I have a small position in GitLab (GTLB). After the recent earnings report I wanted to look closer at the company to decide if it is worthy of being a larger position in my portfolio. As I am also a user of GitLab, I thought I would share a full write-up. I may at times be bit long winded in the below writeup, this post is as much for my own notes on the company as to share with the board.
I am a professional software engineer. While I am now semi-retired, I still use GitLab for my personal projects and I am still well connected to the software development community. I will endeavor to keep the technical perspectives to a minimum needed to support why I am invested in this company.
GitLab is a code repository and collaborative software development platform which handles all stages of the software development lifecycle. GitLab has both open a free open source offering and paid subscriptions which offer additional features. GitLab may be used via their SaaS platform or as self-hosted software.
As an investor I see no need to dwell on product details beyond this high level view, however it may at times be useful to understand the scope of what GitLab offers in order to compare it to competition:
• Project Planning and Progress Tracking
• Code Version Control (any text or binary file)
• Issue tracking (Bugs, feature requests, planned features, etc.)
• Continuous Integration (automated builds, testing, etc.)
• Continuous Deployment (create new software releases automatically)
• Simple website hosting (mostly used for documentation)
From The Company: GitLab is The One DevOps Platform that empowers organizations to maximize the overall return on software development by delivering software faster and efficiently, while strengthening security and compliance. GitLab’s single application is easier to use, leads to faster cycle time and allows visibility throughout and control over all stages of the DevOps lifecycle. With GitLab, every team in your organization can collaboratively plan, build, secure, and deploy software to drive business outcomes faster with complete transparency, consistency and traceability.
Quarterly Results: https://ir.gitlab.com/financial-information/quarterly-result…
GitLab is very new as a public company with an IPO on 31 October 2021. Because of the short history, I have included the prior year numbers (pre-IPO) included in earnings press releases in order to better evaluate the company.
Q1 Q2 Q3 Q4 FY:2021 $ 42,152 $ 46,147 FY:2022 $ 49,930 $ 58,127 $ 66,800 $ 77,796 FY:2023 $ 87,407 $ 101,041 FY:2023 Q:3 Guidance: $105,000 - $106,000 FY:2023 Guidance: $411,000 - $414,000
Revenue: YoY Growth
Q1 Q2 Q3 Q4 FY:2022 58.47% 68.58% FY:2023 75.06% 73.83%
Revenue: Sequential Growth
Q1 Q2 Q3 Q4 FY:2021 9.48% FY:2022 8.20% 16.42% 14.92% 16.46% FY:2023 12.35% 15.60%
Q1 Q2 Q3 Q4 FY:2021 $ -0.44 $ -1.20 FY:2022 $ -0.44 $ -0.49 $ -0.34 $ -0.16 FY:2023 $ -0.18 $ -0.15 FY:2023 Q:3 Guidance: $ -0.15 - $ -0.16 FY:2023 Guidance: $ -0.67 - $ -0.64
Gross Margin: Non-GAAP
Q1 Q2 Q3 Q4 FY:2021 89.00% 89.00% FY:2022 87.00% 88.00% 90.00% 88.00% FY:2023 89.00% 87.00%
Dollar Based Net Retention Rate (DBNER):
FY:2022 Q:3 >130% FY:2022 Q:4 >152% FY:2023 Q:1 >130% FY:2023 Q:2 >130%
Customers with more than $5,000 of ARR:
FY:2022 Q:3 4,057 up 66% YoY
FY:2022 Q:4 4,593 up 67% YoY
FY:2023 Q:1 5,168 up 64% YoY
FY:2023 Q:2 5,864 up 61% YoY
Customers with more than $10,000 of ARR:
FY:2022 Q:3 427 up 73% YoY
FY:2022 Q:4 492 up 74% YoY
FY:2023 Q:1 545 up 68% YoY
FY:2023 Q:2 593 up 55% YoY
FY2023 Q2 Investor Presentation Notes
High Growth Potential:
• Estimated Total Addressable Market: $40 billion
• 85% of organizations use 2 - 10 tools for software development
• 69% of organizations want to consolidate toolchains
Personal Note: This mirrors my personal experience in the industry
Marketing Model: Land and Expand
• Begin with developers
• Expand to other users, departments, projects, and use cases
• Expand to ‘Ultimate’ tier capabilities.
Personal Note: In my experience, GitLab is an infectious tool. It makes life simple in many ways and integrates easily with many different aspects of the software development lifecycle which all become natural as you use GitLab.
Earnings Call Transcript Notes: FY2023 Q2
[Sid Sijbrandij] Our differentiation starts with our core value of Iteration, which in turn drives our rapid pace of innovation. GitLab is far ahead in the comprehensiveness of its DevOps platform. Every month on the 22nd, we ship a new version of GitLab with many new features and improvements. We’ve done this for 130 months in a row. Our innovation is also driven by the open core nature of GitLab. Which means our customers and users contribute to the capabilities of the platform, enabling us to drive even more differentiation and value for all of our customers. Every quarter hundreds of improvements are contributed by our customers.
[Sid Sijbrandij] Our differentiation also extends to security and compliance. In today’s environment, security is a business imperative. We believe we have the most comprehensive security offering in the market, enabling companies to truly adopt DevSecOps practices.
[Sid Sijbrandij] The third area of innovation involves our use of Artificial Intelligence and Machine Learning. […] To illustrate how we are leveraging AI to improve the product, we now have a feature where GitLab will suggest to developers who should review their code. […] To invite more personas to the platform like Data Scientists, we are also integrating the DevOps process with the MLOps process. We see this as the next big step in consolidating historically separate development workflows. Today, machine learning is an essential part of modern application development.
[Sid Sijbrandij] Let me give you examples of a new logo win […]. a North American-based global leader in cross-border peer-to-peer payments needed a DevOps platform that streamlined and automated processes, reduced cycle time, and provided the ability to set and enforce organizational policy across every stage of their development process. From a GitLab proof of value engagement, they realized a 30% efficiency improvement in building, securing, and deploying versus their previous tool chain implementation for new and changing applications. As a result, they became a GitLab SaaS Ultimate customer, replacing a previous vendor’s implementation.
Personal Note: See the transcript for more examples.
Earnings Call Q&A Notes: FY2023 Q2
Q:[Matt Hedberg] […] it sounds like you’re not seeing any real macro pressure. It doesn’t feel like you’re embedding anything into your guide. Was it sort of just – like a linearity question, was it sort of business as usual for you guys? Was there any more back-end loaded nature of the quarter? Just maybe a little bit more granularity on that side.
A:[Brian Robins] Yeah, absolutely. We’re super happy with the quarter to grow 74% year-over-year and then also to add the largest number of base customers in the company history. When we went back and looked at the sales cycles, the sales cycles are actually compressing this quarter. So we didn’t see any elongation.
Q:[Michael Turits] Sid, I think there – it’s fantastic what you’ve done and it’s in an environment where people are cutting back, including some reports of developer hiring cutting back. So, at that high level, what’s making it work that you continue to grow at these rates even while some developer hiring is cutting back and there are probably some projects that are being cut. And then I have a question – quick sort of a housekeeping question for Brian.
A:[Sid Sijbrandij] Thank you very much, Michael. We’re definitely seeing that companies are cutting back on hiring developers, that they are sometimes instituting a hiring freeze. And the situation they’re faced with is that they have to do more with the people they already have, and GitLab enables them to do that.
When they move to GitLab, they save on the integration effort. So the people who before were doing the integration of DevOps tools can start doing something that adds value to the business directly. Second, all their existing people get more efficient with GitLab because you don’t have to go from point solution to point solution to point solution to get more work done in a day. So, they can – without hiring, it kind of feels like they have more development capacity.
And last but certainly not least, GitLab helps them to go faster. So, they’re able to move to the cloud faster, close their data centers and free up those people to directly add to their business. So, on three levels, moving to a platform helps. And that’s why in this environment, GitLab is mission-critical. Companies are willing to free their budget for it. And it’s not an option to not do this, they have to undergo the digital transformation. They have to move to the cloud.
A:[Brian Robins] Yeah. Before I answer that, let me just add on to Sid’s comments just a little. Our cohorts from seven years ago are still expanding with us today.
The Open Source Conundrum
As an investor I am very sceptical of any company which is based around open source software for all the same reasons which have often been discussed on this board. Here is an overview of how GitLab has built a successful business around open source software:
• The free (open source) version of GitLab is available to anyone at no cost but has very limited features.
• A ‘premium’ paid plan adds many features at a reasonable cost per user, many of which become necessary for a project of any notable size.
• An ‘ultimate’ paid plan adds more features at a high cost per user but provides features necessary for large scale projects.
• Any open source software project may apply to use the ‘ultimate’ tier plan for free.
As both a professional software engineer and investor I am very satisfied with these offerings. The paid features add significant value and are appropriately targeted at projects (and thus companies) of increasing size and complexity. While the free option does offer the option for a private repository and may be used for a commercial project, its features are limited such that it is only useful for a very small scale projects which would likely not contribute significantly to revenue.
It is important to note that ‘git’, the software version control system used by GitLab, is the most widely used version control system in open source projects and likely the most widely used in commercial projects (though as far as I know, exact statistics are not available). The fact that the fundamental tool, git, is free software is in this case irrelevant because by itself git is only a tiny portion of the overall software development lifecycle. Even small personal projects need the additional features provided by a platform such as GitLab.
Taken in this context, I see the free offerings provided by GitLab as a smart marketing decision. Open source developers and hobbyists become familiar with the platform and will bring that knowledge into their workplace. Small business startup projects can test the GitLab platform indefinitely and scale up the features used (to paid plans) as their own software becomes successful.
Furthermore, GitLab encourages users to contribute to the GitLab software. Even for paid features, code is available (but not open source). Both the open source community and corporate customers may contribute new features for consideration. All indications I can find online are that GitLab is very responsive to code contributions. Based on my own personal experience in the software industry, this trikes me as a smart move that will build a lot of loyalty to their platform and likely add unique features which keep exiting companies from moving to other platforms.
This is a rare case where I do not see the use of open source software as a risk to my investment.
Competition, moat, and why GitLab is popular
Examining competition is a bit more complex when considering GitLab than for most companies because it is best evaluated in terms of both the underlying version control system (git) and the actual company offering (a collaborative software development platform for all stages of the software development lifecycle).
The underlying tool GitLab is built around (git) is almost certainly the most widely used version control system, and likely by a wide margin. The reasons for this are irrelevant to the analysis of GitLab as a company, but is worthy of note because it means that if a users leaves the GitLab platform they are for more likely to transition to another platform based on git than to a platform based around a different version control system.
The primary competition to GitLab is GitHub, which is owned by Microsoft. While GitHub has a larger user base (56 million users) compared to GitLab (30 million users), it is very important to understand the nature of those users and the history of GitHub.
GitHub was the first collaborative software development platform based around git and as a result it still has the first mover advantage. However, it was acquired by Microsoft in 2018 which angered many people in both open source and corporate environments leading to a large transition to other platforms, primarily GitLab. GitHub is remains a powerful tool and is the primary platform of choice for open source projects, however they have all the expected limitations of being attached to a large corporation. Since the acquisition by Microsoft, GitHub has changed relatively little compared to the rapid advances being made by GitLab.
Bitbucket is the next largest competitor based around git, coming in at 10 million users, and does not seem to be any significant competition. After this, one must look to platforms that do not use git as the core version control system. While there are a number of other platforms which are commonly used in the software community, none have the degree of presence of GitHub and GitLab. Many of those other platforms are tied into a larger ecosystem of corporate tools and as such are not as directly in competition.
When considering competition it is also instructive to consider integration with other SaaS tools, both free and paid. There are many enhancements possible beyond what a collaborative software development platform can offer on its own, and many of these companies permit easy integration between the development platform and external tools. As I survey those available integrations, GitHub and GitLab are by far the most common options in the external tools.
The question of moat is important. Why would a user stay with GitLab and not switch to a different system? On the surface, it seems there is little that should be sticky with GitLab. GitHub is very similar GitLab and even offers a system to import existing projects from GitLab into GitHub. GitLab offers a similar import option as a mechanism to transition away from GitHub. However, a deeper dive into documentation shows a perfect example of the benefits of GitLab: GitHub offers a very limited import capability from very limited sources, the full extent of which are difficult to track down in documentation. GitLab offers clear documentation on how to migrate from 15 other collaborative software development platforms. This type of clear documentation and robust features is very common with GitLab. The lack of such clarity and robust features has been a constant source of frustration every time I deal with GitHub for any length of time. GitHub may have had the first mover advantage, but GitLab has come along and done the same task better for many use cases.
GitLab also is one of the best tools I have use to facilitate the overall software development lifecycle. For relatively small up-front configuration time, productivity enhancements are easily obtained. Its own tools integrate well with each other and flow naturally from one stage to the next. The interface is simple yet provides a lot of options to expand into more complex configurations as desired. I see a lot of potential for enhancing productivity at even a small scale in ways that are appreciated (in my experience) by both developers and managers.
This type of tool also tends to be sticky within an organization. While it is possible to transition to a different platform, a tool such as GitLab becomes so all-encompassing in the software development lifecycle that the enterprise cost to change to a different platform goes far beyond the technicalities of importing a project.
A quick note on repeatability: Could anyone do what GitLab has done? Yes and no. Technically it is possible. But in reality, it is highly improbable and would take years of effort. GitLab has a very smooth interface which also improves over time. Documentation is clear. They have a very good reputation. They integrate with many third party tools. I do not foresee new competition any time soon. Side note: After writing this, I noted that the investor presentation includes this as a point under “Iteration drives innovation”.
My end conclusion is that while GitHub undeniably is a risk for competition, primarily by GitHub, I also see a clear advantage to GitLab. They also seem to better market themselves towards corporate projects rather than relying on brand name recognition of GitHub/Microsoft.
I do not see many risks to this company.
Competition from GitHub or another competitor is possible yet all indications seem to be that this is so far not an issue.
This company has been publicly traded for less than a year. Too early to judge a lot of finances, but what is available looks hopeful.
I am uncertain how “sticky” GitLab is within an organization. My own experience says it should be very sticky within a company and resist switching to a new tool, but I have learned the hard way that personal experience with a quality product is a poor indicator for judging investment quality. However, the high DBNER and customers still expanding after 7 years on the platform both indicate customers are more likely to stay and expand than to move on to a different platform.
I approached GitLab with a lot of skepticism because they are based a core of open source software, but as I looked deeper I realized the way they have used open source software is atypical and seems to be a strong driver for their current rapid growth.
As a user of the product I am a bit biased in favor of GitLab, but my investment career has taught me to be brutal about anything that sounds good or feels good. Looking at the financial results, I am content with the numbers though cautious simply because of the short track record GitLab has as a publicly traded company.
The company seems to have a very good synergy with a number of current industry trends, in particular remote work, transition to SaaS platforms, and transition to cloud platforms.
Judging by the earnings numbers, current world events do not seem to be hindering expansion.
I like what I see of this company and will be increasing my investment.
If anyone has commentary on all this or opposing views I would love to hear them!