
Please consider supporting the earthquake devastation in Turkey / Syria

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Ok in case anyone hasn’t found access, here’s the full memo.

I’ve go to say it seems more respectful than the average. Heard last night how Google are terminating their employees - apparently message goes out at midnight to a personal email account and the company system access is terminated immediately. So much for do no evil.

In any case - the numbers and % are certainly less than GitLab who are also closing their offices and going full remote.

The tone may have changed but then so has the macro environment, investor sentiment and expectations and the tone for every tech company which is turning out to be the worst job letting in a generation in Silicon Valley. It happened last to GitLab, who are cutting less than most other announcers. They are also still hiring whilst GitHub announced a hiring freeze.

I’m also waiting to see as the growth rates of GitLab were holding up better than others going into this downturn.

Ant

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According to https://layoffs.fyi:

  • In 2023 thus far, 340 tech companies have laid off about 101,807 employees

  • In 2022, 1044 tech companies laid off 159,846 employees

Additionally, IT contract staff have also been cut in 2022 and 2023. I could not find reliable counts for these cuts. I suspect they are similarly in the thousands.

Tech professionals like these are the primary users of Gitlab’s and Github’s products and services.

So even if customer counts for GTLB keep growing at a healthy clip, average subscription revenue per customer will likely drop due to the reduction in user counts.

Therefore GTLB’s and Github’s (MSFT’s) staff cuts make sense at this time.

We might even see further cuts in the near future…until tech companies start hiring again.

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