Q1 2022 Elastic NV Earnings Call
In infrastructure, we acquired an APM company upbeat with the goal of integrating application traces into our platform.
We recognize that keeping systems up and running is a search problem regardless of the type of data used to do so.
That was even before the thermal observer ability was widely used in.
Yeah.
And as we continue to bring innovation to our search platform.
Our customers are seeing the benefits in our observation solution.
For example, <unk>.
Currently released correlation capabilities built using advanced search techniques in elastic APM.
It accelerates root cause.
The analysis by automatically surfacing the attributes that have the most significant impact on service performance.
The unifying power of our platform is always top of mind.
We also just marked an important milestone for elastic security.
As we observe ability we will recognize the convergence.
<unk> endpoint security early on.
And two years ago, we acquired endgame.
And as we did with albeit an APM, we've integrated and games endpoint technology into our platform.
I'm thrilled to see the vision come to life in a major way with the market's first limitless xdr.
Providing end to end protection detection and response for any organization not just large enterprises.
Xdr, what's in a name a lot like observer ability, it's a broad concept extended detection and response.
We believe that the army is modernizing security.
Security operations by unifying the powerful capabilities of Sim for detecting prep.
And endpoint security for protecting and Remediated issues on all endpoints, including in the cloud.
All in a single platform.
We take this a step further with limitless xdr customers can search year.
Here's worth of data in our frozen data here, they can investigate across multi cloud environments with our cross cluster search capability.
They can ingest data of any type from any source.
They can apply numerous built in and community driven detection and analysis techniques.
All of that while paying only for.
The resources they use now based on the number of endpoint agents seeds or gigabytes of data ingesting all of these capabilities make our exit we are offering limitless.
<unk> in the market.
Couldnt be more proud of the team in delivering this innovation.
To.
Extend our limited SEC ZR to further support cloud application and services. We recently announced that we are joining forces with buildup security.
Policy definition and enforcement platform.
Im excited for our teams to integrate buildup security technology into elastic security over the coming quarters.
This will give.
Our customers the ability to continuously monitor the cloud environment and validate their security posture against its well established standards like Cif benchmark.
In addition, as we announced today will also be joining forces with CMV to accelerate our efforts in cloud workload onetime security.
CMT is a leader in infrastructure detection and response or <unk>.
Using extended Berkeley packet filter technology also called Etfs CMT provides deep visibility into cloud workloads and performance expert detection and prevention on cloud native data.
With the technology.
<unk> expertise, we gained by teaming up with CMV, we will be able to expand our security capabilities, even further for cloud native application workload.
<unk> implemented using the frictionless approach made possible with <unk>.
Okay.
With our investments in TMT and buildup security we.
We anticipate that our customers will be able to secure their cloud workloads at both onetime and deployment time.
This will give our customers even greater value from their existing security an observer ability use cases of the elastic search platform.
Another critical component in both observer ability and security.
He is a single unified elastic agent, which we recently GE.
In a world where organizations need to manage an ever increasing number of data sources deploying managing and maintaining agent's poses a significant challenge, especially when the resources being monitored can number in the tens of thousands.
With elastic agent customers can simplify data on boarding enabled faster telemetry collection reduce mean time to resolution and detection and even response to threats.
All to unify the centralized agent management that is fully integrated across elastic observer ability and security.
Because well while you observe why not protect.
We've been saying this for years and it is resonating with both our existing and new customers.
Security is shifting left.
Mobility is shifting right and we're seeing that natural convergence happening now.
This is important because today's increasingly distributed complex and data driven organizations require a new standard of operation.
Organizations need to invest in technologies that enabled them simultaneously monitor their processes and systems to ensure that nothing is slow or broken while also protecting.
Again, Bret and cyber is that.
A great example of this is a deal we closed in Q1 with one of the world's largest casual dining restaurant chain with over 700 global locations.
They needed to be able to quickly identify potential threats across different systems and applications.
They also wanted to leverage machine learning and anomaly detection as well as our APM and infrastructure monitoring capability.
They chose the lost because of the significant value they find in using a single platform that can address their needs across their most important <unk>.
A security use cases.
Moving on to enterprise search.
With elastic enterprise search customers have a powerful solution for website application and workplace search that enables them to search everything anywhere.
We continue our efforts to make it simple and easy for customers to adopt and deploy enterprise search.
In Q1, we expanded business with a large mutual insurance company.
Their existing internal agent portal was difficult to use and lack the ability to scale across multiple data sources.
Already using our observer ability and security solution and they chose to implement our workplace search product.
When the streamlined and intuitive interface.
Out of the box connectors and easily configured API.
This is another example of a customer who started with one solution and adopted another and another and they realize the benefit of the elastic search platform.
And a fortune.
15, multinational investment bank and financial services company expanded business with us in Q1.
They turned to elastic to power their global financial crime and compliance unit with robust search capabilities.
We also wanted to build a front end search solution for analysts and investigators who are trying.
Connect different data sources to identify and stop the financial crimes.
With the lofty investigators are able to perform complex searches within milliseconds cross here's a wire transaction.
And of course, we continued to add new features and functionality to our enterprise.
Turning to the <unk>.
Release of a new slide or in App search allows customers to easily make search results as narrow or broad as they want and it literally goes all the way up to 11 with 11 predefined option towards search precision.
<unk> also announced that customers can now fully manage app.
Apprise workplace search directly from cabana, making it easier to access certain insights and visualization.
With enterprise search now in the coupon iui, we're bringing more unified management and navigation to our search platform with access to all three elastic solutions in the same user interface.
And we continue to be recognized for our innovation. We were recently named the leader by Forrester research in the Forrester wave for cognitive search.
Now onto elastic cloud, we continue to expand our strategic partnership with cloud providers.
It can meet our customers.
Sure they are and support them with a simple worry free and easy to use cloud experience.
During the quarter, we closed business with one of the worlds, leading social trading and brokerage companies displacing an existing vendor.
The customers popularity grew over the last year.
They chose elastic to help them balanced cost scale and performance.
The speed of elastic observer ability on elastic cloud combined with our searchable snapshot capabilities means that the customer is now able to store years of data in cold in frozen storage tiers without losing the ability to search the data whenever.
It is where it needs to without breaking the bank.
We have been investing heavily in building seamless cloud experiences for our customers and we've seen that investment starting to pay off in recent quarters is gratifying when I talked with customers, who never thought they'd move to the cloud and they tell me they are.
They're making the move with elastic.
Our recent product enhancements and marketplace integration are delivering a frictionless onboarding experience.
Sorting and more customers coming to us from these channels.
Our traction with Microsoft Asia continues to grow building.
Building on our previous launch.
Our now our native marketplace integration, we announced the Microsoft Asia privately.
Which provides one click private connectivity from Asia virtual networks to elastic cloud deployment.
Customers using Microsoft Azure private Mi with elastic cloud are provided an additional layer of security.
To meet their security policy and compliance requirement.
And we were also honored to receive the Microsoft U S partner Award in business excellent in the commercial marketplace.
In addition in Q1, we were named as the 2020 and Google.
<unk> cloud technology partner of the year in the data management category. This is a wonderful recognition of the continued work we've been doing with Google cloud to provide our customers with a seamless cloud experience.
I'm thrilled with the momentum we are building with all of our partners to enable our customers.
<unk> with a unique cloud experience that is intuitively flexible feature pack and use case ready.
The power of the elastic search platform extends beyond our solutions, helping customers to achieve their business outcomes with our continuous innovation.
We.
We continued to invest in resources to scale, our enterprise reach and to grow our teams from engineering to marketing to sales.
And I'm very excited to share that we've just released the dates for our virtual elastic on global conference, which will take place on October 5th through the seven.
This.
Series event will feature product announcements plus presentations from customers partners illustration and other guest speakers, including Scott Guthrie EVP of Microsoft Cloud and AI group.
Got a great lineup this year.
I'm incredibly humbled as I think about all.
All the people, who make our continued momentum possible from our employees to our community customers and partners.
Now over to you <unk>.
Thanks, right Q1 was a great start to the year, continuing our momentum of crisp execution against the backdrop of a gradually improving global economy.
Our cloud momentum was strong with robust usage trends and we expect that cloud will remain a deal with from a longer term.
Our solutions continue to resonate with customers and we are continuing to invest against the rich market opportunity ahead of us.
Let's get into the numbers.
Total revenue in the first quarter was 193.
$1 million up 50% year over year, reflecting continued successful execution of our strategy to cross enterprise surgeon's ability and security delivered on a unified service platform with a unified pricing model.
We are very pleased with our performance, which was significantly better than expected primarily driven by significantly stronger.
Unexpected usage and elastic cloud.
47% of our revenue came from outside the United States.
Continue to view this geographic distribution as a long term strength of our business model.
Subscription revenue in Q1 totaled $177.2 million comprising 92% of total revenue.
Within subscriptions revenue from elastic cloud was again strong at $61.5 million growing 89% year over year, driven by strong customer growth and usage. We once again saw strength in both our annual cloud business as well as our monthly cloud business.
Our feature advantages over competitors are expanding reach.
And our partnerships continue to give us confidence that elastic cloud will grow faster than our overall business.
Professional services revenue in Q1 was $15.9 million growing 111% year over year.
Services revenue can fluctuate across quarters, depending on the timing of projects in delivery and we saw an approximately.
<unk> $3 million benefit from that in the quarter.
Professional services remains mainly a product and we do not expect professional services to increase significantly in mix over the year.
Moving on to calculated billings.
Calculated billings in Q1 grew 27% year over year to $165 million.
As I mentioned previously the growth rate reflects the headwind driven by the $5 million pull forward of a multi year deal out of the first quarter of fiscal 2020 due into the first quarter of fiscal 2021.
Overall, we are pleased with our execution in the quarter strength was broad based across our three solutions driven by new and existing customer.
Customer growth across segments and geographies.
At the end of Q1 total deferred revenue was $364 million up 31% year over year.
Remaining performance obligations totaled approximately $776 million up 35% year over year.
Customers continue to make multiyear commitments to.
Reflecting the increasing strategic relevance, we bring to their businesses.
Contract length was slightly over one five years on average slightly shorter than the prior quarter as well as Q1 of fiscal 2021.
As a reminder, we do not actively manage the business to a target contract length. So this can fluctuate across quarters.
Also.
So our marketing cloud business has no deferred revenue or remaining performance obligations.
Turning to customer metrics.
We ended Q1 with over 16000 total subscription customers.
We once again saw significant strength in customer additions driven by new customer momentum for our elastic cloud.
We also ended.
In the quarter with more than 780 customers with annual contract values above $100000 compared to more than 730, such customers at the end of Q4, reflecting continued strong expansion trends.
Of note the sequential growth in customers over 100000, ACD has accelerated over the past two quarters.
Orders, reflecting the success of our product and go to market strategy.
Our net expansion rate was roughly flat compared to Q4 remaining slightly below 130%.
We expect the net expansion rate to remain at current levels give or take a few percentage points in fiscal 'twenty two.
Now turning to profitability, which.
And GAAP.
Gross profit in the quarter was $149.8 million, representing a gross margin of 77, 6%.
We managed our overall gross margin well during the quarter. Despite the increase in the cloud mix.
Looking ahead elastic cloud will remain a modest headwind to gross margin overall as we continue to invest to drive.
Drive growth.
Looking at operating expenses in Q1, we increased our investments in the business as we've laid out in the prior call.
Investments was spread across all functions.
Our operating profit in the quarter was $7.2 million with an operating margin of three 7%, which was significantly better than expected.
It primarily due to the strong revenue performance in the quarter.
This reflects the operating leverage inherent in our business model.
We also continue to benefit as expected from lower travel and event spending given the pandemic.
Earnings per share in Q1 was <unk> using $98.2 million diluted weighted.
Average shares outstanding.
Turning to free cash flow.
Free cash flow was $12.4 million in Q1.
As we've said before quarterly cash flow can be lumpy and affected by timing issues and seasonal variation. So we look at cash flow primarily for the full fiscal year.
We expect our free cash flow margin to remain.
Slightly positive on an unlevered basis in fiscal 'twenty two.
We ended Q1 with a strong balance sheet cash and cash equivalents totaled approximately $991 million.
Our cash balance reflects the net proceeds from our senior notes issued in Q1, we expect cash interest expense from the notes to be approximately 24.
$4 million per year.
Turning to guidance, we remain very excited about the long term opportunity ahead of us and continue to invest aggressively across all functions.
We continue to assume a gradual improvement in the macro environment weighted in the second half of fiscal 'twenty two.
Given this backdrop and in combination with our investments taking.
In greater hold over time, we continue to expect our calculated billings growth in the second half to be greater than the first half.
Further we remain confident that elastic cloud will continue to grow faster than the overall business.
Finally, we do not expect any meaningful revenue from the acquisitions of buildup security and CMT and the additional.
<unk> operating expense fits into our operational plans and has been incorporated into our guidance.
For Q2, we expect revenue in the range of $193 million to $195 million.
Representing a growth rate of 34% year over year at the midpoint.
We expect non-GAAP operating margin in the range of negative.
Four to negative, 3% and non-GAAP net loss per share in the range of 19% to 15 using.
Using between 92% 93 million ordinary shares outstanding.
For full fiscal 'twenty, two we expect revenue in the range of $808 million to $814 million, representing a growth rate of 33 <unk>.
<unk> year over year at the midpoint.
We expect non-GAAP operating margin in the range of negative 4% to negative, 3% and non-GAAP net loss per share in the range of <unk> 67 to <unk> 57.
Using between $90 to 94 million ordinary shares outstanding.
Finally, I'll point out that the midpoint of our non-GAAP EPS guidance.
Includes added interest expense for the debt would be previously discussed approximately seven cents per share for Q2, and 22 cents per share for full fiscal year 'twenty two.
In summary, we had an extraordinarily strong start to the year and our strategy is working nicely. We remain excited about the long term market opportunity ahead of us and we are investing.
Going towards that.
And with that let's go ahead and take questions operator.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question please.
Star then two.
Our first question today comes from Matt Hedberg with RBC capital markets.
Oh, Hey, great. Thanks for taking my questions. Congrats on really strong results again here.
Got it for you I mean lots of positives to drilling too, but the surgeon.
Press tumors off of what was a really strong <unk> impressive I'm wondering at a high level do you think the licensing change that you guys previously made it having a positive impact on customer adds and maybe secondarily when you look at growth and elastic cloud customers.
How much of that is.
I should say elastic cloud revenue.
Costs, how much of that is being driven by new customers versus expansion from your base.
Yes of course high Mac I'm happy to answer I think the first part is around the license change I remind that we did the license change a few months ago with the main goal of trying.
<unk>, who make sure that we address the confusion and the misdirection that what's happening with the competitive service from Amazon.
First of all I'll say, but we're very happy with the changes.
Over the last couple of quarters we've.
They did quite significantly we released a few minor versions at elastic.
To remind everybody sees a major release that you can see it with the recent one.
When we announced our limitless.
So we're running that has fast and innovating for our customer base and that's really resonating I'll also without community.
We've based on all the metrics that we're looking at downloads engagement on forums.
Rooms, and Github and others.
Our users are just running ahead with us and are very excited about all the innovation that we do across all of our Covid solutions in our.
Foundational search platform.
When it comes to how much it applies to our growth in new customers.
Our analysis and expectation is that.
This will play out over the long term, obviously, a license change applies only to new releases that we have so it's only a few quarters a N a and we think that over the long term that will start to have a and impact on on new customers or customer adoption as they start to migrate as they.
With the new versions and start to see the differentiation and and come along for the ride with us.
Beyond that you you've mentioned the new customer growth and obviously a lot of cloud I would say that I think you know a big part of our new customer growth is coming from our monthly SaaS and self service.
And a big part of that is just the amount of investments in innovation that we put into our products and elastic cloud specifically you mentioned this quarter and over the last few quarters. The for example, the significant innovation and investments that we're making at various cloud marketplaces and native into questions that we do with all of them.
But specifically focusing.
And integrating natively into Microsoft Azure and Google Cloud.
And I think our customers are saying that it's much easier for them now to go into consumer so on on various cloud providers.
Microsoft as easy as going to the Microsoft Azure console and deploying elastic cloud within the console itself without me.
We're seeing I think that for example is a great example of something that drives new customer adoption.
That's super helpful. And then just a quick one for you sort of on the elastic cloud comments, you noted that the monthly usage doesn't impact deferred revenue when those feelings.
I was wondering if there's a way.
Our SEC about what that headwind represents to billings growth and maybe a different way of asking it would be all.
Your elastic cloud revenue how much of it today is monthly versus annual or something beyond Daniel.
Yeah, Matt I'll I'll touch on that so stepping.
Stepping back for.
Yourself, but I just think about the cloud business overall at 89% year over year growth people thought it was just extraordinary performance and we are very pleased with that.
Monkey cloud business has increased a couple of points and mix versus Q4. It was closer to 15% of total revenue in the quarter and it continues to grow quite nicely I think we've been calling out for.
Some time now that it's been increasing slightly in mix and so it has continued to inch up.
And as I said the web the web based self service option. It's just a great way for us to acquire new customers. So the vast majority of you find new customers do come in via multi cloud.
They're usually small customers that then gradually increase their spend with us.
And the pace of customer additions as you noted was quite strong and we're pleased with that but it wasn't a massive step function change to indicate any kind of shifting workloads to the monthly format.
The billings growth rate headwind that you've mentioned that comes mainly from just the billings timing point that I mentioned earlier in the prepared remarks, but it was that.
At $5 million that had had gotten pulled out of Q1. This year into Q1 of last year I would not correlate that to the monthly cloud business.
The strengthened month eats outcomes from just the fact that we've made heavy investments in cloud and marketing with our partner Shire was talking about and strength in cloud was really a result of all of these factors and it's great.
To see those investments paying off.
Great. Thanks, a lot congrats again.
Thank you.
Our next question comes from Raimo <unk> with Barclays.
Yeah.
Hey, this is pre Cathy for right my lunch hour.
I wanted to ask a lot.
With me is around the security space with security belt.
And the acquisition that you guys announced today.
Can you talk about the go to market strategy with security.
And any update you can provide on the partnership with Palo Alto I bet, you announced last year.
Sure. This is John here I'll take it so first of all we are making as you mentioned, we're making significant investments in the security solution that we have.
Over the years, we started with that going quite searching.
We mentioned that we became honestly a leader over the years.
As was noted by Forrester.
Which we're very proud about we've been leading the charge you know absorbability starting from logging and then extending to APM and that'll give some mobility market.
And we have been used in the security space for a few years now, but people will have to go and roll up their sleeves and build their own make.
<unk> shift the same if you will.
So it's very very powerful search platform.
In about two and a half years ago, we started to build a sim solution, we joined forces with endgame around endpoint security.
And the 714 released the last one is that we have we announced our liberties 60 already.
The the fact that.
On top of all folded the endgame technology, almost all of it into our unified search platform into the elastic stack and provide it to our customer base.
We're also very excited about as you mentioned build security at CMT.
There are two great companies with very impressive technology that we're looking forward to embed into our.
For a security.
Security solution, and we think that that's what ended up providing.
Much broader applicability of security to a much broader user base.
Help support the the.
Nations to the emerging if you will of endpoint security cloud security and Sim.
And also over the years.
We use the emerging all big parts of the book Superlative security, which would typically produce them.
When it comes to the G T M itself.
First of all our stuff that we're also very focused on trying to build.
But I'm, a free and open community driven approach to the security market. We deeply believe that that's one of the differentiating.
Really that we bring to market, but more than that we deeply believe.
They've got a much better way to try to go and address the existing security threats and future security threats that companies are facing.
In a very similar manner, the doubts ops and developers drawn together to become Dev ops.
And.
In fact standing then in order to keep an infrastructure up and running and performing seem to date ticket yield environment. We just need to have this collaborative nature between developers and operations people. We think the same thing is going to happen with security.
We're investing heavily in the same way that we have in the context of observer ability.
And that goes and starts with building great products and great communities doing things and be open to other things that we know and love doing and window that makes a big difference and we are seeing is making a big difference in the security market today.
When it comes to partnerships, where you know, obviously always happy to partner with our with various.
Hum our approach is a free and open approach and we started with data where starts with them and as a result of it. We're just halfway to collaborate with any company that ends up shipping data to our Sim solution to a place that can store vast volumes of data and then making the searchable.
We've done one with Palo Alto networks are about a year ago. We're doing you know several with many other companies.
And we're excited to bring all of them Monday this.
Can talk security if you will while also addressing specific customers needs like endpoint security and container security and others.
And just one more question you guys have introduced quite a bit of cloud native solutions. This year.
I want to understand how the code base is shared between the on premise product and the product basically trying to understand how simple it is for a customer to deploy.
In a hybrid environment.
Yeah. So he is in the context of the security market Big portion. So what we do are can run on Prem. So I'll give you. An example cloud native workloads are.
But certainly a big part of them are containerized workloads or Cooper.
Workloads that customers can definitely and they do go and run on Prem.
And our cloud Native Foundation has made.
Many projects that can go and run on Prem or in a hybrid environment. The build build security for example, our focus around something called open policy agent against something that helped.
Levels and enforce policies specifically in cloud native workloads, but there was also can run on crime or more specifically as you said its hybrid environment.
I would probably say that the vast majority of our technology is CAD run in hybrid environments, we always prefer for customers to run on our cloud because we could do that it's just not significant.
Monitor user experience, but we know that not all can move quickly to the cloud.
We're happy to engage with customers through our security solutions and by the way observer ability and if my search and allowed them to run it in a hybrid environment as they transition to the cloud and a big part of it for example to move their workloads to become a containerized.
Linux overseeing under Linux and then running on kubernetes.
And then make the jump to the cloud and while they do that we want to provide them with the right level of observer ability and then detection and protection that they deserve.
Thank you.
Our next question comes from Frank <unk> with Jefferies.
Cheyenne light unlike the reference to a spinal tap and go into the 11, I guess talking about go into a lot of them a lot in the last few quarters, you've seen an acceleration in the business I'm just curious if you could.
Set the stage of what you think is causing.
Is this effectively a larger commitment to the broader platform you're seeing initial Ah you know bigger initial purchase orders or are.
Are you seeing you know divisions that have opened up that you've never seen before.
A sense of what what you're really seeing through your lines and what what's what's happening with with the inflection of the numbers that we're seeing.
Yeah of course, so first of all as just mentioned, it's very broad base.
Like are the company that we are you know where.
A bigger company now are we address multiple personas multiple solutions multiple opportunities I, just think that we have a wonderful leverage.
We are unified search platform from both a product and a go to market perspective, but were addressing customer needs across multiple fronts.
And when we take all of these and you know all of them by the way are growing fast right Italian anti church and companies moving to become more and more digital they are moving more.
For it to become digital workplaces are communicating mostly in an online fashion and all of that data needs to be search and that's a great sweet spot for our enterprise search product and specifically for example, I'll walk they search product.
More companies go online they are running applications that need to serve their.
More Emerson they need do those need to be observed in the generate more data.
And the same thing with security as companies go online or surface areas become bigger and they generate more data that needs to be.
Used to detect very slow moving threats that are fast search engine is best at.
And and all of that if we can go even a step back.
As data volumes grow the best and most natural way to explore their lives by searching it and.
And we see aside from these three use cases, we see.
It's a joke, Alaska, just as a general search plas.
That is very useful to do many many different things.
So we're excited about that and how much they could take that and put it together with cloud and our significant investments in cloud and our partnership with Microsoft and Google For example, within the cloud providers.
That would help accelerate and increase our growth so.
I'm excited and happy to see all of that innovation within the product all the innovation that we're doing on the more go to market all the investments that we're making and we mentioned weak going up into the enterprise, while maintaining our base of developers and practitioners.
Doing go with high velocity.
He knows but also a value based selling to our enterprise customers.
Cloud focused solutions focus all of these things that we're doing as a company realizes itself over the last few quarters.
And for generics I know growth has been the number one focus but when you think about the bottom line over time.
You know sustainable profitability can you just talk to how you're thinking about balancing both.
Yeah happy to talk about that friends. So you know as I think about our performance here. In Q1, you. Obviously are very pleased with the results you saw that the operating leverage that we haven't modeled that comes.
Time and needs as well as the revenue performance largely neatest way to the bottom line you know as I said.
I can think about it and then shai painted the picture of the broader environment, where.
We don't feel constrained really by bye bye.
By demand on the size of the markets in which we play these are very large opportunity sets in.
Really the unit economics in the business are very strong and so we feel the right thing for us to do is to continue to make investments in the business to drive growth. That's the plan that we laid out in the last call. We are continuing to make those investments you'll see that reflected in the outlook for the year as well and you know when you look at the implied spending in the business in fiscal 'twenty.
When you look at the increase in the spending in the business in fiscal 'twenty compared to fiscal 'twenty. One that's implied in the guidance, you'll see it's a significant step up because we are.
They're making the investments now to capture the opportunity ahead of us and I think that's the best thing we can do in the business at this stage to drive growth.
We do thank you.
Our next question comes from Jonathan <unk> with Baird.
Yeah, Hi, good afternoon.
So the question I have is is really our the xdr solution. It seems obvious to move in that direction just given your.
Focus and your Edr product, but I'm wondering if you could talk about product positioning.
Last is different from the numerous other vendors, we see emerging in that category.
It's very early days, there, but any early customer feedback you can provide.
Your Sim validate your differentiation would be helpful.
Yeah of course topic.
So first of all I think.
Here is an interesting term because it starts with extended which makes it by definition is very broad extended detection and response.
And we believe that any level.
That might security solution is to start with data.
To be able to observe cracks in order to be able to detect them and then in order to be able to then go ahead and protect them.
And we've spent the last 10.11 years building what I believe is to be one of the if not.
The most advanced search engine today to be able to go and find amongst other thing right.
And data is not an easy problem to solve to make it searchable being able to search across trillion threat.
Hundreds of machines Petabytes of data in return results in milliseconds or seconds.
Another busy and easy.
An easy task to do I know.
The last few quarters, we've innovated significantly in the circle the ability to go in store.
They are natively on cloud object stores, and then you can pick and choose between the cost of storing 10 years' worth of data versus.
Versus.
It's not in a month's worth of data and the speed of how fast you want to get the results that some people will provide our customers with exactly the same interfaces MEP.
I say July our.
Our ski and mountain regions came online integrations all of these things make a big difference for five countries.
And even like six seven years ago.
Advanced Security research.
Such as in threat hunters out there, we're taking Alaska church and keep on our core products and we're using it to build their own Sim and when asked them why they were doing it because it was not easy.
Have to go and figure things out and they have to roll up their sleeves and build things around it to make it a thin and the answer was well we can't get.
The level of data handling the data support that we need from other siem vendors.
And obviously, we're excited about it and we're doubling down on these core capabilities and now we're adding seem capabilities on top of it. So we're thinking deeply believe it that everything starts with data.
And then I think.
You know like we did with Absorbability. Thank.
Basically the fact that we're almost you know we're coming from a data perspective to the security market.
I think that we have the benefits of looking around corners, as we mentioned and for example, joining forces with endgame and getting into the endpoint security market two years ago.
Believing that this market will end up emerging.
And the need to have a more unified solution that is built into a unified technology stack and now with M D and build security and.
And obviously internally innovations that we're doing within the company all the time I think.
Our position from a product perspective to really support the.
What the ZR market, there's really climbed to solve which is trying to.
Ah.
Create a place where you can store all data possible and quite times extremely fast.
Either manually or through AI and machine learning algorithm.
And then expenses are peripheral so you can prevent and detect and prevent things there like endpoints of container and cloud native workloads.
So that's one big aspects, where I think our XD. Our solution is a strong I'll mention one other thing that I think there's more micro and more long.
With them or if we believe that our security shifting left and at the same time by the way in which we see it internally as well in terms of anything shifting right you talk to a person is people out there they care about security more.
More and more obviously.
Then I think that are.
Inefficient footprint within the observer ability.
Don't forget we're one of the most popular Korean open observer solution in the World today allows us to go through all of our visibility customers and tell them, while you observe why not protect.
And that's a I think a big differentiator for us and our ability to go to bring security capability.
Two existing.
Martin Observer ability workloads.
Is a significant advantage that we have as a company and I would say that it's significantly easier to do so compared to get security companies to convince operations people to add security work capabilities to them.
And so I think that's foundational element that way.
We have over the long term when it comes to the emerging novel capabilities and security is a very strong one and the last one.
We're bringing a whole new go to market to security we're doing these bottom up are focusing.
Focusing on threat hunters developers, we're joining forces with companies that I'll also believe in doing.
That's P M D and building security are great examples of it.
And I I I personally deeply believe that this market needs innovation not only from a product perspective, but also from an engagement perspective and a.
Community oriented.
All in it together to try to go and create better security.
Across the World and we want to go in are going to enable it in great places for these communities to engage develop and and collaborate around security threats.
That's helpful. It at just the monetization path I understand you have a fever when would you expect that to take place.
So first of all the monetization and security philosophy is exactly the same that we have across the board. So if someone goes to be deployed on our cloud obviously everything is paid for and we're making significant investments in our cloud product.
Free and open and people can take our products and run it themselves that's very of borrowing below as you see with Cmos.
Sugars are choosing our cloud, which we're very proud of.
If someone does decide to run on crime or in a hybrid environment and then we have additional commercial capabilities.
That they would go into to use and provide them with more value and then they become customers of ours. So for example within security are malware.
More and more things are free but.
Ransomware is a paid for feature if you're running us on crime.
Finally got balance of free and open over the years and we're finding that balance also in the context of security and so far I think it's been resonating really well without passenger base.
That's great. Thank you very much.
Our next question comes from Brad Reback with Stifel.
Oh, great excuse me, thanks, very much Dinesh maybe a couple of quick tactical ones on the free cash flow commentary around Unlevered just on a reported basis should we expect it to be about negative 20 because of the interest expense.
Right I'm not putting a specific number out there in terms of what the unlevered amount will be consistent with what we laid out at the start of this year, which is slightly positive.
Cash flow can be incredibly lumpy as you know and and then seasonal and timing effects that play into it. So we'll just monitor that as we go and and.
But for the next couple of quarters as well and then we can provide a more thoughtful of them go from the rest of the year, but at this point I'd be thinking about it just in terms of slightly positive on an unlevered basis.
Got it Okay, and then on RP O going forward I know you mentioned earlier that a lot of the.
Month to month cloud customers.
It's fairly small.
And as they get larger they contract with you that being said how should we think about the potential impact from the cloud business getting much bigger to our P O growth rates going forward if it if at all.
Yes, you know what I say.
And similar to what I've mentioned.
Earlier than that.
As customers.
Sign up with us on monthly cloud and the increase that business gradually with us overtime.
Do you need to find annual contracts and thats been the potentially at the deferred revenue and RVO. So in terms of.
The RVO connecting.
<unk> two day monthly cloud again, I would not make any connection there at this point, but I just look at the overall reported RVO number at 35% year over year, we were actually quite pleased with that with that growth I think that sets us up nicely.
For the rest of this year looking ahead.
If anything thats connected to be slightly shorter.
Contract lengths that I mentioned, but overall, we are actually quite pleased with the way that played out in conjunction with the overall business performance.
Great. Thanks very much.
Our next question comes from Rob Owens with Piper Sandler.
Hi, guys Ben Schmidt on for Rob Thanks for taking my.
My questions.
So looking at are looking at the guidance.
Given the beat in the quarter it looks like a relatively modest increase to the rest of the year for revenue about $6 million or so given how much of revenue now is ratable or usage based just wondering.
I guess, we were kind of thinking that we'd see more flow through into the coming quarters, given the beat in this quarter and.
Wondering if you can just add some color there and if maybe there is more conservatism in the usage based amounts and potentially some given some potential seasonality in the usage.
Revenue.
Yes, Im happy to talk to that so in Q1, we had very strong growth not just in the cloud side, but also on the self managed business. So across the board we were actually quite pleased with the results in Q1 in terms of the revenue performance in the quarter as I mentioned it was driven in part by a significant.
Based on stronger than expected usage on elastic cloud, which I think is just a great indication of the success of the investments that we've been making in that part of the business.
As I think about the full year, we had already factored strong growth into the model over the course of fiscal 'twenty two and in Q1, we just saw that strength come into the model earlier than expected. So it provided.
It can be a little bit of a benefit in the quarter earlier than we expected it would but as I think about the full year, we've already factored a significant portion of that into the other piece that I'll point out is the roughly $3 million benefit that we had from the timing of professional services revenue in both of those helped us achieve revenue growth, even well ahead of our expectations here.
<unk> one <unk>.
I think about the guidance then for Q2 and the rest of the way I would characterize it as the same as they did previously.
Think about the full fiscal year 'twenty do we've got a lot better visibility this year than we had in fiscal 'twenty. One for example.
And that's mainly because the broader economic and business.
<unk> is a lot more clear and customers know how to how.
How to adapt their businesses in the face of the pandemic and so forth and that's what we factored into the guidance, so I'm not holding back or being unduly conservative with respect to usage or any other factor of the business.
We already considered all of those.
Those things as we laid out the plan in the at the start the year. So we feel pretty good about how Q1 played out we feel optimistic about the rest of the <unk>.
Looking forward to updating you again next quarter.
Okay got it and so on customer adds really impressive acceleration there and wondering if you can add some color.
Or to what <unk>.
Products customers are landing in.
Whether security observer ability or search and if that varies at all from the broader trend you guys see in your customer base.
Yes, I'm happy to take that so in terms of.
The customized to your point.
We're quite pleased.
These with the with the additions that we had in the quarter as the second quarter in a row, where we've seen a very high rate of customer additions and we continue to add customers. Both on cloud as well as south managed a lot of our new customer additions tend to be on the monthly cloud site, where again, we saw very strong trends.
If I think about the.
The products are the use cases of those solutions, but we stay initially adopt us it really can be across the board. The way. We think about it is we provide those curated search experiences across enterprise search visibility and security and when customers sign up for a subscription deal or a subscription level it could be for any one of those.
Those solution areas and over time, I think youll start to see some of those lines start to blur, we've talked quite a bit about convergence between availability and security on the call over here and it's sometimes tricky to see where certain use case might end and another one might begin, particularly in monthly cloud web because thats all cells.
Self service and customers are signing up without necessarily advanced human engagement from us we may not have visibility into what our customers and.
And use case might be but broadly speaking the way we've seen it play out is that we see strength across the three solution areas as is reflected in all the number.
<unk>.
And we see that convergence is happening even more of a dime.
That's helpful. Thanks, a lot guys.
Thank you.
Our next question comes from Steve <unk> with SMB seen in Macau.
Okay.
Hi, elastic thanks for taking.
Since.
Congrats first of all on a great quarter it looks like your crushing the Stonehenge monument onstage.
Hey wanted to ask you about your hiring lots of hiring your job postings or like three X the level they were even pre pandemic.
And so I'm kind of wonder.
My question in sales hiring is it looks like it's increased a lot too.
Kind of maybe some color on what's behind those trends in on.
How how youre seeing.
Productivity of new hires trend and systemic.
Systemic productivity as well and then I've just got one other question for you.
Wondering how could you maybe I'll start us off so in terms of the level of hiring in the level of investments he.
He said last quarter as we mentioned earlier on this call as well, we just see a very significant opportunity ahead of us and.
We think that's the right answer for US here is to invest now to capture that growth some of the investments.
We will drive growth in the current year some of them are more.
Forward looking in nature.
As we think about investments that we made particularly on the sales side people that'd be higher now will start to gradually ramp into productivity and will hopefully contributes a little bit towards the <unk>.
<unk> in the back half of the year, which.
It maintained in the prior call we had mentioned that we see.
And expect stronger billings growth in the second half of the compared to the first half and I think that just sets us up nicely with momentum going into fiscal 'twenty three.
Where those investments are going it's across the board in all the functions are clearly on the sales side, but also in the engineering.
He was buying product organizations as well as in the G&A teams to support that scale and to support that growth as we go.
We've seen I think broadly speaking.
<unk> levels of productivity across the board and the entire organization I think theres a lot of that.
That people are getting done.
It's quite visible, obviously and easiest to measure.
The field organization and I think Theyre all of our internal metrics have been holding up.
Quite nicely.
On the field side.
Paul has just been a great addition to elastic and it's been great partnering with them over the course of the last year as we first built the plan for this.
It's where we're now executing against that so I think thats all been working out quite nicely.
And as I think ahead as I mentioned, just a short while ago. The unit economics in the business are strong so as we make these investments and continue to drive them. It sets us up very nicely to capture the growth opportunity ahead of.
Right, Thanks, and if I could do one follow up per se.
So you've already talked about the differentiation of xdr.
Very helpful. I'm wondering could you just maybe educate us a little bit on are you seeing your xdr solution as a replacement for what what your patents there isn't an alternative.
Up to what you've had in Sam.
Our traditional sem out there or is it complementary or kind of how do you. How do you view that how our customers viewing that as well thanks very much.
Yes, happy to I think thats.
I think our single unified search Glassful, the wonderful thing about it.
Is that a M.
Every upgrades every time, we've gone to cloud and happen to log in again, you suddenly get all the features deeply integrated into a single solution. So it's not like we have a same product line and then separated xdr product line in a separated observer ability line or something on those lines. It's.
All built on the same unified service platform. If you go and deploy our solution on the cloud you can go on call of websites.
Ah monitored the webserver that serves our website can protect the host advanced that website all at the same time with the same quarter.
So the wonderful news.
News for all of our Siem users out there is doubt once they go and upgrade to a new version. They just got an SDR and.
And one of the aspects of limitless xdr that I love. The most is that it's limitless when it comes to its usage for all of our seniors that are used to us.
Having resource base or.
Based pricing, we charge based on the resources that are needed to store and one year data.
They just got xdr.
This was part of the same package, if they're an enterprise customer of ours.
How have they can go and deploy as many endpoint security endpoint.
Since they want and they get malware and ransomware protection as part of their agent that collects data as well so I think that that's very exciting.
We love to pleasantly surprise our customers with.
Over the air updates if you will.
And we're delivering another one where.
They wake.
Up in the morning, and somebody got more.
And they can go and deliver more on an absolute building value for their customers.
Sounds perfect. Thank you very much I appreciate it.
Sure.
And again, if you have a question. Please press Star then one.
Our next question.
<unk> comes from George Atlantic with Oppenheimer.
Thank you for taking my question.
Maybe just following up again on the security side, you mentioned the go to market.
Approaching the threat hunters to kind of a bottom up approach can you give us the top down and you know that.
Uh huh.
The success, we're having with the traditional security buyer and you know as the platform matures.
Right of course.
We like to say the last week.
But up has outbid us.
I think the best companies in the world that Starwood bottom up adoption.
Once the.
Obviously focused on the practitioners and building tools that practitioners love, but at the same time, you go up to their managers and directors and Vps and C. I OS and she says more than anything by the way because you want to have the practitioner stopped if they go and trust your product and makeup.
Selling it you want to go and have their bathroom present ourselves well support them, while they go and that product spreads and being used we make significant investments in growing up I don't know you probably saw our investments and analysts relationship with this which is just one of it.
One example, and we've done it.
We're starting to invest heavily of already over the last year, and we're already presented well and three magic quadrant and of course, the waves and we're making additional engagements as we speak.
Those are all things that we're doing in order to be able to go up.
I will say that one of the things that I care a lot.
About Easter make sure that's why would go up and support all practitioners, we also still being focused and build towards that practitioners.
Because you.
The best companies in the World I think are ones that can can do both.
That's something that we're definitely able to be.
Yeah.
You know what.
They are now on the table, maybe sharing a longer term security vision over the next say three to five years, how do you feel that can evolve over time.
Of course.
So three to five years is a long period of time, but.
I mentioned briefly what we how we're looking at the market. The first part is just to make sure that toward the best data platform out there for any type of threats or security data and that's a lot of work.
Our software faster more relevant more scalable.
Running on multiple cloud providers everything around that.
Security is a big part of it as I mentioned, so bringing all the capabilities of an edr or the best of class endpoint security across Windows Banko at some minutes almost see that as a critical part of it.
Build security and and CMT health.
Help us invest.
And cloud workload data securities, whether it's container security and coupon that is.
Connecting to cloud data sources, and helping to protect the cloud.
Policy management and enforcement around the same type of workloads. We also wanted to bring this level of protection and support not only from one time, but to deployment times.
Tore as you deploy if we wanted to help you protect at the time of Department.
Only when something which money.
And then going even further and help you protect at build time, and then take all of that and by the way and connect to all of the existing stores that you have there because all of them are generating data, whether it's to see ICD pipeline.
That is controlled really complications are ending up being shipped to the cloud and deployed that generates data that's data that can be stored at east toward an elastic and can be observed and can be used for thrive topic. So we believe that every piece of data is important when it comes to securing an organization and we're investing heavily.
Being able to store all of it and being able to do both manual type hunting, but also automated machine learning driven threat hunting that we provide out of the box and our community provides that the rest of our community can benefit from.
Thank you.
This concludes our question and answer session I'd like to turn the call back over to Shannon for any closing remarks.
Yeah. Thank you.
Thank you everyone for joining us today.
Q1 was a great starting the year, we look forward to sharing updates with you as we execute through the year take care.
In Chile.
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