Q3 2022 Elastic NV Earnings Call
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 'twenty 'twenty. Two quiet period begins at the close of business Friday April 15th 2022 with that I will turn it over to ash.
Yeah.
Thank you Janice.
Hello, and welcome everyone I'm honored to join you on my first earnings call as elastic CEO .
Since assuming the CEO role in January I have spent time with many of our teams across the company.
Learning understanding and speaking with as many elastic <unk> as I, possibly could.
It has been tremendous to be welcomed so warmly by them.
I'm continually impressed with the passion of our organization the knowledge of the team and most importantly, their commitment and dedication to serving our users and customers.
I would also like to thank shy Bannon for building an amazing foundation here at elastic.
A foundation that we will continue to grow and expand upon especially as we accelerate our opportunity in the cloud.
Our growth area, where I have strong conviction.
I'm very excited about the contributions that Shire is already making his return to the role of plastics CTO.
Driving even greater innovation as we continue to increase our cloud focus.
Q3 was a strong quarter.
We delivered revenue of $223 9 million.
Up 43% year over year.
I'm very pleased about our performance in cloud, we're increasing consumption trends.
Cloud revenue of $80 4 million up 79% year over year.
We will spend a fair bit of time talking about our Q3 results and business momentum.
And there are three key messages to take away from today's discussion.
Horst.
The markets, we operate in are immense and growing our.
$78 billion opportunity and we are well positioned to succeed.
Our focus on elastic cloud will be a major driver of growth for our business as more organizations embrace the cloud.
Third our team has bought the drive for innovation and the operational expertise needed for success.
And that will continue to show in our results.
I joined the elastic a little over a year ago as its chief product officer.
I had been a big fan of the elastic platform even before that.
Having used it in the past for implementing various search powered solutions for zelle ability and security.
So the size of our market opportunity and the breadth of use cases was clear to me.
Whether it's the complexity of modern cloud native applications.
The sophistication of cyber threats or the explosion of customer facing services that rely on data.
Organizations are constantly being challenged to extract value from data with.
With speed at scale and with relevance.
This is their search comes in.
It's the most intuitive and interactive way to approach data and therein lies our biggest strength and differentiator.
Elastic search.
It's the best Foundation for addressing modern observed <unk> security and enterprise search needs.
When our customers bring their log data there trace data that metrics data that threat data all of this data into elastic search.
They can use our advanced machine learning algorithms to correlate across logs traces and metrics to quickly identify performance issues <unk>.
They can use a rich set of behavior detection rules for identifying threats across their entire environment.
They can seamlessly adopt elastic for more and more of their observed Billety security and enterprise search use cases.
We can do this at scale with.
With great speed.
And all in a single unified data store with a unified pricing model.
This foundation of elastic search enables our many innovations across our platform and solutions.
As data continues to grow in volume and importance.
We believe elastic will be essential to our customers' success.
Very recently I met with several of our customers in Europe , including BMW, Deutsche Telekom, and sappy and several others.
When I speak with customers.
There are three universal themes and takeaways from our conversations.
First.
Customers are unconditional invoicing their reliance on using elastic for absorbing <unk> security and enterprise search every single day to extract value from their massive amounts of enterprise data.
I, especially heard significant interest in using elastic for Sim and security and four log analytics and observed beauty, where customers are looking to displace incumbent offerings with elastic.
Second the.
The value of elastic is a unified platform within and across observed beauty and security.
Especially with our resource based pricing model.
Which allows them to scale their costs and more manageable ways.
Even as their data volumes explode.
This is something that our competitors often struggle with.
Are there costs tend to become prohibitive as data volumes grow.
Our strategy is resonating with our customers.
Many of whom now use us for more than one solution.
And third our investments in elastic cloud are positioning us better than ever to address the large market opportunity across all three solution areas.
And our opportunity in the cloud is significant.
Growing elastic cloud is a top priority.
And our performance in Q3 is a testament to that focus.
36% of our total revenue is cloud compared.
Compared to 29% a year ago.
The majority of our customers are already in the cloud in new and existing customers are universally driving more workloads rapidly to the cloud.
Elastic cloud is ready for them today and will get even better in the future.
We continue to expect that over 50% of our revenue to be driven by elastic cloud in the next three years and we will not stop there.
With our deepening technical and go to market partnerships with cloud Hyperscale.
Frictionless Onboarding experience with elastic agent.
Prebuilt integrations and so much more.
We are incredibly optimistic about our plastics future in cloud.
There is no better indicator of our progress in the cloud and the success, we're seeing with customers.
In the third quarter, we expanded business with our customer Barclays.
Who is using elastic observed beauty on elastic cloud to power their global internal center of excellence that supports hundreds of use cases across their business.
Barclays uses all three elastic solutions.
There are new deployment of elastic absurdity, an elastic cloud creates a single pane of glass to monitor their data across the bank.
Now they can spend time, serving their internal stakeholders instead of on infrastructure maintenance.
Similarly, one of the world's leading digital travel companies also expanded business with us in Q3.
They use elastic security on elastic cloud for Sim.
Threat hunting and fraud detection and analytics throughout their organization.
Elastic enables them to significantly increase the efficiency of their security team and.
And they are also seeing immense value from searchable snapshots.
Which allows them to store a year or more of security data for compliance requirements and future analysis and low cost object storage in the cloud.
We also signed on a new customer canvass.
The global visual communications platform and one of the world's fastest growing tech companies with over 75 million monthly active users.
Panama is using elastic cloud to deepen their security capabilities and enable more effective threat hunting and detection at scale.
A leading online retail delivery service in North America continued to expand their business with us in Q3, using elastic cloud for their enterprise search use case.
The customer uses elastic cloud to power their searches you type experience as well as their real time text matching ads offering.
Making it easier than ever for their users to find what they're looking for.
I'm also inspired by the outstanding work done by our teams.
Across all functions and their passion for operational excellence and continued innovation.
We recently launched elastic eight point, though.
Our game changing release that featured capabilities like native vector search enhanced machine learning natural language processing capabilities simplified data onboarding and streamline security.
The native vector search capabilities empower users to search and receive highly relevant results using their own words and language.
With the natural language processing feature users can now perform named entity recognition sentiment analysis, <unk> classification, and more directly and elastic search without requiring additional components or coding.
We introduced new Absorbability tooling for continuous integration and continuous delivery pipelines.
We also delivered more than 30 out of the box integrations, including New service now connectors as well as new integrations with AWS.
And a more simplified elastic cloud on AWS Onboarding experience.
Our continued focus on the cloud marketplaces, AWS, Google cloud and Microsoft Azure.
It remains a source of strength for us and will continue to help drive future growth.
Also we are grateful for our robust elastic community and all the engagement, we see from them every day.
In fact, our second annual elastic community conference in February had more than 2000 global attendees, who joined more than 60 sessions in six different languages.
Looking ahead.
We are focused on delivering a strong Q4, while actively planning for FY 'twenty three.
We remain confident that our prioritization of cloud.
Our dedicated innovation and observe <unk> security and enterprise search.
And our large total addressable market.
Will yield durable growth for many years to come.
We have the ambition and the demonstrated capabilities to capture the large market opportunity ahead of us.
And to become a generational company, whose offerings are synonymous with the markets in which we operate.
I look forward to sharing more with you when we lay out our plan for next year.
I will now pass it over to <unk> to talk more about our Q3 financials and our fourth quarter outlook.
Over to you <unk>.
Thanks Ash, we were very pleased with our third quarter results and in particular with the momentum and elastic cloud.
We are building a great long term business in the cloud and are still early in our journey.
Total revenue in the third quarter was $223 9 million up 43% year over year.
We performed better than expected with robust consumption and elastic cloud.
4% of our revenue was outside of the United States.
Subscription revenue in Q3 totaled $209 6 million comprising 94% of total revenue.
Within subscriptions revenue from elastic cloud was again strong at $84 million growing 79% year over year, driven by customer growth and usage.
And as Ash said elastic cloud comprised approximately 36% of total revenue up from 29% a year ago.
As a reminder, the vast majority of elastic cloud revenue is now derived from consumption based arrangements in which a customer can bring unlimited data into our platform. They can consume resources flexibly as needed and in terms of the commercial model. They can either go month to month and simply be invoice for actual consumption at the end of the month or they can purchase.
Credits upfront and consume those over time.
These three factors the scalability of the platform the flexibility of consuming resources as needed and the choice of the commercial model all reduce customer friction.
We believe this makes the consumption business model superior to a traditional ratable model.
Also in the consumption model, we recognize revenue based on the actual consumption in the period and not based on a preset time based schedule. This.
This makes revenue a more current measure of customer activity and business performance.
Revenue grows as consumption ramps for new and existing customers and we believe this sets us up nicely for durable long term growth.
Accordingly going forward. It is important to focus on revenue as the measure most representative of our business growth.
With an elastic cloud we saw continued strength in both the annual and monthly formats.
Monthly cloud revenue was approximately 17% of total revenue in Q3 versus 16% in Q2, continuing the trend we've seen for some time now.
The monthly cloud format continues to be a great way to acquire new customers.
The vast majority of our new customer start on monthly cloud and as they scale up and ramp their spending they can move to an annual subscription.
Professional services revenue in Q3 was $14 3 million growing 45% year over year.
As I've said before this revenue stream can fluctuate across quarters, depending on the timing of projects in delivery.
Professional services remains mainly a product adoption enabler and we do not expect professional services to increase significantly in mix.
The quarter strength in terms of deal flow was broad based across our three solutions, driven by new and existing customer growth across segments and geographies.
APG grew the fastest followed by the Americas and then EMEA.
The U S federal business performed well in the quarter.
Looking at customer metrics, we ended Q3 with over 17900 total subscription customers.
Once again saw significant strength in customer additions driven by new customer momentum for the elastic cloud.
We also ended the quarter with more than 890 customers with annual contract values above $100000.
Third to more than 830, such customers at the end of Q2, reflecting continued strong expansion trends.
Our net expansion rate was slightly up compared to Q2 and remained just under 130%.
As you know this is a trailing 12 month measure and therefore a bit slower moving.
We continue to expect the net expansion rate to remain around the current level in Q4.
Now turning to profitability for which I will discuss non-GAAP measures.
Gross profit in the quarter was approximately $170 million, representing a gross margin of 75, 8%.
We continue to track well relative to our expectations.
Looking ahead elastic cloud will remain a modest headwind to gross margin overall as it increases and mix and as we continue to invest to drive growth.
Looking at operating expenses in Q3, we continued to invest in the business as we laid out in prior calls.
A significant portion of these investments were in sales and marketing, where our core strategy of driving initial adoption, particularly on cloud and then scaling up to the enterprise remains unchanged.
We added sales capacity in various roles across the Geos.
In terms of operating income and operating margin we achieved breakeven.
This was significantly better than expected primarily due to the strong revenue performance in the quarter once again, demonstrating the operating leverage inherent in our business model.
We also continued to benefit as expected from lower travel and event spending given the pandemic.
Loss per share in Q3 was 12, <unk> using 93 million weighted average shares outstanding.
Turning to free cash flow.
Free cash flow was $15 8 million in Q3 on an unlevered basis.
As we've said before quarterly cash flow can be affected by both timing issues and seasonal variation. So we look at cash flow primarily for the full fiscal year.
Although we expect free cash flow to be negative in Q4, we continue to expect our free cash flow margin to remain slightly positive on an unlevered basis for the full fiscal year.
We ended Q3 with a strong balance sheet cash and cash equivalents totaled approximately $864 million.
We remain comfortable with our cash position from an operating perspective.
Turning to guidance.
The year is playing out as we expected for elastic we've.
We've executed well, so far and our customers' consumption patterns on elastic cloud have been robust.
We expect this trend to continue.
We are therefore, raising our revenue and profitability outlook for the year.
The increase in the revenue outlook reflects not only the outperformance for Q3, but also a healthy increase relative to what we previously expected for Q4.
This was more than our typical increase and there is less conservatism built into our revenue guidance than in prior quarters.
Further for those of you that look at quarter over quarter growth rates I'll remind you that our fiscal fourth quarter has only 89 days compared to 92 days in the third quarter.
With that background for Q4, we expect revenue in the range of $230 million to $232 million, representing a growth rate of 30% year over year at the midpoint.
We expect non-GAAP operating margin in the range of negative five 5% to negative four 5% and non-GAAP net loss per share in the range of 24 to 20.
Using between $93 1 million and $94 1 million ordinary shares outstanding.
For full fiscal 'twenty, two we expect revenue in the range of $853 million to $855 million.
Representing a growth rate of 40% year over year at the midpoint.
We expect non-GAAP operating margin in the range of negative 0.4% to negative, 0.2% and non-GAAP net loss per share in the range of 42 to 38.
Using between $92 million and 93 million ordinary shares outstanding.
Looking ahead to fiscal 'twenty three we're in the middle of our planning process, while it's too early to provide specifics I will share some thoughts on how we are approaching next year.
First we're focused on delivering durable long term revenue growth as we build a multibillion dollar revenue business.
We are confident that we are still in the early stages of this growth journey. We also expect to comfortably meet our stated goal of exceeding $1 billion in revenue next year.
Second we expect cloud will remain a powerful revenue growth driver for us and continuing to increase meaningfully in terms of mix.
Although incremental gross profit dollars elastic cloud will create transitory pressure on gross margin for fiscal 'twenty three.
Okay.
Third we will continue to invest in the business with discipline in support of our drive to durable long term growth.
This discipline is visible in our results we expect.
To continue to make targeted investments in all functions in fiscal 'twenty three to drive growth.
We also expect to travel and in person events to come back into the model in a meaningful way.
Additionally, we are keeping a close eye on wage inflation and the talent markets in which we operate.
Despite these near term considerations on gross margin the return of travel and wage inflation, we expect to be operating margin breakeven in fiscal 'twenty three.
Some of these expenses will come into the model early in the year, while revenue will ramp. So we expect Q1 to be the low point on operating margin.
Longer term, we expect to demonstrate leverage in the operating model as we have done previously.
We also expect to have slightly positive free cash flow on an unlevered basis in fiscal 'twenty three.
In summary, we've had a great year, so far and are looking forward to successfully finishing out Q4, as we ready ourselves for next year.
And with that let's go ahead and take questions operator.
Yeah.
We will now begin the question and answer session.
To ask a question press Star then one on <unk> found.
If you are using a speakerphone please pick up your handset before pressing any keys.
If you would like to remove yourself from the question queue Press Star then two.
We will pause momentarily to assemble our roster.
Okay.
Pardon me, we are experiencing technical difficulties.
Please hold on the loans.
Just one moment, while I get another operator.
Pardon me. Thank you for standing by the first question comes from Tyler Radke with Citi. Please go ahead.
Hey, good afternoon, Thanks for taking my question.
Maybe first question for you ash.
And congrats on the first.
Earnings call.
Oh here.
How are you how are you thinking a little bit more about the go to market strategy here, obviously that was a huge focus for you.
One of your priorities taking taking over.
Yes.
The top seek here and especially how are you thinking about organizing our sales force.
Into FY 'twenty three.
As you are really focusing on cloud.
Just any any thoughts.
Thank you.
Thank you very much for that question Tyler and good afternoon to everyone.
So it's been it's been wonderful to see the team executed very strongly in Q3 and in.
In the last couple of months have been spending a lot of time traveling and regions meeting with customers meeting with our teams.
And fundamentally what I have developed even stronger conviction in is that from a fundamental strategy standpoint, the markets that we're in are absolutely the right markets for us the opportunity in these markets is massive and specifically in areas like log analytics for <unk>.
For Sim in security there are tremendous opportunities to displace incumbents. So as we think about what we're doing today, we are continuing to make sure that from a go to market standpoint, we focus first and foremost on cloud where there is demand in our customer base, new customers are coming to us on cloud.
Existing customers as they increase workloads, they're tending to increase them disproportionately on the cloud and thats good for customers and it's something that we absolutely are leaning into.
In terms of FY 'twenty three you should expect that we will continue the intentional bias towards cloud that we have been doing for a while we see that as a growth engine, we see that as something that's good for customers. That's good for our business and we're going to continue that not only in the go to market side, but also on the relationships.
That we formed with the cloud Hyperscale or <unk> and also on the R&D side of course.
And organizationally as I've spent time immersing myself with the go to market teams.
I've been I've been very excited to see the depth and strength that we have and the teams and as I as I have explained at the time when I spoke to several a few.
Around the CEO transition.
All our selling teams report to Michael Clayman.
And Michael and the teams have done a fantastic job in Q3. They are focused on driving Q4 to a strong year end and we're going to continue on that journey and in terms of organization.
I'm loving what I see in the team and we're just going to continue to drive.
Great.
Maybe a follow up for Jim.
So obviously.
It sounds like you're focusing investors on total revenue.
And moving parts.
Billings in Q1.
Monthly staff.
Maybe two questions.
First if you look at the monthly SaaS revenue line was there anything to call out from a seasonality.
Usage impacts that some others in this space called out longer holiday period does that have any.
On the quarter and then secondly on billings.
Just anything.
Help us think about that metric both for the quarter and Q4, just some of the moving pieces.
Given the cloud consumption model it doesn't always gets built.
Thank you.
Yeah, Hey, Tyler are happy to answer those so on the consumption side, we did not see any particular trends around demand patterns over the holidays.
We were not expecting any unusual trends either so the quarter played out as we expected.
And when you think about our solutions overall, particularly for observer ability and security those are persistent security threats don't vanish over the holidays. As an example, so we did not see any significant variations around those.
And then with respect to billings look as you saw we're very pleased with the with the numbers. We posted here in Q3 was a strong print we had many successes across the business you see that reflected in all the the numbers the revenue numbers as well as the customer metrics. So there's a lot for us to be pleased about in that.
And as I said in my remarks earlier revenue I think is a better indicator of business performance for us since it is a much more current measure of customer usage.
Of our technology and particularly in the consumption model in terms of order flows I'd say the quarter played out as expected. We did provide the details on billings and in the press release for those for those folks that want to look at that but we did deliver strong growth. It was stronger than the first half as we said it would be.
And so we did deliver against that that expectation and if you think about it and in constant currency terms. It was even stronger than the than the numbers, we had posted in the first half.
So if I think about the business going forward, we will continue to focus on revenue, particularly because when you look at the monthly cloud business, which is now 17% of revenue that has no deferred revenue and that's a significant enough portion of the business that it just makes the calculated billings conversation less relevant. So so I don't expect us to talk about billings going forward.
Again, we will focus on revenue, we had really strong results here and we feel very good about the business looking at fiscal 'twenty, two and beyond and you see that confidence reflected in the raised revenue guidance for the year.
Thanks, so much.
Thank you.
The next question comes from Raimo <unk> with Barclays. Please go ahead.
Thank you.
Two questions if I may.
One for Ash actually if you look at the.
Big guys like us like Barclays, finding up and being in the cloud with you observe ability et cetera, as well can you maybe talk a little bit about what.
Kind of what's the message to your in terms of how comprehensive youth factors because you. Obviously you were known for.
Good luck in wealth management, but obviously theres more aspect here like infrastructure monitoring APM et cetera that need to be fulfilled. This wells for maybe talk a little bit about how comprehensive your portfolio <unk> by now and then one for you on that in terms of like the customer adds on the over 100000 that was just kind of a very strong number I haven't seen that for quite a few.
<unk> is now was there anything particular that was driving it or you're focusing a little bit more on kind of expansion et cetera, what drove that number. Thank you and congrats from me as well.
Okay. Thank you. Thank you Raimo and most importantly, thank you for the continued business and the trust in elastic we appreciate it.
So let me let me maybe touch upon the question on observer ability and the completeness of the stack and this is this is one of our core strengths. The fact that all the data that we bring in whether it's log data APM trace data metrics infrastructure metrics data see ICD monitoring data all of that comes into elastic search and <unk>.
<unk> talked about this in my prepared remarks, but this is fundamentally one of our greatest strengths that when all of that data comes into elastic search our ability to run very advanced machine learning rules, our ability to run all kinds of correlations and advanced square is is very powerful and we can do that a tremendous scale and when you think about large.
<unk> like Barclays that have very large amounts of data you're talking about.
And for many of our customers. Many petabytes of data that becomes a difficult problem and thats, where given our roots and given that our core foundation.
<unk> search we have a tremendous advantage and over the years, although we started with log analytics, we've been building out our portfolio today, we have over 2000 customers that are using our APM capabilities just on elastic cloud.
And that's you know that's been growing similarly, we've introduced capabilities around metrics and infrastructure monitoring we've talked about the work that we've done in our ability to monitor see ICD pipelines. The integrations that we've done with maven in ansible and other technologies that <unk>.
<unk> part of the CIC due process.
<unk> calendar year, we acquired optimize this was an acquisition a small technology acquisition that really gave us tremendous capabilities in the area of <unk>, which is a new technology that really allows us to look deep into Linux based systems and the visibility that we can provide with.
All of this in the cloud in a very fast frictionless manner. It's a it's a big source of our strength. So all of you might have started from logging as we see the expansion and also here our natural our pricing model, which works very well in allowing a more viral motion has been playing to <unk>.
Our strength. So that's what gives me a lot of confidence and optimism in the overall strength and then obviously.
As many of you know this this convergence as we are seeing between observer ability and security, which also helps us as customers continued to expand their usage.
Hey, Ryan this is John as a follow up on the on the question about the customers.
And look we're very happy with the metrics on customer accounts. We've got as you saw more than 890 customers now with more than 100, K HCV and fundamentally our strategy is working as customers start to use us for one use case, a one solution the data volumes grow their needs grow they ingest data from more sources they extend into <unk>.
<unk> solutions in all of this drives significant expansion for us over time, so it's great to see that customers that start small expand to become customers more than 100 can eventually even larger than that.
The other piece I'd call out there is that we're also calling higher within the enterprise, which as you know is an area that we've been investing and our strategy is playing out quite nicely over there too we're continuing to see greater awareness beyond departmental buyers, calling on C level executives and are now routinely taking down transactions more than $1 million in size.
With all of that that's those are some of the pieces that I would call out that that I think on our highlights that indicate the opportunity ahead of us and the success we've had.
And if I try and.
Offer another way to think about that opportunity ahead of US you will recall that we previously shared a stat that if.
If I look at that pool of customers more than 100, K HCV more than half of those customers have still adopted us for only one solution and if I look at a pool of $1 million plus customers more than 75% of those <unk>.
Adopted us for two or all three solutions. So thats just an indication of the of the room that we have to continue to drive up sell so we've been executing quite well and we're excited about the opportunity ahead of us.
Okay perfect. Thank you.
The next question comes from Brent Thill with Jefferies. Please go ahead.
<unk> I just wanted to follow up on the comment you made on the guide and I think you had said there is less conservatism in the guide can you explain why that is.
Yes happy to brands. So look obviously, we had very strong results here in Q3, we've talked about that quite a bit consumption has been stronger than we expected. So far this year and that's all been reflected quite nicely and the results we posted for the first three quarters.
So when I look at the guide that we've provided now we've raised the full year by $9 million more than the Q3 outperformance.
And if you look at that in terms of quarter over quarter growth typically the way we have guided.
Our guidance increase this time is more than it's usually been.
Typically for any quarter in the past the way we have guided is just slightly above the prior quarter and this time, it's $7 million higher than the prior quarter and that's despite the fact that on a quarter over quarter basis, We've got a headwind of three fewer days in the quarter that headwind in itself is a little bit over 3%. So despite that headwind we've got it.
Nice sequential increase that we are guiding to here. So we are continuing to take a prudent approach, but it's it's far less conservative than it was before we feel really good about Q4 and the full year.
Brent you saw there or Tom.
Yes can I just as a quick follow up on the on the Dr. On the current Dr. Kane.
It came down.
Terribly.
So I just I just wanted to drill in on the dynamics between current and.
Long term.
Sorry, the non current piece.
Dropped more.
What's happening.
Not just the shift to cloud <unk>.
Yes, I think there is always dynamics associated just with deal flow and you know for the most part in our business, we invoice customers only annually in advance.
From time to time when customers request us to have.
An entire transaction the <unk> invoice will accommodate that that request, we saw some of those kinds of transactions.
Last year in Q3, and I think what Youre seeing now is some of that bleed over from from long term to short term is as we lap that year or so.
As you know in deferred revenue and billings more broadly timing can always be a factor I think short term deferred revenue adjusted for some of those timing issues quite naturally and.
Did that grew 25%.
Currency is another piece and if you adjust for currency. It would have been short term deferred revenue growth would have been several percentage points, even higher but more importantly, Brent as I step back as I said the monthly cloud business fundamentally does not have any deferred revenue.
It is now 17% of the business so that starts to make deferred revenue overall, just a lot less meaningful to look at so that's why we continue to stay focused on revenue is the most current indicators spending patterns in the consumption model.
Thanks Shashank.
Thank you.
The next question comes from Matt Hedberg with RBC capital markets. Please go ahead.
Hey, guys great. Thanks for taking my question Congrats ash on the promotion here.
I'm curious on the CRO fronts. Obviously, you guys are are operating well.
I think Michael taken on more responsibility, but just wondering sort of what.
What are the thoughts on sort of.
That role timing et cetera.
Yeah. Thanks for the question. So from my perspective, I'm really actually enjoying spending time with the teams because to me as I think about our go to market and the fact that we've got this massive opportunity in cloud, it's really important to make sure that I understand and continue to drive the.
Cloud motion the solution motions that we have that are working so well throughout the organization and defined the plan for FY 'twenty three that's going to allow us to make sure that that that bias in the cloud.
Is even greater than what it has been now in terms of the sales teams as I've called out.
The selling teams today already report to our Chief sales officer, Mike considering a wonderful job.
In the future. It's I can imagine a time, where we would have a single person leading all our field operations, but honestly at this point in time I'm you know things are working incredibly well I'm enjoying working with the team and I am not seeing any any reason for any immediate changes because we have got such a great working engine and the <unk>.
Team is executing wonderfully.
Got it that makes that makes a lot of sense.
And then just one for you and maybe I missed it but could you talk about <unk> growth.
In the quarter.
Hey, Matt No I didn't mention that specifically, but I am happy to touch on it here.
As you saw again, just strength overall and on the business side on so many different metrics.
On <unk>, specifically again, just like deferred revenue you know that the monthly cloud business does not have any RVO, either and so again, our apio just becomes less meaningful for us, but the other important piece.
In a consumption model as he realizes that if a if a customer is ramping their usage faster and burning down their backlog that's actually a good thing.
And that's a big chunk of what we saw.
So that will allow us to go back to those customers sooner than expected in the future to increase their commitments based on their higher usage and that's obviously not reflected in the <unk>. Today. So that's just another piece why why RPM has been less of a focus area for us if I look at the reported numbers RVO growth was 22%, but again you can normalize that for.
Things like FX, which was several points in terms of a headwind in and would have been higher on a constant currency basis, but the main piece as I said is as we shift towards a consumption model. There is significant opportunity for us to drive growth with our with these customers over time, whether they are on the monthly format or whether they are they make commitments to us in the future.
So for US we are continuing to stay focused on revenue is the primary indicator of the business.
Got it thanks, a lot best of luck guys.
The next question comes from Kash Rangan with Goldman Sachs. Please go ahead.
Hello, Thank you very much congratulations to ash Jaenisch Ash question for you you want to pivot to the cloud.
As.
Quickly as you can.
From a product perspective, what are the things that you are looking to invest in the cloud platform that would make it a no brainer for an initial customer who might otherwise be predisposed to the on Prem elastic version, because it's got such a rich legacy, but how do you ensure that the core platform is not just on parity, which is part of it.
But it's actually heads and shoulders above the on Prem version that it becomes a no brainer and one for explanations as you have multiple consumption models. When you look at consumption models like Snowflake and data dog they have been able to put up CRP of RPM growth.
When you cut over to the.
And what are the optimal client avenue consumption oriented cloud businesses that that you can also see the benefit of our POC our peer growth like the other consumption models. Thank you so much.
Hey, Thank you for the question Kash.
I wanted to sort of step back a little bit and talk about the journey that the.
The team has already been on when it comes to cloud.
We've been on the on the R&D side very intentionally.
Driving a lot of investment into our cloud platform elastic cloud.
There are there are lots of advantages of elastic cloud just given the fact that you don't have to worry about the management aspects in the monitoring aspects. The way you typically would need to if you were doing everything and self managed we've delivered capabilities like searchable snapshots that work incredibly well, especially in the cloud we've got auto scaling that we've.
Already delivered on that's true for elastic search and several of the other components and what all of that has meant over the years is cash the point that you made not only is it on par, but in fact elastic cloud already is significantly at a stage where it is.
Even.
Less friction kind of way to get started you can get going faster you can adopt the technology and all the capabilities in there better and Thats just a natural reason why we are seeing some of the the advantages today in the cloud we are we're not having to pivot in the sense that we're not really forcing customers.
Customers are naturally choosing elastic cloud what we're doing is making sure that we enable our field teams NV educate our customers and that's what's resulting in customers like Barclays that have been traditionally a self managed customer and you are talking about a very large organization here at Barclays.
That has depended on elastic for a very long time in the self managed mode.
Recognizing that all of these investments over the years have actually made elastic cloud an incredibly compelling platform.
When I when I joined elastic last year as the Chief product Officer I saw that this was the trajectory I had confidence in the trajectory and I continued to invest more and now as we as we sort of not only on the product side, but also on the go to market on the partnership side.
Continue to work the cloud focus I personally am very excited the organization is very excited about the future in the cloud and our customers are very excited about everything that we're doing that let me turn it <unk> for the other question.
Yes.
On cloud nine right.
Like I said you know we appreciate all our customers and definitely Barclays has been it's been a wonderful relationship but cash there's no reason why we can't have the same relationship and continue.
I'd love to be able to thank all of you in the future for similar reasons.
On that note cash on the remaining performance obligations look I think one of the important distinctions between us and some of the other consumption oriented business models out there is that customers actually have the choice of signing up on a monthly basis and being <unk>.
Being invoiced at the end of the month based on their actual consumption or making an annual commitment.
And so they can they can opt for either model and that's the monthly cloud piece, which is now 17% of the business and there is no <unk> at all in that so depending on what form that takes and how customers onboard which is primarily on the monthly cloud site and when they convert over to annual you can have a lot of.
Dynamics that come into that that our <unk> number.
It's a it's a perhaps a little bit less meaningful for us at this stage of of where we are.
And I look more at the revenue number which is it's really the equalizer right revenue measures the consumption across all the different formats. It adjusts for duration and it's the most current measure of how customers are using our technology. So so that's why in my mind, that's a stronger measure.
Wonderful. Thank you so much.
The next question comes from Mark Murphy with Jpmorgan. Please go ahead.
Thank you very much ash Amazon has been removing the term elastic search from its website I think that's part of the trademark infringement resolution and yet you still seem to have very strong momentum in the AWS partnership you mentioned it several times here today is there a feeling that everyone has kind of made their piece.
Or or Bury the hatchet.
And do you sense, a benefit from kind of clarifying your linkage to the term elastic search.
Yes. Thank you very much for the question so.
The relationship and the partnership with AWS is continuing to strengthen and this is an area, where we have intentionally put a lot of effort in making sure that we work with them on tighter product integration you know in the press release, you must have seen some of the work that we've done.
To make it easier for prospects when they come to the AWS marketplace to start a trial for elastic cloud and the integrations that we have done for cloud native data coming from AWS directly into elastic cloud, that's really very valuable to our joint customers and that's really helping strengthen that part.
<unk> and as you mentioned.
The resolution of the trademark, but even before that the license change that we made last year those things have been helping clarify things in the market.
And customers see that now there's only one elastic search and it's from elastic and as I've been having conversations with customers.
It's becoming more and more apparent that.
This is helping create clarity in the market in the long term I can see that that's going to definitely be a tailwind, but even in the near term, it's helping AWS and us partner better which is which is immediately apparent to us and I'm I'm, particularly excited about that.
Excellent and as a follow up for <unk>.
We've had this unique situation where investors have been assuming.
That the slowdown in billings in the first half would would foreshadow a slowdown in revenue and yet we look at what's happened it's the opposite.
Where revenue growth accelerated.
Both sequentially and year over year at 43%.
And so I'm wondering.
What would you ever consider shifting Q&A IRR metric or some other type of metric to help us or is there some approximation to help normalize.
For instance, if we see billings growth at 35.
Maybe there's a mental model, where we can tack on five to 10 points to that rate. If we if we want to try to account for the shift to consumption.
Just kind of wondering if you have any thoughts along those lines.
Yeah, Mark it's a great question in terms of.
I'll answer the second part first in terms of just thinking about monthly and annual and in an apples to apples way, it's still probably best just to look at revenue, particularly since the vast majority of our cloud business is now consumption based and revenue reflects just a full three months of current consumption, regardless of whether it's monthly or annual business.
So it addresses the duration quite naturally it reflects the current consumption patterns, rather than a time base run off of historical deals.
And it's got the full effect of the adoption of our technology across all the different formats that we offer. So that's why I think that's probably the more meaningful measure for us to focus on looking ahead.
<unk>.
With respect to <unk> look there isn't a perfect measure out there that addresses all the aspects of the business model differences in timing.
We think revenue is probably the best of the measures at this point in time and again in a even in a consumption model keep in mind that it's harder to use <unk> as a revenue predictor, just given the variability of consumption patterns and the ramp in consumption that we're seeing particularly when customers first join.
So cloud is a big portion of that and Thats largely consumption. So I don't want to put a metric out there that's not reflective of the full business and that may have a short shelf life as the consumption format continues to increase and mix. So that's part of the reason why we're staying focused on revenue I think it's still the best indicator of our overall business.
Thank you.
The next question comes from Brad Reback with Stifel. Please go ahead.
Great. Thanks, very much Jenny I know billings isn't necessarily the best way to look at the business and I know we've talked it about talked about that a lot. This afternoon that being said I don't think you guys reiterated the commentary from last quarter or about <unk> being a head of one H and it was only 90 days ago. So I'm just trying to figure out is if any.
Things changed on that front and if so why.
Yes, Great question Brandon look.
We spent quite a bit of time talking about billings as you said and why it's a less relevant measure in the business.
The way I think about it is in Q3 here, we delivered 35% year over year growth compared to 26% in constant currency terms in the first half.
So I think that's that's the indication enough and the way I think about it in the future as we're pivoting to revenue. It is the best measure, we really aren't going to focus much on billings going forward.
Great. Thanks very much.
The next question comes from Koji Ikeda with Bank of America. Please go ahead.
Oh, Hey, Ash agent asked thanks for taking my question apologies. If you guys went into this in detail on the prepared remarks harping on here a little bit late.
I noticed in the press release, you know with elastic a point of announcement natural language processing is really highlighted there. So I guess could you help me understand why is this such a big deal and more importantly, what can this mean from a use case expansion or maybe a usage expansion from the end market. Thanks, guys. Yeah. Thanks for the question Koji and.
Let me address that so.
First and foremost <unk>.
Is truly a fundamental released because we typically have always delivered a lot of innovations not just in the major release, but in all the minor releases that come on top of it and so you can expect us to continue to deliver innovations as we always have in a continuous manner not only through this calendar year would be.
Now with <unk>, one of the big advances.
Is the capabilities that we've introduced in the area of vector search and there are a whole bunch of other capabilities surrounding it like natural language processing and when you take all of those capabilities together what that really lets you do is for your enterprise search kinds of applications use more.
Natural.
Clearly more natural language query techniques to get the results that you are looking for the applicability for enterprise search both in App search and in workplace search, which are the two kinds of use cases for customer centric applications and employee centric applications are tremendous.
And this is where we obviously are expecting to continue to drive a lot of momentum.
Also when it comes to Victor search it allows you to do additional more interesting custom search use cases.
That also depends upon the vector search functionality and all the machine learning that you can apply on top of it.
But that's just for enterprise search beyond that.
The announcements that we made in terms of additional integrations cloud centric integrations. The work that we're doing for observable it to make it easy to bring in data and advanced analytics on top of it all of that benefits from what is inherently a data. So a lot more to come in observed <unk> security and enterprise search.
On this platform.
Thanks I appreciate it.
The next question comes from Rob Owens with Piper Sandler. Please go ahead.
Yes. Thanks for taking my question I was wondering if you could speak to net new customer adds which were kind of flattish year over year and flat to down a little bit quarter over quarter.
Realizing it's a rounded number but with cloud providing more of a frictionless onboarding motion why aren't we seeing an inflection here or will we see an inflection here in the near future.
Hey, Rob This is John <unk> I'll take that so we were actually quite happy with the pace of new customer additions in the quarter. We've seen a consistently strong rate of new customer additions for many quarters now and in Q3 continued that trend.
The majority of our new customer ads as I mentioned around monthly cloud, where again, we saw strong trends from a revenue perspective as well we've invested quite heavily in cloud and marketing and partnerships in the product. So it's actually great to see the results of these investments.
And thinking about.
We see that.
Grow if I think about average.
Average deal sizes and annual subscriptions deal sizes were slightly up year over year. So we are pleased to see that as well and when I look at the overall data for all of our customer metrics in Q3, I think it was actually quite strong across the board. So we're happy with the results.
Thank you.
The next question comes from Steven Koenig with SMB Nikko SMB CE Gao. Please go ahead.
Hey, Greg Hey, Thanks for squeezing me in.
I Wonder if you guys could give.
Yes.
Any color on.
Kind of self managed customers converting to cloud and.
Especially the larger customers.
Can that be lumpy at all in.
Are you able to kind of.
Anticipate their choice of deployment options.
And kind of what what are the factors that drive them to convert you know either in part or in whole or cloud. Thank you very much.
Yes, Hey, Steve This is John Asia, and maybe I'll start and then see if ash would like to add anything but fundamentally when I think about the business and when I look at self managed customers.
Everyone's got their own strategy, it's not like we're driving some sort of substitution in the business by.
Trying to move customers to the cloud people move out there at their own pace and every customer is unique in that regard everyone's got their own story behind it.
But when I look at the self managed business overall or even the cloud business, obviously very happy with both of those with the growth that we posted most of our net new customer additions as I mentioned was we're on cloud to the cloud strength was not necessarily from transitions and the customer base a lot of that is just organic strength that we've driven.
With the new customers and as those continue to expand.
So cloud is a significant opportunity for new customer growth as well as for expansion customers are just spending more in cloud and Thats, what we are seeing.
So.
We expect that the cloud will continue to grow faster for us because thats their customers are driving their spending pattern.
And so it's more of the opportunity rather than some sort of transition I think our opportunity is large our penetration rates are low and so we have plenty of room to grow in both formats.
Ash anything you'd add to that yeah, the only thing that I'd add.
As I look at all the customers that are continuing to expand.
Several of them are are expanding into the cloud others are new into the cloud, but the one thing that is important to understand is the way we've architected our offerings. It makes it very simple for somebody who might have started on prem in a self managed environment to start to sort of expand in the <unk>.
Cloud.
And run their queries create their applications in such a way that theyre able to seamlessly take advantage of them and as they see the frictionless easier to use easier to manage easier to monitor.
Capability and natural attributed the cloud, that's where the growth becomes even faster so to <unk> point, we're not foreseeing any behavioral patterns and our customers. We are showing them. The advantages of cloud and then letting them naturally just make those choices and we find that to be a more.
Much better model than anything else.
Okay.
Super helpful. Thank you very much.
Okay.
The next question comes from Blair Abernathy with Rosenblatt. Please go ahead.
Thanks, Thanks for squeezing me in guys and congratulations ash.
Just a quick question on the on the security space.
Elastic security solutions.
<unk> added a lot of functionality acquired functionality on that over the last year or so just wondering how you see.
Your competitive positioning.
With that solution now how do you go to market and differentiate yourself in the security side of things and what's the security demand environment looking like.
Today versus the beginning of the beginning of the quarter.
Yeah. So the security continues to be a very strong demand driver.
If you look at our security business today.
Security now accounts for over 25%.
Of our overall business.
And over the last couple of years the investments that we've made both organically and Inorganically have set us up very nicely. So in my prepared remarks, I talked about the fact that.
We are actively seeing opportunities and involved in opportunities, where we're displacing incumbents in Sim in a Sim is the most mature part of our security portfolio and we've expanded from there and it's a natural area of strength for us because our Sim.
Effectively requires you to be able to pull in data from all kinds of different sources run analytics against it find the patterns that indicate attacks and then take actions on it and that's enabled us to expand to xdr.
The investments and acquisitions that we've made in the area of cloud security I expect that to start showing up in the product.
In the next couple of quarters and most importantly, we have been investing a lot in threat research. So just as an example earlier this week.
Our threat research team detected and started protecting endpoints in Ukraine against our new data wiper effectively a form of malware that wipes and destroys data on your end on your end systems that we started to observe in Ukraine, and we were able to protect endpoint.
Endpoints, there and we were very proud of that kind of work that we're doing in December we discovered a new malware type called blister.
That was again attributed to some Russian crime groups. So we're doing a tremendous amount of work.
I personally could not be happier about the quality and the strength of our teams and starting with this core strength in elastic Sim and expanding from there I see a tremendous amount of potential.
Great. Thanks, very much for the extra color.
This concludes our question and answer session I'll turn the conference back over to Asheville, Kearney for any closing remarks.
Well, thank you everyone for joining us today as.
As you can tell we remain very excited about the opportunity ahead.
I'm also looking forward to meeting many of you in the coming weeks and months.
Thanks, again and have a great evening.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
[music].
Okay.
[noise].