Q3 2020 Earnings Call

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Good day and welcome to the elastic fiscal third quarter 2020 financial results Conference call. All participants will be in listen only mode. So do you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero. After today's presentation, there will be an opportunity to ask questions.

To ask a question press Star then one on your telephone keypad to withdraw your question. Please press Star then too.

Please note. This event is being recorded I would now like to turn the conference over to Anthony less screen Vice President Investor Relations. Please go ahead.

Thank you good afternoon, and thank you for joining us on today's conference call to discuss the last six third quarter fiscal 2020 financial results.

On the call, we have shied ban and founder and Chief Executive Officer International more Johnny Chief Financial Officer. Following their prepared remarks, we will take questions.

Our press release was issued after the close of 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 lie remarks, and can also be downloaded the conclusion of the webcast when the Alaska Investor Relations website IR done elastic osteo.

On this call today, our 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 well. These forward looking statements represent our current judgment on what the future holes there are subject to risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include those set forth in there.

Yes, released 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, and AK and other filings we make with the as you see from time to Todd 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 not assuming.

An obligation to revise or publicly released the results of any revision to 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 an 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.

You 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 in the slides accompanying this webcast.

A webcast replay of this call and slides will be available for two months on our company website under the Investor relations linked with that I'll turn it over to shy.

Thank you Anthony welcome everybody to another elastic earnings call.

It's great to be here today and talk about a third fiscal quarter results. We once again delivered strong performance driven by broad adoption of our offerings. Our results underscore the widespread than rapid adoption of the elastic stack in solving mission critical problems for customers across segments and geographies.

We believe our market opportunity across enterprise search observe ability and security is enormous and that we are well positioned to capture the long term opportunity and the live a better outcomes for our customers end users.

In Q3 revenue grew 60% year over year, and we once again, so robust customer acquisition and expansion metrics. We ended the quarter with more than 10500 subscription customers, including over a 570 with annual contract values of.

More than $100000 and our net expansion rate continues to be over a 130%.

I commentary I don't know recent company all hands meeting that I'm amazed at how much the team accomplishes in between calls I feel the same way in these forum and I'm Super excited to share some of our Q3 highlights with you.

Well I guess everything ties back to first principles why do we do that things that we do.

How do they continued to make our company and our customer successful.

Our free and open distribution model fuel is rapid adoption and innovation.

Our business model Leverages proprietary features to drive product differentiation and customer growth.

I was strong innovation delivers value to our customers and our unified pricing model helps them grow with flexibility not friction.

All of these Israel, there's a through I'll focus on building enterprise search observe ability and security solutions on a single technology stack that can be deployed anywhere.

Surgery is foundational too many experiences finding documents monitoring logs in infrastructure protecting against security threats and beyond.

And because elastic is a search company, we're able to power a multitude of solutions in large markets that drive results for our customers in a weight that other companies can't.

This is because we engineer a search box you can put on just about anything.

In the enterprise search space, we believe that putting a fast and scalable search box on your website application or workplace data should be simple.

This contrasts with what you are probably used to with other vendors lack of scalability poor relevance capabilities insufficient conductivity and long set up times that involved heavy integration services.

The landscape has changed with the tremendous proliferation of SaaS services from slack through Google G Suite Office 365 service now and Salesforce enterprise search solutions and need to meet customer expectations for searching across these services easily.

They need to be fast scalable and relevant they need to be simple we're delivering on this.

Our investment in the enterprise search space continued in the quarter would deliver the highly requested platinum level features like Mehta engines for our apps search product.

This helps enterprises better scale and managing multiple search deployments.

We made our proprietary app search offering natively available through our elasticsearch serviced on elastic cloud.

This is yet another step toward our vision of elastic cloud being the single SaaS platform on which customers can deploy all of our solutions.

For us they innovation hasn't stopped in the enterprise search will in continues to unfold on top of Elasticsearch. One of the most popular search engines in the world in order to live on the speed scale and relevance capabilities, our customers need and deserve.

For example.

Tim <unk> Science company down close new business with us in the quarter for enterprise search, they're replacing a previous search product with elastic to ultimately drive a better employees search experience by connecting to more data sources and delivering more relevant results.

Another example from Q3 is international real estate Franchiser remarks.

They closed new business with us for enterprise search moving from a monthly elastic cloud subscription to an annual subscription.

These gives them the flexibility to be more cost effective while generating additional revenue and gaining a competitive edge for their business.

Because our search technologies flexible and built on a single stack, it's easy and seamless for us to take a search box for full tax and documents and applied to log metric and a P.M. data with our observe ability solution.

As the amount of infrastructure websites and applications needed to support today's enterprises increases so does the need to monitor and observe it.

We deliver a unified approach to our customers with a single staff and a curated observe abilities solution.

All the data lives in one place on the one you why it's easy to go from analyzing infrastructural metrics to analyzing server logs and application traces.

Its simplicity resonates with our customers for example in the quarter. We renewed then expanded business with a leading global investments that.

They use elastic to get 360 degrees visibility into their log metric and a P.M. data.

As a result, they can power multiple use cases that track customer activity on the website backend <unk> consumption and fraud detection.

When all the data lives in one place, it's easy to apply our new platinum level machine learning capabilities, introducing the quarter to observe ability workloads.

Suddenly millions of unstructured logs can be automatically categorized helping practitioners get to root cause quickly and efficiently.

When all the data leaves in one place, it's easy to expand cloud monitoring and unlock more visibility into billing and usage metrics to help customers run more efficiently.

Well why stop there while you observe why not put that.

Which leads me to our security solution here, we've made it easy to go from log analysis to trust hunting in a single click and also integrate with superior endpoint protection.

In a market that is over one with an integrated single purpose legacy offering we are we drawing the line.

Our security solution already offered as a unified approach that reduces investigations from hours two minutes, but we continue to innovate on it.

In the quarter, we deepened visibility for securing when those endpoints a popular choice for many enterprises and went practitioners spared the new capability with our highly requested seem detection engine that we released in this quarter. They now have enhance layered prevention.

This is exciting for a few reasons.

First practitioners are armed with a curated list of nearly 100 free package rules that automate threat detection reduced dwell time and align with the mitre attack industry standards.

Second because our same is open we have a wonderful opportunity with our community to further build out a reach library of detection rules.

This creates a network effect for us that amplifies our ability to reach more users then use cases.

I'm incredibly proud of the team's effort here, we've come a long way from the middle of last year, when we previewed our seem product, which is now generally available under their proprietary elastic license.

And it will just keep getting better and better with each iteration.

The excitement with each release is not only presence in that develop a world I see it continued to get traction as we move up the enterprise as well from a hands on practitioners and decision makers visiting our booth at era say this week to the C. So at a major financial institutes.

We shouldn't I met with recently.

There are hungry for something different.

There are wary of the on integrated tooling restrictive pricing model and the need for specialized expertise to operate.

Our approach to security is different and its resonated with users across various industries and sizes of business.

We had several strong security customer wins in the quarter from the public sector in the U.S. them globally as well as in the banking telecommunications and higher education technology sectors.

Across all our solution areas customers are coming to us asking for the tools and resources to migrate their workloads to elastic and because data has gravity to it it's important that they have the freedom to deploy where they choose in the cloud on prem or hybrid environments.

We provide that.

With elastic cloud customers can get access to our proprietary offerings like our seem and machine learning capabilities on their preferred cloud provider.

Level, U.S., GCP Asia, Tencent cloud or Alibaba cloud.

And we continue to invest in a growing number of regions each quarter, which included GCP in Montreal, Virginia, and Mumbai and Asia in Tokyo in Q3.

It's worth highlighting our partnership with Microsoft Cloud platform.

They've been a great supporters of our technology and community they've committed to sponsoring our elastic on tour event in the U.S., APAC and South America, and Weve sponsored several of their ignite conferences.

It's been really fantastic to watch this relationship grow.

For customers that shoes, and on prime or hybrid approach, we continued to make investments in the quarter to help customers orchestrate that elastic deployments with ease.

We continued to see strong customer adoption for our elastic cloud enterprise product.

For example, we closed new business with Switzerland's, leading telco provider swisscom.

A few years ago, they were running a few nodes of elastic for logging.

Today, they've grown to 40 instances of elastic cloud enterprise to offer on demand logging solutions.

It's exciting to see them build out a strong foundation that sets up a path for even more growth.

Well users who prefer to run kubernetes I'm excited to share that our elastic cloud on kubernetes product became generally available and I'm happy to share it's already driving more adoption.

For example, Japanese collaboration software companies see Basel isn't knowledgeable user off kubernetes.

They adopted our elastic cloud on kubernetes product when we first previously last year it will be important to see both due to orchestrate their observe ability workloads with elastic as a result, they closed new business with us in the quarter.

Everything I've covered so far it's very validating of our strategy. It is also very humbling as I think about the people who make it possible.

From employees to our community customers partners and beyond and I'm excited to welcome to more people to the team as of this quarter, Allison Gleason and Sally Jenkins.

Allison officially join our board this quarter, bringing with her 20 plus years of a strong experienced at Cisco, where she led a successful go to market team of over 9000 people.

Sally joined Us as our Chief marketing officer, as we scale, our marketing function for strong future growth.

She is a result, driven marketing leader with many years of experience at companies like Informatica, Vmware and Symantec.

They are both great additions to our company and I look forward to the impact there will have on our growth.

Similar to the addition of Allison in Sally looking ahead, I see an opportunity to bring in a season go to market leader, who has built in seen multi billion dollar scale as we addressed at large and exciting market opportunity ahead of us.

Accordingly, Aaron Cat will step down from his current role as Chief revenue Officer, and immediately move to an advisory role.

I would like to thank era and for his many contributions to elastic over the years. During his tenure, we have delivered rapid growth and laid a strong foundation for the future.

In the near term, Justin Hoffman, and we'll step by step in to lead our global sales efforts.

I expect this to be a smooth transition since Justin has already been successfully running sales for the Americas EMEA since he joined US almost seven years ago and those two regions make up the vast majority of our global business.

We remain focused on our efforts to provide more customer value through making solutions that are easy enjoyable to use delivering on differentiated product innovation and a strong go to market strategy through our Salesforce and partnership.

And with that I'll hand, it over to generic to cover the details of our financial performance.

Thanks try we're pleased with our strong performance in the third quarter, which reflects continued execution against our large market opportunity.

As Troy mentioned the quarter strength was broad based across enterprise search observe ability and security driven by strong new and existing customer growth across segments and geographies.

I'll cover our Q3 performance first and then provide an outlook for Q4 and the full fiscal year.

Total revenue for the third quarter was $113.2 million growing 60% year over year as reported or 61% on a constant currency basis.

44%, if our revenue came from outside the United States, reflecting the strength of our bottom up community based adoption model.

As I've mentioned before we view this geographic distribution as a long term strength of our business model.

Subscription revenue totaled $104.2 million, an increase of 61% year over year as reported or 63% on a constant currency basis and comprised 92% about total revenue.

We continue to benefit from a robust product offering underpinned by a single technology stack and a unified pricing model, which we believe positions us well for the long term.

Within subscriptions the rapid adoption of our SAS offerings continues to be the largest driver of our overall growth.

Revenue from elastic cloud, which was our family of SaaS products was strong at $25.1 million growing 114% year over year as reported or 118% on a constant currency basis.

We saw strength in both our annual SaaS business as well as our monthly SaaS business.

Our rapid growth and increasing scale incest reflect the success of our strategy to widen of each advantages over competitive offerings and leverage our partnerships.

Customers of all sizes are demonstrating a preference for elastic cloud.

We are confident that these customer trends combined with how continued investments in our SaaS business can drive fast growth faster than our overall business growth in the future.

Professional services revenue was $9 million, an increase of 44% 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 and consulting offerings, which continues to be enablers of subscription growth.

Moving on to calculated billings.

Collated billings in Q3 grew 54% year over year or 56% on a constant currency basis to $122.9 million.

To provide a bit of geographic color. It TJ was once again the fastest growing region, followed by the Americas and then EMEA.

Within the United States, we successfully closed a portion of the fed deals that were delayed in Q2.

At the end of Q3 total deferred revenue was approximately $209.8 million up 52% year over year.

Remaining performance obligations totaled approximately $426 million up 40% year over year.

Although we do not actively manage the business with target contract length contract lengths, but slightly shorter compared to a year ago, but continue to be roughly one and a half years on average.

As a reminder, our monthly SaaS business has no deferred revenue all remaining performance obligations.

Turning to customer metrics.

As of the end of Q3, we had over 10500 total subscription customers compared to over 9700, such customers at the end of Q2.

We saw similar strength in new customer additions in Q3, as we have seen in prior quarters.

The majority of the growth in total subscription customers came from elastic cloud, reflecting the product and market strength I referenced earlier.

We also ended the quarter with more than 570 customers with annual contract values above $100000 compared to more than 525, such customers at the end of Q2.

Our existing customers continue to expand their relationships with us reflecting increased spend for existing use cases and adoption of new use cases.

In Q3, our net expansion rate remained over 130%.

Overall, we were pleased with our customer metrics as we continue to execute against a significant market opportunity ahead of us.

Now turning to profitability, which was non-GAAP.

Gross profit in the third quarter was $84.7 million, representing a gross margin of 74.8%.

We are tracking well relative to our expectations.

In the near term, we will continue to invest in our fast business, which will remain a modest headwind to gross margin overall.

Looking at operating expenses in Q3, we managed our investments and spending well as we remain focused on driving topline growth, while scaling our investments with discipline.

Our operating loss in the quarter was $20.2 million with an operating margin of negative, 17.8%, which was better than expected primarily due to the strong revenue performance in the quarter.

This reflects the strength of our underlying business model.

The FX impact on operating margin was insignificant since we have natural hedges as we incur expenses globally as a distributor company.

Net loss per share in Q3 was 28 cents using 80.7 million weighted average shares outstanding.

This compares to a net loss per share in Q3 of last year of 16 cents.

Turning to free cash flow.

Free cash flow was negative $24.2 million in Q3 compared to negative $9.9 million in the same period, a year ago, reflecting timing differences of certain inflows and outflows.

As a reminder, we look at free cash flow and free cash flow margin, primarily on an annual basis syncera, both seasonal and timing effects in any quarter, making quarterly cash flow inherently lumpy.

We continue to expect modest improvement in free cash flow margin for the fiscal year.

We ended the third quarter with approximately $294.1 million in cash and cash equivalents, we remain comfortable with our cash position from an operating perspective.

Turning to guidance for the fourth quarter and the full year fiscal 2020.

At the start of the a we laid out our investment strategy of driving revenue growth and accelerating organic headcount related investments and reinvesting the operating leverage inherent in our business model back into R&D to drive longer term growth.

The acquisition of end game in Q2 bolstered our investments further.

We've executed well according to that plan so far.

For the fourth quarter fiscal Twentytwenty, we expect revenue in the range of $119 million to $120 million, representing 48% year over year growth at the midpoint.

We expect non-GAAP operating margin to be in the range of negative 20.5% to negative 19.5% and non-GAAP net loss per share in the range of 32 cents to 30 cents using between 82 million and 83 million weighted average ordinary shares outstanding.

For the full year fiscal Twentytwenty, we expect revenue in the range of $423 million to $424 million.

Representing 56% year over year growth at the midpoint.

We expect non-GAAP operating margin to be approximately negative, 20.5% and non-GAAP net loss per share in the range of $1.13 cents to one dollar and 12 cents using approximately 79 million weighted average ordinary shares outstanding.

In closing I'm pleased that we delivered yet another strong quarter.

We remain excited about our long term market opportunity and competitive positioning as we prepare to close out the.

With that let's open it up for questions operator.

We will now begin the question and answer session to ask a question you make press Star then one on your telephone keypad, if you're using speakerphone. Please pick up your handset therefore pressing the keys to withdraw your question. Please press Star then Kim.

Our first question comes from Brent sale with Jefferies.

Thank you good afternoon odd if curious if you could just give an update on some of the federal deals from last quarter. The status of those transactions and just secondarily, Microsoft Preannounce negatively due to the krona virus curious if you're hearing any change in tone in the overall I T environment and what you're seeing.

With a with the current situation. Thank you.

Hey, Brent its donation maybe I'll take the first thought if that question and then let's try to talk about the impact of Corona virus.

So overall as I look back on the quarter, we are actually quite pleased with the performance that we delivered obviously strong performance across many different fronts in Q3.

Across revenue and I'm not just total revenue, but also in terms of SaaS revenue will be more than doubled year over year as I mentioned in my prepared remarks, a portion of the fed deals did close which help the billings growth a little bit.

But we had many successes more broadly through the rest of the business as well and those are reflected in the rest of the metrics that we talk about so there's quite a bit for us to be pleased about in terms of the performance in the quarter.

And in terms of any.

If any remaining deals I'll touch on that as well.

As I mentioned in Q2, there were a handful of deals that had slipped then we closed some of those here. So there are still a few deals in the pipeline, but I will point out that the timing continues to just remain unpredictable on those so I don't see any significant risk or upside in Q4 from those remaining deals I'm also recall that Q4 is seasonally our largest quota so.

At this point I'm looking at the remaining deals just like any other deals in our overall pipeline and I don't expect it to cover those in future quarters.

Yeah, maybe I can take the Corona virus a question. So first of all our Hearts go to everybody are affected by the vars and their near and Dear ones.

I do situation changes, but admitted it seems obviously, we're paying very very close attention to it as a company.

Specifically when it comes to China. Our exposure there is very small most of our business come vast majority of our business come from outside of China.

And when it comes to the rest of the wall that once they were paying very close attention to it we are at the very distributed company is as a team.

Which helps so be it when it comes to internally as a company to continuing to operate but the effect that it has on the global market is something that we're paying close attention to.

Great. Thank you.

Our next question comes from Mark Murphy with JP Morgan.

Thank you I'll add my congrats and a an error and you will be best and best of luck and all your future endeavors.

Shy, we've heard a couple of suggestions recently that companies are putting about 10% of new cloud a budget into this category of logging monitoring metric et cetera, and it seems like a surprisingly large percentage that would be directed toward elastic and a few other companies focused on.

In that area does that align with your input or is that where is the range kind of to variable across different customers to try to Ah pinpointed [noise].

Yeah, I'm not familiar with the number specifically that you mentioned, but I mean, we've seen companies adopt our logging solution for many years ER and that need to be able to go now and observe your whole infrastructure. Your application in your deployment is only increasing observe ability is relatively new but it has.

Become.

A term if you will very quickly.

And I think it maps to the need that companies have whether it's on cloud or on prime to be able to better observed or infrastructure.

That involves not only logging, but that involves JPM and infrastructure monitoring.

And I think maybe what you see is what something that I believe in which is New York opportunity that you have in do you observe a better to space is actually bigger than the summation of these or other spaces combined.

I do think that also if I may I mentioned on the call I think as companies are built on crime and they moved to cloud that bear the need to be able to August we observed their infrastructure and their deployment only increases at the need to secure this infrastructure also increases which makes me excited about our security investments.

And also the fact that our strategy is to be there for.

Our customers wherever they are I mentioned on the call that data has gravity to it and our ability to go and deploy our.

Solutions next door the consumers are whether it's on a self manager on prem basis, or whether it's on various cloud providers resonates with our users.

Thank you at Cheyenne Generics just a quick follow up is there anything else holding back the RPL growth.

Sequentially and year over year other than the contract duration and then I guess I'm just wondering could you normalize that RPM number at all for the duration and anything you can do there too.

Help us understand the impact.

Yeah, Mark says I think about our appeal you mentioned, both the ARPU growth as well as a billings sort of calculation based on that RPL growth in terms of the ARPU I think the primary factor is the contract durations that it looks like the short as I mentioned, they still hover around the one and a half year, mark and in any particular quarter there.

And all these bounce around by a couple of months up or down.

And so that's a little bit of what we saw over here in terms of quantifying that we haven't done that discreetly a and on our appeal billings are specifically a you know that's a metric that I've mentioned before it's less meaningful for us because we don't actually manage the business actively do a particular duration, we managed primarily based on HCV.

And as I talk to our sales teams and as we think about the overall economics of a transaction I, we try and maximize the.

The overall economics for ourselves rather than a providing concessions for long term contracts that are that are beyond what we would ordinarily provide so so that's why we focus mainly on or on the calculated billings and revenue as a primary metrics that we look at when we measure the business, but broadly we've not seen any any big changes.

Overall do you metrics and we just continue to be quite happy with the way we've executed here in Q3 and I'm looking forward to Q4.

Thank you.

Our next question comes from Heather Bellini with Goldman Sachs.

Great. Thank you so much I had two questions one for international one per Shai I guess generic it's just following up I think a little bit to Mark's question, just trying to get a sense for even for the percentage of your contract that might be less than one year, because if we if we look at the current.

Balance of unearned revenue.

I mean, that's becoming kind of inline with expectations, but but I'm just wondering if there's anything to the current number that's getting impacted by contract duration, maybe for a certain percentage you burned stalled they see less if there's any.

And any changes in that amount and then secondly, burgeoned actually I was just wondering when with endpoint given given obviously that's a relatively recent acquisition. Just wondering I know you gave some highlights in your prepared remarks kind of who are you seeing most often when you're when you're competing for business and you know can you talk about.

Maybe that competitive advantage is that you're seeing burst into your primary competitor. Thanks.

Hey, how that's today, so I'll take the first part of that in terms of the nature of the business that's less than one year in duration. A you know the primary piece there is the monthly Saskatoon pulling into a fee overall SaaS business and there again, we were quite pleased with the performance of that part of Hsas and in fact, obviously SAS as a whole as well.

Well the monthly SaaS component continued to be roughly 10% of total revenue and a continued to grow quite rapidly or the way. We think about it is that the web self service option. It's a great way for us to acquire new customers and then nurture them and watch them grow over time, and that's all net new business.

Oh quickly point out that the monthly satisfy the we also includes the on demand usage, that's above the contracted a rate for annual SaaS customers. So as I think about the impacts there again, it's a it grew at a pretty healthy pace consistent with the overall rate of of SaaS growth and its it's hard to predict the growth rate in that monthly.

Component because customers might move to annual contracts, what might move to different kinds of models that better accommodate their uneven consumption. So that's why I prefer to look at the SaaS business as a whole than we do see the total SaaS business continuing to grow faster than the rate to fuel growth business.

Yeah, maybe I can I can touch on the endpoint question. So first of all we closed to turn it back to their transaction only recently D. N game team has joined us and I will mention how.

Impressive I have been with the team joining us we have more than 100 engineers, joining our security solution team now and they've already shown their capabilities that we can deliver not only when it comes to endpoint, but also tour for assume solution. A we just GE aydar assume solution a this quarter and together.

With that we delivered the one of the highly requested features that we had a in the roadmap, which is our detection engine, but together with that as well we had our protection team now that came from endgame that delivered more than 100 prepackaged rules for it.

As I look forward towards the upward opportunities yeah, we have around endpoint, how we're making significant investments to fold the endpoint product into our own elastic stack or to really aligned with our vision that there's a single technology stack that that delivers all of the various solutions that we put.

Vide, we've done the same thing three years ago, where they P. M and we're seeing the results now when it comes to competition I'll mention that end game developed a one of the best endpoint protection solutions today, and obviously, we provide the ability for customers to engage with us commercially on it a and the competition varies across.

Your usual players in the space out from.

The legacy vendors like Mcafee N C met that to a new ones like carbon black and I'm proud strikes and others.

Great. Thank you so much.

Our next question comes from Raimo Lenschow with Barclays.

Yeah, Hey, congrats on a great quarter for start the and I was wondering like the Youre your comp business has been doing well and we have now we've seen our like for quarter of accelerating growth there and we're just really nice to see but can you talk like how is that impacting your your car took a customer addition.

Well, you kind of overtime kind of start signing more customers because they are coming on to lower price point or how do I have to think about that.

Hearing what so generic <unk> I'll take that so you know broadly the SaaS business. As you noted has been phone has been performing really well even in the past quarter we had.

A large number of net new customers that that came into a msas and we also saw significant expansion we've invested quite heavily in the SaaS business expanding availability across a hosting providers as well as our geographically and shy touched on some of those investments and regions and we've also I'm sorry.

To add more marketing resources that focus on onsite. So the strength that we are seeing in SAS really as a result of all of these factors.

From the standpoint of customers you know that the elastic cloud piece, a monthly SAS components continue to attract a a large number of customers a lot of the net new customers that we added in Q3 and that we've added in prior quarters I start with house on cloud, it's a really easy on ramp it's pretty easy to get started and from.

There are they continue to grow with us.

But obviously as a numbers get bigger gets harder to sustain our triple digit growth, but we do expect that are that the SaaS business will grow nicely for us and over time those customers will continue to expand their spend with us the averages can be a little bit misleading because you can have very wide ranges or I've got customers and that makes that started spending a few hundred.

<unk> dollars with us and have expanded to be multimillion dollar customers. When we've got some customers and that started at a few hundred dollars and Anna still today only a few hundred dollars. So it can be a very wide range, but overall, we continue to see pretty strong expansion dynamics in that part of the business as well.

Perfect and then one follow up for shy. The if you look at observe ability you know like everyone is competing but you guys are going to bring the message to cover off like having it all in one place, including also security, but on on some of the importance parts of that you're probably starting from a.

Slightly from behind Werent, if the customer thinking in there in terms of.

Having best of breed and some of those you know solutions versus kind of actually seeing the benefit of one platform and its very like a tipping point coming at some point or how do you think about that dynamic.

Yeah. So a a few points about that first of all we've been one of the most popular logging solution out there for many years now so Africa when it comes to the full observe ability space is around various companies in various areas.

Or other solutions like a P.M. and infrastructure monitoring realizing that it also acting and trying to to address the observer ability opportunity that is in front of them.

I would mention that we have been seeing be strand happening for more than three years, a we acquired the NAPM a company about three years ago seeing the the need to provide what is now called observe ability.

We worked and invested quite hard on R&D efforts to try to folded into a single technology stack because we're truly believe that if from if markets folds in new products falls and they become features.

That means that a a strong technology stack a in a single experienced triumph.

We also taking that to market in how we brought on how we package and price our products. So we don't have different skews for the different solutions and that's really really resonates with our customer base.

And we're doing the same thing that would security.

I think as I mentioned before I think the observer, but if the opportunity in front of us is bigger than the summation of logging infrastructure monitoring or a P. M. A because more walk loads are moving to cloud more infrastructure needs to be monitored you know observed a and we're well positioned to be able to go going to address that.

Okay perfect. Thank you for them.

Our next question comes from Kash Rangan with Bank of America.

Hey, guys. Thank you Sir Thank you were taking my question congratulations on the quarter.

Hi, I'm, Oh, I would love to get your perspective on the single platform, but that Youre architecting the products that around that strategy as it was little played really well have a grassroots level at the developer level, but that's the deal sizes become larger your your competition your industry. So fragmented them that you haven't absorb.

Notably vendor emitter and security later and logs or is there a risk that you are ahead of the curve and that you're waiting for the convergence to happen, but the buying centers are still very separate and that it might complicated sales cycles for the foreseeable future while being very respectful of the fact that you're building. This all our platform and that context what are you.

Looking for with the new Chief revenue officer that are looking for what kinda quantities or what kind of experience or you're looking for especially as the so buying centers, which are signed yesterday that may or conversion the future what does it take to succeed from a go to market standpoint. Thank you yeah, thanks cash or some of it.

I'm sorry, the fact that we're building our solution or a single platform first of all manifest itself you're monarch in our ability to have a power plays are compounding results on our investments. So for example, what are we going to add a drag and drop of his organization called coupon or lands into our core stack it means that suddenly.

Every single Dev ops person or security practitioner becomes a business analyst if you will not there, but if you're going to visualize it.

I said that that I believe manifest itself in our ability to go in and have an efficient R&D. When it comes to try to address all of the various solutions that we we have.

We don't necessarily want to force organization lines to break where it will happily Sal we didn't do you observe ability space a into one division that needs blogging and another one is that needs a P M.

And definitely when it comes to the differentiation between observe ability and security will help really engage with the various buying centers in order to provide them the solutions that they need.

I am encouraged by the fact that we have to a promising factors from my perspective. The first one is that any login users suddenly get exposed with very little effort into the rest of the observer ability paradigm and as you see that market matures and people realize that that's needed.

Bend that resonates with them and as you go up up into the enterprise Bob the the CIO isn't and the Csos that I'm talking to our packaging and pricing ease of use. The fact that users don't have to train on multiple various products, if and when a single accompany delivers it might be multiple products.

Really resonates with them so they see the ability to actually bad on a single company that can see them through in induce vision of observe ability and then security also as abroad.

To your second question around what we're looking for ER in in in a COO.

Yeah, We just had sally join us a to be our CMO hours and hours you see the effect of someone that has seen a scale bring to our company Oh, we had a strong very strong foundation, you know marketing team already but as I think about how do we.

How do we position our company to capture the opportunity that we have in front of us and really the wrote to get to move 2 billion dollar company in revenue I'm looking for someone that can come in and have the similar effect and set the next set of foundations and make sure that we go into dressed structurally or the opportunity out in front of us, especially as you mention across various business.

I'm going across various solutions.

Best wishes guys. Congratulations thank you very much cash Thanksgiving.

Our next question comes from Matt Hedberg with RBC capital markets.

Hey, guys congrats on the quarter, thanks for taking my questions.

A lot of us or at our say this weekend and I'm wondering you know shine when you look at your progress on becoming more of a.

Vendor in the security space, you know from a customer market for section standpoint, what are other things. He could you sort of have people think if you guys in that light.

Yeah. So we're a it's a great question first of all I spend a whole day yesterday at our assai a it was a great event from our perspective, we actually had to booth [laughter] at our essay and game how to both before and we had a pretty big presence there.

Even with our said, which is more business oriented conference or you could see people getting drone I think we had full capacity in every single demo in every single a every single time that we showed our products. The excitement is issues is contagious.

When it comes to a two hour efforts into security space and that's practitioners.

There are also resonated really well with our recent release of the excitement that their practitioners themselves have around our detection engine and the seem improvements that we've done an endpoint and it can't wait to have endpoint protection.

But that just like I feel like it's it's similar to what we had about six or seven years ago. When it comes to the logging space.

At the same time go I had meetings all day, a in our saying I was reading with Cisos and CIO is that that are.

Varying to.

They are actually making buying decisions that are making decisions around which technologies and which vendors that have begun a bad on towards the future and that can satisfy their needs when it comes to the security.

Space in our story resonates with them our story around the convergence of seem an endpoint.

Our resource base pricing and packaging a the fact everything is built on top of a single stack or do you observe ability and security use cases, all of that really resonates with our customer base in our user base and everybody that I'm talking to and I'm going courage by it.

And that's Super helpful. Try Thanks, and then maybe another product question. The beta version of Cabana lens was launched this corner feels like really big step forward on the B. I side of it really is making business data more consumable front, our technical users could you talk a bit more about that product how it might help sort of broader enterprise adoption and consumption of elastic.

Yeah of course.

First our stuff, we're saying that one of the things that I really like about what we do is we're really trying to think about I mentioned first principles and if you think about the technology stack as being layered this like how low can we implement it in a way that ends up manifesting itself of course, all of our solutions and I think you bundle and she is a great example of that.

And I'll start with just saying like even developers practitioners or or users on the ground. They love simple tools, you know our developers become consumers they want to be able to have simple and easy to use tools and they love. The fact and the the reaction that we got to lands was amazing and they love. The fact that they can take and apply lands on.

Top of zero, because everybody to data on top of their security data or even enterprise search data.

As we make inroads into the space, we have what we call though.

The other use cases, you know the fraud detection that elasticsearch is being used for and matching rides on Hoover and tons of use cases that that Alaska is being used to that I somehow it somewhat hard to bucket into these three major solutions that we have end up by search observer baked in security and definitely business analytics falls into them at work.

Making tactical investments that helps us go in and slowly mature also in this space, but for now where we're spending all of our time being highly focused on the street solutions that I mentioned.

Thanks, well done guys.

Thank you.

Our next question comes from Brent Bracelin with Piper Stanley.

Thank you and good afternoon, I guess had one for sure shy and one for international shy.

As we approach the one year anniversary of Amazon Open District was I was wondering if you could just share with us what have you learned about that competitor in the last year in and if you could just kind of maybe explain.

Despite.

Increased competitive overlap why that cloud SaaS business is actually accelerating here in the short run intuitively I would think you're with more competition you wouldn't see acceleration show you know what you've learned about you know opened this during the last year and why is that SaaS business accelerating and then quick one for generic.

Yeah, So maybe I can take that so first of all the situation at least from our perspective when it comes to open distro hasn't change, we see very little adoption of it our users come and still download and deploy our software ER and the capabilities that we delivered to them really resonates.

We said on a path to start to create differentiator differentiation on the product level through our free yet proprietary features.

Same is one of them at the elastic security same product Cubana lands is another and the amount of differentiated features. These just increasing exponentially every single release. So I'm really encouraged by that that also has resonated with our user base they want to get a product that actually deliver their outcomes that they look for.

Better happily engage with us on a community level when it comes to the fact that part of it is free proprietary and open.

And I think that that helps just drive the larger adoption that we have.

And the vast majority of our downloads and obviously our deployments because we're the only one that can provided a includes our de for distribution, which is basically our includes both open source and our proprietary features I think for all of these reasons, we haven't seen opened distro really.

Make any change or difference for us.

When it comes to SAS. The answer is the same a we're driving full product differentiation and the only way that you can get elastic same or elastic lands cubana lands or other major substantial solution oriented features as well as low level optimization ones.

He is our cloud service and our users are seeing that and they're using our SaaS services to be able to get the best product possible.

Now for color there and then just.

Last year as we think about 2020 here I know in games, you know contributing but operating expense growth will actually be faster than revenue for the first time, a that we've seen a your operating expenses now are gonna be north of $400 million. I guess my question really is from a philosophy standpoint, given the accelerated and.

Segments that you made I get this year, but what is your general philosophy around kind of showing now that you're going to be above a 400 million dollar opex spend going into next year. What's your philosophy around trying to show some leverage on on that investment that aggressive investments that you've made this year.

Yeah. Thanks, Ben So you know broadly I'll say, we continue to see a pretty rich market opportunity ahead of us in enterprise search observe ability as well as security in the near term we are focused on continuing to grow and scale the business as recapture that opportunity and we've been investing against that market opportunity at the start of this fiscal year.

Oh, we laid out our plan to accelerate organic hiring into the first half and then we actually doubled down with end game with closing that transaction in Q2. So as you point out there was sick or significant investment there.

And we executed well according to the plan that we laid out so we've had pretty strong results every quarter, we raised our outlook every quarter and manage the dilution from end game quite nicely and you'll see have raised the op margin outlook for for fiscal 20 again.

And as I think about the future along that we continue that data. We continue to believe that we'll invest in a disciplined way a commensurate with the growth opportunity that we see.

Importantly, or against we'll invest against our execution against that opportunity as well. So it's it's important for us to be good stewards of capital if we see the opportunity to invest in growth. We will if not then we will adjust accordingly, and and there is leverage inherent in the model, which we've demonstrated this year end and then we will take I take that core so.

I'll give you a view on how we see fiscal 2001 unfolding in about 90 days time, but Oh conceptually we are aligned with the thought that we need to we need to continue to grow the business and invest against that growth.

And and that gives us the a the ability to drive the business forward in fiscal 21.

Couple of color. Thank you.

Our next question comes from Tyler Radke with Citi.

Hey, Thanks, Good afternoon shy you in your prepared remarks, you talked about a enterprise search I felt like more than you.

You normally have and I think mentioned some some competitive displacements, maybe just talk about that market opportunity was it was at a higher mix of use cases.

And then typical this quarter and and maybe just give us a sense on how that competitive environments evolving. Thank you.

Yeah of course, a habit too so first of all I'll start with saying that observer basically.

Still represents a the biggest out of the three solutions that we have as and when it comes to landing customers or the mix that we have.

I am excited about the enterprise search opportunity for multiple reasons. The first one is weve establish ourself as a leader in the enterprise search space for.

Many years now Oh, we have a one of the most popular search engines out there and we've been implementing other parts search use cases for for many years and even within the enterprise search solution, though we have a whole team that continues to continues to not only think about the president but also about the future and what we get way.

Working with ticket forward well, we chatted about creating products that are more consumer oriented we believe that there's an opportunity to take these products through to the workplace and being able to with one click deployment connect to all of your SaaS services, a and B go to go in search easily and within seconds Youre Zoom Chad.

So your slack messages your Salesforce data Workday service now another tools.

We're working on this product it's in better version now and we think that that's that's another opportunity for us within the enterprise search phase two to really revisit some core assumption that has been down over the last few years.

Thanks, and maybe I could ask a follow up.

Just on <unk> generics for the is as I think about the the cloud business to SaaS business. You know I think historically, you you'd kind of cautioned us on on modeling that too you know continuing kind of going up to the right as a percentage of overall revenue and I know you know the last couple of quarters you.

Kind of seen a tailwind of lapping the SaaS pricing headwinds.

How should we just think about the sustainability of I'm kind of the the growth rate of that that business. I mean, it's kind of growing at almost double the rate of of overall is that more of a an optical kind of phenomenon just from the lapping of that the the tailwinds or is there a.

Is there kind of a fundamental reason that maybe that should continue thanks, yeah. Tyler a couple of different dimensions did that answer. So you know one is in terms of the growth rates that we've seen as I mentioned earlier significant part of that as because if the investments that we've made in the business and in the the reach as well as.

As a the customer acquisition efforts that we've got over there. So we've been quite pleased overall with the growth rate of the SaaS business as a whole and we continue to be excited about the the possibilities on that front as well the team has executed really well over the course of Ah Q3, as well as a the probably the quote on the SaaS side.

So you know we've seen this broad based strength in SaaS, but as we've said longer to or the growth in hsas will generally mineral customer preferences, and where their workloads reside and so as a business grows I think it'll be hard to sustain triple digit growth, but we do expect SaaS to continue to grow faster than the rate of or the growth in the a in the overall business.

So we continue to be really excited about the the possibilities on the SaaS business.

Thanks.

And our last question will come from Ittai Kidron with Oppenheimer.

Hi, This is George I want to cover a tight.

Ah, Yes, maybe can you give us a sense of your assumptions for the Atlanta virus or are you building in any conservatism.

The guidance for that.

Not particularly right as Sean mentioned, we are watching the situation quite carefully and it seems to be evolving in near real time. So it's it's a little bit hard for us to think about that and the potential impact it might have but broadly I can tell you that you know the way we've constructed guidances.

It's still reflect all the things that we know about the business at this point in time, we're quite pleased with the a track record that we've had so far in terms of delivering yet see expectations that are that weve set forth, but Q4 is a pretty large quarter for us and there's a lot that we need to get done over the next 60 days.

So we haven't discreetly factored in any particular disruptions into the business, we'll keep an eye on that one of the advantages of us being a distributor company is that that a weekend were a little bit more resilient. If you will from that standpoint, but obviously to the extent that we start to see things happening more broadly in the marketplace with our customers.

And and partners in our community and if there are travel restrictions and so forth that can tell you have an impact and if not discreetly thought about any of that.

But broadly speaking I can tell you that at this point the guide reflects a my best view of the business based on on everything we know here and now.

All right and you mentioned that need close some of the that deal have you lost any of those and the ones that are remaining made what kind of timeframe do you think a close glass.

Yeah, you know broadly so the short answer is no we didn't lose any of those competitively Ah, but I'll tell you you know looking back we're quite pleased with outperformance overall in the fed space and also in public sector worldwide.

We did close some of the deals we had several strong security wins as well and the in the public sector space. Overall, so we continue to work very closely with or without customers. Both in fed as well as a more broadly in public sector. The remaining deals that are in the pipeline or the timing continues to be unpredictable, but as I said its.

Not gonna have a meaningful impact one way or another here and in Q4 and at this point I just look at them like I do any other deals that are a in the pipeline.

All right. Thank you again, congrats on the solid quarter.

Thank you.

This concludes our question and answer session I would like to turn the conference back over to shy banning for any closing remarks.

Thank you all for joining the call Q3 was a strong quarter for US we remain focused on addressing the large an exciting market opportunity ahead of us and look forward to sharing our progress with you again next quarter.

Bye.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.