Q1 2023 Elastic NV Earnings Call
Good day and welcome to be elastic first quarter fiscal 2023 earnings results Conference call.
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I'd now like to turn the conference over to Nikolai Beloff, Vice President of Investor Relations. Please go ahead.
Thank you.
And thank you for joining us on today's conference call to discuss it last first quarter of fiscal 2023 financial results on.
On the call we have high school called me, Chief Executive Officer, and Jim Nice mood, Johnny Chief Financial Officer, and Chief operating Officer.
Following their prepared remarks, we will take questions our press.
But I assume this was issued today after the close of market and is posted on our website.
<unk>, which accompany this webcast can be viewed in conjunction with live remarks, and can also be downloaded at the conclusion of the webcast on the last Investor Relations website, IR dot elastic adult seal.
Our discussion will include forward looking statements, which may include predictions estimates or expectations regarding the demand for our products and solutions and our future revenue and other information.
These forward looking statements are based on factors currently known to US speak only as of the date of this call and are subject to risks and uncertainties that could cause actual results to differ materially.
We disclaim any obligation to update or revise these forward looking statements unless required by law.
Please refer to the risks and uncertainties included in the press release that we issued earlier today.
In the slides accompanying this webcast and those more fully described in our filings with the Securities and Exchange Commission.
We will also discuss certain non-GAAP financial measures disclosures regarding non-GAAP measures, including reconciliations with the most comparable GAAP measures can be found in the press release and slides the.
The webcast replay of this call will be available for the next 60 days on our company website under the Investor Relations link.
We will be participating in the Citi Global Technology Conference on September eight and the Goldman Sachs Combing the Copier Technology Conference on September 13.
Stick will cost it's 2022 financial Analyst day on September 19, and hope many of you will join us in person in San Francisco.
Our second quarter fiscal 2020 free quiet period begins at the close of business of Friday October 14, 2020 to them with that.
I will turn it over to ash.
Thank you Nikolay, Hello, and welcome everyone I'm happy to be here with you today to share our Q1 FY 'twenty results.
I'm very pleased with our execution in Q1, as we continued to see strength in the demand environment and drove disciplined execution across the board and.
An excellent start to our fiscal year.
In Q1 revenue grew 30% year over year, and 34% Euro where you are in constant currency and we once again saw robust momentum in elastic cloud.
Cloud revenue grew 59% year over year or 62% in constant currency and comprised 39% of our total revenue compared to 32% in the prior year quarter.
We ended the quarter with more than 19300 subscription customers, including over 1010.
With annual contract values of more than $100000.
And our net expansion rate was just under 130%.
Our results in Q1 reflect our focus on our strategy and the consistent execution of our team.
As data continues to grow in volume and importance. We believe that elastic data analytics platform powered by search will continue to be essential to our customers continued success.
We saw this play out in the form of strong demand patterns throughout the quarter with good linearity I.
I also heard this in customer conversations throughout the quarter.
Even with the strengthening U S dollar.
We saw execution strength across geographies with each of our geographies delivering order growth adjusted for currency and duration in excess of 40% year over year.
All of this gives us the confidence to raise.
<unk>, our constant currency revenue growth guidance for the year.
We also feel well positioned to achieve our long term goals of cloud exceeding 50% of total revenue by the fourth quarter of fiscal 'twenty, four and achieving $2 billion in total revenue in fiscal 'twenty five.
Let me share our progress across our three key focus areas.
<unk> durable growth.
Widening the competitive moat and fueling profitable growth.
Starting with durable growth.
We believe the need for our customers to protect observed and search data is mission critical.
And we continue to see customer spend stay resilient and maintained steady growth.
We believe the level and pace of consumption across our solutions remained strong because customers recognize the power of our data analytics platform and continue to expand usage across our solutions.
For example, our U S Regional Bank company is leveraging our security solution on elastic cloud for a Sim and security monitoring capabilities.
This quarter, they expanded business with us and we closed a new absorb city deal with them.
So they can leverage elastic to meet their application log monitoring needs ensuring all of the banks critical compliance requirements are met.
Additionally, we renewed business with get Lab, Inc.
Which is leveraging elastic to run their SaaS service search functionality and managing all of their data logging infrastructure on elastic cloud.
Last quarter I shared details about our focus on the cloud.
Which continues to drive results.
In Q1, the field drove a significant increase in elastic cloud pipeline creation, what Q4 and a substantial portion of elastic cloud deals closed by the field in Q1 came from new logos of note. We are seeing that our enterprise subscription tier is now the fastest growing.
Tier amongst our cloud customers.
We continue to build momentum with the major Hyperscale AWS, Microsoft Azure and Google Cloud.
The marketplaces are an important growth driver of elastic cloud and our fastest growing route to market.
In fact, our tight integration across the marketplaces and our go to market investments that these partners. Once again resulted in revenue growth of over 100% year over year from the cloud marketplaces.
I am excited to share that we were recognized as a finalist for the 2022 Microsoft commercial marketplace partner of the year Award.
Now onto our widening competitive moat.
I'm incredibly proud of what the team delivered this quarter as we launched new enhancements for elastic cloud that make it easy for our customers.
Search data anywhere from one platform.
With new updates to our cross cluster search and cross cluster replication capabilities.
Customers benefit from interoperability between self managed and elastic cloud deployments.
These capabilities support our customers in their transition to the cloud.
Providing a seamless way to search across hybrid environments.
This is particularly important for two categories of customers.
Who may need to maintain data in their own data centers do.
Due to regulatory or privacy constraints and those who are in the process of migrating from private to public cloud and need an approach to migrating data over time.
With these new capabilities. In addition to the multi cloud cross cluster search and replication capabilities that we have already had.
These customers can now seamlessly search or migrate data across private hybrid and public clouds.
This accelerates the migration of customer data to the public cloud and we believe grows the footprint of elastic to be wherever customer data lives further widening our competitive moat.
Moving onto our solutions, starting with elastic security.
The strength of our security capabilities continues to fuel our success in the market.
This quarter, we expanded business with the leading data streaming platform company.
Who is leveraging our sim to ensure deeper security intelligence.
And with the New cross cluster search enhancements I mentioned earlier.
Can easily search across hybrid environments to identify relevant security data in any environment.
They're also using searchable snapshots, which enables them to meet their internal data retention goals.
They look to cost effectively store and easily search years' worth of data one of the major drivers to choosing elastic enterprise level subscription.
In security, we continued our pace of innovation.
Just this week, we introduced elastic modern approach to shore.
Security orchestration automation and response.
This new capability allows our Sim users to streamline their operations workflows speedup threat hunting and reduce mean time to respond.
Elastic approach to shore is powered by elastic agent.
Our single click approach to integrating data from hundreds of data sources.
Delivering endpoint and cloud security.
It includes expanded native remediation capabilities through elastic agent.
Our purpose built user experience for remediation and orchestration and expanded third party sure vendor integrations.
And we announced our cloud security offering at Odyssey in June .
Which featured capabilities to secure modern kubernetes environments and cloud workloads.
Reception to the announcement has been strong.
And we expect the full product G by the end of calendar year 2022.
Leading to enhanced opportunities to cross sell within our security products.
Now moving onto elastic absurdity.
Our success in evolving log analytics use cases to larger more holistic observe litty implementations continues as customers look to elastic to monitor their entire ecosystem.
This quarter, a large global electronics manufacturer expanded business with us as they leverage our observed <unk> solution to monitor and investigate errors across Iot applications that power their connected appliance offering.
With elastic they're able to enhance their connected consumer appliance products to ensure customers have a world class user experience.
This quarter, we also closed a new deal with Telefonica in Germany.
They're using our observed <unk> solution with elastic cloud.
Across all three cloud Hyperscale.
The company targets, a radical transformation for the upcoming years or to Telefonica is relying on elastic to support observe realty to further improve customer satisfaction by increased service availability and performance.
On the product front, we just announced new updates.
Lighting smarter alert management for AI ops that accelerate problem resolution.
AI ops, driven alert and incident management are crucial for proactively detecting triaging investigating and resolving anomalies and complex business environments.
Customers like S&P, Jaguar land Rover, and I N G rely on elastic absurdity to deliver unified visibility and actionable insights about critical business infrastructure.
We also recently launched the beta of synthetics monitoring a.
Our capability often requested but APM customers.
We've seen excellent adoption of this new capability.
Since the launch more than 240 elastic absurdity customers on elastic cloud have tried out the beta.
Our consumption based pricing model makes it easy for customers to try and adopt these new capabilities and that drives incremental consumption and revenue for us.
And elastic was named a visionary in the 'twenty to 'twenty, two Gartner magic quadrant for APM and observe ability for the second consecutive year. In addition, elastic absurdity was named among the top three vendors and five out of six use cases and gardeners companions.
For the 2022 Gardner critical capabilities for APM and <unk>.
Further showcasing the tremendous traction we have gained across our overall observed beauty solution.
And lastly, with elastic enterprise search we continue to see momentum.
As organizations look to elastic to fuel their database search.
Enterprise system Offloading e-commerce customer support workplace content website search experiences.
And more.
In Q1, we.
We expanded business with a leading American health solutions company.
Who is using elastic enterprise search.
Their customer experience evolution and fuel their clinical support product.
This purpose built application.
Built on elastic search.
<unk> supporting staff with the seamless search experience that delivers a comprehensive easy to read.
Near real time view of their customers.
This enables team members to provide faster and more accurate health recommendations and an overall better customer experience.
This quarter, we also expanded our business with one of the world's leading financial institutions, who has been steadily increasing its adoption of elastic over the past several years.
In addition to designating elastic.
Their enterprise standard for such they operate a centralized center of excellence that provides elastic enterprise search to multiple lines of business.
Supporting a wide variety of use cases, including fraud analytics regulatory reporting payments search and customer account lookup.
On the innovation front, we are encouraged by the early strong interest in our enhanced machine learning and natural language processing capabilities, which we first introduced and technical preview with our eight <unk> release in February .
Now we have over 200 customers trying out the capabilities testing out the features and providing us feedback across use cases from e-commerce and career search to online dating patent search and graphic design.
Our integrated ml capabilities are a significant component of our competitive mode across all three of our solution areas.
It helped drive consumption on our platform.
I'm excited to share that we are officially getting back together in person.
With our elastic customers and community.
While our elastic on comes to us cities.
We are hosting six events around the world.
Our community and customers will come together to learn about the latest elastic technology and how we can drive transformation.
With elastic cloud together.
These events drive greater awareness fueled.
Fuel pipeline and reinforce our bottom up adoption and product led growth.
Moving on to our focus on profitable growth.
I'm proud of the team and the fact that we exceeded both our revenue and our profitability targets for Q1.
We continued to invest in the business in a disciplined way.
Primarily in our sales capacity and in key technical rules.
And at the same time, we let a significant portion of our revenue outperformance dropped to the bottom line demonstrating.
Demonstrating the operating leverage inherent in the business model.
We've also slightly increased our non-GAAP operating margin outlook for the year.
Based on the continuing customer adoption of our solutions and our momentum and elastic cloud we remain confident of achieving our goal of $2 billion in revenue in fiscal year 2025, while also continuing to grow our operating margin over time.
In other important developments I'm thrilled to announce that Ken Exner is joining elastic as our chief product officer effective August 2009.
Ken has close to three decades of experience, leading product and engineering teams.
He joins us from AWS, where he spent 16 years building and managing dozens of products used by millions of customers worldwide.
Most recently he served as the VP and GM of AWS developer tools.
He ran a portfolio of over 30 products.
Ken's experience building and running Hyperscale cloud services.
Will accelerate our cloud first business strategy and strengthen our relationships with all of our cloud partners.
This past quarter, we launched our first company ESG report and added industry veteran So hey, Bob Busey today elastic board as Vice chair.
So he has extensive experience supporting organizations as they grow to become a multibillion dollar companies.
We're also looking forward to sharing more about our business with you all during our upcoming analyst day on September 19th now.
Now as I turn the call over to Jim <unk>.
I remain very confident in our future.
We are committed to driving durable growth.
Widening our competitive moat.
And fueling profitable growth.
And now overdue Dinesh.
Thanks Ash the first quarter was a great start to the year, we delivered 34% constant currency total revenue growth year over year, and 36% constant currency subscription revenue growth year over year.
We continued our momentum in elastic cloud, which represented 39% of total revenue in the quarter up from 37% in Q4, and 32% a year ago.
Resilience of <unk> solutions in the current environment was evidenced through continued strength in new customer additions and a sustained high net expansion rate and.
And we did this while demonstrating expense discipline and operating leverage we once again beat the high end of both our topline and bottom line guidance for the quarter, we remain confident about the rest of the year and our long term goals.
Let's get into the results.
Total revenue in the first quarter was $250 million up 30% year over year or 34% in constant currency.
Subscription revenue in the first quarter totaled $232 million up 31% year over year or 36% in constant currency comprising 93% of total revenue.
Within subscriptions revenue from elastic cloud was again strong at $98 million growing 59% year over year or 62% in constant currency driven by customer growth and usage.
We're pleased with our performance, which was against a very strong growth comparison point last year, we did not see any unusual usage patterns during the quarter.
Professional services revenue in the first quarter was $18 million growing 15% year over year, we do not expect professional services to increase significantly in mix.
To give you a bit more color on deal flow. We once again saw both strength and balance in deal flow across geographies segments and industry verticals in the quarter adjusted for currency and duration. Each geo grew orders in excess of 40% year over year growth.
<unk> also remains strong as we've said before diversification is the strength of our business model and reflects the breadth and resilience of the solution supported by our search platform.
Throughout the quarter. We were also pleased with the strength in linearity as well as new logo wins and net expansions.
Full of customer conversations remains positive as we continue to work with them closely on mission critical use cases in their businesses.
All that said we are aware that the external environment is dynamic and customers are increasingly agile in responding to changing circumstances. We continue to monitor this closely I'll touch more on this when I discuss guidance.
Looking at customer metrics, we ended the first quarter with over 19300 total subscription customers with the vast majority of the additions in the quarter once again, an elastic cloud.
Strategy of focusing on acquiring and nurturing customers at a higher quality rather than solely focusing on quantity has been working nicely.
We also saw the success of the strategy reflected in the count of larger customers.
We had over 1010 customers with annual contract values over $100000 at the end of the first quarter compared to over 960, such customers at the end of the prior quarter, reflecting the strength of our product portfolio and our ability to drive expansion across the solutions.
Our overall net expansion rate in the first quarter continued to be strong at just under 130%, reflecting our momentum and success and elastic cloud.
Now turning to profitability for which I will discuss non-GAAP measures.
Gross margin in the quarter was 73, 9% with the sequential change versus the prior quarter driven mainly by professional services for which gross margin can fluctuate based on service delivery timing.
Subscription gross margin at 79, 2% was consistent with the prior quarter we.
We are pleased with our progress against our plan.
Looking ahead, we continue to expect elastic cloud to remain a modest headwind to gross margin for the year as it increases in mix and we continue to invest to drive growth.
Looking at operating expenses in the first quarter, we continue to invest in the business with discipline. According to the plan we had laid out our operating margin in the quarter was negative one, 9%, which was significantly better than expected primarily due to the strong revenue performance in the quarter.
This reflects the operating leverage inherent in our business model.
Loss per share in the first quarter was 15 cents using $94 6 million weighted average shares outstanding.
Free cash flow on an adjusted basis was $1 $7 million in the first quarter.
We continue to expect to have slightly positive adjusted free cash flow for the full fiscal year.
We maintain a strong balance sheet, we ended the first quarter with cash and cash equivalents of approximately $849 million, we remain comfortable with our cash position from an operating perspective.
Before discussing our outlook for the second quarter and the remainder of fiscal 2003, I'll briefly recap our overall long term framework we.
We continue to be well positioned to deliver durable long term growth achieving $2 billion in revenue in fiscal 'twenty five.
Remain confident in our ability to achieve our growth objectives, given the strength of our products are significant momentum in elastic cloud a healthy new customer trends and net expansion track record.
We continue to monitor the environment closely and have executed well so far this year.
We continue to expect elastic cloud to exceed 50% of total revenue in the fourth quarter of fiscal 2004, and we continue to expect to expand operating margin by several percentage points each year in fiscal 2004 in fiscal 'twenty five.
Turning to guidance.
Our performance in the first quarter sets us up nicely for the remainder of the year as we've said before we believe our products are core to our customer success, which helps us build a healthy business that performs consistently through both upswings in downturns.
The first quarter played out as we said it would and we delivered well against our goals.
We continue to stay close to our customers and monitor the broader environment, we're not discretely adjusting guidance down for a macroeconomic slowdown simply because we have not seen that yet in the business.
What we have seen so far is the impact of currency movements with the continued strengthening of the U S. Dollar we expect currency movements to present, a headwind to year over year total revenue growth of approximately 5% for the second quarter and approximately 4% for full fiscal 2003 or $10 million incremental headwind for the full year compared to our prior guidance.
With respect to operating margin since we also incurred a significant portion of our expenses in currencies other than the U S. Dollar we effectively have a natural hedge so the impact to operating margin from a strengthening dollar is less significant.
You've often heard me say that diversification is the strength of our business model and this is another example of that strength.
Given our strong execution, so far we continue to invest in the business. According to the plan we laid out at the start of the year. We expect to continue targeted investing in all functions in fiscal 2003 to drive growth, while continuing to improve profitability.
Finally, our overall guidance philosophy stays unchanged, we continue to guide thoughtfully and without excessive conservatism.
With that background for the second quarter of fiscal 2003, we expect total revenue in the range of $260 million to $262 million, representing 27% year over year growth at the midpoint on.
On a constant currency basis, we expect total revenue growth of 32% year over year at the midpoint.
We expect non-GAAP operating margin in the range of negative 0.6 to negative <unk>, 2% and non-GAAP net loss per share in the range of 11 to nine using between $95 million and 96 million ordinary shares outstanding.
For full fiscal 2003, we continue to expect total revenue in the range of $1 billion $80 million to $1 billion $86 million, representing 26% year over year growth at the midpoint.
Compared to our prior guidance our currency neutral outlook for the year is higher by $10 million, which was offset by the headwind of the incremental $10 million of currency movements I referenced earlier, resulting in no net change in total revenue for the year compared to the prior guidance.
On a constant currency basis, we expect total revenue growth of 30% year over year at the midpoint versus the prior guidance of 29%, reflecting the higher currency neutral outlook for the year.
We expect non-GAAP operating margin for full fiscal 2003 in the range of 0.3% to 0.7% and non-GAAP net loss per share in the range of 31 25.
Using between $95 million and 97 million ordinary shares outstanding.
In summary, we had a strong start to the year with continued cloud momentum. We believe that we are well positioned for long term durable growth and profitability and we look forward to continuing to execute in the second quarter and beyond.
We're also looking forward to seeing you at our upcoming analyst day on September 19th and sharing more about our strategy and growth trajectory, then and with that let's go ahead and take questions operator.
Thank you we will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
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If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Raimo <unk> with Barclays. Please go ahead.
Okay. Thank you and congratulations.
Asked about cloud.
Our cloud business like what are you seeing in terms of customer behavior. In these uncertain times in terms of like moving faster to the cloud.
Also in terms of like where the customers are coming from it's like most of your customers whats the story on customer migrations towards the cloud.
My first question on that and a quick follow on.
Yeah Raimo. Thank you for the question.
The pattern compared to the last quarter remains unchanged. We are seeing customers continue to both expand and also new customers to come onto the cloud.
And that's across pretty much all geographies and segments. So the demand that we're seeing the usage of the product we haven't really seen any change in that part of it as we expected and we've talked about in the past is just the kinds of solutions that customers tend to use us for you.
You're talking about security or absorbing 30 or enterprise search, we don't see that kind of variability. So we've seen consistent consumption patterns.
In elastic cloud.
Okay, perfect and Josh like from you.
There's a big debate about like the.
The linearity in the quarter could you speak to a little bit of what you saw in late June .
If I could guys were all like Germany.
June was kind of funny them. So call yesterday, you Im sure you follow like sales force.
Thank you have a guidance essentially lie or where is kind of different you sound a little bit can you talk a little bit of what you saw in terms of linearity in the quarter. Thank you.
Yes, happy to Raimo look linearity for us was actually quite good across the quarter.
Q1 is always unique because its the first quarter of the year, we assign quotas and territories and things like that and linearity can also be affected by the timing of specific deals as you know, but at this time, we actually saw pretty good deal velocity June was a strong month and that took a little bit if the burden of July and the team delivered nicely in July as well and and met.
The expectations that we had so we're actually quite proud of how the team executed to finish the quarter. So strong.
Okay perfect. Thank you.
Our next question will come from Tyler Radke with Citi. Please go ahead.
Good afternoon. Thanks for taking the question I wanted to ask you about the order growth that you referenced north of 40%.
Could you just better contextualize.
Is that kind of synonymous with it.
Current RPI bookings or how do you exactly measure that and then you know.
Is the way to think about that that 40% is kind of accelerating.
Just trying to understand kind of.
The recent trajectory of that and how it flows into revenue. Thank you.
Yes, hi.
I'll take that so yeah look the way to think about that is it's essentially field performance right.
We pay.
Our field and give them quarters based on driving orders across cloud and self managed and services and.
And Thats, what Theyre focused on in driving essentially ACB of subscriptions plus of course services as an attached to that.
And that's what that's what that metric represented in each of the Geos did really well as we said more than 40% growth when you adjust for currency and duration across the geos in terms of what that means looking ahead.
Obviously.
<unk> start to the year for us and that eventually that that all of those translate to revenue as those are those orders eventually get consumed in the in the case of cloud or services are delivered in the case of services and of course on the South Bionic sight, it's ratable, but we are actually quite pleased with the execution on that front.
A big chunk of those came from cloud, which now represents 39% of the business and it sets us up quite nicely for even greater momentum as we as we continue to progress through the year. So overall I think the team did a really good job and we're quite happy with the outcome.
Great.
Excuse me and second one for.
Maybe just talk about how youre seeing the field team respond to some of the news incentives around cloud and.
Are there particular use cases.
They are leaning into more just given the incentive structure.
<unk>.
Thanks Tyler.
I'm actually really pleased by the field has responded to it and it's not just the field, but across all functions the lean in and to cloud has been excellent we talked a little bit about.
I talked in my in my prepared remarks about the fact that we've seen strong pipeline growth.
And all of that is being driven by the field as you can imagine.
And just the order growth that <unk> talked about.
And mentally what we're seeing is that it's becoming very clear that our customers are choosing given all the advantages inherent advantages that crowd provides.
They are they are naturally biasing towards it or.
Field is doing a wonderful job in terms of positioning cloud and we are seeing that kind of uptake across all three use cases that we tend to start with so whether it's enterprise search or observe entity or security, we're seeing traction across the board in all of them. So no change in that.
Returns there.
Thanks for the color.
Our next question will come from pendulum Bora with JP Morgan. Please go ahead.
Hello, Thank you for taking the question and congrats on the quarter.
Jenny on the cloud.
We are getting some questions why is that whereas the decelerating.
And the point that there is a pretty tough comp and the comp I guess it gets easier through the year. So should investors expect kind of the cloud grew three to edge higher through the year.
Or given.
Given the evolving macro landscape do you expect to see any change in the consumption patterns of elastic cloud.
If the environment deteriorates.
Yeah pendulum. So Q1 played out really nicely for us actually.
That growth of year over year of 62% year over year in constant currency against the tough comparison point last year.
The other way to look at it as sequentially, where we grew 13% in constant currency and that's about the average rate that we've seen over the prior few quarters. So what's driving that is really healthy new and expansion trends that we're seeing in the business.
We've added incremental dollars on elastic cloud consistent with what we've been adding we haven't observed any adverse change in terms of consumption patterns more generally.
And recall as we said the last time and as you mentioned earlier that our solutions are fundamentally address mission critical use cases and customers see a lot of value in the features and elastic cloud like surgical snapshots and cross cluster search and cross cluster replication, which help drive costs down as well as increase operational efficiencies. So we see all of those.
Not going to provide a particular view on on.
The numbers, how they might play out in terms of Q2 to Q4, specifically on cloud, but in general what I'd say is that we've seen really strong momentum in terms of new and new customer adds as well as expansion and core reasons and the drivers for that are the mission criticality of the use cases that we mentioned overall you've seen.
This increase the cloud mix from 37% to 39% and we're actually quite happy in the outlook and I'm excited by the momentum.
Understood. Thank you for the thoughts.
And actually one for you it seems like enterprise tier is doing really well you, obviously added searchable snapshot and that youre, adding.
Cross cluster search engine application, how should we think about the opportunity within the client base to upsell them to those higher tiers, and how you're enabling feels to kind of help achieve that.
Yes. Thanks for the question. So as Janice you mentioned, we are we are seeing wonderful uptake in our enterprise tier.
That is that is the fastest growing tier.
Across all the tiers that we have.
And that's by design the capabilities that we've delivered like you've mentioned weather et cetera, snapshots now the hybrid class cluster search and application and let me just maybe touch upon why that's so important if you think about the kinds of.
Things that customers need to do as they are migrating to the cloud we often see customers that might have for regulatory reasons certain data that can never leave their own data centers.
And in those kinds of situations, although they have some of that data. The current leave they want to move the rest of their workloads over to public cloud and they want to be able to see a single pane of glass a single view across all of that data and with the hybrid cross cluster search capability. We now have the ability to enable that for them also as.
<unk> are migrating workloads to the cloud they don't want to turn off the access for their stakeholders to the elastic instances that they have.
And they can't typically do just a cutover all at once so we typically see this pattern where customers are migrating.
<unk> and workloads, a little at a time and to help them accelerate that through that process. This kind of a hybrid cross cluster search functionality becomes incredibly important now they don't need to basically lose any of the benefits even as they're moving workloads over and this is something that we've seen a lot of interest.
And from customers and we expect this is going to be one more of the reasons why our enterprise tier continues to be something that our field is going to be able to drive very nicely within our customer base.
These are as you can imagine these are all specific.
Specific sales plays that we're driving with our field team. So I'm very excited about the prospects with it.
Understood. Thank you for the color.
Our next question will come from <unk> Kidron with Oppenheimer. Please go ahead.
Alright, thanks, guys.
I want to dig into the guidance again I understand your comments about FX.
But I guess, even if I account for FX. It sounds like you're basically guiding to about $4 million upside relative to where consensus is on the next quarter and I guess my question is when I look at.
This quarter in the quarter, you've gone into versus.
The four fiscal quarters of our fiscal 'twenty two.
It seems like the magnitude of your guide is kind of declining and declining the declining so I'm kind of wondering help me get my hands around this again, even if I account for the effects.
Like the up solid implied upside in your guide is just lower than what it used to be just a couple of quarters ago.
So what is it that we're missing.
What has changed.
So nothing fundamentally has changed look couple of quarters ago. We told you that we would see.
Start to guide with less conservatism in the numbers and set the expectation that folks should not expect the level of outperformance like we've delivered in previous years and fundamentally we are staying staying true to that overall philosophy. So nothing has fundamentally changed in terms of the approach that we've taken we guide based on what we know.
And then we work really hard to do outperform and that's what we saw here in Q1 the.
The quarter played out quite nicely, we are quite pleased with the numbers. Despite the tough comp we delivered really strong revenue and customer metrics, particularly on cloud. We just did what we said we would do and we continue to execute well and that's what we'll do here in Q2, you will see that operationally, obviously adjusting for currency, it's effectively a raise for the year and.
We work hard again inheritor in Q2 to see if we can deliver outperformance and then revisit the rest of the year as we go but we feel really good about how we're positioned for the year end and for the longer term alright.
Alright, good maybe as a follow up on the cloud business.
How much of that is completely incremental activity versus.
A switchover from selling its going from on premise deployment to a to a cloud SaaS.
Yes, so fundamentally when we think about the.
The overall nature of the business.
The cloud strength doesn't come from solely from transitions and the customer base right cloud is a significant opportunity for us to drive new customer growth and expansion customers are just spending more in the cloud and so that's what we see reflected in our business as well so it's more of that because of customer spend and the opportunity rather than trying to drive some sort of a business model transition.
And you see that reflected in the net new customer additions, which was again consistently strong compared to the prior quarter, we're orienting more towards the cloud in so many ways in product and go to market. We talked about many of those activities earlier. So we just see that that shift happening happening quite naturally as opposed to Australia.
Or drive some sort of a forced march in the customer base customers will move to cloud when they are ready and until they are ready for that to happen with features like cross cluster search and replication will allow them to be successful even in a hybrid cloud world. So we will be there for them wherever they are going to interpret your comments to mean that the bulk of the cloud activity right now.
Incremental new business versus someone who is on premise and move to the cloud yes, that's right.
Thank you so much.
Okay.
Our next question will come from Koji Ikeda with Bank of America. Please go ahead.
Hey, guys. Thanks for taking the questions. Congratulations on the quarter just a couple a couple from me one housekeeping question just to start off.
You guys used to give a monthly cloud revenue as a percentage of total revenue did I just miss better could you. Please provide that if you can.
Yes, happy too it was again, 17% of total revenue.
Got it thanks, and then okay. So big picture question either for Genesco for Ash.
With the announcement of Ken bringing brought on as a <unk>.
<unk> product officer, I thought its a pretty awesome higher but wanted to kind of ask the question. This way ash, you're a product Guy you brought into the company is as the CTO prior to being named CEO Shai.
Still there is a technologist in the product ICU as the CTO and now bringing Ken on as the Chief product Officer. So I guess, a big picture question is why now why bring on a chief product officer now.
Yes, thanks for the question Ken fundamentally <unk>.
<unk> is.
It has taken on an individual contributor royalty like we've said as the CTO and he is really spending his time on some of the the really forward looking areas around core platform evolving it.
To the stateless kinds of architecture that we are driving towards.
And the role that I used to play as the CPO responsibility for all of products engineering design et cetera.
I've been effectively doing a double job not just as the CEO , but the interim CPO as well and as you can imagine the kind of talent that I was searching for where somebody who could really help us continue on our momentum on the cloud.
As we as we've talked about the fact that our future is in the cloud building that kind of Hyperscale cloud capability as we continue to grow <unk> imagine a world win in the future. The vast majority of our revenue is going to be an elastic cloud and we want to make sure that we are building towards that future.
So Ken just given his background given everything that he has done is just somebody that we are very excited about the skill set that he brings to the table. The knowledge of building Hyperscale services, what it takes to have that kind of a constant availability the ease of use that is.
Very clear in all the technologies that he has built when you built out the developer tools for AWS and all of that makes us very excited about what he's going to bring to the table and this is exactly the time when we need somebody with that skill to continue driving our momentum forward.
He is very excited about having him.
And also the fact that you know.
He just knows what it means to work with the Hyperscale.
I'm also very excited about the fact that he is going to help us continue to strengthen our relationship with all the three hyperscale is that we worked so closely with.
Excellent. Thanks, guys. Thanks, so much congrats on the great higher thank you.
Our next question will come from Matt Hedberg with RBC capital markets. Please go ahead.
Alright, Thanks for taking my question.
I guess for either view in generic you had more history here, but I wanted to drill into AWS, obviously, we're one quarter in here.
It took a lot smaller than the other two at this point, but can you sort of maybe compare and contrast.
The level of uptake that youre seeing with AWS versus maybe when Jcpenney. Your Azure came onboard anything different there obviously is a much bigger base of AWS, but just sort of curious on some initial observations there.
Yeah, Matt I, just wanted to make sure that we clarified that.
<unk> been working with AWS.
For many years now right in the sense that we've had integrations and availability of elastic on the AWS marketplace for a long time matter of fact, when you think about customers, where they tend to deploy elastic.
The customer base that runs elastic on AWS is significant because it sort of mirrors the market share that AWS has in the overall cloud market the cloud infrastructure market.
What's really been evolving and in a lot of ways.
Moving in a very positive direction.
As the overall relationship with AWS and Azure.
Pre level right. So we've talked about the fact that.
With the way in which we've been able to.
Resolved some of the trademark discussions with them now.
Now the only elastic search that you see on their marketplace is from elastic the clarity that has brought to the market.
The ability that that brings to allow their sellers and our sellers to work together with less friction all of that has made the day to day.
Partnering a lot better and.
And I've talked about that last quarter. You know, we are continuing to see that kind of.
Sentiment and movement.
But just wanted to be clear that our relationship with AWS in the sense that we've been on their marketplace. That's not a new thing thats been there for a while.
And we see this more as an evolution as opposed to something that just flipped overnight.
That's super helpful I guess.
I was trying I guess I was trying to get at.
The relationship changed recently it was more of my question, but.
You answered it great so yes or no.
A lot guys.
Thanks, Matt.
Our next question will come from Brent Thill with Jefferies. Please go ahead.
Cash your results are very different as you know versus others and I'm. Just curious what you think is giving you. This resiliency where you are.
Not seeing things slip like others are seeing in <unk>.
As a follow up for <unk>, maybe even a longwall you think should that one is just when you think about the year and kind of.
What you're expecting in the guide are you.
Are you being a slightly more conservative in your close rates and what Youre seeing.
To account for other things that are going on that maybe youre not seeing right now or are you just.
Playing the ball kind of where you've been playing it and given the same level of guidance.
I'm just curious to get your thoughts on that thanks.
For the question, maybe let me just kick it off and then have Gen initiative speak to the question that you asked him.
What I'd say is and again this comes back to the core use cases that we target.
And what our platform is sort of optimized for so if you think about the use cases around security and in security, we always lead with Sim like we've talked about.
Absorbability, what we lead with log analytics, and then expand from there to the comprehensive absurdity.
And then enterprise search where a lot of the use cases end up being around whether it's e-commerce or just searching across data, that's very relevant to sort of the core aspects of the business.
These tend to be pretty mission critical and when you think about security or absurdity, it's really hard for somebody to turn off security or turn off observed beauty for the tier one applications and so we have continued to see the resilience and the demand from our customer base and the one thing that seems to be continuing to grow.
Is logs.
And as that data is increasing.
I can't stress enough the strength that we have and the tremendous differentiation that we have in our platform and our technology, which means that even when customers are choosing to make decisions around.
What.
Where they want to or where they want to think about spending in different kinds of environments. We're seeing them continuing to choose elastic I've talked about the fact that the examples that I gave of customers like or to Telefonica and others, you're seeing a lot of situations where customers are effectively leveraging Alaska.
For more and more use cases, whether it be starting from log analytics and going to all aspects of absorbing city or even crossing from observable 82 security or vice versa. So there's a there's a natural.
Affinity to these kinds of mission critical use cases, and we believe that's a core part of why the results that you see from us are different.
From what you might have heard from some others, who don't have that advantage.
On to you.
Yes, Brent on the guidance question nothing fundamentally changed again in terms of our approach.
Not.
Changing the philosophy in any way as I mentioned earlier in the prepared remarks, we have not factored in any particular macroeconomic slowdown in the business into the guidance simply because we've just not seen anything like that in the business. Yet. So we will obviously continue to monitor the environment to make sure that we operate the business in a disciplined way like we always have but.
In terms of our guidance.
The simple way I think about it is we had a $5 million beat we did a $10 million raise which was essentially offset by FX, which brought the guidance back to where it was but.
But fundamentally there's no other change in terms of the approach.
You guys have built script Tonight. Thank you.
Our next question will come from Kash Rangan with Goldman Sachs. Please go ahead.
Hello, Thank you very much congrats on the results.
In.
I know you've talked about consumption trends in the cloud business a few quarters ago, you talked about how that shift within the SaaS business from.
Subscription to consumption could be.
Minimizing the revenue to be recognized at the front end, but you also expressed confidence as customers start to ramp up their workflows that you could see and non linear sort of implied non linear.
Sure.
Growth in the cloud business. So as we progress through that motion where are we with respect to our customers that are nearing the first anniversary of maybe even post the first anniversary of setting this cloud contracts when the consumption trends should begin to accelerate and if youre not seeing it now.
When are we likely to see that.
Follow up question. Thank you so much.
Hey, Kash, it's it's great to catch up again look I mean at the end of the day, what we've seen in the business is that that customers. When they first sign up with us They will gradually start consuming and then increase that their consumption over time and given the rate at which we're adding net new customers. There is always going to be a mix.
And the portfolio. There are some customers that are earlier on that journey. Some customers that are very large customers for us well.
Well north of it.
The high seven digit kind of range kinds of customers as well so we've got.
A wide mix there, but in general what I'd say is customers are continuing on that journey of expanding we mentioned in the last quarter that our net expansion rate on cloud was in excess of 140% and had actually been increasing and that continues to be the case that continues to be above 140% net expansion rate in the cloud So I think.
We are definitely starting to see the effects of that particularly as we drive.
Greater adoption across the solutions and people extend from one solution into another.
And architecturally is we make it a lot easier for them with the additional features that we've been talking about.
That makes it easier for them to ingest more data we've continued to see significant increases in the volumes of data being brought in and stored in elastic search. So those are all great indicators for us on future consumption in future growth. So we feel really good about that.
Great and one for you ash.
Navigate towards the billion dollars of cloud revenue by the end of fiscal 'twenty five how do you balance the on Prem subscription business versus the cloud business.
At some point.
I would suppose that you hit an inflection point and you do better than one and worse than the other or maybe equally good in both how are you managing through that.
Section point as the cloud becomes larger and larger part of your business. Thank you so much.
Cash one of the things that is it.
Really important to understand is like unlike some of the other.
Vendors that you here are sort of trying to bring together a cloud offering that's completely different from their their self managed offering. This is a strength of ours that it's effectively one codebase and so what that means is.
Not just from an operational standpoint, but even in terms of the innovation that we're driving into the product.
Everything that we are building, except for certain things that might be.
Very very specific to the cloud environment those customers get benefit.
Even in the self managed environment.
And we arent keep in mind that we aren't doing any kind of forced March and <unk> touched upon this all kind of reiterated.
We're not forcing customers.
To move away from self managed or anything of that sort of stuff right. It's it's customers, making their choices and as we've talked about customers that are already on self managed those instances continue to grow they are as data grows.
The utilization the resource consumption grows and that just means that we.
We will see the benefits from it.
And.
That's pretty natural.
The other thing you said I just wanted to make sure that we clarify what we have said about.
The guidance the multiyear guidance, our expectation and the guidance that we've talked about is that you're going to cross the $2 billion Mark in FY 'twenty five and the cloud is going to account for.
50% of our overall revenue by Q4 of FY 'twenty four so I just want to make sure that that's clear, but other than that the.
The Ah <unk>.
Background behind it is important and as I described it.
The innovation is continuing to apply also to customers that are in self managed mode.
And I would expect that they will continue to do well with those deployments, but just naturally newer deployments newer workloads are moving to the cloud and that's a great thing because that's really where our focus is as well and I expect that youre going to be able to strike the nice balance between both of those areas.
Thank you Ashley I love the sound of billion. Thank you.
Our next question will come from Brad Reback with Stifel. Please go ahead.
Great. Thanks, very much real quick can you remind us what caused the strength in the cloud business a year ago.
Yes, I think there wasn't it wasn't related to any specific deals. It was I think just the fact that we had some large customers that were consuming quite heavily and we had already planned for increases that you and those increases started to happen just a lot sooner than than what we had expected so.
There wasn't a single factor that had caused that but part of it was just that our portfolio was a lot smaller and so when you have individual customers that consume at a higher rate.
It would show up a little bit more easily in the portfolio at that time.
Okay, and then just following up on that for this quarter in July .
Did you see any outsized consumption by a handful of customers that help drive the quarter.
No we did not the consumption rates that we saw in general are quite balanced across the board.
Great. Thanks very much.
Our next question will come from Rob Owens with Piper Sandler. Please go ahead.
Great. Thanks for taking my question I think you did a good job of highlighting why you win in a hybrid fashion what the value proposition is but when you are leading with cloud lending to the logo acquisition you talked about what are the biggest differentiators for you versus a whole host of competitors out there in your opinion.
Yeah, Let me, let me take that.
The biggest differentiation that we have is our ability to deal with very large amounts of data of any type at massive scale and to do it very very fast.
And this has been the core strength of elastic search which is the foundation of everything that elastic is built on top of.
So everything that we've done and the product is designed in the cloud to make it easier for you to not only onboard here data, but then to start getting immediate value from that data. So as data starts to treatment and it's automatically indexed.
It's made available to you in terms of dashboards and alerts and everything and the solutions that we've built around elastic observe ability around elastic security.
Come with all of the pre packaged rules that you need to start getting productive and get the kinds of outcomes that you want for absorbing city or security that you need and at scale. We do this better than anybody in the market and that's we're seeing that over in Oregon, and the success that we're having in cloud and <unk>.
Additive environments. So when it comes to logs, which tend to be the <unk> type of data they tend to exist for either absurdity of security.
Have a significant advantage and thats proving out in Oregon.
Great. Thank you.
Our next question will come from <unk> <unk> with William Blair. Please go ahead.
Thanks for squeezing me in.
I just want to follow up on your cash is a question around the long term guidance what will be the primary catalysts are catalysts for the growth inflection it needed to get to that $2 billion of revenue is it primarily just scaling cloud what other investments may need to make to get there and when are you expecting that uptick in growth.
Hey, Jeremy this is Jen H. So what we said when we laid out that $2 billion number continues to be true even today right, which is at its core what's really behind that is the strength and resilience that we're seeing with our solutions, particularly on the observer ability and security side, where we are continuing to get useful mission critical use cases seeing great.
Customer strength and penetration and the second piece of that is of course, a momentum in cloud, which as you've seen has been.
Growing quite remarkably over the last several quarters and we've got lots of new customer additions strong expansion with a high net expansion rate in excess of 140%.
It's just when you've got a portion of the business that is now 39% of the business and is growing that fast.
Hit escape velocity and so we've really got both of those things that factor in that.
Core to the $2 billion number that we had laid out.
That's helpful and just as a follow up several of your competitors have change pricing models over the past few years.
They've been rolled out more broadly can you update us on what you've seen in competitive deal has pricing, especially given the macro concerns become more of a focus in recent months.
We've seen continued advantages that we have in terms of our pricing model.
The discussion around pricing.
When it does come up if it comes up the fact that we have resource based pricing, which means that there's never any shelf fair works to our advantage.
I know that.
Others have started to sort of emulated but to me like what's important to understand is this is the way that we've always operated our customers know what to expect from US our sales teams understand it and they work with that model, that's what they lead with the get it.
There's no friction in the system.
And we've been very successful with it and what we tend to see is when others are as they've tried to shift their licensing models it becomes a pretty clunky conversation.
And we our consistency and the fact that we've got history doing this tends to continue to give us that advantage.
And if anything.
It's validation of the fact that we believe this is the right model.
It's validation that others are now trying to emulate us after so many years.
And I will give a quick shout out to Michael on the full field sales organization right. They did just a remarkable job of holding discounting and driving Asps and did really well in terms of how we executed in Q1.
Okay. That's very helpful color. Thanks again.
Our next question will come from Steve Koenig with <unk> Nikko. Please go ahead.
Hey, Thanks, gentlemen for taking my question.
Just got two and I'll just throw a bulk of them out there at once if you don't mind.
First one a little bit in the weeds, but you brought up earlier the relationship with AWS.
And it's.
It's more settled now etcetera, and your partner well and I'm just trying to.
I wanted to square that with.
The fact that they did.
<unk> opened search released back in May and that our data shows they put a lot more development resources on open search. So are you, saying they are not really going to market aggressively with that product or kind of how do we how do we square those two things and then just not not so that we don't in the weeds, but my bigger picture question is can you give us any color on.
How you're the complexion of your use cases that youre selling to new cloud customers versus.
Your more your on Prem use cases, thanks very much.
Yes, let me let me maybe touch upon the second one there's no material difference between the kinds of use cases that we see in the cloud or in self managed it's very broad.
There are no patterns there.
To see all three use cases when it comes to open searching the one thing its important to understand is at.
Irrespective of the metrics that you look at the number of contributors the number of <unk>.
Full requests that are being made the new features that are being delivered into the.
The source code.
Significantly by by significant factors.
Head of anything that is being done on open search and the other thing that's important to understand is in.
In the past before the before AWS created the Fork and went with open search.
Elastic used to do all the work of <unk>.
During the bills.
Looking at all the the compatibility with all the clients. There's so much work that's in world instead of building and maintaining the core code base.
And.
Effectively AWS just to just benefit from that they would pick.
The code directly from us they would pick the bills directly from US now that therefore, and they have open search all of that work of maintenance is a massive amount of work that they are now having to do themselves and as you can imagine even though they might have added a lot more developers.
A huge amount of that capacity I'm very confident is being applied to just the bare bones effort of keeping short scored sort of active and maintaining it and that's a non trivial amount of work, which most people didn't fully appreciate was.
What we were what we were doing behind the scenes so weird.
Very confident about the continued increase in the moat that we have.
Open search and very confident that in the long term.
The market is going to speak for all of this innovation that we're driving.
Got it well, thank you and congratulations on the very consistent results.
Yes, I think that was your question and answer session.
Well, thank you everybody for joining our call today.
And I look forward to speaking with all of you during our analyst day on September 19.
Have a great rest of the evening. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now.