Q2 2020 Earnings Call
This event is being recorded I would now like to turn the conference over to Anthony less screen. Please go ahead.
Thank you good afternoon, and thank you for joining us on today's conference call to discuss elastic second quarter fiscal 2020 financial results on the call. We have shied ban and founder and Chief Executive Officer International Johnny Chief Financial Officer. Following their prepared remarks, we will take questions.
Our press release was issued after the close market is posted on our website, where this call is being simultaneously webcast slides, which the company. This webcast can be viewed in conjunction with LIBOR marks and can also be downloaded the conclusion of the webcast on the elastic investor Relations website, <unk> dot elastic that CEO .
On this call today or discussion may include predictions estimates or other information that might be considered forward looking statements within the safe Harbor provisions of the U.S. Federal Securities laws. While these forward looking statements represent our current judgment on what the future holds they're subject to risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include those.
Set forth in the press release that we issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission, including our forms 10-K, 10-Q, an 8-K and other filings we make with the FCC from time to time, you are cautioned not to place undue reliance on these forward looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we're now.
Assuming an obligation to revise or publicly released the results or any revision of these forward looking statements in light of new information or future events unless required by law.
In addition, during today's call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to not as a substitute for or in isolation from GAAP measures. Our non-GAAP measures exclude the effect on our GAAP results of stock based compensation employer payroll taxes on employee stock transactions amortization of acquired intangible assets.
Acquisition related expenses and non-GAAP tax rate adjustments.
I can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures in the press release and on our Investor Relations website slides accompanying this webcast.
The webcast replay on this call and slides will be available for two months on our company website under the Investor Relations link with that I'll turn it over to shot.
Thank you Anthony Hello, everyone and welcome to the called it's great to be here and shared the results of our second fiscal quarter.
In Q2 revenue grew 63% year over year on a constant currency basis, we had more than 9700 subscription customers at the end of the quarter, which included over 525, we the annual contract value of more than $100000 and our net expansion rates continues to be overall.
I didn't 30%.
Before June Nash covers our financial performance I'd like to talk about some highlights in the quarter and there is no better place to start then with security.
In Q2, we completed our acquisition of endpoint Security Company and game, we also announced our new product elastic endpoint security. This product integrates what we consider to be the best endpoint protection from end game with the best search technology stack from elastic for new breed they'll threat prevention.
Detection and response.
It's packages a single autonomous agent, that's easy to use and build for speed and scale. It's also one of the only products although market designed for hybrid environments from Starbucks to submarines as the team likes to say so you're protected even if you're not cloud connected.
Elastic endpoint security is available today under the elastic license as part of our enterprise subscription.
It's been validated by many and recently Excel that third party tests from Avi Comparatives.
It's also tightly integrated with our free elastic seem caught up which is all the also on their deal optic license.
Additionally, we announced the end of fair endpoint pricing.
He's aligns with our overall pricing and packaging model, which has a unique model we've had since our company's founding.
No pricing for a host for agent perceived or data ingested just pay for the resources you use.
We've invested in this approach because it promotes growth with flexibility not the friction our customers arent constrained by their success as Dean just more data instead, our model is aligned with the value our customers get from our products and we build trust with our customers as we continued to engineer features that help.
Them be most efficient with the resources they have.
These message has really resonated with our community at our Washington, D.C. elastic on tour event, Nate fake former and game CEO and I heard from many Ceos in Csos, who were excited by these.
There are often used to vendors asking them to pay more without getting more value in the process at elastic we focused on providing more value to customers with fast easy to use scalable technology that allows customers to grow with us.
For example, Texas and M. University is a security customer of ours that came via the acquisition of and game.
Speed, then scalability of elastic endpoint security has allowed them to drop their meantime to threat remediation from seven days to 30 minutes.
Did them the combination of van games endpoint technology with the capabilities of the elastic stat is that compelling way to simplify and automate their security operations.
We see similar benefits coming to our customers as they harness the ability to stop threats with elastic endpoint security.
Repairing security event data with elastic machine learning power anomaly detection.
Another example is multinational financial services from Barclays, they've been a customer of ours for years and power their enterprise search in observe ability to use cases with elastic more recently they have explored utilizing elastic security to enhance their security a state.
To further accelerate our efforts in the security space, we formed a de elastic security team, which combines our elastic theme and elastic endpoint security engineering work Nate will lead. This effort is it the general manager and I have great confident and seeing how he will lead then guide the team.
The combination of our security efforts is similar to our approach will observe ability, which includes logging metrics APPM and uptime monitoring.
We develop these products in concert on top of Elasticsearch and Cubana, we build on top of a single Technical Foundation and these gives us a strategic advantage in the market.
Many of our peers cobbled together multiple products built with different architectures or underlying foundations. A single you I can give the appearance of cohesiveness, but this doesn't go far enough. There are underlying technical complexities that come with gluing together various architectures and implementation.
Building on one foundation as we've done at elastic gives our users are more integrated experience.
For example, the machine learning jobs you run on your log data are the same ones that you run on your a P M or security data.
Another example is keep on a lens.
A new feature we previewed in our 7.5 release Lance is available on the deal I stick license and introduces a drag and drop experience for building out coupon of Visualizations for any kind of data logs metrics security events and more.
I'm very excited about this because it's a powerful step forward on our journey to further simplify the user experience in cubana and broaden its applicability to even more users.
Well I touched on this earlier, it's worth repeating a single technology Foundation simplifies pricing as well. This is strong in the context of eliminating the need to calculate pricing across hosts or seats or ingest volumes or whatever other viable.
But say a customer wanted to take a single application and break it into 10 microns services or a single host and break it into a hundreds of containers why make them pay 10, or even 100 times more.
They cloud content management company box for example.
They are integrated into the work flows of millions of customers and have to deliver on street escalates to maintain stability performance and compliance to them every log line counts and they chose elastic because we make it easier to better manage costs and increased visibility into their logs.
To add to the benefits of frictionless pricing and an integrated product experience building on one foundation is also more efficient for us as a business, there's an economy of scale aspect to it.
If we make one part of our stock faster or more secure the entire stack and all use cases benefit from that.
It also lets us push more value to our users faster and more efficiently.
We've been leading the charge in do you observe mobility space long before you would even it was even called observe ability.
We saw a massive adoption of our products for logging and metrics.
So we bought in a P.M. company almost three years ago that is engineered on the same technology Foundation.
This move immediately added value to many many customers using elastic for logging and metrics use cases.
It's also why we joined forces with end game, because while you observe your infrastructure why not protected.
This message is compelling as many levels I was at our New York elastic on tour event recently and hosted a customer dinner would see iOS and senior executives from several fortune 500 companies.
And our vision for the interaction between the observe ability and security spaces through a single cohesive technology stack really resonated with them.
Their reaction is representative of what we will continue to see across our community.
It's coming for customers to initially adopters for one use case for example in Q2, we closed new business to power the Zale payment network.
Billions of dollars over millions of transactions are moved each quarter via the service and network uptime is critical they replace their previous solution with elastic to address challenges with scaling and speed.
Now they can search across large volumes of system logs to diagnose and resolve potential issues quickly.
But there's more value readily available to customers like them, including a P M endpoint security and more and that's because of how we've engineered our products pricing packaging and business. This is a powerful story to be able to tell all within a single stock.
We also continued to make strides with our cloud business. This quarter, we have a presence on a ws GCP Alibaba Tencent and recently launch our Elasticsearch service on Microsoft Asia.
Now it's easier than ever for customers, who prefer to run their workloads on Asia to get value from our products in the cloud.
One such customer is a fortune 500 manufacturing company, they close new business with us in the quarter for their logging and seem use cases, they had evaluated other solutions like splunk, but wanted to be able to explore their logs and events in a flexible way. So they tried out.
Free and basic offerings, and there now and Elasticsearch service customer running on Microsoft Azure their preferred cloud provider.
Our de business innovation group is another customer who closed new SaaS business with us this quarter.
They have been using our Elasticsearch service for logging for sometime and Theyve now expanded to an enterprise search use case, allowing development team at VW group to boost their productivity and efficiency.
We also expanded our footprint with Google Cloud platform first we announced our availability on Google cloud marketplace.
This makes it even easier for customers to get our elastic sort of service on GCP by simplifying procurement and consolidating billing through their GCP account.
We also announced availability or new GCP regions, including Sydney, London, and Northern Virginia.
More broadly we made it even easier for customers to efficiently store more data up to 60% more in fact in our Elasticsearch service.
This was made possible by elastic license features we've released over the last year or so so things like hot warmed deployment templates index lifecycle management snapshot management and data Rollouts. These gives customers the ability to store millions of additional log messages a P.M. transaction.
And server metrics audit trails, and even endpoint data, while continuing to grow with us overtime.
In the enterprise search space, we continued to close new business I met with one of the five largest banks in the United States. A few weeks back about their elastic use case, they closed new business with us in the quarter for a few projects one of which is enterprise search managed.
Through our elastic cloud enterprise product.
They are also building out real time tracking of electronic payments and customer accounts records history by quickly searching and analyzing billions of documents and transactions.
Earlier this year I mentioned, how excited I am about our enterprise search efforts elastic enterprise search unifies enterprise data in documents through an easy to consume search experience. The team shipped another fantastic preview release in the quarter, we added new connectors for data sources like.
Zendesk get help enterprise Officethree hundred 65 and service now we also introduced document content extraction. This is a powerful feature that makes it easy to find information on the fifth slide of a powerpoint deck stored on Dropbox on page 78 of a sales proposal the worked on.
Last week in Google Docs.
We also introduced document level permissions of custom sources.
These type of security means an engineer only gets the results they have access to and a financial analyst gets access to a different set of results. It just depends on the document permissions.
As we like to say, even our minor releases feel like majors and this release was no different.
Looking back on the quarter I'm humbled by the tremendous work of the team and the results that have come out of it.
We continue to execute on a vision and strategy that we believe is setting our company and customers up for the long run.
We are differentiated through our investment in commercial IP staying true to the value, we provide our customers VR products and unified frictionless pricing model and continuing to be where our users are so that we can grow together.
The bottom line is that we believe the value is in data and searches the best way to get that value and by building on one technology stack that can house all of your data, we make it easy efficient and scalable to search analyze and understand your data through multiple lenses.
It's incredibly powerful when you can bring all the pieces over the same story that you might want to tell into one place we make that possible.
That's all from me I'll now hand, it over to June Nash.
Thanks try we're pleased with our revenue growth in the second quarter, which reflects continued execution against our large market opportunity.
We've now crossed the 100 million dollar Mark in quarterly revenue, thanks to our customers users partners and employees.
Total revenue for the second quarter was $101.1 million growing 59% year over year as reported or 63% on a constant currency basis.
43%, if our revenue came from outside the United States, reflecting the strength of our bottom up community based adoption model.
We view this geographic distribution as a long term strength of our business model.
Subscription revenue totaled $91.7 million, an increase of 57% year over year as reported or 61% on a constant currency basis and comprises 91% about total revenue.
Within subscriptions revenue from our SaaS products was also strong at $20.6 million growing 106% year over year as reported a 114% on a constant currency basis, once again faster than the growth rate in overall subscriptions.
We saw continued strength in our elastic cloud offerings with particular strength in our monthly fast business, which now makes up almost 50% to fosse's revenue or almost 10% about total revenue.
As a reminder, in this part of the business. There is no deferred revenue our remaining performance obligations.
We also saw strength in elastic cloud and some of our large enterprise accounts with a few deals over $1 million.
Our largest steel in the quarter was a multimillion dollar SAS when.
We remain very excited about the SAS opportunity ahead of us.
Professional services revenue was $9.4 million, an increase of 83% over the same period last year.
As a reminder, professional services revenue can fluctuate from quarter to quarter based on projects and delivery timing.
Overall, we've seen strong adoption of our training on consulting offerings, which continue to be enablers of subscription growth.
Moving onto calculated billings.
Calculated billings in Q2 grew 41% year over year or 45% on a constant currency basis $125.3 million.
No. This calculation does not include the benefit of deferred revenue acquired from end game.
To provide a bit of geographic color EPG was the fastest growing region followed by EMEA.
Within the United States, we saw strength in some areas, but also experienced some delays in our federal government business as some deals moved out of the month of October .
We remain confident about the opportunity ahead of us with the U.S. federal government as well as governments worldwide.
At the end of Q2, the mix of short term deferred revenue was 89% of total deferred revenue.
Remaining performance obligations totaled approximately $410 million up 53% year over year, which includes approximately $9 million acquired from end game.
Although we do not actively manage the business to a target contract lengths contract lengths continue to be approximately one and a half years on average.
Turning to customer metrics.
As of the end of Q2, we had over 9700 subscription customers compared to over 8800, such customers at the end of Q1.
We saw similar strength in new customer additions in Q2, as we have seen in prior quarters.
We also ended the quarter with more than 525 customers with annual contract values above $100000 compared to more than 475, such customers at the end of Q1.
And game added fewer than 100, net new subscription customers of which only a handful of customers have over 100 K in HCV.
Our existing customers continue to expand their relationships with us reflecting increased spend for existing use cases and adoption of new use cases.
In Q2, our net expansion rate remained over 130%.
Overall, we were pleased with our customer metrics as we continue to execute against the significant market opportunity ahead of us.
Now turning to profitability, which is non-GAAP .
Gross profit in the second quarter was $75.2 million, representing a gross margin of 74.4%.
Total subscriptions gross margin was 80.6% up slightly sequentially.
We are tracking well relative to our expectations.
In the near term, we will continue to invest in our SaaS business, which will remain a modest headwind to gross margin overall.
Our professional services gross margin was 13.7%.
I referenced the fluctuations associated with the timing of service delivery earlier.
Since the professional services businesses small even relatively insignificant amounts can swing the gross margin in either direction. So we expect that the gross margin and professional services will fluctuate significantly from quarter to quarter.
Turning now to operating expenses.
In Q2, we remain focused on investing to drive topline growth and scaled our investments through organic hiring activities as well as the acquisition of end game.
Sales and marketing expense for Q2 was $47 million up 48% year over year, representing 46% of total revenue.
We will continue to add sales capacity and expand market coverage as we drive growth and expect to realize leveraged gradually over the longer term as we scale.
R&D expense in Q2 was $31.7 million up 55% year over year, representing 31% of total revenue.
As we've said before we are increasing our investments in R&D. This here as we continue to invest heavily in both existing and new products and features.
DNA expense was $14.9 million up 63% year over year, representing 15% of total revenue.
This includes costs associated with our global expansion and continuing to build the infrastructure to support our growth.
Our operating loss in the quarter was $18.4 million with an operating margin of negative, 18%, which was better than expected primarily due to the strong revenue performance in the quarter and to a lesser extent timing as some anticipated expenses shifted from Q2 to Q3.
We remain focused on managing to full year operating margin, which I'll discuss in a few minutes.
The FX impact on operating margin was insignificant since we have natural hedges as we incur expenses globally as the distributor company.
Net loss per share in Q2 was 22 cents using 77.8 million weighted average shares outstanding. This compares to a net loss per share in Q2 of last year of 38 cents.
Turning to free cash flow.
Free cash flow was negative $1.4 million in Q2 compared to a negative $1.4 million in the same theater it a year ago.
We look at free cash flow and free cash flow margin, primarily on an annual basis. Since there are both seasonal and timing effects in any quarter.
They can also be some lumpiness to inflows and outflows.
We ended the second quarter with approximately $305.2 million in cash and cash equivalents.
We remain comfortable with our cash position from an operating perspective.
Lastly, we ended the quarter with 1886 employees, adding 286 people in the quarter across all functions, including 140 from end game consistent with our approach of making investments now to address the longer term market opportunity we see.
Before I turn to guidance, let me talk about end game.
We closed the transaction on October 8th which was earlier than expected. The addition of end game was insignificant to revenue in the second quarter.
As a reminder, our primary investment thesis is to integrate the endgame product into the elastic stack and apply our community based go to market model to it.
As a result, the revenue opportunity for us as much longer term in nature and the pre acquisition levels of end game revenue are not discreetly additive to our revenue for future years.
We're excited to further accelerate our ability to address the security market opportunity together with the endgame team, particularly since we are eliminating per endpoint pricing and applying a unified resource based pricing model to endpoint security.
Turning to guidance for the third quarter and the full year fiscal 2020 .
Our guidance includes the anticipated financial impact related to end game.
In particular for the rest of this fiscal year, we continue to forecast and significant revenue impact given the effects of purchase price accounting.
We also continue to anticipate an approximate two percentage point negative impact to full year operating margin.
Over the last several quarters, we have accelerated head count related investments in R&D and sales capacity and coverage globally to drive growth.
Some of these investments are intended to secure growth this year, while others, particularly in R&D will help drive growth over the long term.
As we look at the second half of fiscal year, we plan to invest with discipline in innovation coverage and scale in order to drive future revenue growth.
For the third quarter fiscal 2020 , we expect revenue in the range of $106 million to $108 million, representing 51% year over year growth at the midpoint.
We expect non-GAAP operating margin in the range of negative, 26% negative, 24% and non-GAAP net loss per share in the range of 36 cents to 34 cents using between 80.5, an 81.5 million weighted average ordinary shares outstanding.
For the full year fiscal 2020 , we expect revenue in the range of $415 million to $417 million, representing 53% year over year growth at the midpoint.
We expect non-GAAP operating margin in the range of negative 23% to negative, 22%, which as I mentioned earlier includes approximately 2% operating margin dilution from end game and non-GAAP net loss per share in the range of one dollar and 24 cents to one dollar and 17 cents using between 78 and.
80 million weighted average ordinary shares outstanding.
Finally, we have demonstrated improvement in free cash flow margins over the past studios and we expect to do the same into the school 2020 .
However, as I've said before we expect only modest improvement in free cash flow margin for the fiscal year. This is mainly because if the dilution from the end game acquisition and related transaction expenses.
In closing I'm pleased that we delivered strong revenue growth in Q2, while investing to address a rich market opportunity ahead of us in so many different use cases I look forward to sharing our progress with you as we move forward with that let's open it up for questions operator.
We will now begin the question answer session to ask a question you May Press Star then one news on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before passing the keys to.
I would try your question. Please press Star then to at this time, we will pause momentarily to assemble our roster.
Our first question comes from Matt Hedberg.
With RBC capital markets. Please go ahead.
Oh, Hey, guys. Thanks for taking my question first I want to start with generic.
The overall quarter looks strong and its it looks like you're raising the full year more than the other than that and then the 70 bps quarter. That's had a lot of the shooting questions on calculated billings and to me I got a couple of questions. There first of all seems like deferred revenue on the balance sheet that change of 7 million was more of them change on the cash flow statement seems to be maybe even more than an FX impact.
I'm I'm working it helps with the Delta there and then as your SAS been used business continues to ramp obviously, you said, there's no impact at afford wearable RPL I'm wondering what's the right way to think about growth. It would appear that calculated billings could be negatively impacted by your SaaS business.
Hey, Matt Yeah. So let me take both of those questions first off in terms of the deferred revenue on the balance sheet versus the statement of cash flows I'd remind you that we closed the acquisition of and game here in Q2, So we acquired a little bit of deferred revenue through that transaction and that explains the biggest speech piece of that so we had about a little bit more than six.
<unk> million dollars of total deferred revenue that we acquired through the end game acquisition.
And then you know as I think about the right way to think about growth in the metrics going forward and I think the two main metrics would be views until now revenue on calculated billings. So continues to be important metrics. So for us as we think about the business overall revenue is probably the single most a meaningful metric because it captures all.
All of the different ways in which customers can do you want to technology. It across all the five different formats. Billings is also really important indicator, but a it kind of course vary from quarter to quarter based on deal timing as well as deal size.
And monthly fast as I mentioned does not impact deferred revenue. So the SaaS business on the monthly component of that has been growing nicely for us a week. It's we've had really strong growth here. There's this past quarter. So you want it to called that out and give you a sense of.
Of how big that is for US at this point in time, we will continue to track that a and as that becomes a bigger piece of business or if it becomes a bigger piece of the business then be provide appropriate metrics that a that help you understand that are in the future.
That's helpful. And then one for shy you know your new endpoint offering.
First of all you know we you mentioned on the call we hear from customers that you know as he is you're monitoring assets. It makes a lot of sense to also protect I'm wondering if I talk about what type of customers you're going to be targeting and then second at some point could you envision putting a b M game offering also on servers.
[noise], yet, but we're question, Matt So I'll start by saying that our mission is to protect a every single piece of endpoint out there a and that's a mission, though you shared with the.
Endgame team when we discussed and talked about it when we joined forces.
Our initial implementation and the elastic endpoint security offering that we just launched means that you deployed the existing end game platform next to the elastic stack and we built a native integration between the two our goal over the next year is two fold at the end game a product into our elastic stack to become.
From a native part of it which means that every deployment of the elastic stack will have built dean endpoint protection within it.
So we are I'm very excited about being able to bring that unified protection and unified story first of all to the security solution space that we have a work it combined seem an endpoint security, but also being able to bring this endpoint security to all of our observe ability users and that definitely include servers as much as laptops and an endpoint.
Computing.
Thanks, guys.
Our next question comes from up Ramella lens Chow with Barclays. Please go ahead.
Thanks for taking my question, China can be you mentioned, obviously ability as a theme and you guys have been doing it but it's also like the new password in the industry can you talk a little bit about the the things that you guys bring to the table I'm thinking like cloud and on premise as their way here to help us understand there's little bit better because from what are you getting bring more spine.
Every vendor and everyone is doing more capability now that's helping us understand that the little bit better.
Oh, Yeah happy to it's almost always saying that our regions. If you will have started from the logging space a and we've developed a complete and end to end solution. When it comes to I'd operation logs, a and I would argue that we have the best solution out there today, but from a functionality technical implementation.
And in both the the reactions that we're getting from users.
But <unk> three years ago or so we saw the story is much bigger than that I think the reason why we saw its too early I was thanks to the fact that when we look at the problem or the opportunity would or could it through a search perspective, and then we said well if you search for logs or while you observe why not observed metrics in a P.M. another type of data sets and really try to.
So the customer needs, which is just making sure that their infrastructure is up and operational.
So we went on this path of having metrics and ATM and now we have a fully integrated solution that combines the three together a and we're leading the pack when it comes or to doing that I'm Super excited as we mentioned on the call about the fact that all of that is implemented on top of a single technology stack, which means that you can weve a machine learning.
Algorithms to custom reserve position, especially using the new way to visualize data using coupon aligned across all of these three data aspects or natively I will admit that observer abilities is somewhat of a buzz words in what we see happening in practice is that they used to be three concrete silos.
Ah within organizations, one of them doing logs one of them doing metrics in one of them doing a P. M and we see now day in day that these silos are collapsing and users are realizing that it's actually different aspects of it over the same challenger opportunity that they're trying to solve and we're trying to lead the back when it comes due to help users solve that.
If I cannot okay perfect.
Yeah. So I was just going out of customer example, around that actually that can bring that to life or even more so you know right when I talked about our largest when in the quarter being a multimillion dollar SAS win and that was a poster child for how our technology and vision are resonating with customers are the tip of the spill that in fact was a competitive win in observable it either customer bought him too.
Our vision EM was the initial use case.
And what was really neat about that was not only did we win against an ATM competitor, but the custom actually moved off eight up U.S. elasticsearch because they saw the value in the proprietary features if he brought so it's it's opened the door for a much broader opportunities for us within the customer as well so quite excited about that win.
Okay. Congratulations there and then they quick follow up you mentioned the to a delay contract like usually you like you know like every quarter has like puts and takes worth anything special about you said you kind of what we wanted them out then Alan you know the typical that's one question would be likes to close or whether you what's the steepest. Thank you.
Yeah. So you know size as I step back and look at the quarter. There were many things that book that were positive for US we delivered strong performance in Q2 on many different fronts in terms of revenue growth in terms of our customer metrics customer accounts and so forth.
Deferred revenue growth was also strong as was noted earlier so there's a lot for us to be pleased about against that backdrop as I mentioned there was some delays in the federal business or some deals moved out of October I'll point out that these are only timing delays a they would not competitive losses. The timing of deals as you know in the federal government can be incredibly difficult to predict so.
Hard to identify exactly when these deals will land, but we remain confident in our federal business. Overall, we are continuing to drive growth not just in the federal business, but in our business in the in its entirety and our outlook for the year reflects that so we're quite confident.
Congratulations.
Our next question comes from Kash Rangan with Bank of America Merrill Lynch. Please go ahead.
Hi, Congratulations team, let's take a question for your generation one for you saw judge initially when I look at the the billings religious trend line. It over the past four to five quarters, there's definitely a deceleration I'm curious if you can help us parse through that it's just a function of Ah size as a company grows bigger obviously things slow down or is there other fan.
Because there will need, particularly pointed about <unk> pointed to SAS now, 50% monthly buildings. So that that would if I just take your SaaS revenue and just split into two and took that monthly and multiply. It by three that should roughly give me the extra amount that could have been bill maybe I'm doing something hugely wrong with the calculation.
He just parse out the pieces of the business other how the business model is shifting visa. We are the fact that the company's just larger and billings will ultimately slow you're going to help us understand what is a systemic versus not that'll be great. Then I've a question for shy I'll pause here for a second though.
Yeah cash in on the calculated billings as I mentioned I think the the main effect. There was the result of those federal transactions slipping in terms of the dynamic on monthly SAS that a that you talked about well monkey SAS was stronger for us we've got so many different areas that we're investing in and we've done.
Go down quite heavily on monthly SAS.
We've we've expanded our availability weve, even shifted some of our marketing dollars to focus on the SaaS business in the entire D.. So we're quite pleased with the way fastest growing.
But in terms of a shift a I wouldn't say that we're seeing a significant shift in the underlying base itself. So that might be some customers who prefer to have tried the monthly SaaS offering rather than committing to an annual self managed for annual SaaS contract, but that's anecdotally we have some of that every quarter. So I wouldn't call. It unusual the monthly SaaS revenue.
Ah was stronger this quarter than what we've seen before so that's something that we'd obviously keep an eye on and if we start to think that there's something broader that's happening, we'll certainly called that out but this quarter I think the sense was that a it was primarily attributable to federal.
Got it got a good but certainly if you didn't see that shift towards monkey SAS you. Your deferred revenues would have been on paper better than what you print I just want to make sure that financially I'm not going off the wrong direction, Yes, yes, you're absolutely right in thinking about if that remotely sascar has been growing for us in Q2 was stronger growth and what we've seen before got it if you did an error or equivalent I think.
The numbers that are different story anyway, so shai I it looks like there's a there's about five or six companies. The public domain, they're increasingly are talking about the the how the product sets are addressing a broader set of problems or they want to color Dev ops are monitoring or or whatever you want to call. It does it at one level.
As a generalist if you look at it feels like everybody speeding up on each other and saying that we do all the same thing strike, but I'm sure. The truth is different what do you make of does is it is it and you guys are putting up a good performance is it because the Tam is growing and there are more customers that realize that they should be doing this or is it really the beginning of Ah.
Just a competitive.
No bravado and then really.
Do you feel that that Youre centers and said this is competitive and you are knocking down a comparative when said it could end up being a probably zero sum game, so somewhere between the big spectrum, how do you see it playing out thank you.
Yeah definitely a great question. So first of all I would say that whenever silos break within a within a a use case or a town you tend to probably see more competitive pressure compared to other wives and definitely we see silos in hopes of ability between logs ATM and metrics breaking down and that that mix Uh huh.
The environment feel more crowded I will say that based on what I see what I'm talking to users and community are going to conferences is that more users are also realizing the fact that they need to observe their infrastructure. So I do see as these silos converged data I do think that the opportunity actually increases over time when it comes to do.
You observe mobility space tools are becoming simpler tours are becoming more efficient. We are I would argue again, leading the pack when it comes to being able to going to observe every piece of the infrastructure. When it comes to a single technology stack in a saying pricing model that doesn't hinders you from going and Instrumenting your applications or or.
Battery and then collecting data from it a were even as I mentioned in the previous answer we've been taking it a step further in our vision once we collapse endpoint security into our stack is to also protect that so bring security capabilities into that story.
So we actively working towards that level of breaking down the silos.
But I do see the opportunity increases over time versus the the single level opportunity and Tom that exists between the three discrete silos that existed in the past I will say that you know we're living here and we're seeing the observe ability movement are we talking to all the thought leaders in early adopters, but in.
Practice, a I would say that a large portion of their user base are still using the silo solution. We are still being adopted primarily for the logging use case and we're doing our best to try to bring to our users as quickly as possible and educating them to make sure that they know that they can actually uses for metrics and ATM and they can actually have a much bigger story about this.
Wonderful happy holidays, Congratulations you guys thinking there Jeff.
Our next question comes from Mark Murphy with JP Morgan. Please go ahead.
Yeah. Thank you very much a ton Nash I think you're the second or third a software company, which has recently seen a little bit of softness in the federal government business and so I guess I'm just wondering if there could be some commonality what was there anything that those agencies are communicating to you about.
Delays and then or do you have any comment on the magnitude of that business that pushed out of the quarter.
Hey, Mark So your nothing specific that it would share in terms of a common theme across those Ah you know there were several deals a they were across the different agencies. So nothing unique that I'd call out there other than the fact that the procurement cycles, there can be quite uncertain and sometimes you know the smallest a change can can trigger can trigger.
A significant delays.
In terms of to sizing I'll say that it was significant enough that it impacted billings, which is why we called it out.
And we'll continue to track those deals and see when they might land, but are we remain confident that that our federal business is going to perform well overall.
Okay, and then shy for you the Google cloud platform seems to be gaining real momentum.
Under the leadership of Thomas Korean and just given you have a strong very strong partnership there I know you've had some deep product announcements there as well is your traction strengthening for elasticsearch on on GCP and and then is there any way you can approximate the decides that revenue.
History, and maybe relative to some of your other revenue streams.
Yeah.
Great question. So first of all I would say that our investment when it comes to a diverse cloud providers is is similar in nature, which is we want to be there for users wherever they are so if the user exist on Google cloud, we want to be there for them in an integrated fashion, if they want to be on Microsoft Azure or the same way or and NWS.
So our investment is spread across all the various cloud providers and making sure that we our goal is to be there where they are natively integrated whether it's from a product perspective or from a billing perspective and marketplace integrations, we do have a a bit of a head start when it comes to Google cloud thinks that the close relationship with Thomas into Google Cloud team Oh.
I'd say that we have a a similar relation with Microsoft Azure now on Google Cloud itself, we announced a native integration would there with the billing system, which means that if you go in and and spend money with Google Cloud you can redirect some of these funds directly into a plastic through their mark billing integration, which I'm excited about than in the future we hope to have.
Even deeper integration is directly into the Google Cloud Council when it comes to specifics change quarter over quarter, a complete for adoption compared to Google cloud versus other cloud providers I don't see any significant trend.
Obviously, there's there's differences between quarters based on some deals that we sign but nothing to call out.
Okay very good thank you very much.
Our next question comes from Tyler Radke with Citi. Please go ahead.
Hi, Thank you.
I wanted to ask you about the SaaS business, Josh I think you you mentioned that the monthly SaaS business is.
Around half of the overall cloud business and I was just curious how that compares historically my thought was it was much smaller than that so so wondering you know kind of what's driving the inflection there in the monthly I know you have a recently announced the version of you know last.
Thick soften on Azure and and obviously the new pricing changes made it opened up a new use cases, but just kind of curious where that monthly SaaS businesses and as a percent historically and then what's what drove the strong growth there this quarter. Thank you.
Yes, it Tyler it's looking back the monthly SaaS business has always been in the single digits for us and even now it remains just under 10% it's been growing nicely, though I'm over the last several quarters, a inching up gradually.
And so in Q2 here it or we saw some strong growth and it's now approaching half the total SaaS business. So close to 10% of total revenue, which is why we thought it would be worth highlighting for you in terms of what's driven that growth I would say, it's largely being the the investments that we've been making into business.
Expanding our presence across different cloud hosting providers are not just with azure, but also GCP and even eight up U.S. expanding the regions I'm in which we are as I mentioned earlier, we even double down what some of our marketing investments to stimulate a that part of the business and all of that has been working quite nicely for us. So that's what's been driving the growth.
Yeah.
Great and then follow up just on now that I'm game, it's close them kind of talked about some of the integration you you're doing maybe just give us an update on how you're thinking about that from let's go to market perspective, obviously that the pure endpoint security market.
It's extremely competitive and I think you talked about shying away from going into that you know in full force that maybe just post acquisition closed and how you're thinking about that did go to market strategy and.
Possibly what what that contribution or could be either this year for next year. Thank you.
Yeah of course, I can take that <unk> said that the first parties that we announced our elastic endpoint security product that is available today and there is of a more limited fashion basically allowing to have at the end game platform as it exists today natively integrated into or sorry integrated into our agnostic stack, but they still if you.
Will exist as two separate installations institute to separate deployment.
It's still provides one of the best endpoint protection systems into world today integrated into one of the leading threat hunting seem tools. If you will would the elastic stack. So I'm excited.
To provide the ability and the features that users can go in use when these two systems that are deployed side by side our goal over the long term, let's say one to two years I used to bring our bottom up adoption model when it comes to the security space in General and obviously endpoint security, we're gonna do it in multiple steps.
The first step used to take the end game platform and the technical implementation and re architecture of folding it into the elastic stack and making it to a native feature of the elastic stack a we we do aimed to have.
Basically our vision is that every single elastic stack deployments will include endpoint protection in it prebuilt and shipped and ready to go whether it's on the cloud or whatever its own problem.
Once we have these technical capability and implementation and that's going to come in phases. As you can imagine how we plan to bring our bottom up adoption model to it and provide that level of of all the investments in growth within it. We think that we can bring a a few unique aspects to the security world and one of them is is this highly fragmented.
Top down a security market can change I think we'd we'd something like ours, you know solution like ours that will take time to go and deployed the team is excited about this vision and that the endgame definitely is excited about being able to bring endpoint protection to as wide as possible audience as possible.
And we're excited to go and execute on that.
Our next question comes from Richard Davis with Canaccord. Please go ahead.
Hey, Thanks, just kind of a general question I guess, you know and the job you're engineers right great software, but you know what and you're in a much broader company, but you were a few years ago, but where do you guys draw. The line between kind of whats open source and what isn't that you know what do you contribute their you know how do you see that evolving over time.
Yeah, Great Great question. So I will start we're saying that that we made significant investments in open source, but historically, we've also created something called the elastic license and the elastic license has multiple paths in it or multiple layers in it and one of them is a free.
Okay, and open code, but not open source a layer.
Or or tier if you will that we have fair and we've made significant investment in that year over the over the past year and a half since we announced it as an example, cubana lands would use the ease of use and simple to use a way to build visualization in a drag and drop experience. It's almost like think about it like a tableau for elasticsearch.
Ah that's something that is under our elastic license in under our proprietary IP.
We are making investments there and a.
A big portion of our investment has moved toward Stat Lane, and we will continue to make that investment.
Yeah, that's super helpful. Thank you so much.
Our next question comes from Heather Bellini with Goldman Sachs. Please go ahead.
Hi, This is Dan church on for Heather Bellini. Thanks for taking my question I guess, just following on that line of questioning it sounds like that multimillion dollar SAS one.
You also managed them I get the customer of AWB eight of U.S. Elasticsearch. So can you kind of ex expand on.
I hope the investments you made over the past here in the half and the free tier to expand that gap and how that's translated.
Into into customer wins, and if you've seen any change in the competitive landscape there.
Yeah of course, I can I can take that so I'll start with saying that that was a a great indication to our vision when it comes jobs if ability the customer was using us a in in several areas around the logging use case.
And then started to look at us when it comes to D.A.P.M. space and there really bought into the vision of logging in ATM and metrics like living in a single place I was happy to see also that our ATM product to beat one of the leading a P.M. vendors out there today that have spent several years just focusing on building a P.M. tool I think it speaks to them.
Maturity and the great work does it seem was down in building a great ATM product, obviously, the P.M. product has a significant portions of it under our classic licensing and users won't be able to have access to it under Amazon Elasticsearch should that made the discussion easy also when it comes to moving to our SaaS solution for.
It is Amazon elasticsearch, because that simply doesn't have a the ATM capabilities out. There. There were also excited about the arc of being able to choose us in the context of security there it really resonated with them that the same pricing models same pricing skews that they've signed today, you're gonna enable them to have access to endpoint security down the road.
And that's obviously also on their proprietary license that they'll have access only one day engage with us.
Helpful. Thanks, and and then just on on the same product I understand you said, it's still fairly early just how is it tracked relative to expectations. What has been the customer feedback and then when you look at the road map and increase not incremental functionality like behavioral analytics or even vulnerability management. How are you thinking about organic development versus M&A.
Yeah, Great question, So I'll start with saying that today, what I see us being used in the conduct of the same place seem space is basically in what is called the threat taunting World. A if you think about it I see us being used either on really significant nation level defense or or a big companies that take us and just use our.
It was because <unk> any other seem product just can't provide them with the answers and the ability to go in hunt for that specific needle in a haystack and were specializing especially in that when it comes to our search heritage.
If it makes sense. We're also seeing the adoption coming from the bottom up adoption model into seems space Oh users and thought leaders are demo buying building products and leaving the pack when it comes to try to hunting tools built on top of the classic stack. Our goal is to formalize that through our elastic seem product and then go the extra mile and start to provide.
By the obvious built in capabilities when it comes through as you might shouldn't be ever I wanted to explore the book your management and detection rules and rule engines and things along those lines, we're making significant investments there that I expect to see.
It's too soon to start to see adoption over it and deployment of it over the following year.
When it comes to thinking about M&A versus not our strategy is always being too to look around and we're excited about people building on top of our stock and we'll go and and pick and choose if we can add the best integrations with the best teams.
I will say that now we have the elastic security team I feel good about our internal people and any investments there to be able to go and execute against our vision and I will also say that when you acquire a company a big part of it a big part of the work is happening obviously before the acquisition, but even more work happens after the acquisition and.
There's a lot of responsibility to the endgame team that we have to make sure that this acquisition goes well culturally I think we're in a great match and it's wonderful to see the teams working together, but we have to be intentional and make sure that.
We'll focus on making it successful and that's the thing that we're going to focus over the next or half a year or year.
Helpful. Thank you.
Sure.
Our next question comes from Brent Thill with Jefferies. Please go ahead.
Makes sense starting to dwell on the the monthly assassin number but when you think about the modeling going forward. How are you modeling the SaaS business over the next year monthly versus versus the the annual basis, how does that shake out.
Great question, Brent So as I think about it you know as I mentioned over the past several quarters, we've seen the monthly SaaS business continuing to improve in terms of or increase in terms. If the mix of revenue that we have oh, we continue to emphasize both the monthly and the annual pieces off the SaaS business as I mentioned, we also read.
Devoted some of the investments stewards of do its monthly SAS. So you know I would expect that continues to grow although the in terms of the makes the shift has been so gradual that it hasn't been it hasn't been meaningful enough for us to call out until this time. So I do think that it will continue to grow but probably at a relatively modest space until.
Just mix.
I think you'll see that reflected broadly in the SaaS makes overall, which we've said we expect will continue to grow faster than self managed.
Okay. Thanks, and then just with the growing portfolio and you know the complexity of your product line growing you know the go to market many questions around how you're going to simplify and make sure that you have you know a clear line of sight with with you know the quota reps combined with the right Presales engineers and can you can use walk through how you.
The evolution of the go to market is it's changing how how you think.
You guys are adapting to this.
Obviously very growing a growing complex product line.
Yeah. It's a great question you know broadly speaking be go to market model for US has been premised on the idea of bottom up community based adoption. So with the rapid innovation cycle that we've gotten the rapid releases that we do have all of our different offerings.
We drive the adoption primarily through through the community and initially and then as customers start to adopt that and use that that drives a greater usage. If those technologies. So fundamentally that we're sticking to the color if that bottom up community based up based model, but also helps quite a bit when it comes to I thinking about the Ah the sale.
Sales rep and what the sales Rep does in front of customers as they represent the broad portfolio. There's obviously when you went to sales rep engages with a custom other customers typically already familiar with the technology at that point, because they've been using it and so that makes the conversation a lot easier that said there are some some technology uses I think about security, which.
Have dedicated buying centers and different groups of customers I think it becomes important for us to ought to continue to elevate those relationships and that's one of the areas that we are focused on in the past. We've I think shared our thoughts around specialists then how we think about the need for specialists within the business and we've taken the position that.
From a technology perspective, it's really the technical specialization around the assays and and engineering resources that are more helpful. In the initial stages that doesn't mean that we we won't have overlays or specialist resources on the sales site in certain pockets and in certain parts, but we might do that but fundament.
Either go to market strategy is largely unchanged from from where it was and what's made us so successful until now.
Great. Thanks.
Our next question comes from Brent Bracelin with Piper Jaffray. Please go ahead.
Hi, This is parkers Nick on for Brett. My first question was I was wondering any more color on a international revenues stay P.G.E.P.J. is the strongest has worked any color that amir a other regions, if you're seeing anything different out there.
Oh, Yeah happy to take that so in terms of the the revenue makes up the reference to a BJ and and EMEA was really in the context of the overall business that we saw as you as they think about the revenue mix overall. The U.S. has continued to be be fairly strong for us 57% this past quarter.
And as I think about the breakdown of EMEA in a P.J. The majority of that international revenue does come from EMEA as you might well expect Ah we had some pretty strong performance in in a BJ both in Japan as well as a within Asia Pac as well, but that remains a fairly small parts of the business overall.
Perfect. Thank you and then.
Last question is just more general you guys are getting into endpoint in a lot of different areas on obviously lot management's what your strongest points, where are you seeing the most traction most growth out of all of your new initiatives over this kind of pass through six months.
Oh, Yeah happy to take it so it's still domain or use case that people start to use or send adopters for is the logging use case within the opposite mobility space, a we're definitely starting to see as I mentioned and increasing metrics in a P.M., especially as the story of UBS everybody to cement itself.
The second after that is our enterprise search solutions that includes enterprise search site search an app search.
When it comes to growth its still a the logging space is still there's a lot of greenfield in front of us when it comes to getting adopted then we see quite a few quite a bit of adoption when it comes to it.
I'm excited about the security space I'm moving forward, we're still in the early stages of it as I mentioned, but it feels like it's it's it's starts to pay off and it's definitely going to pay off in the long term for us I really resonates well with our user base and India UBS everybody space itself I think as I mentioned.
So the opportunities you're just increase with the observe ability.
Or would you observe ability market versus the district silos that used to have there and that's another area of growth wise.
Okay. Thank you.
That concludes our question and answer session I would like to turn the conference back over to shy Ben and for any closing remarks.
Yes. Thank you all for joining the call Q2 was a strong quarter for US we remain focused on a large market opportunity and continuing to deliver both innovation and value to our customers.
We look forward to seeing many of you at the Barclays Conference next week take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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