GitLab IPO Filing: Key Insights and Analysis

GitLab's Public Filing: Initial Observations

As the work week concluded, GitLab, a prominent DevOps company, submitted its initial public offering (IPO) filing. It is crucial to analyze the company’s S-1 document and formulate preliminary assessments before proceeding.

Competition and Market Position

GitLab operates within a competitive landscape, directly challenging GitHub, which was acquired by Microsoft in 2018 for $7.5 billion.

A History of Transparency

The company has consistently distinguished itself through its commitment to a remote-first work model. Furthermore, GitLab has been remarkably transparent regarding its key performance indicators, a practice uncommon among privately held, high-growth companies.

For instance, GitLab previously announced a target IPO date of November 18, 2020, publicly outlining its ambitions. The company also openly shared its progress, including surpassing $100 million in annual recurring revenue.

Funding and Valuation

GitLab’s IPO was anticipated for some time. Its most recent primary funding round saw the company raise $286 million, resulting in a post-money valuation of $2.75 billion, according to PitchBook data.

Additionally, a secondary transaction earlier in the year valued GitLab at $6 billion, involving $195 million in shares changing hands.

Analyzing Growth and Potential

We will now examine GitLab’s growth trajectory, its scale prior to the IPO, and its key SaaS metrics. This analysis will help determine whether the company can exceed its latest private market valuation.

The goal is to assess if GitLab’s performance justifies its current valuation and future growth prospects.

GitLab's S-1 Filing

GitLab is planning an initial public offering (IPO) on the Nasdaq Stock Market, utilizing the ticker symbol “GTLB.” The preliminary S-1 filing indicates a potential capital raise of $100 million, a figure subject to revision as the company establishes its initial share price range. Notably, GitLab’s fiscal year concludes on January 31st, resulting in quarterly reporting periods shifted by one month from the standard calendar.

Let's examine the key financial data.

For the fiscal year concluding January 2020, GitLab reported revenues of $81.2 million. Gross profit reached $71.9 million, while the company experienced an operating loss of $128.4 million. The net loss for the same period was slightly higher, totaling $130.7 million.

Subsequently, in the fiscal year ending January 31, 2021, GitLab’s revenue increased by approximately 87% to $152.2 million compared to the previous year. Gross profit also saw a rise of around 86%, reaching $133.7 million. However, the operating loss expanded by nearly 67% to $213.9 million, and the net loss amounted to $192.2 million.

This reveals a rapidly expanding SaaS company with relatively stable gross margins, consistently around 88%. However, this growth has come at a significant cost, as GitLab’s expenditures on sales and marketing exceeded its gross profit in the past two fiscal years.

During the six-month periods ending July 31, 2020, and 2021, GitLab’s revenue grew by 69%, increasing from $63.9 million to $108.1 million. Over this same timeframe, the company’s operating loss decreased to $55.9 million from $61.0 million. Conversely, the net loss widened to $69.0 million from $43.5 million, partially attributable to favorable currency exchange impacts in 2020 and less favorable effects in 2021.

A detailed income statement is provided below for verification of the reported figures:

Considering GitLab’s recent performance, the reduction in operating loss over the last two quarters is a positive indicator. It suggests a transition from a phase of heavy investment towards a focus on profitability, and a move towards achieving break-even status.

Specifically, in the two quarters concluded on July 31, 2021, GitLab’s spending on sales and marketing was lower than its gross profit. This represents a modest, yet significant, step towards net income.

This shift in the relationship between the company’s expenditures and gross profit is likely a key factor in GitLab’s decision to pursue an IPO at this time. The company demonstrates robust growth alongside initial progress in controlling losses, potentially attracting investors who previously may have been hesitant.

GitLab's Business Model: SaaS and Subscriptions

The company articulates that its core business revolves around the sale of subscriptions, offered through both self-managed and SaaS (Software as a Service) delivery methods. This indicates a contemporary software enterprise employing a modern revenue strategy.

Consequently, the reported losses are potentially less concerning than they would be for a similarly sized organization utilizing a different operational framework. Current investor sentiment highly values SaaS revenues.

This positive valuation allows for the acceptance of incurring losses to stimulate growth in recurring software income.

Understanding Net Retention Rate

A crucial element in evaluating GitLab’s performance is its net retention rate. This key performance indicator (KPI) measures the increase in revenue generated from existing customers over a specific period.

Successful enterprise software companies typically demonstrate net retention rates exceeding 100%. A rate surpassing 115% is considered favorable.

Rates above 125% are deemed exceptional, signifying strong customer loyalty and expansion.

GitLab's Definition of Net Retention

GitLab provides a specific definition of this metric, which has been highlighted for clarity:

This definition appears sufficiently robust to ensure accuracy and reliability.

The resulting data is remarkably strong:

Impressive Growth and Future Analysis

A slight decrease in these figures over time is anticipated. However, GitLab’s recent net retention rate exceeding 150% remains exceptionally impressive.

This achievement raises questions regarding the company’s substantial investment in sales and marketing, particularly given its strong performance in upselling to existing clients.

Further investigation into these aspects of GitLab’s operations, along with details concerning its share structure, will be addressed in a subsequent analysis.

Valuation Assessment

Let's examine the company's potential worth. During the quarter concluding July 31, 2021, GitLab reported revenues totaling $58.1 million, representing a 69% increase compared to the same quarter in the previous year.

This performance translates to an annualized revenue run rate of $232.5 million. GitLab’s growth trajectory is comparable to that of companies like Datadog, Twilio, and CrowdStrike, as indicated by the Bessmer Cloud Index.

These comparable companies currently have revenue multiples of 47.2x, 21.2x, and 44.0x, respectively. Twilio’s comparatively lower multiple is likely attributable to its lower gross margins when contrasted with other Software-as-a-Service (SaaS) businesses.

Considering GitLab’s robust gross margins, we can reasonably exclude Twilio’s valuation from our assessment. A revenue multiple of 45x applied to GitLab’s annualized run rate appears justifiable under current market conditions.

Applying this multiple results in a valuation of $10.46 billion for GitLab. This figure exceeds the company’s final private valuation of $6.0 billion, suggesting a potential for growth beyond its previous assessment.

However, it’s important to note that we are not definitively stating that the company is valued at ten billion dollars. Investor sentiment regarding the company’s rate of losses or any deceleration in its growth could influence its valuation.

Such factors could lead to a public market valuation closer to its previous private price. Nevertheless, based on the present market landscape, GitLab demonstrably holds significant value. Further analysis will be provided on Monday!