Q3 2021 Elastic NV Earnings Call

[music].

Good afternoon, and welcome to the elastic third quarter of fiscal 2021 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal of a conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.

To withdraw your questions. Please press Star then two.

Please note this event is being recorded.

I would now like to turn the conference over to Anthony Law Scree, 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 elastic third quarter of fiscal 2021 financial results call, we have tried and founder and chief Exec.

Okay. The Balkan sure International more Johnny Chief Financial Officer, following their prepared remarks, we will take questions.

Our press release was issued today after the close of market and is posted on our website slides, which accompany this webcast can be viewed in conjunction with live remarks and can also be downloaded at the conclusion of the webcast on the elastic Investor Relations website IR of elastic got the T O.

Our discussion will include forward looking statements, which may include predictions estimates or expectations regarding the impact of the COVID-19 pandemic and other information. These forward looking statements are based on factors currently known to US speak only as of the date of this call and are subject to risks and uncertainties that could cause actual results to differ materially.

We disclaim any obligation to update or revise these forward looking statements unless required by law. Please.

Please refer to the risks and uncertainties included in the press release, the we issued earlier today and included in the slides accompanying this webcast. The knows more fully described in our filings with the Securities and Exchange Commission.

We will also discuss certain non-GAAP financial measures disclosures regarding these non-GAAP measures, including reconciliations with the most comparable GAAP measures can be found in the press release and slides.

The webcast replay of this call will be available for the next 60 days on our company website under the Investor Relations link our fourth quarter of fiscal 2021 quiet period begins at the close of business Friday April 16, 2021, we'd also like to inform you that we would be participating in the truest Securities technology Internet and services conference on March 10th in the Bahrenburg cyber secure.

The and Dev Ops conference on March 12, with that I'll turn it over to Shai.

Thank you Anthony.

I'm happy to share some highlights from Q3 with year to date. It has been a busy start to the year and I am very proud of everything that we've accomplished this quarter I am truly humbled to see the rapid innovation of box solutions growth in our cloud business and all of deepening customer relationships as we scale on our go to market strategy.

The continuing the optimism and resilience of our employees customers partners and communities. During these trying times are truly an inspiration.

We had a great quarter and once again, we showed strong execution against the ongoing mixed demand environment. In Q3 revenue grew at 39% year over year and we saw continued the robust customer acquisition and expansion metrics, we ended the quarter with more than 13800.

Sure the customers, including over 670 with an annual contract value of more than 100 thousands of dollars.

I'm proud of the team and the results in the innovations will deliver at the end of Q3.

Now I'd like to share more about those innovations with you.

At elastic every minor release has a major impact.

The aim to consistently launch new features every eight to 10 weeks on strategies to build three power force solutions enterprise search of mobility and security into a single technology stack.

This enables our customers to easily deploy any solution as the needs of their businesses of volt.

We recently announced the change to our licensing model moving on Apache to license the source code email on the church in coupon on to be dual license under the elastic license me too and the server side public life.

Giving users the choice of which license to apply.

We also simplified the elastic license and made it substantially more permissive keeping to our principles of openness transparency and collaboration.

Since introducing the elastic license three years ago, we've continuing to widen out feature of differentiation and have built a strong competitive moat as we've expanded our proprietary features set.

Our strong track record of execution, particularly on revenue growth and elastic cloud over the past several quarters.

All of that our growth strategy is working well.

This latest update further put backs are continuing the investment and extend our competitive differentiation. It ensures our community of customers have free and open access to use modify we distribute and collaborate on the code while restricting cloud service providers from offering the elastic search and keep on hours of service without country of bidding.

Back.

I am excited about the future of our products and solutions and confident that we'll continue our fast pace of development and innovation across the line ex that.

Two of my favorite examples of this innovation can come from our recent announcements of the general of an ability of searchable snapshots of the better all the scheme on wheat.

Both new features transform water of customers can do with the power of the elastic stack.

Search of all the snapshots of paid the enterprise level feature that lets customers retain of search more data on this.

Is a game changing enhancements that lets customers deep couple of computers from storage and extract the most value from their data on optimal cost.

We will be using search of on snapshots to power two new first class data tiers.

The Cold day, that's here now generally available help customers significantly reduce storage costs with modest impact on performance.

The frozen peer currently in development will take the step further making data stored exclusively in low cost of object stores fully searchable.

These new capabilities, making it easier and more cost effective for customers to manage growing data volume in the elastic while meeting data retention requirement.

We are already starting to see interest from customers.

Sap's concur recently expressed excitement or searchable snapshot.

<unk> that having the ability of search data stored in the S. Three expenses of options, allowing them to potentially reduce the total cost of service.

We believe this opens the door for more usage of the elastic across the company.

Blazing fast performance is why the elastic is known for but our customers have told us that sometimes they want to trade some of that speed for added flexibility with the dress. This with the recent launch of the better of schema on read which allows customers to create data structures on the fly.

Customers can now choose between the flexibility of schema on read or the blazing speed of scheme on right all in one step.

The innovations and the speed and flexibility that we are delivering are translating into benefits for our customers.

For example, we also close the business this quarter with the leading digital workflow company, who is using the elastic to power AI all the capabilities that gives customers deeper insights into the digital operations there.

It was taking the advantage of the speed of the elastic to analyze what caused the intelligence automation with mitigation task and reduce the number of level one incidence.

The cross cluster replication is also being leveraged to keep all global data in sync or the service.

Now on to our enterprise search solution, which powers search of cross websites applications in the workplace.

It's easy to use easy to scale and is it the connect.

It helps increase productivity and improve customer engagement, we're creating a consumer like experience built for the enterprise.

I'm thrilled that customers are responding so positive the two elastic workplace search our one stop answer shop or the virtual workplace.

For example, this quarter, we closed the business with a global cloud Communications platform company.

They needed to increase sales team productivity through self service cost of discovery.

Because of their teams are now fully remote and employees can tap of coworker of on the shoulder. The company wanted to ensure they have access to information needed to do their job.

They've chosen workplace search to help their sales rep serve customers more effectively and reduce the time. It takes the technical team to answer the product related questions.

We remain highly focused on creating simple beautiful search experiences for our users with.

We deepened our portfolio of content sources for workplace church, adding box to a growing list of out of the box connectors.

We also invested in the bed all of the new web crawler for elastic App search, giving users of simple yet powerful way to make web content instantly searchable on their websites.

They solve the day it is an important milestone in simplifying the lives of our users and enabling new use cases for enterprise customers.

Now on to our mobility solution, which unifies log metric and APM data analysis into one place it's easy to use eliminates data silos and low wars meantime to resolution.

We continue to see customers rapidly adopt our because of ability sort of a ship this quarter.

A great example of this is a fortune 50 U S telecommunication and media company that renewed business with us this quarter.

The originally came to us because they needed a way to get actionable insights from data that existed the cross multiple silos and different solutions.

With the elastic they are able to monetize the reliability of the video on demand service from their data center to the consumer books and back.

All in one place the.

They are replacing the previous logging solution with elastic combining the diverse set of projects into a single center of excellence powering next generation of observer ability across the company.

As companies move more of their business functions on line the ability to monitor the real time activity is mission critical or new service helps you in the elastic APM addresses this need and summarizes all of the information about the health of the service in one place, making it easier for customers to troubleshoot issues.

With this expanded visibility into service so customers are realizing that they can do more with our exit of the ability solution.

One of the World stopped on software companies by revenue for example started using the elastic for small logging cluster and has since expanded their business with us to capture of four times the data.

Now they've added APM traces to build out of single view of their environment.

And they can resolve issues more quickly and get deeper inside of their systems.

In addition, our new searchable snapshots capability help keep them sort of ability of data from logs metrics and traces on line and searchable for longer on customers told us They love that they can store 90, or 120 days of data and get the millisecond level of responses.

But they also want to be able to store years of data in an efficient way with.

We delivered on that request with searchable snapshots now customers can store years' worth of data and is an inquiry as needed to gain actionable insights without breaking the back.

Moving on to our security solution, which unifies the endpoint protection and the same into a single experience that is fast and scalable.

We continue to gain traction with large global enterprises looking to partner with the elastic thanks to our unified approach to security.

In Q3, we close the business with the German multinational engineering and Technology company, who is building out their global security strategy.

It turned to elastic to provide best in class protections for more than 425000 endpoints.

The company already Leverages, our enterprise search and observe mobility solutions.

Further an expanded their relationship with US to include our end to end security solution.

This is another example of how our customers can easily expand into multiple use cases with the power of our three solutions built into a single technology stack.

We continue to invest in our security solution to help customers eliminate blind spots stop threats of scale and arm every analyst.

We recently launched prebuilt machine learning jobs didn't detection of goals supporting Mitre sub techniques to operationalize analytics and provide a deeper understanding of how it stacks are unfolding within an organization.

We also closed business with the European Law enforcement agency looking to gain full of visibility inside the speed to act within their infrastructure the.

The agency chose elastic because they see the value in investing in a single platform Forbes of mobility and security, while managing total cost of ownership.

They are deploying elastic security as the full featured Syn <unk>.

And endpoint protection solution on more than 35000 device.

Because while you observe why not protect.

I'm excited to see how our unified technology stack and resource based pricing model are helping customers expand to multiple use cases and do more with their data.

The innovation in all of us that translate into the rent benefit for security teams with searchable snapshots James can benefit from direct access two years of the high volume data with significant cost savings.

This supports the use cases across all of security operations from compliance to seem to threat hunting and more.

Extending the retention of security of data ensures that even one of the facing extremely long dwell times practitioners have the data they need.

Now onto our cloud business, we're making it easy to deploy and scale of our solutions with the elastic cloud, which is available on Microsoft Azure, Google Cloud AWS Alibaba and Tencent.

Our ease of use and simplified management make elastic cloud of clear choice for customers.

We've also added some incredibly powerful features to elastic cloud.

Notably the ability to easily replicated on the church of cross cloud providers in rigid <unk>.

Imagine you're running multiple of laughing deployments around the world on the Azure, Google cloud or AWS.

Data has gravity and the customers want to keep their data where each of originates.

Now they can break down silos by accessing connecting and even replicating the global data using elastic in multi cloud and multi region environments without being locked into a single vendor.

And of course, our innovations in the elastic stack of bringing powerful enhancements to elastic cloud and easy to use called tiers later in the elastic cloud powered by searchable snapshots make it easy for customers to return more data for longer at the same cost.

As we continue to scale our business, we welcome Ashkelon Karni as Chief product Officer.

<unk> has more than 20 years of experience in enterprise software and has led product and engineering teams at leading companies, including Mcafee Akamai and Informatica.

I am excited to be working alongside ash as we continue to bring the power of search to our community and customers and expand our elastic cloud presence globally.

At elastic communities more than just code I'm excited to share that in two days will be hosting our first ever global the elastic community conflicts of.

Virtual event filled with insightful technical content delivered by our community members and elastic employees.

And I was thrilled to see that elastic employees raised more than 400 thousands of dollars on giving Tuesday.

Part of our elastic cares initiative.

I am excited about where the team is headed and what's to come as we move into the final quarter of our fiscal year on.

I'll hand, it over to <unk>.

Thanks, Troy and thanks again to everyone for joining US Q3 was another excellent quarter for the elastic we once again delivered strong performance on all our key growth and profitability metrics.

Total revenue for the quarter was 157 $1 million growing 39% year over year.

We are very pleased with our performance, which reflects continued execution against our large market opportunity.

During the third quarter the demand environment remained generally similar to the first half of the year Asics.

As expected we saw some headwinds from COVID-19 related to overall spending and slightly longer sales cycles as compared to pre pandemic levels offset by deal wins in cloud and adoption of part of solutions.

Our execution against this backdrop remains consistently strong.

Subscription revenue totaled 147 $2 million comprising 94% of build the revenue.

Within the subscriptions revenue from elastic cloud was again strong at $44 $9 million growing 79% year over year as customers continue to express a preference for our cloud offerings as they grow their workloads into the cloud.

We saw strength in both of our annual SaaS businesses, whereas on a monthly SaaS business.

We have rich feature advantages over the other cloud offerings and continue to invest in expanding our reach and the partnerships.

Looking ahead, we remain confident that elastic cloud will continue to deliver faster year over year gross on our overall business.

Professional services revenue was $9 $9 million growing 10% year over year as.

As I've said, the four services revenue can fluctuate across quarters, depending on the timing of projects in delivery.

Moving on to calculated billings.

Calculated billings in Q3 grew 41% year over year to $173 $2 million.

Looking ahead, although we don't formally guide the calculated billings I will point out that Q4 presents a tough comparison, given we had a strong quarter last year.

At the end of Q3 total deferred revenue was $334 million up 59% year over year.

The remaining performance obligations totaled approximately $706 million up 66% year over year.

Contract lengths, but slightly longer compared to a year ago, and we're a little over 1.5 years on average.

As we've said before we do not actively manage the business to a target contract length.

We've been pleased with the multiyear commitments that customers are making to us reflecting the importance of thought of solutions to their long term success.

As a reminder of monthly SaaS business has no deferred revenue or the remaining performance obligations.

Turning to customer metrics as.

As of the end of Q3, we had over 13800 total subscription customers and over 670 customers with annual contract values above $100000.

On net expansion rate remained modestly above 130%.

Our continuing strong customer acquisition and expansion metrics demonstrate the strength of our land and expand business model as customers grow their spending with us over time as the extended elastic to multiple projects and multiple solutions and as their overall data footprint grows.

Now turning to profitability, which is non-GAAP grew.

Gross profit in the third quarter was $121 million, representing the gross margin of 77.0%.

We continue to track well relative to our expectations.

Looking ahead elastic cloud will remain a modest headwind to gross margin overall as we continue to invest to drive growth.

Looking at operating expenses in Q3, we increased our investments in the business as we expected and as we laid out on our protocol.

We achieved operating breakeven in the quarter, which was the better result than expected primarily due to the strong revenue performance in the quarter and to a lesser extent some expenses shifting to Q4.

This reflects the operating leverage inherent in our business model.

We also benefited as expected from lower travel and event spending given the pandemic.

Net loss per share in Q3 was force sense, using $88 3 million weighted average shares outstanding.

Turning to free cash flow pre.

Free cash flow was $18 $3 million in Q3.

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

We are very pleased with our progress so far this year and now expect positive free cash flow of margin of approximately plus on the plus 3% in fiscal 'twenty. One one year ahead of our prior expectations.

We also expect positive free cash flow of module in fiscal 'twenty two.

Turning to guidance.

Despite the mixed demand environment be references in the first three quarters of the fiscal year, our strong execution. So far gives us the confidence to raise our revenue and profitability outlook for fiscal 'twenty one.

Given the significant market opportunity beginning in Q4 and continuing into fiscal 'twenty. Two we plan to further accelerate investments to drive long term growth.

Cash on these in a minute.

We also expect to see continued significant savings from travel and events in Q4 as we have so far this fiscal year.

With that for Q4, we expect revenue on the range of $158 million to $159 million, representing a growth rate of 28% year over year at the midpoint.

We expect non-GAAP operating margin in the range of negative eight five to negative seven 5% of non-GAAP net loss per share in the range of 18 cents to 15 cents using between 95 and $91 5 million ordinary shares outstanding.

The full fiscal 'twenty, one we expect revenue in the range of $589 million to $590 million, representing the growth rate of 38% year over year at the midpoint.

We expect non-GAAP operating margin in the range of negative three 3% of negative 3% of non-GAAP net loss per share in the range of 19 sense, the 16th using between 87 and 88 million ordinary shares outstanding.

Finally, looking ahead to fiscal 'twenty two we are in the middle of our planning process. So it's too early to provide specific numbers, but I will share a couple of overall thoughts on how we are approaching next year.

First we have not yet seen of change in the near term demand environment and believe that whenever that starts to improve it will only be of gradual change.

We remain excited about the long term opportunity ahead of us.

Second we continue to believe the best thoughts the capturing the long term opportunity is to further accelerate out of investments in the near term.

Plan to accelerate head count on related investments in sales capacity and coverage globally to drive growth and also in the R&D to drive product innovation and in G&A to support our growth.

Although some of these investments will support growth in fiscal 'twenty do many of these will be more long term in nature.

Finally, we have experienced significant operating margin expansion. This year in part from the near complete the elimination of travel and in person events as.

As the distributor company, we previously had a significant amount of spending in these areas.

We expect that increase in travel and event spending gradually over the course of fiscal 'twenty two.

Given the higher investment profile on the return of travel and event expenses. We are currently expecting that our operating margin in fiscal 'twenty two will be a few percentage points lower than in fiscal 'twenty, one out of investments reflect our optimism on the large market opportunity and how well we're positioned to capture that to deliver growth.

We do expect that we will remain free cash flow positive in fiscal 'twenty do on going forward.

In summary, we had a strong third quarter and executed well on the current environment. We have built a strong foundation have a tremendous market opportunity ahead of us and are making investments to capture that opportunity.

With that let's take questions operator.

We will now begin the question and answer session too.

To ask a question you May press Star then one on your telephone keypad. If you were using a speakerphone. Please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Brent Thill with Jefferies. Please go ahead.

Good afternoon shy just as it relates to the pricing changes I'm curious if you could give.

Give us your your overview on Theres been a lot of questions on your investors about the tailwind headwind what this is what.

What you're seeing short term and in the long term effect from your perspective.

And and Virginia, if you can just maybe comment.

On the license piece, obviously growing slower, but the SaaS component growing growing quick I think that's the shift you want to see the can you just talk about the dynamic you saw on.

In license versus SaaS on the corner and kind of how you're balancing that going forward. Thanks.

Sure I'll start the hi, Brian Thanks for the question.

The.

When it comes to or subscription over the last few years, we introduce an enterprise subscription tier and he started off with having.

Significant value in it in our orchestration capabilities.

Capabilities that we allow the gave to self managed customers to be able to go on run it themselves whether it's our.

Our own built in orchestration systems or other.

Our kubernetes integration when we joined forces with endgame. We also added to the enterprise subscription tier our endpoint product in the elastic and games support and now we'd searchable snapshots and the cold in the frozen here that we believe provide significant value to our customers even more like the ability to.

The couple of computing storage as I mentioned in the ability to really drive down the.

The cost per gigabyte at the expense of speed.

And we play study other the enterprise subscription we.

We thought it's a good opportunity to update them to reflect the enterprise subscription price point to reflect all of the additional value that we ended up adding over the year end, which is quite a bit. So that's the story behind the change are very happy about it. The reaction of is that mentioned on the script around surgical snapshots of the excitement about.

The ability to have a single technology standard that provides both of these.

Resonating really well with our customer base and the ability to add more data and stored data of longer at elastic and then have the toggle between fast and and slightly more.

Expenses on the storage side or slower and have more scale and flexibility the company that our customers love being able to have access to over the next.

A few quarters when it's come through there the ETA.

Fact over the short term or long term.

Think that over the long term these values that we put will end up providing a tailwind you know starting from end point.

Obviously endpoint security being put into the enterprise subscription and then now with such a brief snapshot of everything that comes with it but that's going to be gradual and take time. So we don't expect any immediate tailwind as a result of it.

And the rental for the follow up on the question about the self managed business.

Nothing specific to highlight that would be on you touched on the key issue already which was the.

We've seen customers continue to express a preference for cloud, particularly in light of everything happening in the context of the pandemic and you know as we've said before our.

And SaaS will generally mirrored the small preferences on where they go towards reside so that's what we've seen in SaaS will continue to grow faster than the business overall, specifically within the self managed business if I disaggregate that and look just at the license fees to be honest, that's as we've said before that.

Not really a number we focus on because we focus primarily on the overall subscription and we just sell the ACB.

And that license number as you know is that a little bit of an artifact of the accounting and there's a number of different factors that can affect that so there's nothing in particular that I would call out there. It's really of the continued emphasis on cloud. The P. C are all customers continuing to drive and our market opportunity is large our penetration rates are still low so.

I think we have plenty of room to grow on both the self managed as well as the SaaS side and we're investing towards that.

Thank you.

The next question is from Tyler Radke with Citi. Please go ahead.

Hey, Thanks for taking my questions shy I wanted to ask you about the licensing change that was announced recently and I think there's been some debate out there in the in the open source community on.

Whether this.

This licensing changes is favorable for the elastic community.

And I guess you know.

For those that you know those developers of members of the community that are that are concerned that you know.

This is kind of moving away from open source.

I guess, what do you say to them in and what's kind of your confidence level that that you can continue to.

Sustain a really robust community and you know make sure that you know your.

Your community members are satisfied with the you know.

The license of change.

Yeah of course, so first of all of we are we announced the licensing change and the vast reaction from our customer and our user base was to be perfectly fine with it.

One of the reasons for it by the way is that over the last three years, we've when since we introduced our elastic license.

The vast majority of our user base north of 90% of been downloading and using our distribution that already uses elastic license and they've been happy with it and excited about the significant innovation that we've driven into that propel.

Proprietary tiered that is governed by our elastic license.

And those innovations include both the D C things like a siem elastic siem or observe abilities to the suite or a P. M.

Or app search and workplace search as well as a smaller more inherent features into our into our stack.

And those users are perfectly fine with the change day. It was a non event for them and we actually provided them with more options by giving them a choice between both of the elastic license would be to end.

And another one between the wood.

S B L as well that more would you be adopted the old created.

That's the vast majority of the customer base that we have almost the there's some debt.

Care a lot of about the pure of this open open source license of one or another.

But the vast majority of our community are totally happy with our products, our innovation and you know I'm very confident about our ability to go on and continue to deliver value for this community on the customer set.

Great and then if I could sneak in a follow up either Virginia or youre going to shy of it.

If I just look at the the customers spending more than 100 K with you on the growth on that that number has come down a little bit through this year, you know I, presumably because of the pandemic, but just wanted to get your thoughts about how we should think about kind of the the larger deal activity, particularly as youre heading into.

Sure.

Seasonally strongest Q4 here and I know that's been a focus for you in terms of you know expanse.

Expansions within our larger customers. Thanks.

Yeah, Tyler on I'm happy to take that so you know as I look at the customer additions that we had in Q3, whether it's the total customer count all the customer is more than 100 K a C. D. We were actually quite pleased with the performance. There are you know to your point the the number of net adds and those are both of those numbers has been consistent with the probably a few quarters and.

Right in line with what we've experienced during the pandemic. So there's no surprises on that front for us I think it actually played out quite nicely.

And I think looking ahead to Q4.

The policy early to your point, we've got a fair amount of business to get done and it's our seasonally largest quarter in March and April in April in particular tends to be a very busy month.

But the the good news for US is that the sales team has continued to work really well over the course of this past year as you've seen strong execution through the first three quarters.

And just overall disciplined execution, so we feel pretty good about the outlook. The feeds are provided here for Q4.

There's still a lot to get done so it's early days and as you know obviously still.

All of the effects of the pandemic out there that we deal with but also some significant structural tailwind the beef talked about with preferences for customer shifting towards a solution shy touched on the number of those examples I put the I think those all the end up being a catalyst for us.

So as I think about Q4 of them you know all of those things are baked into the outlook that I provided and and we're confident in our relative for the year.

Thank you.

The next question is from Raimo <unk> with Barclays. Please go ahead, Pete the thing.

For taking my question on congrats from me.

I wanted to start with one bigger picture and the bigger picture question. If you were in a beach on now for the schema on read.

Historically, it's been more schema on write schema on read the speed more something that the number of competitor of yours, who kind of associated with what does it mean is this just like the small add on thing or do I need to think slightly more bigger picture about the the changes coming that way.

I have one follow up yeah.

Of course, I can I can I can I'm sorry.

First of all of them were very excited about schema on read we.

Were searched people so scheme on royalties, what we wake up in the morning, and think about it because we want to return responses maybe of seconds and the fact that we index everything by default the provide snap of results is what we pride ourself that's index.

Extremely difficult technical challenge to have.

Well one of the only companies out there that provide it as a data company that makes sense.

The last couple of years, we worked on expanding trying to support scheme on read next two scheme on the right in a way that it still works and behaves like our scheme on right except that it's slower.

I'm extremely happy with the team being able to.

Provide these core capability into our stack on the way that I think it's going to manifest itself is by providing more flexibility and more ease of use when it comes to Onboarding new types of datasets before you know exactly how the day they structured.

And also when it comes to people that really wants to.

Control how much did at the end of storing in schema on read vs came on right.

This is the stack level on our technology stack level features so it's more core and we've implemented at a foundational level and on the next step is for all of our solutions think about like the security solution, all the sort of ability solution and our enterprise search solutions to start to take care of that.

Make use of these features in its own curated workflows.

I think over the upcoming few quarters of these feature will end up reflecting itself in various areas and I hope that our users would be very happy about it because we will be one of the only platform data platforms out there that provide both schema on write in scheme on REIT with a travel of the button.

And that's exciting very exciting to me yeah, the exactly yet that should be very exciting the.

And then one follow up for you on that like if you think about the the environment over the last of year, and then potentially kind of improvements going forward. There's obviously several factors that you need to think about in terms of of like number of deals deal size closure rates et cetera from what you can see so far has any of those changed over the long.

Uhm and asked me kind of think about recovery going forward, where do you think of booths drugs kind of manifesting itself first thank you.

Yeah. It's the great question, Raimo and you know I wish I had the economic Crystal ball to answer that question well enough I can tell you that so far what we've seen on the way Q3 played out was very similar to the prior quarters.

We've not seen any any significant shift we've not seen any significant changes or trends you know I think if I had the point to.

Maybe one trend the.

Where things start to open up a little bit more on the economies when when the economies start to come back a little bit more I think that's why you'd be starting to see a little bit more activity, which was really as expected if.

If I think about it in terms of verticals. The same COVID-19 impacted verticals continued to be impacted we did do some pretty good deals on those in those verticals as well, but I think it's too early to call. It the trend on the recovery in the.

Those areas.

If I think about it from a segment lens again, it was pretty much straight down the middle of the fairway for us in terms of comparing it to prior quarters.

SMB continued to be resilient not as not as strongest pre pandemic levels, but very much in line with what we've seen.

Over the course of the fiscal 'twenty one during the pandemic. So I think you know looking ahead it'll be.

Well quite watchful as we look at all of these different inputs are one of the good things for US is we have balance across geography and segments and verticals. So as we see signs of recovery then we obviously factor that into our thinking on a model, but as I think about fiscal 'twenty due to me it seems like the the economic recovery will be will be.

More gradual.

Okay perfect. Thank you.

The next question is from Brad Reback with Stifel. Please go ahead.

Great. Thanks, very much Chi as you look at usage on the SaaS platform.

What has surprised you the most how people are using the product and maybe how is that sort of modified your future development.

And of course, I am maybe on uncertainty in multiple ways.

I think I don't know if it's a surprise like things to call out that we saw that meant more of our customers of the first one is just the fact that we provide them support across the multiple clouds, but there's we see more and more.

The customers and users, especially in larger enterprises that liked the fact that we provide a seamless experience across cloud vendors, whether it's Google cloud AWS or Microsoft.

And we're also taking the extra steps to natively integrate with each one of them, we're going to be me, whether it's around the security whether it's around shipping relevant data sources.

The things along those lines and.

I'd like to call out one of the.

More highly requested features that we have that we've shipped in last quarter and in the quarter, which is the our cross cluster of search and cross cluster of application that's pretty unique if you think about it if you think about what we do on data.

Because the data has gravity to it and you know of logging solution or an application that produces logging of producing a significant amount of data you would want to deploy us next to that application. So if you have trading application you would want us in London with one of the price in London, and then if theres wanting the Hong Kong or in New York than you would want to deploy some of.

The data in various regions on even in the same cloud provider and we provided the ability to cross search of cross these deployments without having to move the data around which ended up being very expensive, but obviously it takes it all.

A lot of time and that was one of the more highly requested features you know of clouds, which to me speaks about the fact that on.

Almost all of the companies out there today are now more to regional whether it's for highest on the ability or four on.

Silver and T or privacy or many other reasons and several companies out there as well our multi cloud and the fact that we give them the choice to store the data where they want and then it will go and do the hard work of searching across all of it very efficiently and that's something that resonates really well with our customers.

That's great. Thank you very much.

The next question is from Kash Rangan with Goldman Sachs. Please go ahead.

Hi, guys. Congrats on the quarter. One question for you for you each of you.

Of your generation and shy of one.

The one for you John if you could just talk about the investments youre going to be making what time will you be commencing these investments is it the sales and marketing or a combination of sales and marketing research and development.

Granted that you've got a really really productive sales model I'm curious what are you looking to achieve on I don't I know you did say that you'll be accelerating your investments.

I suppose that would mean that that should lead to the acceleration of growth as well, but just wanted to clarify that the inver.

The timing of the payoff timing what exactly are you looking for there on the one for your Chi.

It doesn't look like when you maybe it's just a bit of a cough.

Some of that is applicable to the Hyperscale nursery you've seen generally.

Somewhat of a U shape, maybe even a V shape recovery among the public clouds.

And even some of the larger companies like of service now have been talking about the recovery when it feels like a new aerospace it seems to be stretched out a little bit more I'm. Just curious if you can just out of little bit more color on why it is taking a little bit longer than in your segment of the software industry.

Your value propositions of property of been making all of these changes which are of great. Just curious why is the big deliberate longer in this segment versus the the broader segment of the software. Thank you so much.

Hey, cash out so maybe I'll answer the first thought.

The the investments that they are intending to make really that's based on the strength. We've seen so far this year and so we are accelerating our investments that will soften in Q4 itself and extend into fiscal 'twenty, two and really the you know the goal for US is to address the the large long term opportunity that we see ahead of US is to get out ahead of the pandemic and invest in.

In anticipation of.

Of driving that growth in terms of where the investments will be it will be across all functions. So clearly investments in AR in the sales organization on the marketing side as well, but also in the engineering teams and in R&D as well as in the G&A functions needed to support all of that that growth and scale the business.

So as you think about the nature of those investments you know some of those can be a little bit more short term oriented but many of them out of in fact long term oriented.

Investments in R&D investments in some of the sales motions that we need to continue to scale I think those low return will create returns are in the longer term, but really doesn't intend to drive some level of return in fiscal 'twenty two as well. So we lay all of that out for you in more detail when we come back on the next call on lay out without guidance for the year.

But I'd say, it's the most.

Out of your horizon.

Some of the of the investment and what gives us the the confidence in that is just the size of the PUC for Mark up the notice that they're spending probably the piece continue to shift towards areas, where with where we are very well positioned so despite the headwinds we might face from the pandemic in the near term, we think it's important for us to invest through the cycle. So that when we all come out of the.

Yeah on the other side, moving very well positioned to capture the opportunity.

A lot of shower you want to take the other part of the question.

Yeah.

I'm, saying is true in terms of of what we see when it comes to the recovery I would just start with saying that I'm very happy and proud of the team's execution in this context.

And we delivered strong results in the last few quarters and we've overachieve the deck. That's a testament to our I think the value of that we're creating to our customer base first and foremost, but also of interest to the resiliency and execution of our company as the whole end and the team members that we have there was kind of through the shape of the recovery.

It's hard for me to say, if it's gonna be U shape, a V shape or linear extrapolation or something along those lines.

What I will say is that we do see the effects of the pandemic, they're still out there people are still working from home.

Our sales cycles are slightly longer.

It takes a bit more work and it requires the I don't know another approval in the chain of command of approvals for our of.

The spend.

With us we manage to go on and get them, but its definitely not as as it was before the pandemic hit and there's more scrutiny around spend at the same time, we are seeing cases, where there is a you know customers in our user bases are more eager and excited about moving to cloud.

Good.

But.

You know what I've mentioned in the previous call.

Our customer.

The customers tend to move to the cloud as their workloads the end up moving to the cloud because they're the ones that generate data and they care about deploying elastic next to their workloads and as long as they're not moving their actual workloads to the cloud that generates the data on whether it's security of data in the same.

Whether it's obviously the ability of data like logging then they'll end up preferring to run it on prem or or in the self managed way and that's the case I'm encouraged about the fact that.

We can still go to these customers and tell them Hey, like you can still depressed next to your workloads now it sounds manager and then when you move to the cloud wouldn't be there for you regardless of which of our cloud vendor you choose a region, where we can actually go on to support of hybrid deployment, while you're out of it.

Got it so there's probably of that lag that's probably a good thing. It gives you good visibility on some very quickly any changes on the competitive environment pretty stable or any minor fluctuations you can see there that's it for me. Thank you so much.

Sure I mean, we haven't seen any change from a competitive environment of environment versus previous quarters from our perspective, and we feel very good about our strength in the opening of the ability story and.

And we're ramping up and within the Siem market, where you know facing extremely fast and get to a point of our siem product in the mature and can take on.

The feature by feature replacement of other popular Siem vendors and we're excited about the progress of folding endpoint security.

Into our stack and that's going to be you know that's going to take a few more quarters.

But other than that no we haven't seen any any change from a competitive perspective.

Thank you so much signs of it.

Sure.

The next question is from Matt Hedberg with RBC capital markets. Please go ahead.

Hi, guys. Thanks for taking my questions.

So I wanted to ask go back to the S. S. P. L. It sounds like no real change to the community of partners, but but you know a couple of days after you've made the announcement of AWS at a blog post indicating that we're going to force the code.

I'm curious what is the reaction been from sort of the broader user base to that end.

Does it mean at some point that there.

There could still be even of tighter relationship with AWS at some point of just sort of curious on on the status of of that.

Yeah of course, so we change our licensing just to clarify would change that I suppose to be dual license with both the SSP and the elastic license each one.

Basically serves a different camera that cares about different aspects so in the.

The licensing ecosystem, if you will and.

And we got great reaction for elastic license be too by the way, which we simplified while still maintaining the protections when it comes to the announcement of a poor listen we've been dealing with Amazon efforts in creating a force not creating the four open dextro and try to take elastic search and.

And you start to be in control of the distribution channels and I've been very happy with our ability to go and control of it and being able to go in and provide more value on more differentiation to proprietary features.

They're already exists now right. It's like the past three years, we worked very hard to add significant amount of proprietary differentiation and get to a point, where any type of changes will not matter that much of it because I think our users just will vote with their feet in the Hampton voting with their feet when it comes to using our our product.

When it comes to looking forward nothing is off the table from my perspective to meet these license change of being no drawing a line in the sand when it comes to saying hey, like that the level of what we believe to be brand and trademark abuse and you know we're going to courts around the things that home designs.

Changing the license to go of stronger line in the sand, but at the same time on it we're very happy to work with Amazon if they decide to.

To do to work with US we're already working with the their marketplace teams and other functions and we would be happy to work with them. It just needs to be on their mutual termination of that makes sense.

Got it that makes sense that's super helpful. And then I guess you know enterprise search you guys. We've been talking about this for a long time partner seemed really really excited about that I think of a shy of where.

Where are we in sort of the maturation of enterprise search in terms of you know sort of wiring up additional API integrations I know you talked about adding box and the bureau of cloud and confluence of cloud, but you just sort of curious on on on where we're at there and what are you. Most excited about in terms of usage of enterprise search.

Yeah of course, Theres, a theres a few things that on et cetera, but the first part of is a workplace search which is a relatively new product. If you think about it.

Probably every company in the war on today, the company's became more virtual they generate more data in the digital mechanisms day chat more sand more emails like more documents versus face to face of meetings and all of that is amazing IP that you just want to put in the hands of every single employee in the company and have.

The searchable on.

Obviously with the right controls and privacy controls and things along the line and that's something that we've done at the elastic and I'm happy to be able to provide that to all of our customer base. That's the thing that makes me excited about workplace search specifically.

It's a new product we are still working very hard to centralize. It build as you said more connectors to get to a point where other.

Our users and customers can build their own connectors on their own dataset.

Just early phases of it but we built this product as a distributed the company for the needs of the distributed company and I think that's being realized by a whole a whole set of companies out there that are now suddenly find themselves working in the district decentralized fashion.

I think the other parties App search, which you know we've invested out but we the main focus was to get to a point of when we can ship workplace search.

And to me I'm searches about how quickly and how easily can you add a search box to your websites or two year old application.

And we've made some investments there and we announced the day the web color. So we'll go on the call a website or or anything along those lines. When it comes to providing more data. So you can search over versus using quote unquote like role elastic search which tend to require more developer time and more interactions and more.

Roll up your sleeves and go on build something too out of web search box on your website.

And that part of it makes me excited because it means that our products become easier to use more plug and play more easier to adopt to across the ecosystem versus just you know developers if you will.

It makes a lot of sense congrats on the quarter guys.

Thank you very much.

The next question is from a tie could range from Oppenheimer. Please go ahead.

Thanks, Hey, guys of great quarter.

And maybe because of all of a few if you could double click of a little bit on the cloud business I'm.

How much of it by the way he's done it the enterprise price tier versus in other price tiers and.

And with the change of licensing of have you seen any.

Carryover from AWS elastic search of has seen any people move away.

From the service into yours.

Yeah happy to answer so I'll start with the enterprise subscription tiers. So the enterprise subscription theory is relatively new and when we introduced it at the last day. The biggest reason why someone would.

And up engaging with us on the enterprise subscription tier one's actually for self managed customers because we took our cloud product packaging and allow users to run it themselves in case. They could go on in the cloud for various reasons day, having migrated to the cloud or something like that that's what we'd call elastic cloud enterprise and now elastic line on kubernetes. So four are pretty low.

Period of time, the biggest value proposition in the enterprise subscription deal was actually just for self manage when.

When we joined forces with endgame, we added the endpoint security there on and off again game endpoint security into the enterprise subscription.

We're working very hard obviously to fall all of the and endpoint capabilities into into our stack, obviously that heavily.

Applies to our cloud customers in this case and now we'd searchable snapshots that that's even going to be even stronger.

Actually with the G E of our cold here and the frozen tier the truly the couples storage from compute that will come in the next few quarters.

So all of that the the.

The feature set and the capabilities and the value in the enterprise subscription tier setup.

So our cloud customers have been relatively.

Recent.

Especially which are triple snapshot, so up until now we haven't really seen the larger.

The larger adoption of it due to it which is perfectly accept expected.

But I think that we will start to see more and more adoption of line up of subscription tier for our cloud customers moving forward.

Okay, and as far as the AWS on carryover.

Yeah of course, so we see users migrating from AWS to elastic, especially since we provided a more advanced capabilities like private link and others or if they want to go and start to deploy on the other cloud providers.

And thanks to the differentiation of the.

Of our feature set.

The size of it is always tricky to capture because you don't always know because our.

The adoption cycle for this is mostly around self service just someone coming in and start to create an account and start to migrate so we.

Took care of an hour of interest needs to kind of go on to quantify it.

Got it and then as a follow up on the generic on the expansion rate last quarter, you've talked about it dropping a little bit it sounds like if I'm interpreting your commentary correct that he was perhaps stable. This quarter. So maybe you can give us some color on that and also on the in the context of the fourth quarter of a tough compare.

How should we think about net expansion rate in respect of the comment.

Customers coming to us coming to the elastic cloud from AWS because of the richness of the features of people. We've always seen that I think the the impact of the licensing changes.

Provide the little bit of a tailwind, but I think it plays out over the over the medium to long term debt.

And then in terms of the net expansion rate.

Yeah, I think of it you know characterizing it as stable is the right way to think about it it usually does bounce around by a couple of points here all day on it it remains essentially a modestly above 130% so very consistent with the last quarter and if I think about that in terms of Q4 on how that might play out.

You know look I think depending on how the business unfolds in Q4, all of our customer metrics across new and renewals and expansions, where just the middle of that overall performance. So I'm not the street the modeling of specific percentage myself at the stage, but overall as we've talked about on the skull, we feel really good about the relevance of <unk> the alignment of <unk>.

Customer priorities and the opportunity ahead of us. So we will execute here in the next in the next couple of months of and then come back and share more with you in 90 day thing.

Very good good luck guys.

The next question is from Mark Murphy with Jpmorgan. Please go ahead.

Thank you very much shy of I'm curious, how elastic and your customers' process of the solar wind the security breach.

And whether you're seeing any incremental opportunities are there to capitalize on that and also I'm on the topic of security just how is your visibility into doing some of the wholesale replacement of incumbent Sims out there in the marketplace.

Yeah, I'll start with solar Winton.

We haven't seen first of all we saw an increase in attention to security are generally between not within our customer base on our user base. So it's solar wind definitely put security conscious people into the forefront and they're trying to think about okay. How do we make sure that this doesn't happen to us.

And we have various answers to that question from features that we developed that actually apply directly to the solar winds of bridge two of the ability of together all of the data that you've generated by supply chain on to make sure that you try to find the anomalies in the end and that's something that we do really well of the company.

And as the security product.

We havent seen like any tailwind of someone going and suddenly you know buying our security products not the right or something of that it's more of the thoughtful implementation and try to make sure.

That.

The the aspects of solar wind as being the dress by customers that ended up of adopting that's for security use cases on.

When it comes to wholesale replacement of G. A dollar of Siem solution and I'll have a call out to our to the end game teams of join US and of the existing team that we have the endgame team and the team has done an amazing job in pulling forward of future and releasing it sooner.

We'll probably have a couple of more quarters to get to a point, where we feel like the product can stay on a wholesale replacement if that makes sense of an existing incumbent when it comes to feature by feature of comparisons. So today, we see obviously adoption of our simple, but it's more around hey, we're going to use the features as the used today, but we're also betting on about the fact that we're going to be there for our customers.

Two quarters of three.

Set of features.

And that's where we stand when it comes to actually replacement of the reason for replacements are the usual ones that you would expect for efficiency speed to the answers to a threat hunters out there of T. Applicability of our solution. The fact that we have worked really hard to fold the endpoint security and sales.

The working on that vision when it comes to security and how much we try to address the biggest story and actually go on.

Provide outcomes to customers versus trying to mark of feature here and there in the security.

Thank you Shai in generics as a quick follow up I was looking at your total costs and expenses I think they've only grown about 19% year.

Year to day, it's it's very very nice disciplined you've had the solid margin expansion and you're now signaling you're going to ramp it up in in fiscal 'twenty. Two I'm wondering about any sense of magnitude you know for instance, could you accelerate that closer to say 'twenty.

Five or 30% cost and expense gross into fiscal 'twenty, two just anything to help us.

Understand the magnitude of that comment.

Yeah, Mark so in terms of the investments we've made this year, we consciously were a bit slower in off the school Q1, and then we started to increase in Q2 and then in Q3 as well. So you know you look at the sequential increase in spending in the last couple of quarters, It's it's sort of been in that 10%.

The million dollar range and you can then get into the implied the expense guide in an embedded into the Q4 numbers and if I think about fiscal 'twenty two.

You know as I said earlier in the call. The the way. We're currently thinking about it is that the op margin will probably be a few points lower than that of fiscal 'twenty. One and then we break that out a little bit more discrete in terms of the areas of investments and so forth as we go through our planning process.

Thank you very much.

Yeah.

This concludes our question and answer session.

I would like to turn on the conference back after the sharp eye on it for any closing remarks.

Thank you and thank you for joining US today, we're very pleased with our third quarter results and remain focused on addressing the large and exciting market opportunity ahead of us channel.

The.

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

Yeah.

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