Couchbase, Inc. (BASE) Q1 2023 Earnings Call Transcript

Couchbase, Inc. (BASE -4.66%)
Q1 2023 Earnings Call
Jun 08, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Couchbase's first quarter 2023 earnings call. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Edward Parker, head of investor relations. Thank you.

Please go ahead.

Edward Parker -- Head of Investor Relations

Good afternoon, and welcome to Couchbase's first quarter 2023 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me are Couchbase's president and CEO, Matt Cain; and CFO, Greg Henry. Today's call will contain forward-looking statements, which include statements concerning financial and business trends and strategies, our expected future business and financial performance and financial condition, and our guidance for future periods.

These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements, by their nature, address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today's press release and our most recent annual report on Form 10-K or quarterly report on Form 10-Q filed with the SEC. During the call, we will also discuss certain non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, as well as how we define these metrics and other metrics is included in our earnings press release, which is available on our investor relations website. With that, let me turn the call over to Matt.

Matt Cain -- President and Chief Executive Officer

Thank you, Edward. Good afternoon, everyone. On today's call, Greg and I will provide details on our first quarter results, as well as our second quarter and full year fiscal 2023 guidance. Let's kick things off with a few highlights of our Q1 financial results.

Revenue in Q1 was $34.9 million, an increase of 25% year over year. Total annual recurring revenue or ARR was $139.7 million, representing 27% year-over-year growth. Net new ARR was a record for Q1, and RPO grew 68% to $169 million. Our gross margin remains best-in-class at 87.3%.

Operating profit was negative $13.4 million, ahead of guidance. I'm pleased to report that we had a great quarter and strong start to the fiscal year. In our core business, we continue to see ongoing large deal momentum, robust renewal activity, strong expands and healthy new lands. And in our emerging cloud business, initial uptake and leading indicators of demand for Capella continue to validate our excitement in and indeed my very high expectations for our as-a-service offering.

I'll cover more on that in a moment. In addition to beating our guidance across all metrics, I'm especially excited that ARR grew 31% year over year on a constant currency basis, the third straight quarter of acceleration and at the fastest rate for us since the beginning of the pandemic. This not only reflects our growth potential, but also the momentum we are seeing in the marketplace for our leading enterprise platform and the continued urgency behind digital transformation initiatives despite the increased macro volatility we've seen in recent months. Simply put, I remain confident that we have the opportunity to drive a generational rethink in the $60 billion database market.

Couchbase is the modern database for enterprise applications, and we are convicted that we have the best enterprise database. And now we are equally convicted that we are well on our way to having the best cloud database. We've made tremendous progress on this front, and we've been accelerating our innovation engine toward realizing this aspiration. As a primary example, we recently announced significant additions to the Capella portfolio, as well as major enhancements to our core platform.

Let me dig into a little bit more detail about each of these innovations and our acceleration of how we develop and deliver our services to the market. First, we continue to invest aggressively in Capella, and feedback remains overwhelmingly positive. Our offering provides flexibility and ease of adoption for developers and performance at scale for enterprise applications with price-performance that is superior to competitors. We are thrilled with the response thus far, and leading indicators are all where we wanted them to be.

One of our near-term priorities is extending the availability of Capella to new regions and more cloud service providers to support hybrid and multi-cloud strategies. Last week, we announced Capella on Google Cloud, giving customers flexibility with where they choose to deploy Capella, improving alignment with applications and supporting hybrid and multi-cloud strategies from a single platform. Additionally, we recently announced that Capella now fully manages and hosts a back end for mobile and IoT applications called Capella App Services. It's worth noting that adding our unmatched mobile support to Capella has been the No.

1 request we receive. We are bringing this to market significantly ahead of schedule and are delighted to address this market need. By unifying the entire Couchbase product offering under Capella, we are delivering all of the Couchbase-as-a-Service with a highly competitive cloud offering that makes it easier for developers to build the next great mobile and IoT application. Our unique investments in mobile and edge database capabilities completely round out our ability to run anywhere, and mobile support is a strong differentiating factor among our competition.

We have a robust Capella road map ahead of us, and you can expect more announcements this year, including support for additional cloud providers, enhanced developer experience and more ways to consume Couchbase-as-a-Service. Turning to our core platform. In May, we introduced version 7.1 of Couchbase Server, which delivers meaningful advancements in performance, storage capacity and workload breadth. These new innovations significantly reduced the cost of building and running applications while gaining operational efficiency and reducing TCO.

We also expanded our operational analytics capabilities at a time when customers demand easier access to analytics on active data. This latest core platform release is noteworthy because it reduces deployment costs for Couchbase and sets the stage for our long-term plans for Capella. We will continue to invest aggressively and thoughtfully in technology, with an intense focus on scaling our company for long-term growth. A major aspect of this initiative is fully committing to becoming a cloud-centric company.

Naturally, this starts with our cloud offering, but we're taking this commitment to the next level. As we shared in March, we welcome Gopi Duddi to our leadership team as our senior vice president of Engineering to help accelerate our product development and delivery. Since then, we have refocused roles and responsibilities across all levels of the engineering organization pursuant to our top priority of cloud centricity. In Q1 alone, we more than doubled the number of people focused on Capella development, and we're already seeing results.

The most visible sign of this is last week's Capella announcements, which were delivered ahead of schedule. We're also evolving our software release cadence from server-led to cloud-led, so that new features and capabilities will be released on Capella before or concurrently with server updates. This not only results in a faster release cycle for our customers who will benefit from seamless updates, but also encourages new customers to choose Capella, and existing customers to migrate to Capella. On the go-to-market front, we are engaging and cultivating a new audience of developers with our evolving buy from sales motion.

We are seeing ongoing interest in our free trial, strong engagement from existing customers and great responses to our Capella workshops. In fact, we saw nearly a 50% increase from Q4 to Q1 in new trial accounts created and nearly 45% growth in new trial clusters deployed. And I am proud to say that we closed another seven-figure Capella deal in the quarter. On the sell to side, we continue to execute on our high-touch enterprise sales motion, including global return to in-person customer and prospect meetings and events.

We're seeing continued investment in digital transformation, resulting in big deal momentum, driven by very healthy renewal and expansion activity. Our partner and alliance ecosystem remains strong and continues to contribute to our go-to-market acceleration. Specifically, in Q1, we saw an over 100% year-over-year increase in partner sourced and influence new business. Now, I'd like to spend a few minutes discussing some exciting customer wins during the quarter.

Western Union is a Couchbase customer delivering cross-border, cross-currency, money movement and payment service to its millions of customers around the world across more than 200 countries and territories. This quarter, Western Union broadened its relationship with us with the Capella transaction, which will migrate multiple applications to our Database-as-a-Service. Western Union relies on Couchbase and AWS for scalability in the cloud, greater developer agility and to deliver a seamless customer experience. We are very proud of this partnership and excited Western Union has turned to Couchbase for its modernization strategy.

Another new win was Fortune 500 company, Halliburton, which is one of the world's largest oilfield services companies. Halliburton chose Couchbase for our unique mobile and data synchronization capabilities as they seek to automate various processes and workflows, aiming to achieve new business opportunities and efficiencies across well sites and drilling operations. With Couchbase, the Halliburton completion tools field mobile application will be able to synchronize data across devices with limited to no Internet connectivity, increasing efficiency by preventing both data duplication and redundancy of efforts. We are thrilled that they chose us for this exciting application.

Another new customer during the quarter was a leading website hosting company. This customer was looking for a flexible solution to help deploy next-generation e-commerce capabilities, including online service ordering and payments for its customer base. They needed a platform that could handle complicated use cases for business-critical applications. This customer selected Couchbase Capella over a cloud service provider due to our better performance, better developer experience and cost efficiency.

As we look toward Q2 and the rest of the year, I'd be remiss to not acknowledge the increased volatility across the macro environment. One of our core values is to attack hard problems driven by customer outcomes. Despite the volatility, we have worked hard to put Couchbase in a great position, and I feel as confident as ever in our long-term prospects. And here are four reasons why.

First, from a product perspective, as we have just discussed, we continue to bring new products and capabilities to market, and our portfolio is growing in its ability to meet the complex, wide-ranging demands of the largest enterprises. Customers choose Couchbase, in part due to our ability to enable applications across a wide spectrum of deployment and consumption models from cloud to on-premise, from the data center to the edge and everything in between. Our differentiated technology remains at the heart of who we are, and we continue to aggressively invest in our innovation agenda. Second, with respect to cloud, industry analysts are forecasting that cloud database management service revenue will account for 50% of the total database market revenue this year.

And with Capella, we are now well positioned to fully participate in this opportunity. Cloud is at the heart of most our customer conversations, and Capella continues to gain momentum, as evidenced by robust big deal momentum and strong pipeline generation across all regions. We believe Capella is well on its way toward becoming an important contributor to our business this year. Third, digital transformation initiatives continue to receive the highest levels of attention and prioritization across organizations.

Our fifth annual global survey of 650 IT leaders found that on average, enterprises plan to increase their investment in digital transformation by 46% over the next 12 months. I am consistently hearing this from business leaders, and our conversations with customers increasingly revolve around how Couchbase can play in a central role in driving multiyear strategic transformations, lending visibility and confidence to our outlook. And fourth, as the CEO of Couchbase, I have the honor of leading a great team of people. While it may not be visible on an income statement, the resiliency and creativity of our team inspires me every day.

I am so proud of how a world-class team came together, supported our customers and one another, adapted to constantly changing conditions and executed over the past couple of years. Nothing prepares us for the future more than being battle-tested. My confidence in our ability to persevere and innovate in an exciting, dynamic and, at times, volatile market is stronger today than it's ever been. Before I hand the call over to Greg, I want to share my excitement about the announcement that Huw Owen has been promoted to be our new chief revenue officer.

Huw has served as a leader of our international sales business for nearly four years and knows our business inside and out. He has already played a significant role in accelerating growth for Couchbase. In fact, during his tenure, he has driven sales execution and increased international ARR by nearly 200%. Huw's background combines scaling sales at high-growth companies such as good technology, with operational sales excellence at leading enterprise technology companies like Veritas, Symantec and Lenovo, and makes him well suited to take Couchbase to the next level of growth.

He was an ideal successor to step into the CRO role, and I am pleased to welcome him to the management team. Succession planning is part of maintaining a world-class team. And with our strong and healthy business foundation, I am certain that now is the right time to make this transition. I'd like to thank Dennis Murphy for his contributions to Couchbase as CRO over the past three years.

He has led the field organization with incredible dedication and focus, throughout the pandemic, no less, and we wish him well in his future endeavors. Dennis will be with us through the end of this month to aid with the transition. Thanks to him, sales is in a great position to begin a new chapter under Huw. In conclusion, we had a great start to the year.

We continue to execute across all facets of the business, and the secular drivers supporting our growth trajectory remains strong. I believe this will be a landmark year for Couchbase. I'd like to thank our team for their effort and focus in starting off the new year on solid footing. I'd also like to thank our customers and partners for placing their trust in Couchbase, all of whom are our pleasure to serve.

With that, I'll hand the call over to Greg to walk you through our results in more detail. Greg?

Greg Henry -- Chief Financial Officer

Thanks, Matt, and thanks, everyone, for joining us. We had a great start to the year. We've seen a continued robust demand environment, and we're pleased to have outperformed our previous outlook. I'll now walk you through our first quarter financial results in more detail before providing our guidance for the second quarter and full year.

We are thrilled to share that total annual recurring revenue or ARR at the end of the first quarter was $139.7 million, representing 27% growth year over year or 31% growth on a constant currency basis and an acceleration for the third quarter in a row. Revenue for the first quarter was $34.9 million, an increase of 25% year over year. The impact of foreign currency exchange on year-over-year revenue growth was immaterial. Subscription revenue for the first quarter was $32 million, an increase of 21% year over year.

Professional services revenue for the first quarter was $2.9 million, an increase of 93% year over year. We exited the quarter with 614 customers, an increase of 24 customers from the fourth quarter. Please note that we changed the way we classify customers, including 11 incremental customers resulting from an attribute change in our customer count requirements starting in fiscal 2023. Our ARR per customer performance in the first quarter was $227,000, up from $225,000 from the fourth quarter.

During the first quarter of fiscal 2023, we revised our ARR definition to measure Capella ARR by annualizing the prior 90 days of actual consumption. We continue to execute from ARR revenue derived from the use of cloud products only based on on-demand arrangements and services revenue. The revised methodology had an immaterial impact on ARR. We are pleased to report our dollar-based net retention rate continues to exceed 115%.

In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, results of operations and share count are on a non-GAAP basis. In Q1, our gross margin remained best-in-class at 87.3%. This compares to a gross margin of 88% a year ago and 88.7% last quarter. Turning to expenses.

Our sales and marketing expenses for Q1 were $24.8 million or 71% of revenue compared to $20.1 million or 72% of revenue a year ago. We continue to build out our go-to-market functions to capture the generational opportunity that we see ahead of us. Research and development expenses for Q1 were $12.5 million or 36% of revenue compared to $12 million or 43% of revenue a year ago. We saw healthy leverage from our R&D investments during the quarter, and we capitalized approximately $750,000 of Capella software development, which was previously planned to be in expense.

We expect to see additional leverage as we scale. General and administrative expenses for Q1 were $6.5 million or 19% of total revenue compared to $4.8 million or 17% of revenue a year ago. Operating loss for Q1 was $13.4 million or negative 38% operating margin compared to an operating loss of $12.3 million or a negative 44% operating margin a year ago. Non-GAAP net loss attributable to common stockholders for Q1 was $14.3 million or negative $0.32 per share.

Turning to the balance sheet and cash flow statement. We continue to be well capitalized, ending Q1 with $201 million in cash, cash equivalents and short-term investments. Our remaining performance obligations or RPO totaled $169 million at the end of Q1, an increase of 68% year over year. Our continued exceptional strength in RPO growth is fueled by significant upsell and renewal deals.

We expect to recognize approximately 60% or $100.7 million of total RPO's revenue over the next 12 months. Operating cash flow for Q1 was negative $8.6 million, while free cash flow was negative $9.4 million or negative 27% free cash flow margin. Now, to conclude the call, I will provide guidance for Q2 and the full year fiscal 2023. Despite increased macroeconomic volatility, our pipeline remains strong.

We continue to see strong business momentum and elevated database infrastructure migration activity across our industry and sort of broad-based digital transformation initiatives. That said, we are monitoring the environment closely. We've continued to see an incremental strengthening of the U.S. dollar, resulting in a headwind from foreign exchange exposure.

Furthermore, we've historically seen variability with respect to the implementation timing of certain deals, which impacts our revenue visibility. Accordingly, we are prudently considering these factors into our revenue guidance even as we see continued upside to our ARR outlook. Clearly, a deviation from this assumption would cause us to modify our guidance higher or lower. Keeping that in mind, let's turn to our outlook.

For the second quarter of fiscal 2023, we expect total revenue in the range of $35.8 million to $36 million, therefore, a year-over-year growth of 21% at the midpoint. We anticipate ARR in the range of $142.5 million to $144.5 million, which represents 25% growth at the midpoint. I'd add that we anticipate approximately a 3% negative impact to our ARR growth rate due to foreign currency fluctuations. We expect a non-GAAP operating loss in the range of negative $11.9 million to negative $11.7 million.

For the full fiscal year 2023, we are raising our revenue and ARR outlook while decreasing our operating loss. We expect revenue to be in the range of $147.2 million to $148.2 million, therefore, a year-over-year growth of 20% at the midpoint. We expect ARR in the range of $160.5 million to $164.5 million or 22% growth at the midpoint. We note that we anticipate approximately a 150 basis point negative impact to our ARR growth rate due to foreign currency fluctuations.

And finally, we expect a non-GAAP operating loss in the range of negative $55.2 million to negative $54.2 million. Our updated guidance reflects the full year impact of the capitalization of Capella software development we discussed a moment ago. Finally, I want to share our thoughts on balancing growth and profitability. As Matt outlined earlier, we have a $60 billion database market ahead of us, and we are investing aggressively to become a cloud-first company.

Our level of investment is informed by this tremendous market opportunity while prudently evaluating and managing our cost structure. Delivering healthy revenue growth while improving profitability is a top priority for us. Our fiscal 2023 guidance implies that non-GAAP operating margins will improve by approximately 200 basis points in the second half of the year compared to the first half. Longer term, we are positioning the business to sustain high growth and believe we will have a highly profitable business model as we scale.

With that, Matt and I are happy to take your questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Matt Hedberg with RBC Capital Markets. You may proceed.

Matt Hedberg -- RBC Capital Markets -- Analyst

Great. Thanks for taking my question, guys. Congrats on the results. Matt, really, you had a lot of positive things to talk about with Capella, including the seven-figure win and GCP support.

I'm wondering, now that you have some additional data points there, can you talk a bit more about the competitive environment as you add more features and support? And how are your win rates versus other cloud alternatives?

Matt Cain -- President and Chief Executive Officer

Matt, great to hear from you. Yes. We're very excited about the quarter with respect to Capella, and you mentioned some of the innovations. We're extremely excited to have accelerated the road map in key areas.

Adding additional cloud support like GCP is massive, so, too, is the addition of our mobile platform, which we're calling Capella App Services. This really opens the aperture pretty significantly for us. Previously, we're in market just with server on AWS. And this is going to really add a lot in terms of our ability to go add value to customers.

We're seeing demand across the pipeline, top of funnel. I shared some statistics on trials and clusters and obviously some big wins. We are very competitive with our Capella offering. It provides a level of simplicity and productivity for the developer, which, quite frankly, our previous offering didn't at the same level, but maintains the scale and performance for modern applications and does all that with what we think is the best TCO in the industry.

So we continue to work aggressively to add capabilities, but the leading indicators, pipeline, discussions with our largest customers, discussions with prospects, they really appreciate the value proposition of Capella and the ability to get the full power and benefit of Couchbase with a more simplified consumption model. And we're going to continue to put a lot of wood behind that arrow as we go forward.

Matt Hedberg -- RBC Capital Markets -- Analyst

That's great. And then maybe as a follow-up, you just mentioned simpler consumption models, and you're bringing in a new CRO that you highlighted, Huw. With sort of the ramp in Capella, what are some of the biggest things that you think the go-to-market model could benefit? Because to me, it feels like you have the increased ability to land quicker than maybe you had previously. Maybe just Huw's focus with sort of the success of Capella right now?

Matt Cain -- President and Chief Executive Officer

Yes. Well, let me take a moment to talk about the transition, and then I'll get into what we're focused on, on a go-forward basis. First off, I'd like to thank Dennis for his service over the last three years. Matt, you've known the company for a while, and I think you can appreciate that we're just a different company than we were three years ago.

And not only has he performed in that role, but he's helped me prepare the company and the organization and Huw, in particular, for this important succession. This is something that we've been planning for and making sure that Huw and the organization is ready at the right time. And we're very confident in the decision and now being the right time. A big part of that stems from the very question you are asking on what do we need to drive.

Huw's experience includes scaling growth technology companies, but also operating at a level of detail and scale that few revenue leaders in the world have running over $1 billion businesses. I think that focus and fundamentally understanding the value proposition of Couchbase to developers and architects alike is going to enable him to lead the field organization to continue with areas of strength like land and expand, but quite frankly, improving the areas that we know we can get better, which is new customer acquisition and leveraging Capella as a way to do that. And quite frankly, Matt, the region that he's been leading has been pacing ahead of the company on those important metrics for some time, new logos and early cloud traction. And I expect that that recipe is going to be applied in a more consistent way across the world, and we're going to be well positioned to improve as we go forward.

Matt Hedberg -- RBC Capital Markets -- Analyst

Thanks, guys. 

Operator

Thank you. Our next question comes from Kash Rangan with Goldman Sachs. You may proceed.

Kash Rangan -- Goldman Sachs -- Analyst

Hi. Thank you very much. Congrats on the quarter. Matt, I wouldn't mind if you could just take a step back and evaluate your go-to-market for Capella and also from a product architecture standpoint, considering the service was released not too long ago.

But what are you uncovering as to where the market is resonating with Capella, obviously, the ease of deployment, the cost model and the service is well appreciated. But are you starting to see some clear patterns, maybe you don't, maybe you do, of use cases that are a slam dunk for Capella that you could envision this being able to uncover different market segment, a different set of market needs that are unmet? Or do you think it's more of a consumption model that's really the differentiation that it's meant to really go after a different set of customers that are decidedly not mission-critical, but could be mission-critical in the future? What are the things that you've learned from the launch? And what customers are telling you?

Matt Cain -- President and Chief Executive Officer

Kash, let me peel that apart. And I'm going to start with kind of product first and how we think about our architecture and, quite frankly, how we've carefully built the solution in what we think is the best way possible. You and I have spent a lot of time on the unique differentiators of Couchbase under the hood. And the way that we've architected the platform for scale and performance, a single integrated solution from cloud to edge, SQL compatibility, fundamentals, how we think about things, layering in services like full tech search and analytics, and really having a robust platform so that we can confidently say that we are able to serve enterprises and their mission-critical applications unlike anyone else.

What Capella allows us to do is bring all those benefits to those customers in a very simple way. And I can't tell you how refreshing it is when we hear from customers, I want the full power of Couchbase. I just don't want to spend any time running and managing it. And now you all can do that for me.

Now Kash, quite frankly, another big part of our innovation is addressing the developer experience, and that's everything from the UI, to documentation, to expanding our developer community and the other integrations that are important to run alongside the database. And so, we're working on connectors into things like GraphQL and other important capabilities that we know developers are really interested in and allow them to build and run applications that much more flexible and with agility. That value proposition resonates. I think what we're so excited about is our fundamental architecture has differentiation that we believe we can sustain over time.

And as we continue to build out Capella with an accelerated road map, we have the potential to remain the cloud edge leader with the consumption model that is industry-leading from a total cost of ownership perspective. And how we're going to utilize underlying resources and the things that we're doing with our core technology like new storage engines are all along the lines of moving from the best enterprise database to the best enterprise cloud database. Now in terms of users, we're maniacally focused on the developer with all that ease of use. But at the same time, we can talk to architects about the scale and performance advantages that we maintain.

I will say, Kash, that we are seeing an ability to go downmarket more effectively than we have previously. And I think equally important, we talked about the most mission-critical applications. We believe that we are able to increase the breadth of applications that we can serve for enterprise and mid-market customers. And so, we're not only opening our total addressable market with new regions and new clouds and new services, but doing that from an application perspective, and customers love that.

They want to do more with less. They see Couchbase as a platform that they can invest in. We're now making it easier for them to use and run, and couldn't be more excited about how we go forward. Now, we're clearly investing in the go-to-market along the way.

Everything from managing trials and creating a great customer experience and managing through a different type of pipeline that is very active, empowering our field organizations with the intelligence on where people are in that cycle, while at the same time, increasing the amount of dedicated resources that we have in the field and in other parts of the company to get the most out of our offering. So a lot behind your question, but we're very excited about the trajectory and what we're seeing in the business.

Kash Rangan -- Goldman Sachs -- Analyst

And Greg, one for you. As you approach the next couple of years, what should we think about as being the key drivers of profitability, granted that you definitely had operating income outcome significantly better than what we all expected? But just wanted to get your thoughts -- refined thoughts on that, too.

Greg Henry -- Chief Financial Officer

Yes. Kash, yes, I think part of it goes back to what Matt was saying, Capella is going to drive the way for us. But look, we're in a large and growing TAM. We're going to be -- continue to invest where we see opportunities, both on the R&D and the go-to-market side.

We got an accelerating growth story now. So I think that's going to help us obviously get there. We're going to continue to push forward, and we believe we'll see sales efficiency and productivity coming out of that organization. And we will obviously continue to make the move toward profitability, cash flow profitability.

We obviously haven't set long-term targets. We expect that in the next year or so, we'll do an investor day and lay out those targets for you, but you can be rest assured that we're investing for growth but also being mindful of profitability at the same time. And we are fully funded from a capital perspective to take this on over the next several years. So I'd say more to come in terms of the long-term model, but we are very mindful of that as we go forward here.

Kash Rangan -- Goldman Sachs -- Analyst

Wonderful. Thank you so much.

Operator

Thank you. Our next question comes from Jason Ader with William Blair. You may proceed.

Jason Ader -- William Blair and Company -- Analyst

Thank you. Hey, guys. First question is just on COVID-impacted verticals. We've all been on this over the last few months, and like every seat is taken.

So how is that business trending? Has it returned to kind of pre-COVID levels? Any color there would be helpful.

Greg Henry -- Chief Financial Officer

Jason, it's Greg. Good to hear from you. Yes. Look, obviously, look, you saw we put up a strong Q1, continuing to see growth acceleration, reacceleration into fiscal '23.

And obviously, we're going to continue to push for it going forward. We are -- our sales teams are getting back out on the road. We're trying to -- we actually are having our first in-person sales sort of boot camp here on site this week, right, to get people back in headquarters and train and going. So that's all helping.

And then, as far as the customers go, we are seeing a pretty healthy return of normalcy. I would say we're as close to sort of pre-COVID levels that we have been ever since that began. And that's what's generating the growth rates that you're seeing today. I would also go back to at the IPO time, we laid out the plan that we were being impacted by COVID and that this was going to wane over the next several quarters, and we are going to get back to pre-COVID growth levels.

And that's exactly what we're seeing right now. So we're excited about that cohort, but we're also excited about the rest of the business continue to be healthy.

Jason Ader -- William Blair and Company -- Analyst

Great. And then maybe one for you, Matt. Do you see -- just from a product standpoint, do you see your SQL like architecture as a competitive advantage, especially when you think about connectivity to data warehouse and BI tools?

Matt Cain -- President and Chief Executive Officer

Without question, Jason, I think it's been a key part of our architecture and mindset for many years. In fact, we continue to rack up patents specific to SQL and our implementation and our ability to make the life easier for developers that are writing applications. And we think it's really important. It's going to allow enterprises to do more with their existing people and drive not just modern applications that help them replatform off legacy solutions in a very efficient way.

So without question, we think we're highly differentiated there and continue to make that a point of emphasis as we go forward.

Jason Ader -- William Blair and Company -- Analyst

And do you see customers using some of those SQLs to inspect the BI tools and such on your kind of in-app analytics -- operational analytics?

Matt Cain -- President and Chief Executive Officer

Yes. No question. When I talk about the developer experience and integration, making it easy to move data from an application that we're powering into other analytical solutions has been a big point of focus. And every release, we increase the number of connectors and integrations with the latest and greatest analytics systems and others.

As a matter of fact, we talked about our 7.1 release, had a lot of features around analytics, and particularly our operational analytics where you can run analytic-based queries directly on the data in real time of the application that we're powering. So we spend a lot of time with our customers, Jason, understanding their environments, understanding their technical stack, what role do we uniquely play and then how do we participate in a kind of overall solution perspective with other elements of the stack. So no question about it. We lean into those conversations quite a bit, and it's going to continue to drive our development as we go forward.

Jason Ader -- William Blair and Company -- Analyst

Thanks, guys. Good luck.

Matt Cain -- President and Chief Executive Officer

Thanks, Jason.

Operator

Thank you. Our next question comes from Sanjit Singh with Morgan Stanley. You may proceed.

Sanjit Singh -- Morgan Stanley -- Analyst

Thank you for taking the questions and congrats, Matt, congrats, Greg, on the best quarter yet I think I've seen. And so, congrats to the entire team on the great start to the year. I wanted to talk a little bit about the quarter itself and to what extent the theme of your script revolved a lot around Capella. To what extent was Capella kind of the driver of the extremely solid ARR results this quarter? Maybe we could start there, and then I had a follow-up.

Matt Cain -- President and Chief Executive Officer

Sanjit, we appreciate the comments, and very proud of the team. Look, we talk about there being many layers to grow the Couchbase, and I think that's been consistent in our conversation for some time. Greg talked about some return of industries that are important to us, getting back to sales efficiency that we've proven to ourselves before, and then layering in cloud on top of that. As I reflect on the quarter, I think every one of those had a factor in our results, very healthy renewals, large expansion.

But without question, Capella plays a role. We continue to grow that business. We're excited about the results, as well as the leading indicators. But I think another big part of this, Sanjit, is customers thinking about the right time for them to move into Capella.

And when they're making long-term investments, there's not a conversation that we're having that doesn't involve a win around Capella migration and moving new applications into it. At the same time, if you look at some of the pipeline generation, I think we're benefiting from a solution and a go-to-market model that we haven't. So I think it played a big role, and I think it's going to play an even bigger role as we go forward.

Sanjit Singh -- Morgan Stanley -- Analyst

Yes. And so, let's talk a little bit about that bigger role going forward. If I think of kind of the classes of opportunity ahead for the company and ahead for Capella if I sort of organize them by systems of engagement, which has been sort of the company's bread and butter, systems of intelligence, which you guys have also had to play in, and then, frankly, the relational opportunity with the update to Couchbase server on relational migrations, where do you see kind of the near-term opportunity for Capella in that sort of organizational framework? And what do you think is -- make some -- may take some time to see some of the fruits of the effort -- the sales efforts there?

Matt Cain -- President and Chief Executive Officer

Sanjit, it's a pretty sophisticated question. I think when I think about the application types, source of truth, system of record, relational offload, I sort of separate the Couchbase value proposition and our flexible data schema and our underlying architecture from the delivery and consumption mechanism of Capella. So I think the reality is with Capella, we're going to be able to get after all of those that you talked about. And I think it's going to depend on the particular agenda of the customer base on which one they want to go with first, right? If I think about the demand environment, we have customers that are leaning into digital transformation in a more aggressive way than they ever have.

They're playing offense. They're running modern applications, and they're building things from the ground up that are systems of engagement, source of record-based applications. We have another set of customers that may be weary of the environment and more prudent with their spend, they may be thinking more of how do I do more with less, and we can shift and have a very compelling conversation with them about TCO. The reality is -- and relational offload.

And the reality is Capella can be a weapon for us in both of those circumstances because we've built the database in such a way that we're now enabling it to be consumed, but not losing any of the underlying attributes of the core platform from cloud to edge. So we think the total addressable opportunity for Capella is immense. And the fact that we've taken our time to build it the right way and stayed committed as an end-to-end platform is going to serve us well as we go forward.

Sanjit Singh -- Morgan Stanley -- Analyst

Understood. And very encouraging. Congrats, guys.

Matt Cain -- President and Chief Executive Officer

Thanks, Sanjit.

Operator

Thank you. Our next question comes from Raimo Lenschow with Barclays. You may proceed with your question.

Raimo Lenschow -- Barclays -- Analyst

Thank you and congrats from me as well. Great to see the acceleration. The -- Matt, you talked about some of the aspects that drive the growth in the future in terms of developer product, etc. Where are we on the -- the other thing that we haven't discussed yet is the reference base, reference with customers with deployment at scale.

Where are we on that journey for Capella? Could you speak to that, please? And then, I have a follow-up for Greg.

Matt Cain -- President and Chief Executive Officer

Can you clarify the -- are you talking about when we're going to have Capella customers at scale, talking about the success they've had?

Raimo Lenschow -- Barclays -- Analyst

Yes. Correct. Like if you look -- what you kind of basically want is like people from industry saying like, oh, we're using it, look at it, and then it becomes like more -- and it becomes mainstream then.

Matt Cain -- President and Chief Executive Officer

Yes. Look, we -- I think the reality is we have a lot of customers that are doing pretty significant things with Capella, and we're having very encouraging dialogues with some of our largest customers. You can appreciate that there's always the delicate nature of asking customers to talk about mission-critical applications. And unfortunately, not every single one of our customers is prepared to do it when they're realizing that value.

I do think that Western Union is an example of a customer that has deployed Couchbase at massive scale and is thinking about not just the applications they have running, but displacing other database solutions and moving more and more workloads into Capella. So we're going to provide those examples as we go. And it's not just large enterprises. I think what we really want to help the market understand is the value that developers are getting out of it as well.

So it's a point of focus for us. We're going to continue to serve those up as we have them. The great thing is we don't believe that there's going to be a shortage of examples. There's just going to be the efficiency at which we can provide them at the time they're seeing that value.

Raimo Lenschow -- Barclays -- Analyst

Yes. OK. Perfect. Makes sense.

And then, Greg, the -- last quarter, you -- when you guided, you were one of the first to kind of point out that there's volatility in the market. If you think about the guidance now and how comfortable you are with kind of raising the guidance, which you did, kind of well done, like how are you feeling about the macro impact to your thinking from here?

Greg Henry -- Chief Financial Officer

Yes, Raimo. So first of all, I'd say, look, we're very comfortable with our guidance. As you know, we obviously prepared guidance that we can at least deliver on that, and we're going to continue to hopefully exceed that if we do our jobs well. But we -- so we're trying to guide smartly, prudently, but understanding there is this macroeconomic environment that has some uncertainties in it.

And so, we get a good amount of visibility based on our business model today. And then we're applying that, plus some of this prudence into the guidance. So again, we feel good about it, but we're watching closely, and we haven't seen material impacts to date, but we also know that there is this level of uncertainty out there. So we've kind of tried to build that balance in there into our guidance as we go out into the future.

But we feel good about the guidance that we provided today.

Raimo Lenschow -- Barclays -- Analyst

OK. Perfect. Well done. Thank you.

Greg Henry -- Chief Financial Officer

Thanks.

Operator

[Operator instructions] Our next question comes from Brad Reback with Stifel. You may proceed.

Brad Reback -- Stifel Financial Corp. -- Analyst

Great. Thanks very much. Matt, as you look at the hiring plan for the remainder of this year, have you guys modified it at all from what the original plan was for the operating side this fiscal year?

Matt Cain -- President and Chief Executive Officer

Brad, how are you? Look, we think about our hiring plan on a very regular basis. So we go into the year with sort of a set plan, and then we adapt as we deem necessary. I don't think there's any fundamental shift to how we've thought about the year. We're in great shape with field capacity.

We continue to put more into Capella dedicated resources on our development side of the organization. We're investing in things like university hiring programs. So I think from an overall spend perspective, we understand what the levers are, Brad, and you've seen us demonstrate that over time that we can lean in or pull back a little bit as we deem necessary. But I'd say we're, generally speaking, aligned to what we thought about before, but making sure that we take every investment and every resource that we put into the business with the utmost seriousness and ensuring that we're putting it in the right places.

So outside of those normal sort of operational fluctuations, I'd say we're pacing as planned. Greg?

Greg Henry -- Chief Financial Officer

Yes. Brad, I'd just add one thing. So aligned with everything that Matt said, when we run the business, we run the business to a dollar target, if you will, to an opex target. We don't necessarily drive to a headcount target, and we let our leaders decide how they want to allocate those dollars.

So for example, there'll be our new senior vice president here and came in, he thought that we needed a better sort of feeder system, and Matt alluded to this university hiring, so he's gone out and really taken some more senior roles that were in the budget and added some university hiring element. So you'll actually -- I think you'll see like the headcount tick up a bit as we go forward as we add more resources at lower dollar and creates a sort of a better pyramid for the engineering organization. But again, from a pure dollar perspective, we're making the right investments, and we're going to manage that extremely closely given what's going on in the environment.

Brad Reback -- Stifel Financial Corp. -- Analyst

That's great. Thanks very much.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Matt Cain for any further remarks.

Matt Cain -- President and Chief Executive Officer

Thanks, operator. To recap, we had a great quarter and a strong start to the fiscal year, highlighted by the third straight quarter of accelerating ARR growth. And I am excited about our opportunity with Capella this year, as well as some very big trends in our favor like digital transformation, acceleration of the cloud and innovation at the edge. Couchbase is in a great position.

We look forward to seeing you all back here next quarter. Thank you.

Operator

[Operator signoff]

Duration: 52 minutes

Call participants:

Edward Parker -- Head of Investor Relations

Matt Cain -- President and Chief Executive Officer

Greg Henry -- Chief Financial Officer

Matt Hedberg -- RBC Capital Markets -- Analyst

Kash Rangan -- Goldman Sachs -- Analyst

Jason Ader -- William Blair and Company -- Analyst

Sanjit Singh -- Morgan Stanley -- Analyst

Raimo Lenschow -- Barclays -- Analyst

Brad Reback -- Stifel Financial Corp. -- Analyst

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