Couchbase: Strong Database Play, Watch Out For Profitability (NASDAQ:BASE)

NoSQL principles for implementing database management mechanisms

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Couchbase’s (NASDAQ: BASE) Shares have lost more than 34% of their value since early 2022, as it became increasingly clear that the Fed Reserve should aggressively raise interest rates to lower them. high inflation. Shares have been hit harder than even Invesco QQQ Trust technology (QQQ), but a noteworthy observation is an advantage in the first week of June after good first quarter financial results when the maximum target was exceeded.


This means that if the company is able to exceed the target, the price of its shares may rise again, however, in the current market conditions where the cost of doing business is rising rapidly as a result of high inflation, this thesis will also focus on the background. line by analyzing the financial results for the first quarter of 2023 which ended in April this year.

I begin by providing an overview of why Couchbase is seeing success in today’s digital transformation environment.

The appeal of the Couchbase product

With more IT workloads moving to the cloud, organizations face challenges in how to manage their databases. Now, unlike front-end applications, databases contain critical corporate data and can’t just be migrated to the public cloud from vendors like Microsoft’s Azure (NASDAQ: MSFT). Reasons range from computer security to scalability, so companies like travel need to scale quickly to meet demand.

Thus, many databases still remain in traditional placement-type data centers, while some have migrated to private clouds that have the same ease-of-use features as Amazon’s AWS (NASDAQ: AMZN ), for example, but offer more personalized security. Different use cases have resulted in databases residing in three different environments, namely the public cloud, the private cloud, and corporate data centers, with administrators now facing interoperability challenges. and performance in managing them.

Here, one of the strengths of Couchbase is that it has been able to address the difficulties of managing data in different clouds with its fully manageable DBaaS Capella (database as a service) that can be run in any cloud, including the multi-cloud and hybrid clouds. (or a combination of public and private clouds). This means a single management interface for different databases that facilitates the management of the management team and is cheaper for the IT budget.

Another strength of the company compared to Apache CouchDB used by competitors, is that the database has a non-SQL engine that allows you to quickly scale the data of a corporation while having a nice SQL interface to use to which most database administrators are accustomed. . At the same time, it supports use cases ranging from centralized databases located in large metro data centers to those located on the edge where more companies now retain their data as more analysis is done. end of the network.

Powered by its products, Couchbase is the only database vendor to have seen a distinctive rebound in sales in the last quarter, as shown in the red chart below.


Chart built with quarterly sales data for (Searching for alpha)

Its growth rate may be much lower than that of Snowflake (SNOW) in blue above, but the fact that the Couchbase chart has a higher trend in 2022 while competitors are flat or on a downward trend shows a demand renewed of its products after the increase of the pandemic.

Now, it is important to assess whether this upward trend in sales can be maintained for the rest of this year, given that inflation is high and that in anticipation of fears of recession, CFOs may be reducing computer budgets. This in turn can affect the revenue of computer software companies.

Recurring income and profitability

To this end, I consider recurring annual revenue (“ARR”), an important metric for SaaS companies (software as a service) that includes flat subscription fees paid by customers (monthly or annually) plus money earned from product updates after accounting for cancellation losses. For Couchbase, the $ 139.7 million ARR was a 27% year-over-year increase. This was more than 25% revenue growth in the first quarter, which means that more money is being made with existing subscriber plans, and for that purpose the company can rely on some large customers.

Another useful metric that becomes useful at uncertain times is the RPO or remaining performance obligation, which basically measures the backlog. This metric shot up 68% to $ 169 million, or much more than the $ 123.5 million in revenue generated for the full fiscal year 2022 that ended in January.

In addition to the cloud business, the company continues to see a push for great deals and the expansion of its more traditional RDBMS database business, that is, with the Couchbase 7 server.

On the other hand, given the strength of the dollar and the extreme fluctuations in exchange rates as central banks around the world adjust their currencies to fight inflation, another metric I focus on for Companies selling products outside the US is ARR at constant currency. This was 31% for the first quarter and shows an intangible impact of foreign currency fluctuations so far, but needs to be controlled more as the dollar gains more strength.

In addition, the negative net profit for the last nine quarters shows that the company is spending a lot on operations, more than the amount it generates. Along the same lines, cash from operations is also negative, meaning that money is used instead of generated, as is the case with colleagues in the table below.


Comparison with peers (Searching for alpha)

However, with 87.7%, Couchbase has the best gross margin metric, which is even higher than Oracle (ORCL) despite having a much lower revenue base to share its fixed costs. This shows that Couchbase is being more efficient when it comes to setting up its platform.

Also, even though the company is operating at a loss (considering both GAAP and non-GAAP figures), I noticed that management was aware of expenses during the first quarter earnings call and has taken some measures to solve the problem. Thus, while costs continue to rise, non-GAAP marketing expenses, if considered as a percentage of revenue, fell 1% in the first quarter. The same thing happened with research spending, which fell sharply, to 36% from 43% a year ago.

On the other hand, administrative expenses were 2% higher and must be monitored again in the face of high wage inflation and the tight labor market. Therefore, the main risk for smaller works like Couchbase is having to pay high salaries to retain staff, which can increase operating costs and lead to further loss of cash. This in turn can lead to significant volatility in equities when financial results are announced.

Key assessments and conclusions

In terms of valuations, they are still at least 27% higher in relation to the IT sector, both in terms of the price and sales multiples at the end and in the future (table below) and, as a result, Couchbase remains a company. highly valued. However, due to its market capitalization of less than $ 700 million, the company could be an acquisition target for large cash-rich software games.


Valuation metrics (Searching for alpha)

The company is well-positioned to take on the $ 60 billion database market, both with its enterprise and cloud solutions, to address the need for more flexibility between hybrid and multilevel customers. However, competition remains tough and Couchbase has to spend on marketing and sales to drive growth. It also has to spend on R&D to turn it into a cloud database.

So while improving profitability is still a priority, in practice, things can take time, as this will also depend on the ability to continue to increase revenue rapidly. To that end, Couchbase’s ability to grow without resorting to any recent acquisitions is positive. Other positive aspects are the partnerships forged with hyperscalators such as AWS and Google (NASDAQ: GOOG) for the widespread availability of Capella for subscribers.

Until it’s profitable, the database game may depend on $ 205 million in cash, or enough to fund non-GAAP operating costs of about $ 44 million over five more quarters. In addition, with $ 159 million in portfolio revenue and only $ 8.3 million in debt, Couchbase has the money to keep operations longer, unless it makes an expensive acquisition.

Finally, while operating at a loss, Couchbase has the necessary attributes in the form of product strength and recurring revenue that make it a worthwhile stock to include on your watchlist while you wait for the company to reduce losses. In this sense, one metric to consider during the September financial results is a reduction in non-GAAP operating loss, from $ 12.3 million in the first quarter to $ 11.8 million in the second quarter according to the point middle of the guide.

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