Shares of GitLab (GTLB -0.98%) have soared more than 36% over the past month, most recently fueled by an exceptional quarterly update last week from the software development, security, and operations (DevSecOps) platform provider.
Indeed, GitLab's third-quarter revenue jumped a better-than-expected 32% year over year to $149.7 million, while its non-GAAP (adjusted) earnings swung positive to $14.4 million, or $0.09 per share, from a loss of $0.10 per share in the year-ago period. Most analysts were anticipating a net loss of $0.01 per share on revenue of $141 million.
Customers have continued to flock to GitLab's platform. Among other things, this has led to 26% growth in the number of clients generating annual recurring revenue (ARR) of at least $5,000, to 8,175. GitLab's large-customer base -- its customers generating ARR of at least $100,000 -- swelled an even more impressive 37%, to 874. And in a testament to GitLab's land-and-expand approach, these customers are consistently spending more on the platform after their first year; the company's dollar-based net retention rate (DNBRR) expanded 4 percentage points last quarter, to 128%.
The most exciting metric from GitLab's quarter
Perhaps most exciting trend, however, is that GitLab has historically enjoyed enviable operating leverage as it scales. Both GAAP and non-GAAP gross margins have consistently hovered in a percent range from the high 80s to the low 90s (arriving at 90% and 91%, respectively last quarter), and its adjusted operating expenses have continued to steadily decline as a percentage of revenue for the past several quarters.
Image source: GitLab.
That said, for its fiscal third quarter, ended Oct. 31, 2023, one milestone stood out from the rest: GitLab finally recorded its first quarterly period of positive non-GAAP operating income, $4.7 million, swinging from an adjusted operating loss of $21.6 million a year earlier. The company achieved this feat even as it increased quarterly research and development spending by nearly 20% year over year to just over $49 million, and raised sales and marketing spend by around 7% to $87 million.
GitLab CFO Brian Robins chalked the more robust metrics up to the company's deliberate efforts "to grow responsibly," achieving more than 2,200 basis points of adjusted operating margin expansion.
On GitLab's continued march toward sustained profitability
GitLab predicts its operating leverage will expand even faster going forward. Looking ahead to the current fiscal fourth quarter, GitLab's guidance calls for revenue of $157 million to $158 million, up 28% year over year at the midpoint, with adjusted operating income expanding further to a range of $5 million to $6 million, and adjusted earnings per share of $0.08 to $0.09 (up from a loss of $0.03 per share a year earlier).
So GitLab raised its full fiscal-year outlook to call for revenue of $573 million to $574 million (up from $555 million to $557 million before), an adjusted operating loss of $10 million to $9 million (down from previous guidance for a loss of $33 million to $30 million), and adjusted income per share of $0.12 to $0.13 (raised from previous guidance for a per-share loss of $0.08 to $0.05).
During the subsequent conference call, GitLab management reminded investors the company is chasing a total addressable market worth an estimated $40 billion and growing. Indeed, according to recent research from Gartner, by 2027, around 75% of enterprises will have switched from disparate, multiple-point solutions to unified DevOps platforms like GitLab to streamline their software development operations, up from only 25% this year.
As long as GitLab can continue its streak of "responsible," profitable growth as it captures as much of that growing market as possible in the coming years, I see no reason its share price shouldn't continue to follow suit.
