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Couchbase’s S-1 Analysis — Sofa, So Good🛋️

Open source NoSQL database company Couchbase recently filed its S-1 with $100M as a placeholder for the offering. Couchbase competes against publicly traded MongoDB and has 549 customers generating $108.2M in revenue over the last twelve months, up 24% YoY. Originally incorporated in 2008 as NorthScale, the group changed its name to Membase in 2010, and then renamed itself Couchbase after merging with CouchOne in 2011. Couchbase has 597 employees and is headquartered in Santa Clara, CA.

Couchbase’s S-1 highlights it is a second-generation NoSQL database. They claim first-generation NoSQL players attempted to address relational databases’ limitations but were not architected for the scale and performance requirements of new mission-critical applications, nor were they designed to efficiently modernize and upgrade existing applications and their underlying infrastructure. Importantly, Couchbase states alternative NoSQL databases lack the familiarity of the SQL language, which requires re-training SQL-fluent application developers, making adoption difficult and costly. Couchbase believes these constraints have limited NoSQL databases to non-mission-critical applications. Enter Couchbase, a NoSQL database for mission-critical workloads that can help teams gradually modernize.

Couchbase architected their database with the flexibility of NoSQL, embodying a “not only SQL” approach. It combines the performance of a caching layer to serve up data faster, a document datastore to provide high levels of durability and the reliability of a system of record with ACID to enable high performance in a single platform from cloud to edge. It can compute tens of millions of operations per second and response times are measured in microseconds. Its architecture automatically creates copies of data across multiple nodes without a primary node that is vulnerable to data loss or interruptions. Unlike most NoSQL databases, Couchbase provides a comprehensive SQL-compatible query language, N1QL, that allows for a wide array of data manipulation functions. The business believes database administrators and app developer experience is crucial so built it with a JSON data model to enable schema changes without downtime and an extensive toolset for developers including indexing, query, full-text search that allows users to enable the feature, create an index and start searching the text, real-time analytics, and eventing. It can be controlled within Kubernetes and run from multi-cloud to edge.

The business has three products: Couchbase Server, Couchbase Mobile, and Couchbase Cloud. Couchbase Server is the flagship product and is a full-featured, multi-service NoSQL database. Couchbase Mobile includes Couchbase Lite, a full-featured embedded NoSQL database for mobile and edge devices that enables an always-on experience with high data availability, even without internet connectivity. Couchbase Mobile also includes Couchbase Sync Gateway, a synchronization gateway that allows for secure data sync between mobile devices and the backend data store. In June 2020, Couchbase launched Couchbase Cloud, a fully-managed DBaaS offering including multi-cloud management capabilities. In the 2H’FY22, they plan to release virtual private cloud enhancements and other developer offerings, and in FY23, they expect Couchbase Cloud to be available on the major cloud infrastructure providers.

The business has strong evidence that Couchbase can be a single source of truth. They estimate that in January 2021 80% of customers used Couchbase as a system of record for some or all of their business, up from 45% in January 2018.

They address a large market opportunity. Based on data from IDC, they estimate that the total addressable market opportunity is ~$42.9B in CY20 and expected to grow to ~$62.2B in CY24. They calculated this estimate by aggregating the projected vendor revenue from the non-relational database management systems and relational database management systems. They also ran their own analysis leveraging HG Insights data and calculated a $57.4B market. They compete with traditional database providers Oracle, IBM, and Microsoft; providers of NoSQL database offerings, such as MongoDB; and cloud infrastructure providers with database functionalities, such as Amazon, Microsoft, and Google.

The business blends a “sell-to” go-to-market motion using direct sales targeting enterprise architects with a “buy-from” motion targeting application developers. For the buy-from approach they offer a free Community Editions of some products, free trials of the Enterprise Edition of Couchbase Server and Couchbase Cloud products and a web browser-based demonstration version of Couchbase Server to further accelerate application developer adoption. Couchbase exhibits a land-and-expand model.

Couchbase grew total revenue to $103.3M in FY21 from $82.5M in FY20, up 25% YoY. The substantial majority of Couchbase’s revenue is subscription sales, which accounted for 93% and 94% of their total revenue in FY20 and FY21, respectively. 89% of subscription revenue growth came from existing customers. Total revenue in FQ1’22 represented $28.0M, up from $23.0M in FQ1’21, an increase of 21% YoY. Their revenue from sales of subscriptions accounted for 92% and 95% of total revenue in FQ1’21 and FQ1’22, respectively. Subscription revenue increased by $5.3M, or 25%, from $21.2M in FQ1’21 to $26.5M in FQ1’22. Approximately 85% of the increase in revenue was attributable to growth from existing customers, and the remaining increase was from new customers.

The company derives substantially all its subscription revenue from the Enterprise Edition of the Couchbase platform, which includes Couchbase Server and Couchbase Mobile. The Couchbase platform is licensed per node, which is define as an instance of Couchbase running on a server. The subscription pricing is based on the computing power and memory per instance, as well as the chosen service level. Couchbase Cloud is licensed using an on-demand consumption model or an annual credit model, which removes the need to license different node types separately. Revenue from Couchbase Cloud was immaterial for FY21 or FQ1’22.

Importantly ,term-based software licenses are sold in conjunction with subscription Post-Contract Support (PCS). PCS bundled with software licenses includes internet, email and phone support, bug fixes and the right to receive unspecified software updates and upgrades released when and if available during the subscription term. PCS represents most of the revenue for Couchbase at $82.9M in FY21 (80%) and $22.2M in FQ1’22 (79%).

Services represented 7% and 6% of total revenue in FY20 and FY21, respectively. It was 8% and 5% of total revenue in FQ1’21 and FQ1’22, respectively. The services revenue is derived from professional services related to the implementation or configuration of the platform and training. Services revenue was $6.3M in FY21, up from $5.9M in FY20. It was $1.5M in FQ1’22, down from $1.9M in FQ1’21, a decline due to fewer service hours due in part to COVID-19.

In FY21, Couchbase achieved $107.8 in Annual Recurring Revenue (ARR), representing a 22% increase from $88.1M in FY20. As of April 30, 2020, and 2021, their ARR was $89.8M and $109.5M, respectively, representing 22% YoY growth.

Revenue is derived from both U.S. and international customers. During FY21 and FQ1’22 international revenue represented 35% of total revenue. Other than the United States, no other individual country accounted for 10% or more of total revenue for FY20, FY21, and FQ1’22.

Customers continue to increase. As of April 30, 2021, Couchbase had over 549, up from 511 customers twelve months ago. The customers are comprised of over 30% of the Fortune 100 and over 25% of the Forbes Global 2000. While customers in the Fortune 100 and the Forbes Global 2000 represented a meaningful portion of their ARR, no one customer accounted for more than 5% of ARR. The number of customers with over $1M ARR grew from 16 as of FY20 to 23 as of FY21. The number of customers with over $500K ARR increased from 37 as of FY20 to 48 as of FY21. The number of customers with $100K ARR increased from 170 as of FY20 to 193 as of FY21.

For Couchbase customers that had at least $1M in ARR at the end of FY21 have increased their ARR by an average of 29x since their initial contract. Customers that had at least $500K in ARR at the end of FY21 have increased their ARR by an average of 19x since the first contract. The average ARR of customers with ARR of $100K or more grew from approximately $440,000 as of FY20 to approximately $483,000 as of FY21. The dollar-based net retention rate was over 115% for each of the past five quarters. The median net dollar retention rate for a publicly traded SaaS company is 118% so Couchbase is in-line.

Moving on to gross margin, which equals revenue minus the cost of goods sold that includes things like hosting costs and customer support. Couchbase achieved overall 89% gross margins in FY21, down from 91% in FY20. The decrease in gross margin was primarily driven by the amortization of capitalized internal-use software related to Couchbase Cloud. Our research suggests the median gross margin for publicly traded SaaS companies is 74% so Couchbase is above and healthy. As Couchbase Cloud gains steam it could affect COGS so will be interesting to watch how the company manages its gross margin.

Of each operating expense item, Couchbase spent the most on S&M at 68% of total revenue in FY21 and 74% of total revenue in FQ1’22. Because total revenue declined from FQ4’21 to FQ1’22, the company has a poor magic number of (0.31). The magic number for FQ4’21 was good at 0.87. A magic number of 1 suggests there is S&M efficiency. Our research suggests for publicly traded SaaS companies the median operating margin is (14%) so Couchbase is below their peers at (50%) in FQ1’22 and (32%) in FY21. In terms of net income margin, Couchbase achieved (39%) in FY21, worsening from (35%) for the equivalent period a year earlier.

Couchbase raised $294M from investors including GPI Capital, North Bridge Venture Partners and Accel. It last raised $105M at a valuation of $580M in May 2020, according to Pitchbook data.

Couchbase’s IPO registration touches on a few trends. First, data infrastructure solutions are a popular category of innovation. It is one of a few data companies that have gone public over the past year including Confluent and Snowflake. Like Confluent, Couchbase is open source but interestingly did not highlight this aspect much in the filing. Also, similarly, Couchbase more recently released a hosted version of their service demonstrating customers are moving to the cloud and appreciate turn-key solutions. Second, many companies are moving away from traditional relational databases. Third, SQL is the main language for data professionals so solutions that are compatible can address over 19M SQL developers across the world. After being private for thirteen years, it will be exciting to watch as Couchbase goes public.

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