GitLab Gains Ground As Enterprises Ditch Multiple Tools For Its DevSecOps Platform

GitLab shares in 2023 advanced 38.5%. (Photo Illustration by Rafael Henrique/SOPA Images/LightRocket ... [+] via Getty Images) Shares of GitLab (GTLB) have rallied 17% since the company in early December reported strong fiscal Q3 (Oct.) results that were bolstered by stabilization in the important enterprise portion of the business.

Large organizations are increasingly consolidating multiple tools onto the company’s AI powered DevSecOps platform. While nearly 85% of organizations today are using between two and 10 DevOps tools, a large majority say they would like to consolidate their toolsets to reduce license costs, lower integration costs, improve productivity and ramp up software development cycles.

The GitLab platform leads to faster coding, boosting cycle times by an average of 7x. While GitLab continues to deal with lengthening sales cycles and cautiousness in the SMB and mid market segments, it has been seeing steady demand in the enterprise unit, which accounts for 60% of total annual recurring revenue (ARR).

In FQ3, total revenue rose 32% to $149.7 million, 5.8% above the consensus estimate of $141.5 million. Gross margin of 91% was up 200 basis points year over year. Per share earnings of nine cents topped the consensus by 10 cents. Dollar based net retention of 128% was down only a bit from 129% in the previous quarter.

Total RPO of $548.1 million gained 40%, accelerating from 37% growth in FQ2 even though this metric went up against a tough year over year comp. The total number of base customers (ARR of at least $5k) rose 26% to 8,175. Base customers represent 95% of total ARR. There are now 874 customers with ARR over $100k, up 37%.

GitLab in FQ3 added 64 of these large accounts sequentially, up from 50 additions in the July quarter. For FQ4 (Jan.), GitLab’s total revenue outlook of $157 million to $158 million came in above the consensus of $150.2 million. GitLab offers a free tier for up to five users. The Premium tier ($29/month per user) has continued to experience steady demand since the price increase from $19/month went into effect in April 2023.

GitLab is seeing healthy demand from enterprises for its Ultimate tier ($99/month per user), aided in part by the underlying security and compliance features. Ultimate accounts for 43% of GitLab’s total ARR. In FQ3, Ultimate made up more than half of all ARR bookings. Within the Ultimate tier, GitLab Dedicated—a single tenant SaaS platform introduced in June 2023 aimed at organizations in highly regulated industries with complex compliance and security needs—is gaining traction.

Fully managed by GitLab, Dedicated saves operating costs for customers. In FQ3, GitLab debuted a self serve portal where customers can configure and maintain their Dedicated instances, which should create a more effective onboarding experience. Going forward, Dedicated could turn into a key growth driver for the company given that it provides a big opportunity to convert large, self managed customers over to the new offering.

Today, the self managed business represents the bulk of GitLab’s total revenue, with the fast growing SaaS unit contributing a little over 25% of the top line. In FQ3, GitLab’s largest transaction was an 8 figure total contract value expansion with any auto company for Dedicated. This year, GitLab is starting to monetize its AI products.

The company’s Duo suite now has 14 AI capabilities, up from 10 in the July quarter. The top AI based product at the moment is Duo Code Suggestions, which is used to automate coding to drive faster workflows. The product provides efficiency improvements of up to 50%. Code Suggestions became generally available to customers in December.

Duo Suggested Reviewers improves workflows by using AI to identify the best reviewers of code. In FQ3, GitLab rolled out a beta version of Duo Vulnerability Summary, a product that provides AI generated explanations of vulnerabilities and offers suggestions for how to fix any issues. With Duo Chat, also in beta release, users can quickly get updates on the status of various projects, receive help with configurations and get explanations about suggested code.

Bullish Wall Street price targets on GitLab are generally at or above the $70 level. Goldman Sachs is a leading bull, with a target of $80. The firm says the FQ3 results were reflective of the company’s strengthening value proposition as a provider of an end to end DevSecOps platform. TD Cowen boosted its target to $71 from $63, calling out GitLab as a meaningful beneficiary of organizations consolidating their DevSecOps tool vendors.

At Piper Sandler, GitLab was named a Top 5 Idea for 2024 based on multiple tailwinds playing out in the DevSecOps market, pricing power and the company’s AI monetization opportunity. The firm says the Premium tier price increase is the largest catalyst for GitLab and should help revenue growth remain stable or accelerate over the near term.

GitLab Duo, Dedicated and the new enterprise agile planning SKU will serve as further growth drivers, says Piper. The firm raised its GitLab price target to $75 from $72..