Hashicorp was one of the earnings releases I was most looking forward to as their quarter closed in July, and they didn’t have their earnings until 9/1. I believe they have one of the better high level views of cloud demand as HCP provides the tools for companies to deploy and manage cloud and multicloud infrastructure. Since they report so late in the earnings cycle and their business gives them special insight into cloud demand I thought I would post what they said.
I wanted to provide some context about how we are looking at the current macro environment. While digital transformation and cloud transformation initiatives are long-cycle investments by our customers, we expect to see some macro headwinds in the upcoming quarters. We saw increased scrutiny on spend from several customers this quarter and we expect that to continue. The continued scrutiny on spend may have some impact on the timing of when we can close our contracts.
While it is difficult to predict the impact of macro on our close rates, we have estimated an approximate $4 million to $6 million headwind impact to our revenue in FY 2023
Just to provide a little context, HCP looks to do around 240 million of revenue in the rest of 2023. So a 6 million dollar impact is only ~2.5-3% hit to their revenue in the last 2 quarters.
They discuss the guide in a little more detail here.
Q2 played out was, it was a very strong quarter in terms of the actual performance and momentum we saw but what we did see was scrutiny from customers on spend. And I think you’re seeing that across the board from most customers, most people out there and we’re doing the same. So what we’re expecting is more scrutiny in Q3 and Q4, and the impact of that is essentially the deals we have, we tend to get, but the timing of that is a little uncertain.
So we factored the elongation of close cycles into the back half of the year, and the back half of the year impact is essentially that $4 million to $6 million that we’ve provided to you. Obviously, the bookings, given that we’re a mostly ratable revenue company, is higher than that. But despite all that, we think we’re still going to have a very good year and that gave us confidence to raise the outlook for the year in this guidance.
And here they discuss which companies are impacted the most based on their macro comment
Yes, Alex, so I’d say that the impact was relatively broad-based but I’d say more SMB than enterprise. So that’s 1 area of higher focus of scrutiny on the SMB side. Secondarily, geographically, I would say it was a little bit more EMEA-focused than Americas-focused. So the good news for us is that being focused on $100,000 customers and predominantly Americas, there’s a moderated impact, which gave us confidence in the full year.
This next question is part of the reason I thought HCP would be a good earnings call to review. The analyst is asking how the general demand environment developed over the course of the quarter. I normally like to truncate these, but I think the whole question and answer are worth reading.
And let me add my congratulations. I’m curious how the macro progressed through the quarter. So one big cloud company said that May and June were actually quite strong. July was a step-down of the problem. And then when they reported pretty late in August, they said August hadn’t gotten any better. So I’m just wondering, what was your experience like in the quarter and how has August been so far? Or I guess August is done. How was August?
Pat, it’s Navam here. So the buying cycle for us is very enterprise-heavy. So what that ends up – what that means is that it’s a tail-end weighted quarter for us in terms of how the contracts come in. So you generally don’t see it as much in the beginning of the quarter and you see it closer to the contract ends. So that’s essentially how we saw – the increased scrutiny of spend starts manifesting towards the back half of the quarter, and that’s generally the timing of when you said. All that being said, Q2, we managed to execute very well despite the increased scrutiny.
And August, what would you say? I guess that it’s back end weighted, but any difference so far that you
I don’t see any difference in the August time frame compared to the beginning of last quarter or towards the middle of last quarter. It’s really no difference. Now note that there’s vacation time in the summer that impacts the third quarter, and that’s the seasonality comment I made and that’s been pretty consistent in terms of how it’s been from the previous years as well.
And some interesting seasonality that I think we see in other companies
Historically, Q3 has been a seasonally slower purchasing quarter by customers, particularly due to the summer months, and we expect to see the same seasonality this quarter.
All in all cloud looks to be pretty strong and a good value proposition that will continue. There is definitely some impact and it looks the impact that was felt in July continue in August.