GitLab (GTLB.US) Q2 Conference Call: Welcoming One of the Strongest Quarters in History, Flex Strategy Begins a New Chapter of Growth

The Zhitong Finance App learned that GitLab (GTLB.US)'s results for the second quarter of fiscal year 2027 fully exceeded expectations, with revenue of US$286.3 million, a year-on-year increase of 21%, net ARR growth of more than 40%, and gross reservation reached a record high. Management called this quarter an “important inflection point.” The core strategy Flex received more than 130 customers and promises of more than 20 million US dollars in just 6 weeks. The paid consumption rate jumped to 40 million US dollars, and the target was to break 100 million by the end of the year. The CEO said that AI is becoming a lasting structural tailwind. The more companies use AI development tools, the stronger the demand for the GitLab platform. The flagship ARR already accounts for 59% of the total ARR. Based on strong momentum, the company raised its annual revenue guide to approximately US$1.13 billion, and management emphasized that it is moving from a strong position into the “second act” growth stage.

Core performance: Exceed expectations in all aspects

This quarter, GitLab achieved the largest gross bookings (gross bookings) in the company's history, and net annual recurring revenue (ARR) increased by more than 42% year over year, making it the second highest growth rate in the past four years. The number of first orders increased by more than 100% year-on-year, and the net ARR of the first order increased by nearly 40%, all of which are the best performances in three years. Large transactions worth more than $500,000 increased by more than 150% year over year, and public sector business rebounded markedly. The USD-based net retention rate (DBNRR) reached 117%, the first month-on-month recovery since 2024.

CEO Bill Staples said, “The second quarter proved what we always believed GitLab could achieve. After five quarters of systematic construction of the sales organization, production capacity increased by 30% and per capita productivity increased by 10%. The investment is having a compound effect.”

Flex: strategic transformation, starting a consumption model

Flex is the core topic of this financial report. The model allows customers to flexibly allocate seats and various consumer products with a single monetary commitment. After only 6 weeks of official launch this quarter, it received more than 130 customers and more than 20 million US dollars of commitment. Driven by Flex, the company's paid CRR (paid CRR) jumped from $15 million at the end of Q1 to $40 million at the end of Q2, and management aimed to surpass $100 million by the end of this fiscal year.

Management emphasized that Flex is the key to the transformation of GitLab's business model from a pure seat subscription to a “seat+spend” hybrid model. CFO Jessica Ross stated, “Flex changed the logic of growth — our growth is linked not only to how many seats our customers buy, but also to how much value they get from the entire platform.” She also detailed the accounting impact of Flex on revenue recognition: every 50 million dollars of self-managed renewable customers converted to Flex will cause approximately $5 million in revenue to be deferred from the current fiscal year to the future, with the biggest impact of about $13 million in the current fiscal year. Management promises to quantify this impact every quarter to ensure that investors can see the essence of the business through the accounting effect.

AI: Structural tailwind, comprehensive expansion of product matrices

AI is viewed by management as a lasting structural tailwind. Staples stated, “AI has drastically lowered the threshold for building software, and anyone can become a 'builder'. The code produced by these builders needs to be stored, governed, and compliant, which is the core value of GitLab.”

Duo Agent Platform's paid CRR increased 50% month-on-month; after the launch of the GitLab Orbit (Knowledge Graph) public beta, more than 2,200 organizations have launched it, increasing 70% in 4 weeks. Secure warehouses grew 60% year over year, code push increased 50%, and CI/CD pipelines grew 40%. Some AI-active customer codebases grew by as much as 500%. Management observed a clear pattern: “The more AI development tools a company uses, the more GitLab is needed.”

The Ultimate (Ultimate) ARR increased by about 35% year-on-year, accounting for 59% of the total ARR. Eight of the top ten deals were flagship editions, reflecting that security, governance, and compliance are becoming core procurement drivers in the AI era.

Competition and prospects: Expanding advantages and increasing confidence

In terms of the competitive landscape, the company's CEO Staples said that the winning rate against the only major competitor continues to rise, and “our competitive position is stronger than ever before.” AI-native tools are seen as partners rather than threats, as they create more demand for the GitLab platform.

Looking ahead to the second half of the year, management raised the annual revenue guide to US$1,129-1,133 million (up 18-19% year over year). At the same time, it was emphasized that reservations for the second half of the year would return to a normal pace, and that the unusually high level of Q2 was not extrapolated linearly. The recovery of the public sector is expected to continue, the contribution of AI products is still in its early stages, and the focus is still driving adoption.

Staples concluded, “We are moving from a strong position into the 'second act' — a healthy core business, accelerated customer growth, new products that gain traction, and a consumption model designed for humans and agents to co-build a world of software.”

The following is a transcript of the GitLab Inc. Q2 FY2027 results conference call:

Executive speeches

Nic Edwards

Vice President of Finance, Strategy and Operations

Good afternoon, and welcome to GitLab's Q2 FY2027 financial results conference call. I'm Nic Edwards, VP of Finance, Strategy, and Operations. I was joined by CEO Bill Staples and CFO Jessica Ross.

In the afternoon session, we will provide an overview of the business situation, review the second quarter and full year results, and provide performance guidance for the second quarter and full year of FY2027. In addition to the scheduled statements at this conference call, more information can be found in our shareholder letter, press release, investor presentation, and documents submitted to the US Securities and Exchange Commission (SEC), which are all posted on our investor relations website ir.gitlab.com.

Before I begin, let me explain the Safe Harbor statement. Please take note of the cautionary statement on page 2 of our presentation and the cautionary statement on forward-looking statements in the financial report published earlier today, both of which can be found under the Investor Relations section of our website. Presentations and financial reports include discussions of certain risks, uncertainties, assumptions, and other factors that may cause our actual results to differ from those expressed in any forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

As is customary, the content of today's conference call and presentation is subject to this statement. Additionally, in today's conference call, we'll be discussing some non-GAAP financial measures. These non-GAAP financial measures exclude certain unconventional or non-recurring items that management believes affect comparability over the period cited. For information on these non-GAAP financial measures and reconciliation with the most directly comparable GAAP measures, please refer to our financial reports and presentations.

Bill Staples

Chief Executive Officer and Director

Good afternoon everyone. The second quarter was an excellent quarter. Let me start with a few highlights. Revenue was $286.3 million, up 21% year over year; non-GAAP operating profit was $42.6 million, and operating margin reached 15%. Our sales team achieved the largest gross reservation quarter in the company's history; net annual recurring revenue (ARR) increased by more than 40% year over year, the highest growth rate in several years. We also fully exceeded our target on the first side, and the number of first orders increased by more than 100% year over year.

In the light of these highlights, I would like to give a brief update on the progress of the five growth initiatives we have proposed this year. First, we have stated that it is essential to accelerate the growth of initial orders. The second quarter was our biggest quarter with our first order in three years. The number of first orders increased by more than 100% year-on-year, and the net ARR of the first order increased by nearly 40%. Our dedicated first-order team is building more repeatable sales processes, and our product-driven investments are widening the top of the funnel. Together, the two have contributed to a significant increase in the number of new GitLab customers. It's important to win customers of all sizes, including AI startups and others with smaller initial orders, as more than half of our current annual recurring revenue of over $1 billion comes from customers with an initial order of less than $5,000. Our strategy is to enter where our customers are ready to begin and grow with them over time.

Second, we have indicated that increasing predictable sales capacity will be an important driver to re-accelerate growth. In the second quarter, we saw this argument begin to pay off. Account manager production capacity increased by about 30% year over year, while per capita productivity increased by about 10%. The staff turnover rate also improved year over year for the second consecutive quarter. It is difficult to increase productivity while increasing production capacity, and we believe this shows that our investment in sales organizations is beginning to have a compounding effect. The result was the largest gross reservation quarter in GitLab's history, and a net ARR increase of over 40%.

Third, we have said that it is important to expand our monetization channels. Our seat-based business continues to grow, and AI is creating additional opportunities for GitLab to monetize more and more aspects of the software lifecycle. Flex is a key enabler in achieving this strategy. After just 6 weeks of launch, more than 130 customers have committed over $20 million to Flex. This early feedback reinforces our belief that customers want an easier way to distribute GitLab expenses between seats and new consumer products as demand changes. Prior to Flex's launch, customers committed funds to a fixed number of Premium or Ultimate seats to access our platform. Flex changed that. Customers now make a monetary commitment, and each month they can decide how to use it for seats and all of our consumer products.

This commitment is fixed and can be used for any product on the platform. As agents accelerate their work and more builders enter the field of vision, we are faced with a huge opportunity to create and capture value. Any initiative that shortens the time between customer interest and value is beneficial to the customer and GitLab. Flex does this in three important ways. First, it helps customers get more value from every money promised to GitLab. Instead of leaving unused capacity idle as shelfware, customers can turn their money into products that create the most value for them.

We believe that better utilization should enhance our already healthy retention rate and reduce the risk of loss and contraction due to unused expenses. Flex also reduces sales and procurement friction because once financial commitments are in place, customers can allocate funds between existing and new products on their own schedule throughout the year without having to re-sign commercial agreements every time. We have increased sales capacity and productivity. Flex should help our team spend less time on incremental contracts and more help customers achieve value, thereby further improving production capacity efficiency.

Third, it allows usage to scale seamlessly as customer demand grows. Customers can consume any qualifying product as needed, and any usage over the reserved capacity, including Premium and Ultimate seats, and any usage beyond their promises or reservations will be billed in the same month as it occurs. This eliminates many of the adjustments and contract cycles currently required to capture incremental usage, providing customers with more flexibility. As usage expanded, it created another potential growth tailwind for GitLab. Thanks to the launch of Flex, the paid CRR (paid CRR) was over $40 million at the end of the quarter, up from $15 million in the first quarter.

As a reminder, paid CRR is a point-in-time annualized metric, including GitLab credit commitments, Flex commitments, and pay-as-you-go spending. It doesn't include trials and promotional credits. We believe paid CRR provides investors with a useful way to track the amount of money flowing through our consumption model. Our goal is to achieve over $100 million in paid CRR by the end of this fiscal year. Our business was fully monetized through seat subscriptions at the beginning of this year, and now we expect seats to continue to grow by the end of the year, accompanied by a meaningful and expanding consumer business.

Fourth, we need to improve our performance among price-sensitive customer groups. I am happy to report that we have seen stabilization in the SMB and mid-tier markets this quarter, and the performance of these two segments in terms of expansion and initial orders has surpassed the target. Our argument is that increased attention and investment in this segment could improve performance, and the results for this quarter are encouraging. We hope to see this performance continue over the next few quarters, but we are increasingly confident that we are on the right path.

Fifth, we are implementing a bold AI strategy. Duo Agent Platform's paid CRR increased by approximately 50% month-on-month during the quarter, including credit commitments, pay-as-you-go credit, and Flex reservations. After the first quarter centered around the US, our geographic coverage also expanded. One of the top 20 US commercial banks increased its AI credit pool nearly tenfold this quarter. But I think the broader AI story is more important. For over a decade, GitLab has brought together the context of how software is built, protected, and delivered—covering source code, issues, merge requests, pipelines, bugs, policies, approvals, and deployments.

As AI capabilities continue to grow, we believe the context of this connection will become more valuable, and we've seen early evidence through GitLab Orbit (our software lifecycle context map). Since opening the beta in June, more than 2,200 organizations have launched the Orbit Index, which has grown 70% in 4 weeks. Customers have generated over 170,000 queries, and approximately 80% of customer queries are from customers connecting Orbit to external agents such as Claude Code and Codex. We're also beginning to see evidence that better context can improve agent performance. Compare the Market tested Orbit with 79 real merge requests and found an increase in accuracy from 58% to 70%. The same dynamics can also be seen on our platform.

On a year-on-year basis, secure warehouses grew by 60%, code push increased by 50%, and CI/CD pipelines increased by 40%. Among some customers actively adopting AI-assisted development, the codebase grew by as much as 500%. The pattern is becoming increasingly clear: As companies adopt more AI development tools, they will use GitLab more. This is important because our core business is still very strong. The Ultimate (Ultimate) currently accounts for 59% of ARR, and eight of the top ten deals this quarter came from the flagship edition. Premium (Premium) and Ultimate are the foundation of our business that has supported our revenue of more than $1 billion over the past four quarters, and we are still seeing huge opportunities. AI gives us an opportunity to build on that foundation with new products, new consumption, and new types of work done through GitLab.

Before I give my time to Jessica, I'd like to recognize two important groups. First up is our Chief Revenue Officer Ian Steward and the entire sales organization. Ian has been with GitLab for five quarters. The results we're seeing today reflect many quarters of solid work — building the foundation, refining the strategy, and building a team that can execute it. I'd also like to give special thanks to the entire GitLab team because at the beginning of the quarter, we made the tough decision to restructure. Many chose to stay and help build the next chapter in GitLab.

Together, we delivered one of the strongest quarters in the company's history. To everyone at GitLab, thank you for your hard work, perseverance, and trust. I'm incredibly proud of you and our accomplishments. We're moving from a strong position into the “second act” — a healthy core business, accelerated customer growth, new products that gain traction, and a consumption model designed for humans and agents to co-build a world of software.

Jessica Ross

chief financial officer

Thank you Bill, and thank you to everyone who joined today. The second quarter was an excellent quarter, and we believe it was a major inflection point for the business. Revenue was $286.3 million, up 21% year over year, about 5 percentage points higher than our guidelines. We achieved the strongest gross reservation quarter in the company's history. Net ARR increased 42% year over year, the second-highest quarter of growth in the past four years. The net retention rate based on the dollar accelerated for the first time since 2024, and we also exceeded expectations in terms of profitability. The business is strong and broad, covering new and existing customers, multiple regions, various customer sizes, and our core platform.

This breadth makes us increasingly confident about the potential trajectory of the business. Our marketing team executed extremely well. The number of large transactions we completed far exceeded expectations. We're seeing a better linear pace, and sales compliance rates have improved. The year-over-year increase in transactions of $500,000 and above is a clear sign that our biggest customer is deepening their commitment to GitLab. The public sector also rebounded significantly during the quarter, and we expect there is still room for this recovery as procurement models normalize in the second half of the year. We've also seen a real phased change in the formation of new customers. We had around 1,700 first orders this quarter, more than double what it was a year ago, and the net ARR for new customers increased 39% year over year.

The scale of this quarter's results even surpassed our own ambitious expectations. We care about all of our customers, big or small, who choose GitLab. Today, more than half of our annual revenue base of over $1 billion comes from customers with initial orders of less than $5,000. Acquiring customers early and growing with them is part of our competitive advantage. This allows us to efficiently acquire customers and expand cooperation over time. GitLab's flagship edition also performed well in the quarter. The flagship ARR increased by about 35% year over year and currently accounts for 59% of our total ARR.

As artificial intelligence proliferates in the software development cycle, security, governance, and compliance are increasingly at the core of purchasing decisions. We're starting to see demand completely surpass the traditional developer seat as AI makes software creation accessible to a wider group of builders in the enterprise. We think this expands the range of services GitLab can ultimately serve.

About customer metrics. The gross retention rate continues to be well above 90%, in line with our historical trend. The net retention rate based on the dollar was 117%, the first month-on-month increase since 2024. Total RPO increased 16% year over year to US$1.2 billion; current RPO (CrPO) increased 20% to US$744.7 million. Computational billings increased by 24 percent, double the 12 percent increase in the previous quarter. Our emerging products are gaining real traction. Duo Agent Platform's paid CRR increased 50% month-on-month, and the overall paid consumption rate of the platform exceeded 40 million US dollars at the end of the quarter. Usage trends tell the same story: CI pipeline creation and push operations both increased by more than 40% year over year.

See the income statement below. Non-GAAP gross margin was 86.5%. SaaS accounted for 34% of total revenue, up 36% year over year, thanks to the continued strength of GitLab Dedicated and Duo. Non-GAAP operating profit was US$42.6 million, up from US$39.6 million in the same period last year. The non-GAAP operating margin was approximately 15%, exceeding expectations, thanks to increased sales and marketing productivity and timing of some investments. We have incurred approximately $23.3 million in restructuring fees, consistent with what was outlined last quarter. Regarding JiHu, non-GAAP expenses for the second quarter were largely flat year over year, at $3 million. Our goal remains to untie JiHu, but we can't predict if or when this will happen.

The adjusted free cash flow was $9.8 million, and the profit margin was 3%. The repayment timing for this quarter caused a certain drag on the data. We returned capital to shareholders through the repurchase of approximately 3.5 million shares. Currently, we still have an authorized quota of approximately $245 million. At the end of the second quarter, we held approximately $1.3 billion in cash and investments.

Before I give guidance, I'd like to take a moment to talk about Flex, because it's critical to the direction of business development, and because it changes how some reported financial data is presented. This quarter was Flex's first appearance in our results, so the impact was not significant compared to our current revenue scale.

However, just six weeks into the market, more than 130 customers have pledged to invest over $20 million into Flex. This is a quick and clear signal that the market is in need of a fundamentally better way to buy. Flex's core is an annual or multi-year monetary commitment that gives customers the flexibility to allocate between premium and ultimate seats, GitLab credits, and other usage-based features without renegotiating contracts or restarting the procurement process every time demand changes. We think this is a better model for customers, and we believe it will become the default way for customers to trade with GitLab over time. It's a better model for us too. This means our growth is tied to how much value our customers get from the entire platform, not just how many seats they buy. Given the strong signals from our customers, we are more confident in Flex's growth and popularity.

This also means that as this business model becomes the preferred way for customers to do business with us, Flex could have a substantial impact on our financial results. From this perspective, when Flex is more widely adopted by customers, investors need to clearly understand the impact of two reporting aspects — revenue recognition and RPO.

First, revenue recognition. Currently, approximately 15% of revenue from traditional self-managed licenses is recognized in the early stages. However, in the Flex model, license fees are no longer confirmed in the early stages. Since the customer can adjust the product portfolio within the committed amount, this revenue is instead shared across the contract period. To facilitate model construction, we estimate that every $50 million of self-managed renewable customers converted to Flex in the 2027 fiscal year would delay the recognition of approximately $5 million in revenue that should have been recognized in fiscal year 2027 until future periods.

Considering the size of the second-half renewable pool and our visibility into the second-half channel, we expect the maximum potential impact on FY2027 revenue to be around $13 million. What needs to be clear is that this is only a change in the timing of revenue recognition, not a change in the customer's potential commitment, or a change in the economics of cash. The customer's commitment remains the same, and the cash bill is still prepaid on an annual basis, regardless of which model the customer chooses. Since Flex is a contractual monetary commitment, the full amount committed is included in the total RPO.

However, Flex is excluded from the current RPO (CrPO) because customers control usage time, product mix, and future consumption pace after signing, and we are unable to reliably determine how much of it relates to the next 12 months. This means that as Flex scales, you may see total RPO and revenue growth fluctuate at different rates, and you should expect this. This quarter, CRPO was dragged down by about 3 percentage points relative to RPO due to Flex's commitment not being included in this indicator. Each quarter, as Flex adoption grows, we'll clearly quantify its impact so you can clearly differentiate Flex's accounting impact from the potential performance of your business.

Now let's look at our outlook. After the first half of the year's results, our confidence in the potential trajectory of the business has increased. There are a few things to keep in mind when considering the second half of the year. First, given the improvements in public sector procurement models this quarter, we have a more positive view of this area and expect the recovery to gradually continue throughout the rest of the year. Second, the second quarter benefited from excellent execution — the number of large transactions exceeded expectations, improved linear pace, and the best channel conversion rate in history. Our outlook for the second half of the year assumes that bookings will return to a more normal pace from current levels, rather than repeating the unusually high levels of the second quarter.

Third, with regard to the Duo Agent Platform, we assume a limited contribution to our huge existing revenue base in fiscal year 2027. Our focus this year remains on adoption, turning pilots into production deployments, and laying the foundation for future monetization. Finally, to be consistent with our consistent guiding philosophy and forecasting approach throughout the year, we have not included Flex's potential impact in our guidelines, but we do intend to quantify the impact of revenue recognition for the rest of the year. Based on these considerations, I am pleased to announce that we are revising our guidance to reflect the strong momentum in the first half of the year and the momentum we expect to continue to maintain in the second half of the year.

For the third quarter of fiscal year 2027, we expect total revenue of US$281 million to US$283 million, an increase of approximately 15% to 16% year over year. We expect non-GAAP operating profit of $35 million to $37 million, and non-GAAP earnings per share of $0.19 to $0.20, assuming a diluted weighted average number of shares outstanding of approximately 172 million shares. For the full year, we now expect total revenue of $1,129 million to $1,133 million, an increase of about 18% to 19% year over year. We expect non-GAAP operating profit of $148 million to $152 million, and non-GAAP earnings per share of $0.85 to $0.87, assuming a diluted weighted average number of shares outstanding of approximately 172 million shares.

There has been no change in our investment priorities or the way we balance growth and profitability. I'd also like to provide some additional model building points. First, we still expect gross margins of 85% to 87% for the full year. We expect JiHu-related expenses to be around $15 million for the whole year, compared to $13 million last year.

Looking back, it really was an excellent quarter and provided us with a solid foundation to begin our transition to Flex. We believe Flex is the right long-term model for customers and GitLab, although the transition will cause some short-term disruptions in terms of revenue timing and reporting metrics. Our role in this transition is to provide sufficient transparency so that you can see the performance of the bottom layer through these point-in-time effects. This quarter, we achieved record pre-orders, accelerated net ARR growth, strong retention rates, broad business strength, and unplanned profitability. These performances gave us real confidence in the direction of our business. Thank you all for participating today. Now I'm going to hand over the meeting to Nic and begin the Q&A session.

Q & A session

William Kingsley Crane (Canaccord Genuity):

Congratulations on your landmark results this quarter. Bill, you mentioned that AI Labs are building custom systems around their Git provider because Git isn't designed for agent-scale operations. Since then, you've been restructuring source code management to better serve agents. I'd like more details on this strategy. Is this for all customers? Does this allow you to do more things you might not have been able to do before in AI native or lab customers?

Bill Staples:

Thanks Kingsley. This quarter's results are a real testament to what we've always believed GitLab could achieve. We are now focusing on systematically implementing this opportunity to repeat this performance. In terms of product roadmaps, the need for AI has really brought good luck and exciting opportunities for GitLab. As you mentioned, one of these is the next generation Git product. Let me put that in the background because we launched our first consumer product, the Duo Agent Platform, earlier this year. It has been in the market for two quarters and has performed very well.

Last month, in August, we also launched Secrets Manager and Dedicated Runners, which are our second and third new consumer products this year. Additionally, GitLab Orbit (our knowledge graph) went into public beta in the second quarter. It really is GitLab's secret weapon because we connect code, questions, MR, pipeline, and security discoveries, so agents and humans can get higher quality answers and proxy results at a lower cost. We mentioned on the conference call that early beta adoption is very promising. Over 2,200 organizations have enabled it, a 70% increase in 4 weeks, and 80% of queries come from external tools such as Claude Code and Codex. They are driving more consumption of the GitLab platform.

The other one you mentioned is the next generation Git product. As Git experts, we are one of the leading contributors to this project. We're now rearchitecting the Git infrastructure to scale about 100 times larger than humans ever needed. This is important because agents run at machine scale, and an engineer or builder may call tens or even hundreds of agents to complete a specific task. In addition to the next generation of Git, I'd like to highlight another product roadmap project, our product management product, which is currently in private beta, but we expect it to go into public beta this quarter. It extends our platform to allow customers to store, version manage, govern, and sign binary files and products to complete the software supply chain.

We already have their source code, we build and test the source code, and help them deploy it. With product management, we'll also help them store these products so they can have an end-to-end secure software supply chain within GitLab. This is one of today's top concerns for businesses — how to trust their software supply chain in an age of agents that perform a lot of work. So DAP is our proxy layer. Underneath, we have these new consumption-based products, including the next generation Git, GitLab Orbit, and Product Management, as you asked, that will all enter the market within the next year, providing the ability to help software engineers and their agents operate at a higher scale. It was a very exciting time. Maybe this is also a good time for me to announce the GitLab Transcend event — which will take place in about 6 weeks. We hope you'll stay tuned for more information on the future roadmap.

Matthew Hedberg (RBC Capital Markets):

Congratulations to the company for such impressive results. My question is for Bill or Jessica. The seat growth is very exciting. I think combined with optimism about Flex, the feeling is likely to be more durable. I'm wondering when it comes to seats, obviously developers are the focus. But can we talk about opportunities for non-developers? I think we all think that might also be an important driver. Can we talk about that too?

Bill Staples:

Of course. AI is proving to be GitLab's true lasting structural tailwind, not just for seats, but for every component of our growth algorithm. Maybe this is also the right time to briefly mention it. This quarter's newly released investor letter, written by Jessica and I, gives you an idea of how we see GitLab's future growth algorithm. I'll quickly summarize and cover your questions about seat opportunities. The growth algorithm involves three components. First, more customers. Among more customers, there are more builders than ever before. We believe the opportunities for GitLab are huge here.

We don't have enough penetration in the global market, and we've been building a stronger competitive position, as evidenced by this quarter's results. We added more than 1,700 first orders this quarter, more than double what it was a year ago, and the net ARR of the first order increased by nearly 40%. Increased demand for seats is also included in the increased number of new customers. AI has significantly enabled anyone to become a builder. I'm guessing many people on the phone today have probably tried AI tools and are able to create dashboards or apps, with the code written entirely by agents.

Then this code must be stored somewhere, and if it belongs to an enterprise, it must be governed by the organization, and it must meet the organization's compliance and security standards, which is what GitLab does best. So AI is creating a structural tailwind for more customers and more builders in each of our customer accounts.

The second part of our growth algorithm is more products. You've heard me talk about the exciting product roadmap in response to Kingsley's questions. This is an important part of our growth strategy, as we are surpassing the business of over $1 billion in annualized revenue (which is still growing strongly) achieved through platform seating capacity alone. This part of the growth algorithm works, and there is evidence this quarter. For example, we've shared that secure warehouses grew by 60%, code push increased by 50%, and CI/CD pipelines grew by more than 40% year over year. This is our core platform at work.

In addition to the core platform, the introduction of consumption models and credit is also exciting. This quarter's evidence includes a 50% month-on-month increase for Duo Agent Platform. Finally, the third part of the growth algorithm is to unlock each customer's spending. This is exactly what Flex does because it enables frictionless use of seats and credit through a single commitment, and customers can choose how to consume the platform each month to solve their specific problems.

Jessica mentioned that in the last 6 weeks of the second quarter, more than 130 customers chose Flex, promising over $20 million, and our paid CRR increased from $15 million at the end of the first quarter to over $40 million at the end of the second quarter due to Flex. Looking back, AI is drastically lowering the threshold for building software. Anyone can be a builder. Customers need GitLab more than ever, and we've been seeing this pattern for several quarters. Thanks for asking.

Sanjit Singh (Morgan Stanley):

Congratulations on this fantastic quarter. You have a lot of work going on when thinking about the evolution of business models and pricing models. Looking at the bigger picture, Bill, is this framework still relevant when considering the Ultimate and Premium editions? You're growing your seat, and it sounds like the non-developer community might be a structural driver. So will the model be reduced to seats plus additional monetization vectors for these product add-ons? I'm sure there will be more in the next few years. So I want to think about the evolution of the business model and pricing model from here on a larger level.

Bill Staples:

Thanks Sanjit. Seats are definitely at the core of the business, and we're excited to continue to offer premium and flagship capabilities, which have brought in over $1 billion in annualized revenue and continued strong growth. But to take the problem to a higher level, I think how investors should view our future growth is to understand the benefits Flex has for customers and GitLab. Let me expand on the GitLab strategy because it's central to understanding future business models.

We launched Flex in the second quarter, and I've highlighted some of the early results: 130 customers, over a $20 million commitment. You might be asking why are we launching it? What is driving customers to adopt so fast early? The benefits to customers are clear. Flex represents more value per dollar because every month they have the opportunity to move unused capacity from shelved software to products that create the most value. For example, in the face of the new demand to provide GitLab to non-engineering users, they can move capacity to more Premium or Ultimate seats. Additionally, these users may require the Duo Agent Platform to provide agents to assist in their software lifecycle work, and they can allocate reservations on the Duo Agent Platform.

Second, it also allows customers to adopt new products without having to go through a new contract cycle or obtain a new budget from procurement. This is one of the main advantages of the Flex model because in the Flex portal, new products appear, they can allocate reservations, and even set budgets to control expenses. Finally, it also allows customers to seamlessly expand usage even if they exceed their promises. So if they see demand, they can configure more seats and credits as needed, and charge monthly if they exceed the promised portion.

For GitLab, the benefits are also clear. First, we believe Flex will help us further improve our already healthy retention rates. It allows us to include any unused capacity in our Flex commitment and allows customers to reallocate it as needed, increasing our already over 90% gross retention rate. This also helps us increase our improved sales capacity. I mentioned a 30% increase in production capacity and a 10% increase in productivity per capita this quarter.

Sales representatives can now spend more time helping customers realize value and spend less time on contract negotiations, adjustments, and purchases. Finally, it also represents a new downturn in growth, as customers can unlock usage as needed, and we're billed instantly to get another monetization boost. So the business model strategy is clear. We want customers to switch to Flex because it gives them more value, reduces sales and contract friction, and enables on-demand consumption. We started this year with a 100% seat subscription business. Now we're focusing on ending the year, as the core platform continues to grow, exiting the year with a meaningful and expanding consumer business and moving towards the second billion as we monetize the work done by humans and agents.

Ethan Drake Weeks (Piper Sandler)

I'm Ethan asking questions for Rob. Bill, I'd like to ask how much of this quarter's strength came from improved internal execution, and how much of it came from an acceleration in the overall demand environment as all organizations began to really think about the toolchain they could provide to developers?

Bill Staples:

Great question. As we said, the largest gross reservation quarter in the company's history. Net ARR increased by more than 40% year over year, the second-highest growth quarter in the past four years. I think this is the result of multiple quarters of investment, and a tailwind on multiple dimensions. As Jessica mentioned, there was a significant rebound in the public sector. This is a strong sign after several quarters of poor performance due to factors such as the government shutdown. We're also seeing the AI tailwind driving large transactions. Jessica mentioned that transactions of $500,000 and above increased by more than 150% year over year.

Our biggest customer has deepened their commitment to GitLab. These promises cover seats and credit for our new consumer products. Beneath these, we do see AI starting to become an enduring tailwind for GitLab. It really affects all three levers of the growth algorithm: more customers, early adoption of new products (as reflected in GitLab Orbit), and more consumption. You should consider net ARR as an output indicator for growth algorithms because it takes into account the effects of these three dimensions superimposed on each other.

Koji Ikeda (Bank of America Securities):

The results and response this time were excellent. With so much focus on Flex over the next few years, there are many parts of the financial model that will change. So what's the best single metric to measure Flex's performance? Another quick question about the guidelines: without Flex, would this year's guidelines increase by $13 million? In other words, is the guide actually underestimating business performance due to Flex's time shift?

Jessica Ross:

Thanks Koji. Let me take a step back and talk about how we think about guidance this quarter. First, Flex has only been on the market for 10 weeks, so it's still too early to be included in the guidelines accurately. At the same time, we were pleasantly surprised by customer demand and Flex's potential impact in the second half of the year. Therefore, when considering guidelines, we do not want accounting mechanisms to distort guidance discussions or investors' views on the potential health of the business. We have adopted two key principles: consistency and transparency.

First, it's about consistency. We want to be guided the same way throughout the year. Therefore, we did not include Flex's accounting point-in-time impact in our guidance at the beginning of fiscal year 2027, and kept the approach consistent rather than changing direction mid-year. Second, with regard to transparency. In line with our commitment to transparency, we provide a few key data points to help you model.

First, the heuristic data we mentioned in our statement: for every $50 million converted from managed customers to Flex, the revenue recognition impact of approximately $5 million was delayed from FY2027 to future periods; and the biggest impact in FY2027 was $13 million. In the future, we will continue to clearly quantify Flex's accounting point-in-time impact every quarter, so you can differentiate between accounting effects and potential business performance.

We're committed to that. Regarding that $13 million, I'd like to emphasize that our business has a high level of visibility. Therefore, when calculating this amount, we are confident in its accuracy because, firstly, we understand the self-managed renewable pool for the second half of the year; second, we have clear visibility into the channel.

Bill Staples:

Koji, on the other part of your question, measurement metrics, the paid CRR metrics we introduced last quarter and updated this quarter (over $40 million) are the best way to understand the flow of money through our consumption model. Paid CRR includes Flex promises, credit commitments, and pay-as-you-go usage. All three are within the metrics. It doesn't include promotional use, trial, or other unpaid use. As mentioned in our stated statement, we have set an ambitious goal of achieving over $100 million paid CRR by the end of this fiscal year.

Radi Sultan (UBS Investment Bank):

Very good. Now that you have some data points for converting to Flex, when evaluating the initial Flex deal size of those conversions, are there a higher tendency to scale up transactions because of increased flexibility and new product consumption? I'd like to know how much is just a transformation of form, and how much includes anticipated new product consumption or seat expansion.

Jessica Ross:

Yes, we're excited about it. It's been about 10 weeks since the launch, and it's still too early to tell. But I tend to go deep into strategy, does Bill have anything to add?

Bill Staples:

From a sales strategy perspective, this is an opportunity to do more than one thing. First, some customers are early adopters and are already testing our beta products. Flex gives us a way to not only renew their seat subscriptions, but also convert commitments into Flex agreements to create space to use new products as soon as they're officially available. As long as we can create the space promised by our customers, of course we want to use it. It also lets us focus on customers who had unused capacity because they were previously forced to promise full-year seat forecasts. Instead of having them shrink their accounts, they should maintain or even increase their commitments and redeploy their budgets to new consumer products.

So it helps us both in terms of growth and mitigation of potential downsides, and we're happy to deploy anywhere where we can agree with our customers on GitLab's promised value.

Derrick Wood (TD Cowen):

Congratulations to all of you too. Bill, can you talk about the competitive landscape, including new AI native companies and traditional competitors? Where do you think you're currently better at competing or getting a share?

Bill Staples:

Great question. The competitive dynamics have been stable this quarter. We still have a major competitor. With respect to our position relative to this competitor, I think we are stronger than ever. They are struggling with reliability and meeting customer needs for security, trust, etc. in the new agent era. As a result, we saw a higher win rate, which was reflected in our numbers: 100% increase in initial orders and over 40% net ARR expansion. Regarding AI native companies, I think this is actually an opportunity. They create a smooth wind for us. They greatly simplify anyone's ability to create code, and all code requires GitLab.

So now we see that, as I said, customers contacted us saying they wanted more GitLab seats because non-engineers needed access to the platform. And those users who need a seat will eventually need credit to use our consumer products. So we're happy to work with any proxy coding tool because we see it as a smooth breeze for our business.

Nicholas Altmann (BTIG):

I'd like to follow up on Radi's previous question. How much of the interest in Flex or the $100 million CRR target is driven by newer products such as Duo Agent Platform, Orbit, Secrets Manager, and Dedicated Hosted Runners? Because I don't think all of the things you mentioned are incremental revenue, but some of these new products should be incremental. So can you provide some colors and to what extent are these new products driving interest in Flex or the $100 million CRR target?

Jessica Ross:

As for the financial part, it is still too early to judge. But let Bill talk about the interest he sees so far.

Bill Staples:

Yes, we have only 6 weeks in Q2, 130 customers and $20 million are captured data. But I think it's important to take a step back and understand the strategy because even when customers switch to Flex and use promises on their seats, this changes the nature of the relationship. This is an important part of the strategy because the demands of today's software engineering teams are changing dramatically weekly, monthly, and quarterly. With the advent of new tools, new technology, and new models entering the market, customers want to allocate expenses flexibly as demand changes. If the current seat subscription model fits their needs, there's no need for Flex.

There will be no demand. We're not going to see this rapid adoption. Obviously customers are seeing the benefits of it; they may have used previous seat subscription funds to fund the Flex agreement, but they see the value proposition and flexibility to accommodate our new product entering the market. Of course, part of the driving force comes from our current consumer product Duo Agent Platform (launched in January), as well as our emerging products Secrets Manager and Dedicated Hosted Runners, which just launched in August. But we're already using beta products on a fairly large scale. I think customers are also looking to the future and appreciate the flexibility we provide through the Flex agreement.

Zachary Schneider (Robert W. Baird)

I'm Zach asking questions for Srini. My question is about gross profit margin. Obviously, as businesses begin to support more AI and usage-based workloads, while credit also increasingly monetizes human and non-human activities, gross margins have declined. The question is how much of the recent gross margin changes are actually related to AI reasoning and infrastructure rather than other factors? As agent usage grows, what gives you confidence that pricing, model efficiency, Orbit, and the ability to route workloads across models can drive attractive incremental economics without creating a less structured margin revenue mix?

Jessica Ross:

Yes, thanks for asking. As for the gross profit margin for this quarter, there is not much change from what was previously described. Our dedicated SaaS-specific contribution was approximately 34%, up 36% year over year. This is in line with what we said at the time of the IPO — 22% at the time. Therefore, we expect gross margins to decline over time. Looking ahead, this year is a year of investment and execution. We are interested in investing in consumer products and driving customers to shift pilots to production. This is what you see. Bill, any additions?

Bill Staples:

Yes, you mentioned the token and AI optimization potential, and about how GitLab views original AI products. Let me talk about this a little bit because I think we're still in the very early stages, and we actually have a few structural advantages over typical AI-native tools where almost all monetization is token-based. The beauty of the Duo Agent Platform is that we deliver it in a cloud-agnostic, model-agnostic manner, which means we support all models, including open source open weighting models, and allow customers to deploy and use in any cloud, including, for example, the isolated data center environments they run.

This means that for many of our customers, token or inference costs are not included in the GitLab agreement. They pay for access to the platform, for the work, context, governance, and auditability done within the platform, rather than for inference. These are all high-margin products. Furthermore, we are in the very early stages of AI adoption. There are simple things on the roadmap that we and others will gradually advance to allow dynamic model routing, model optimization, and provide high-quality proxy results in a more cost-effective manner. These are also what we want to provide our customers with the best experience and price-value performance.

So I encourage you to think about gross profit margin in a slightly different way, rather than a typical AI-native company. As Jessica mentioned, many of the gross margin changes in the business were driven more by a hybrid SaaS shift than early AI adoption.

Lucky Schreiner (D.A. Davidson):

Maybe that customer story about increasing their monthly commitment by 10x is mostly driven by usage growth? How much of this comes from vendors integrating and replacing other tools? How well do you think this expansion model fits within your customer base?

Bill Staples:

Yes, it was one of the top 20 banks in the US, and their previous commitment to the Duo Agent Platform was quite moderate. Once we started rolling it out and seeing value among its engineers, we increased our commitment tenfold this quarter, and we want to replicate it on every customer. We believe the value of the Duo Agent Platform exists and is complementary to other AI-native tools that focus more on coding. So we're very excited about this Lighthouse customer. We already have several customers who spend several times the price of their Premium or Ultimate seats on credit. It's a pattern we're trying to learn, optimize, and replicate as much as possible.

Nic Edwards:

OK, that concludes this conference call. Thank you all for attending our second quarter conference call. We are very excited about the results delivered this quarter and thank you for participating. We'll see you soon at the next investor conference.