TA-002-P tricks - HashiCorp Certified: Terraform Associate 2023 Updated: 2024

HashiCorp (NASDAQ:HCP) has become an integral part of the every-evolving cloud computing landscape. The company's multi-cloud and open-source automation tools have given it a clear edge in an increasingly competitive market. As cloud computing continues to gain traction in the software world, HashiCorp is uniquely positioned to capitalize on the cloud trend.

While HashiCorp has seen its valuation drop over the past few years, the company has started making steady progress.

Cloud-Agnostic Approach

The cloud industry is an increasingly multipolar industry, with a number of large players like Amazon's (AMZN) AWS, Microsoft's (MSFT) Azure, and Alphabet's (GOOGL) GCP dominating the space. The industry is no longer singularly dominated by AWS, which means that platform adaptability is more important than ever.

HashiCorp's cloud-agnostic and multi-platform approach is perfect for this sort of multipolar environments. The company's popular tools like Terraform, Nomad, and Vault can seamlessly integrate multiple cloud platforms at once. A single Terraform module, for instance, has the ability to incorporate both AWS and Azure providers. This is something that platform-specific infrastructure-as-code tools like AWS's CloudFormation cannot, or have trouble doing.

HashiCorp's tools allow customers to be more adaptable in the rapidly shifting cloud computing space by helping avoid vendor lock-in. If, for instance, a company that was previously a majority AWS shop decided to switch to Azure for pricing reasons, the company's DevOps team could easily make the switch with HashiCorp tools. However, if the company's DevOps teams were using vendor-specific tools, they would have to learn an entirely new set of tools in order to effectively use Azure's cloud platform.

The cloud computing space continues to grow at a rapid rate, and is no longer dominated by a single player.

Strong Community of Developers

The cloud-agnostic and open-source beginnings of HashiCorp's tools have allowed the company to gain a relatively large community of developers that are constantly looking to Strengthen upon them. While HashiCorp is shifting away from open-source, the company still has a vibrant community of developers that are constantly giving feedback on how to Strengthen their products.

This feedback cycle allows HashiCorp to stay ahead of the curve by continually improving its tools to meet new demands. The multi-cloud nature of HashiCorp tools allows for a larger community as developers utilizing any of the major cloud providers have the ability to use HashiCorp products like Terraform. The continual feedback from its users make it far easier for HashiCorp to iterate on its products.

Financials Remain Robust

HashiCorp's financials are improving at a steady rate. The company reported a Q3 revenue of $146.1 million, which represents a 17% YoY growth rate. The company is also experiencing significantly improved profitability at a non-GAAP net income of $5.6 million during the quarter. The company's robust top-line growth and path towards profitability is a promising sign for investors.

HashiCorp is competing against giants like AWS and Azure, all of whom have their own cloud computing tools. As such, HashiCorp growing profitability showcases the company's ability to thrive in such a competitive market. What's more, HashiCorp's tools continue to gain wide-adoption and have a good chance of becoming the standard devops tools in the cloud industry.

Significant Challenges Remain

As was previously mentioned, it is easy to forget that HashiCorp is competing against cloud computing giants themselves. These company all have their own cloud computing tools that they would like their users to use. In fact, these companies are constantly improving upon and pushing their own tools so that they can build their own walled garden of sorts.

Fortunately for HashiCorp, the cloud computing industry is becoming increasingly fragmented, which means that no matter how good platform-specific tools like CloudFormation become, demand for cloud-agnostic tools will likely always remain higher. Even if many cloud customers are vendor-locked for a specific period of time, they always have the option to change platforms in the future. Furthermore, many customers already use a combination of cloud-computing platforms for their workloads.

Conclusion

HashiCorp's compelling combination of cloud-agnostic tools, a strong developer community, and a customer-focused agenda make it a strong competitor in the fast-growing cloud-computing space. Given how large the cloud-computing space is expected to become and given HashiCorp's increasingly important role in this space, the company still has more room to grow at its current valuation of $4.49B.

Investment action

I recommended a buy rating for HashiCorp (NASDAQ:HCP) when I wrote about it the last time, as I expected growth to reaccelerate as HCP moves towards FY25, where the economy should start to recover. Importantly, I believed that the long-term secular tailwind for HCP remained strong and that HCP was well positioned to ride on it. Based on my current outlook and analysis of HCP, I recommend a buy rating. My view remains the same for HCP, in that the secular tailwind remains strong and HCP is poised to return to 30+% growth eventually. I don’t think the weak 4Q24 revenue guidance is a good representation of long-term growth potential, as I believe management is being conservative due to the macroeconomic situation.

Review

HCP reported 3Q24 revenue growth of 16.6% to $146.1 million, beating the consensus estimates of $143.2 million. The bulk of HCP’s revenue, subscription revenue, grew 18% to $141.9 million. Better-than-expected top-line growth was accompanied by an expanding margin profile. Wherein, non-GAAP gross margin expanded by 61bps to 85.8%, and non-GAAP operating loss came in at -$10.5 million (-7.2% margin), which was well above management's guidance for -$23 to -$26 million and a -17% operating margin.

The burning question to address is why the HCP share price dropped by 20% post-Q324 results. I believe it was primarily due to the revised FY24 guidance. While FY24 guidance was revised upwards, the 4Q24 revenue growth painted a weak growth outlook for FY25. Specifically, 4Q24 revenue was guided to $149 million, or 10% growth at the midpoint, while FY24 was guided to grow at 21%. Naturally, the bugging question would be, “Is the base growth rate 21% or 10% for FY24?”. I believe this uncertainty has led to many investors pulling their capital out of the stock as they await further validation. Suppose 10% is the base growth rate to think about when modeling HCP FY25 performance. It is likely that consensus will start to revise their estimates downward, impacting valuation. FY24 exit growth rate aside, HCP also reported certain metrics that are quite negative. For instance, pro-forma CRPO is essentially flat sequentially at $420.8 million in 3Q24 vs. $420.3 million in 2Q24, which is a degradation in performance when compared to the 5% sequential growth last year (3Q23 vs. 2Q23). Cloud platform subscription revenue sequential growth also decelerated by 300bps to 8%, reflecting a weaker sales trend for HCP’s cloud-based business. The last nail in the coffin, in my opinion, was management's decision to hold off on making any remarks—directional or otherwise—about FY25 revenue guidance until its Q4 earnings call.

That said, I am willing to play devil’s advocate and believe that the weak 4Q24 guidance is likely due to the current macroeconomic environment, which is still murky in outlook. My take is that management is most probably being conservative in their estimates. Once the macroeconomic environment recovers, which seems like it is stabilizing, growth should bounce back to HCP’s historical 30+% growth rate. Even though the macro environment will probably slow growth in FY24, new customers are paving the way for reacceleration in the future as HCP executes its land and expand strategy. Indeed, overall customer additions increased from 64 in 2Q24 to 137 in 3Q24, with a particularly noteworthy improvement in HCP additions of customers with more than $100,000 in ARR, which increased from 21 in 2Q24 to 26 in 3Q24. If we layer these datapoints with management commentary that they are seeing higher deal volumes offset by smaller land and expand activity, it suggests that there is still a long runway for growth as HCP “expands” in these newly acquired customers.

Deal volumes, as Navam indicated, are as high as ever. Our win rates are as consistent as ever and we're not seeing any changes to the discounting behavior in our field. We're just seeing smaller land and expand activity from our customers. 3Q24 call

I would also emphasize that the growth runway (customer additions) is still incredibly long for HCP. There are multiple tailwinds at play here. Firstly, my view is that more and more companies are going to adopt multi-cloud infrastructures, and this should drive demand for HCP products. Secondly, as the penetration of object storage services [OSS] increases, it bodes well for HCP as it will make HCP stickier, putting it in a better position to raise prices.

The Accenture folks, the GSIs is a good proxy, they have a very focused hybrid cloud and automation practice that, again, continues to think HashiCorp. Because the OSS is everywhere, they will build a practice around our technology, which will help us with large customers. HCP Financial Analyst Day

Thirdly, I believe HCP can continue to churn out new solutions to make the lives of developers and coders easier. This goes back to the roots of HCP, which is a developer-centric company with deep knowledge of the user community. Given the growing influence of developers in corporate strategy and operations, I see this as a significant advantage. As HCP occupies more and more mind share among developers, they will be one of the few vendors of choice when businesses need to deploy any related solutions. Take, for instance, the new product, Boundary (HCP’s Privilege Access Management), which is already gaining recognition and is adding new revenue streams to HCP’s platform. Furthermore, the more HCP products businesses use, the sticker HCP becomes as it is more tightly integrated with the business workflow processes. In short, HCP becomes even more mission-critical.

Valuation

The management reiteration of FY24 guidance pretty much solidified my view that HCP will grow revenue by a low-20% percentage in FY24. However, I revised my FY25 growth to 15% (half of the 30% historical growth rate) to reflect the macroeconomic uncertainty (management-guided 4Q24 exit growth rate of 10%). My view of growth recovering to 30% remains the same for FY26, as I believe the strong secular tailwind will continue to drive growth once the economy recovers. A slight adjustment to my model is that HCP should trade at 7.3x forward revenue. With 3Q results out, the market has adjusted infrastructure peer valuations upwards to a median of 7.3x. Comparing HCP's operating metrics to peers’ medians (revenue growth, gross margin profile), I believe HCP should continue to trade at the same multiple.

Risk and final thoughts

LTM net dollar retention rate came in at 119%, which is a 500bps deceleration from the 124% we saw in 2Q24 and 134% last year. While I mentioned that this is likely due to the weaker “expand” motion, it could be an emerging red flag of customers churning for unknown reasons. If this metric continues to decline, it would impact growth as it suggests HCP is not able to upsell or cross-sell or that more and more customers are churning. My concluding thoughts are that HCP remains a buy despite the accurate market reaction to the weak 4Q24 guidance. Despite concerns regarding the deceleration in certain metrics, I maintain a positive outlook on the long-term growth runway, driven by multi-cloud infrastructure adoption, increased OSS penetration, and continuous innovation for developers.

Cloud infrastructure automation company HashiCorp Inc. delivered strong third-quarter financial results today that topped analysts’ expectations, with its revenue up more than 16%.

But its stock plunged more than 20% after-hours on the back of somewhat disappointing guidance, which was only in line with Wall Street’s estimates.

The company reported earnings before certain costs such as stock compensation of three cents per share, beating the Street’s estimate of a four-cent-per-share loss. Revenue came to $146.1 million, ahead of the $143.3 million forecast. But despite beating expectations, the company remains unprofitable, racking up a net loss of $39.5 million for the quarter, though down from a $72 million net loss one year earlier.

Looking to the fourth quarter, HashiCorp said it sees revenue of between $148 million and $150 million, the midpoint of which is squarely in line with the Street’s forecast of $149 million. The company also forecast earnings of between break-even and two cents per share, ahead of the Street’s view of a penny-per-share loss.

HashiCorp has been growing fast for a number of years thanks to the rise of the software and applications that operate as the beating heart of every enterprise today. Building software is complex and time-consuming, meaning there’s a big opportunity for anyone who can make that task easier.

The company sells automation software for enterprise technology infrastructure. Its main product is Terraform, which enables “infrastructure as code,” where system administrators write scripts to automate the configuration of cloud and on-premises systems. Terraform makes life much simpler than the old way of doing things, which involved navigating various consoles to configure systems manually. It eliminates the need to configure and adjust hundreds of settings, helping administrators save hours of work.

HashiCorp Chief Executive Dave McJannet (pictured) said in a statement he was pleased with the company’s results, saying they demonstrate “consistent execution” despite the ongoing macroeconomic challenges it faces.

Investors are no doubt concerned, however, by the company’s slowing revenue growth. Until recently, HashiCorp had regularly delivered growth of more than 20%, but it isn’t doing so now. One reason for that might be that it’s struggling to squeeze as much money from its customers as it was doing in the past. It reported a net revenue retention rate of 119% in the quarter, down from 124% in the prior quarter. NRR is a metric that measures how much the company’s revenue from its existing customer base grows.

The company is at least adding new customers. It ended the quarter with 4,354 total customers, up from 3,648 one year earlier. Of those, 877 generate more than $100,000 in annual recurring revenue, up from 760 a year ago.

Overall, HashiCorp enjoyed a very good quarter, with its revenue growing thanks to the enterprise push to become more software-driven, said Constellation Research Inc. analyst Holger Mueller. “HashiCorp made good progress on its path to profitability during the quarter, practically halving its net loss,” the analyst said. “It’s also encouraging to see the rising adoption of AI in the company’s portfolio, as generative AI has the potential to be both an enabler and a disruptor. The fourth quarter should see HashiCorp achieve a new miletone, breaking the half-a-billion annual revenue barrier for the first time.”

During the quarter, HashiCorp announced its intentions to acquire a company called BluBracket Inc., which develops software that can identify and fix insecure code before it’s launched. The software is said to be especially good at catching so-called hardcoded secrets, which include any passwords that an application may store, encryption keys and the authentication tokens that workloads use to verify one another’s security before exchanging data.

HashiCorp said the plan is to integrate BluBracket’s software with its open-source secret management offering, called Vault. Once that’s done, Vault will be capable of not only storing secrets but also ensuring that they’re not accidentally hardcoded into the software that uses them.

Photo: HashiCorp/YouTube

© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

HashiCorp has released v2 of their Terraform Cloud Operator for Kubernetes. The Operator enables managing Terraform Cloud workspaces through a single Kubernetes custom resource. The release adds support for multiple customer resources, setting the watch scope to specific namespaces, improved synchronization, and newly exposed metrics.

With the Terraform Cloud Operator for Kubernetes, it is possible to provision infrastructure, both internal and external to Kubernetes, directly from the Kubernetes control plane. As noted by John Houston, senior software engineer at HashiCorp, and Vishnu Ravindra, product manager at HashiCorp, "[p]latform teams can now provide application developers with Kubernetes-native workflows, while ensuring the use of approved Terraform modules."

With the version 2 release, there are now multiple custom resources, each with its own separate controllers for different Terraform Cloud resources. It is now possible to modify the number of worker threads assigned to each controller. By default, each controller has one worker, but more can be added to increase the number of custom resources the controller can handle concurrently.

The Operator can be used to manage Terraform Cloud agent pools and Terraform Cloud agent tokens via the AgentPool. Module is used to implement API-driven run workflows and Workspace can be used to manage Terraform Cloud workspaces. The following example creates an agent pool named agent-pool-development and generates a token named token-red:

---
apiVersion: app.terraform.io/v1alpha2
kind: AgentPool
metadata:
  name: this
spec:
  organization: kubernetes-operator
  token:
    secretKeyRef:
      name: tfc-operator
      key: token
  name: agent-pool-development
  agentTokens:
  - name: token-red
  agentDeployment:
   replicas: 1
  autoscaling:
    targetWorkspaces:
    - name: us-west-development
    - id: ws-NUVHA9feCXzAmPHx
    - wildcardName: eu-development-*
    minReplicas: 1
    maxReplicas: 3

When run, the token-red agent token is stored in the my-agent-pool-token-red Kubernetes secret. The autoscaling portion enables the operator to ensure at least one agent pod is running with a maximum of 3 based on resource needs. This assessment is done by monitoring the load of the workspaces listed under targetWorkspaces.

The Operator now manages a Terraform Cloud client for each Custom Resource. With this improvement, a single Operator deployment can be used across multiple Terraform Cloud organizations.

The release also exposes standard Prometheus format metrics for each controller available at the standard /metrics path over HTTPS port 8443. The Operator exports all metrics provided by the controller-runtime. A full list of exposed metrics can be found within the Kubebuilder documentation.

The release also adds a new --namespace option to focus the Operator's watch scope to specific namespaces. The new --sync-period option improves the synchronization between custom resources and Terraform Cloud.

The Terraform Cloud Operator for Kubernetes is available for users of Terraform Cloud. There is a migration guide available for users moving from version 1 to version 2. More details can be found in the release blog post or within the Terraform discussion forums. The Terraform Cloud Operator for Kubernetes is available on GitHub.