Q2 2023 Elastic NV Earnings Call
Good day and welcome to the elastic second quarter fiscal 2023 earnings results Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded I would now like to turn the conference over.
So Mr. Nikolai Beloff, Vice President of Investor Relations. Please go ahead Sir.
Thank you good afternoon, and thank you for joining us on today's conference call. We will discuss it last six second quarter fiscal 'twenty to 'twenty three financial results on.
On the call we kept a school Gardner Chief Executive Officer engine, Nash more Johnny Chief Financial Officer, and Chief operating Officer.
Following their prepared remarks, we will take questions. Our press release was issued today after the close of market and is posted on our website.
Slides, which accompany this webcast can be viewed in conjunction with library marks and can also be downloaded at the conclusion of the webcast on the elastic Investor Relations website, IR dot elastic Dot C L.
Our discussion will include forward looking statements, which may include predictions estimates or expectations regarding the demand for all products and solutions and our future revenue and all the information.
These forward looking statements are based on factors economy known to us.
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 include in the press release that we issued earlier today included 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 web cast replay of this call will be available for the next 60 days on our company website under the Investor Relations link our third quarter.
<unk> his school Twenty-twenty pretty quiet period begins at the close of business on Friday January 13 2023.
On December eight 2022, we will be participating in the Barclays Global technology media and Telecommunications conference with that I'll turn it over to ash.
Thank you Nicholas and thank you all for joining us.
In Q2 revenue grew 34% year over year in constant currency.
Lastly, cloud comprised 39% of total revenue up from 34% in the year ago quarter and grew 52% year over year in constant currency.
We ended the quarter with approximately 19700 subscription customers, including over 1050 with annual contract values of more than $100000.
I have continued confidence in our long term market opportunity in the core fundamental strengths of our business.
During the quarter, we continued to make progress across our three key focus areas driving durable growth.
Widening our competitive moat.
And continuing our focus on profitable growth.
We also saw customers continue to show a preference for consolidation onto our platform for multiple use cases.
While our differentiated platform positions us well, we have also started to experience the shift in the macroeconomic climate ourselves.
In the month of October we began to see belt tightening and consumption slowing down in the SMB segment.
Also saw increased scrutiny on deals overall.
Particularly in countries, where the strengthening U S. Dollar has created adverse conditions.
In order to help our customers through this clearly difficult environment. It is more important for us than ever before to stay.
<unk> close to them and help them realize the value of consolidated onto a single platform for multiple business critical use cases.
It also requires us to be more focused on our coverage.
Sales place, our product investments and our internal support as we drive greater operational excellence.
Looking ahead, we intend to be even more focused on those areas of our business, where we see the opportunity for continued profitable growth.
Optimize investment in other areas and drive overall profitability in the business even faster.
In challenging times, those who adopt the fastest are those who ended up ahead.
Towards this end.
<unk> made the very difficult decision to reduce our workforce by 13% to align our investments with our strategic priorities and position us for long term success.
We made this announcement earlier today within the company.
This was not an easy decision and we are taking the right steps to help impacted employees and their families.
The all of our success to all of them are.
And our profoundly grateful for their hard work and contributions to elastic.
With this decision we are rebalancing investments across all functions in the company and we will reinvest some of the savings selectively in areas that best position us to drive profitable growth.
As an example, and sales and marketing we're going to double down on our automated low touch approach to better address the needs of SMB customers, who generally prefer self service motion.
This will also allow us to reposition a portion of these investments to thoughtfully increase our coverage in the enterprise segment and.
In products, we will emphasize strategic areas like cloud and server list in our future technical hiring.
These actions set us on a path to deliver improved non-GAAP operating income growth in the second half of FY 'twenty, three and 10% non-GAAP operating margin for FY 'twenty four.
A significant increase compared to our prior commitment.
<unk> will share more details later.
Now, let me talk about the long term durability of our growth.
Over the last 90 days I've met with more than 100 customers, including Canada Sap's concur.
Hey, Ecolab West back standard chartered bank and owe to Telefonica.
We're also meeting with customers at our elastic on events.
Which are driving greater awareness fueling pipeline and reinforcing our bottom up adoption and product led growth.
Demand for our in person events has been strong.
But standing room, only crowds attending our elastic on events in Singapore, New York, and Amsterdam to hear from elastic and some of our amazing customers, including a firm Autozone BMW booking dot com Comcast and Swift.
We are seeing from our customer interactions that they are continuing to invest in absurdity security and search and our platform strategy is working.
Especially in the areas of absorbed it and security we offer an open high performance platform that allows customers to analyze all their data across logs application traces metrics and other related data with the simple consumption based pricing model.
All at a price that creates a compelling value proposition to switch from other technologies and consolidated onto our platform.
And with elastic cloud expanding with elastic to newer use cases is incredibly easy.
In these times, we see a greater opportunity than ever before to lean into our platform and cost advantage and drive consolidation place onto our platform.
This quarter, we expanded business with our Rd.
A leading global provider of marketing packaging print and supply chain solutions.
A longtime elastic enterprise search customer the recently expanded to elastic absurdity on elastic cloud to consolidate multiple applications into a single cloud instance, and streamline their infrastructure.
We also expanded business with a seven figure deal this quarter with the top U S based global heavy equipment manufacturer.
Previously an open search customer the company consolidated its logging platform.
With elastic absurdity, an elastic cloud to improve service availability and customer satisfaction.
Sites to me. The most is that we partnered with AWS on this deal through the AWS marketplace, which demonstrates a strengthening partnership.
Speaking of cloud partnerships, we continue to build momentum with AWS, Microsoft Azure and Google Cloud.
Revenue through the cloud Hyperscale marketplaces, again more than doubled year over year.
With AWS, we announced a new streamlined experience for elastic cloud on the AWS marketplace.
This enables joint customers to get started on elastic cloud with an easier to sign up and setup experience through the AWS marketplace console.
Also elastic was a key partner for Microsoft Azure as launch of the latest Azure virtual machines. The dampier ultra arm based processors letting customers maximize operational efficiency across their absurdity security and search use cases.
Finally, we announced an expanded partnership with Google cloud to make it easier for customers to monitor and secure Google cloud workloads and drive insights from data that resides in data lakes on Google Cloud.
Now onto our continuing product innovations and our widening competitive moat.
In the current environment, we see a real opportunity to help our customers drive consolidation onto our platform and reduce their overall costs.
At our elastic on events, we recently announced a series of innovations to our platform.
These include more optimized support for metrics data in elastic search, which will enable us to further extend our competitive advantage in metrics and enable customers to more easily consolidate onto elastic for all their observed beauty needs. This is available and technical preview today.
We also announced a new query language.
<unk>, which will enable us to support richer query semantics and additional use cases across all of our solutions and will also enable us to make it easier for customers to migrate to our platform from competing offerings, we anticipate SQL, becoming available on our platform later next year.
Lastly.
We unveiled a roadmap for new service cloud product, which.
It will broaden our addressable market.
This new offering will provide a fully managed experience for supporting short duration or bursty workloads and will be a great complement to our current elastic cloud service, which is optimized for control flexibility and performance for long running workloads.
Now I will share some details about additional innovations and customer wins across our security absurdity and enterprise search solutions.
Starting with security.
This quarter, we renewed and expanded cloud business with Uber.
I've been using elastic for Tetra hunting investigation and response and recently expanded their use of elastic siem to power their entire enterprise defense platform <unk>.
Elastic security is integral to their ongoing security journey at.
It provides critical capabilities that enable their team to correlate behaviors across data sources build interfaces for examining security logs and craft protection logic the surface malicious behaviors.
We also expanded business with the U S. Federal agency that previously deployed the free and open version of elastic they're now using elastic Sim on elastic cloud for visibility across their security environment, focusing on insider threat analytics.
More than 20% of our security customers now use our newer use cases, and xdr and cloud security.
Validating our unified security approach for the modern security Operation Center.
We already have over 30 customers using cif's benchmark based cloud security posture management for Kubernetes, our newest use.
Use case with just recently became generally available.
Over the last two quarters, we have.
Released several new capabilities in our Nextgen Sim, including threat intelligence management hybrid sure and host and user entity analytics and.
In addition to this we also recently released the first elastic global threat report, which details the evolving nature of cyber security threats.
While using customer Telemetered data. The report showcased the first party research conducted by our security research teams and provided unique insights to our customers.
Last month elastic security was named a visionary in the 2022, Gartner Magic quadrant for Sim and I am excited to share that elastic was honored with the cyber security breakthrough award for threat intelligence platform of the year in recognition of the cutting edge threat intelligence capabilities of elastic security.
Now moving onto elastic absurdity.
This quarter, we expanded an eight figure multiyear piece of business with the global 2000 multinational financial services company.
Which uses elastic absurdity in elastic security.
The company realized an elastic absurdity for distributor tracing to enable the migration of thousands of applications from the Companys datacenters to Microsoft Azure and Google Cloud and.
And uses elastic security to significantly reduce the time spent on threat hunting.
We also expanded business this quarter with one of the world's leading media and entertainment companies, which has been using elastic observed lately to monitor idea operations at one U S theme Park location and have now expanded to include two additional park locations in the U S and APG.
With elastic they can ensure the consistent uptime of critical path functions, such as Wi Fi point of sale systems and virtual lines to provide the best visited experience possible.
APM traction in the elastic observed <unk> solution continues to gain strength.
30% of our observatory clusters are using APM. In addition to log analytics and we continue to see competitive wins as customers seek to consolidate tools.
In Q2, we added additional capabilities to our beta synthetics monitoring capability and I've seen almost forex growth in synthetics test trends.
In general the open to elementary protocol and open standards are an elastic strength.
And in Q2, we saw a 44% growth in elastic clusters ingesting APM data using the open to elementary protocols.
We also recently launched the private beta of Universal profiling, and innovative performance optimization and cost saving capability.
Universal profiling is lightweight and requires zero instrumentation overcoming the limitations of other profiling solutions by requiring no changes to the application code.
In enterprise search, we renewed a seven figure multi year deal this quarter with a multinational aerospace company.
They use elastic enterprise search to provide customers with real time digital access to the documentation needed to ensure proper aircraft maintenance within their fleet and reduce time on the ground due to maintenance delays.
We also renewed business this quarter with the U S. Government agency. They are using elastic enterprise search to help their vaccine approval center rapidly access and evaluate mission critical data to expedite the submission and approval of new vaccines and monitor adverse event reporting for existing.
Vaccines in partnership with the CDC on.
On the innovation front, we recently announced the general availability of vector search as well as updates to improve search relevance through hybrid scoring that combines traditional search with vector search to deliver more accurate and relevant search results.
We have seen an 84% increase in deployments actively running a machine learning models in the last quarter.
Indicating wider adoption of our natural language processing capabilities.
Our product strategy in this area has centered around making complex search functionality accessible and scalable across use cases and segments.
Now moving on to our focus on profitable growth.
I am proud of the team and the fact that we exceeded both our revenue and profitability targets for Q2.
Our Q2 operating margin of one 9% was significantly better than our guidance and clearly demonstrates the operating leverage inherent in our business.
I've already talked about the steps, we have taken to accelerate our profitability growth.
Although these decisions are difficult wants to make.
We are confident that the changes we have announced will drive even more focus on those areas of our business that have the highest opportunity for growth and operating margin expansion.
This will enable us to navigate through this macroeconomic environment with greater discipline and ensure our success in both the near and long term.
In summary, our.
Want to thank our employees for their dedication and contribution to our performance I also want to thank our customers partners and investors for their continued support and confidence.
We continue to have confidence in our ability to build a generational company.
Given one our market opportunity to the <unk>.
Criticality of our solutions to our customers third.
Our platform strategy, which is more relevant than ever before given customers increased desire for tool consolidation in the current environment.
The execution by our team and finally, our strong fundamentals.
Now over to Dinesh.
Thanks Ash, we are pleased that we delivered ahead of our commitments for Q2, we delivered 34% year over year constant currency growth in total revenue. We continued our momentum in elastic cloud, which grew 52% year over year in constant currency.
We once again beat the high end of both our topline and bottom line guidance for the quarter. Despite the current economic environment and despite greater FX headwinds on revenue than we had included in our previous guidance.
On a currency neutral basis, our total revenue beat in terms of year over year growth in Q2 was similar to Q1.
In the current business climate and with the trends in our business that Ash described we see room to focus more sharply on helping our customers derive the benefits of tool consolidation onto a single platform and also to realign resources internally to drive greater efficiencies in all functions.
Accordingly, we are taking specific actions in the business.
We have better focusing our investments to optimize our coverage in the SMB segment, emphasizing automation and low touch approaches to better address the needs of customers in that segment, while repurposing some of that investment towards enterprise sales coverage.
Second we are rebalancing investments across other functions to invest in priorities such as our service architecture and engineering and in digital demand Gen and marketing.
We will also drive greater efficiencies and allowing to business priorities and our customer success and G&A functions.
Third we are adopting a specific goal of non-GAAP operating margin at 10% for fiscal 2004, and the actions announced today already put us on the path to achieving that.
We believe these actions will not only help profitability in the near term, but importantly allow us to align our team to best capture the market opportunity ahead of us.
While we navigate the near term we remain confident in our strategy for the mid and long term, we have a large market opportunity and our solutions are used in core mission critical use cases.
Most are increasingly looking for tool consolidation in the current environment, which plays well to our platform strategy we.
We give customers enormous flexibility with a consumption based business model and resource based pricing model.
And our core land and expand motion continues we had healthy additions to the pool of customers over $10000 in HCV, adding approximately 80 customers in this category and also the pool of customers over $100000 in HCV, adding approximately 40 customers in this category both consistent with the prior quarter and we continue to have a.
World Class net expansion rate.
Now, let's get into Q2 results and our updated outlook.
Total revenue in the second quarter was $264 $4 million up 28% year over year or 34% in constant currency.
Subscription revenue in the second quarter totaled $241 $2 million up 27% year over year or 32% in constant currency comprising 91% of total revenue.
Within subscriptions revenue from elastic cloud was healthy at $103 2 million growing 50% year over year or 52% in constant currency.
Elastic cloud represented 39% of total revenue in the quarter up from 34% a year ago and also represented 43% of total subscription revenue from 42% in the prior quarter and up from 36% in the year ago quarter.
Professional services revenue in the second quarter was $23 $2 million growing 47% year over year or 53% in constant currency.
We do not expect professional services to increase significantly in mix.
To add more context around deal flow and performance by region. Although we saw balanced do you feel across geographies on a currency adjusted basis, the Americas grew faster than APAC and EMEA given currency impacts in those regions.
Looking at customer metrics, we ended the second quarter with approximately 19700 total subscription customers with the vast majority of the additions in the quarter once again, an elastic cloud.
The lower sequential number of customer additions reflects the slowdown in the SMB segment that we described earlier.
We are confident that our strategy of focusing on acquiring and nurturing customers that have a higher propensity for growth rather than solely focusing on quantity continues to be the right strategy for us.
We once again provided data on customers over $10000 ACB and Youll see the additions in Q2 in that category was similar to prior quarters.
We also saw the success of this strategy reflected in the count of larger customers. We had over 1050 customers with annual contract values over $100000 at the end of the second quarter compared to over 1010, such customers at the end of the prior quarter, reflecting the strength of our product portfolio and our ability to drive.
Expansion across our solutions.
The customer count in this category remains a strong underpinning of our land and expand motion.
Our overall net expansion rate in the first quarter was approximately 125% and was down slightly reflecting the trends I mentioned earlier.
Now turning to profitability for which I will discuss non-GAAP measures.
Gross margin in the quarter was 74, 5% with the sequential change versus the prior quarter, driven mainly by better professional services gross margins.
Ascription gross margin at 79, 2% was consistent with the prior quarter.
Looking at operating expenses in the second quarter, we continued to manage our expenses and investments in the business World.
Our operating margin in the quarter was one 9%, which was significantly better than expected due to both the revenue performance in the quarter and tight expense discipline.
This once again demonstrates the operating leverage inherent in our business model.
Earnings per share in the second quarter was zero cents.
Free cash flow on an adjusted basis was $10 $3 million in the second quarter.
For full fiscal 2003, we now expect to be roughly breakeven on adjusted free cash flow. This outlook includes cash outflows of between $25 million and $28 million related to the restructuring, we announced which reflect one time payments and were not included in our prior outlook.
We also continue to maintain a strong balance sheet.
We ended the second quarter with cash and cash equivalents of approximately $856 million we.
We remain comfortable with our cash position from an operating perspective.
Before discussing our outlook for the third quarter and the remainder of fiscal 2003 I'd like to provide additional color on how we will be approaching the next few quarters.
As we announced we will be reducing our workforce by 13% and rebalancing our investments across functions reinvesting a portion of that into areas best suited to drive growth.
We will continue to hire for the right roles in the second half of fiscal 2003 to ensure we are set up successfully for fiscal 'twenty four and beyond.
While the decision to reduce and rebalance investments was not easy to make we believe it positions us better for the future to deliver multi year durable and profitable growth.
It also allows us to deliver faster margin expansion than we had previously committed and we currently expect to deliver 10% non-GAAP operating margin and a commensurate increase in adjusted free cash flow margin in fiscal 2004.
We also remain confident in our ability to deliver healthy revenue growth given our market opportunity the strength of our products, new customer trends and our expansion track record.
We also continue to expect elastic cloud will exceed 50% of total revenue in the fourth quarter of fiscal 2024.
Turning to guidance.
The continued strength of the U S dollar against the year ago rates, we expect currency movements to present, a headwind to year over year total revenue growth of approximately 4% for the third quarter and approximately 4% for full fiscal 2003.
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.
Our overall guidance philosophy stays unchanged, we continue to guide thoughtfully based on what we know and without excessive conservatism. We have now considered the impact of the current business climate in our second half revenue outlook.
Despite this impact we are raising our operating margin outlook for the year, reflecting our emphasis on profitable growth.
With that background for the third quarter of fiscal 'twenty. Three we expect total revenue in the range of $272 million to $274 million.
Representing 22% year over year growth at the midpoint on a constant currency basis, we expect total revenue growth of 26% year over year at the midpoint.
We expect non-GAAP operating margin in the range of four 3% to four 7% and non-GAAP earnings per share in the range of four to seven.
Using between $98 5 million and $99 5 million diluted ordinary shares outstanding.
For full fiscal 2003, we now expect total revenue in the range of $1 $67 million to $1 billion $73 million, representing 24% year over year growth at the midpoint.
On a constant currency basis, we expect total revenue growth of 28% year over year at the midpoint.
We expect non-GAAP operating margin for full fiscal 2003 in the range of two 2% to two 6% and non-GAAP earnings per share in the range of negative <unk> <unk> to positive <unk> using between $95 million and 97 million basic weighted average ordinary shares outstanding and between 98 five.
And $100 5 million diluted weighted average ordinary shares outstanding.
In summary, we remain focused on execution and believe that we are well positioned for long term durable growth and profitability and with that let's go ahead and take questions operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two please limit yourself to one question and one follow up and if you have further questions. You may reenter. The question queue at this time, well pause momentarily to assemble our roster.
And the first question will come from Tyler Radke with Citi. Please go ahead.
Hi, Thanks for taking the question.
So I think given that you just had an analyst day and put out some long term targets I think investors.
Or are keen to kind of hear the magnitude of what's changed in the last couple of months.
So maybe if you could just talk about where youre seeing the slowdown by use case, whether it's search versus security.
<unk> ability and then if you could kind of comment on the trends throughout the quarter and into November if things worsened in November and then I just wanted to clarify if you're backing away from.
The targets or if you're.
Reaffirming those thank you.
Yes. Thanks for the question Tyler This is ashare, maybe I can kick things off and then.
And right Dinesh to also add more to it so.
Uh huh.
Just in terms of what we saw as we talked in.
September during the financial Analyst day, we had been watching the macro environment very carefully, especially given that we had seen the FX headwinds.
And through all of Q2, what we saw was in October .
Things started to change and act differently than what we had seen prior to that specifically in SMB. We saw a lot of belt tightening and we are seeing this in a couple of places very obviously first is in monthly cloud monthly cloud tends to be a lot of it tends to be SMB, we saw consumption constriction. There also.
Fewer SMB customers signing onto the platform. So that was one the second thing that we saw in October which is sort of the last month of our quarter as you know.
In certain international geographies, where we had seen the dollar tightening having the dollar increase.
Having a significant impact on the way customers are thinking about things, we saw customers going through more approval processes and these are deals where we continue to compete very well. Some of these deals slipped out from Q2 into Q3 some of them have been closed since then.
But we see that that pattern of more approvals and we expect that to continue going forward. So the assumptions that we're making effectively are that <unk>.
<unk>, what we saw in October is going to continue for some time the pattern of deal inspection is going to continue for some time, but having said that our competitive position remains very strong we continued to do well in competitive environment.
In terms of our win rates they stayed healthy as they have been.
And we had promised when we talked to you during the financial analyst day that we're going to be watchful and we are going to be thoughtful in terms of how we act based on the data that we see and hopefully youll see that thats exactly what were doing here, we saw some impact and we saw behavioral changes in SMB and we are taking.
Actions to make sure that we change the way we operate based on some of those data points.
Your other question was in terms of use cases, we really didn't see any difference in terms of the behaviors around use cases, it was more around segments. So the biggest impact was in the SMB segment, where we saw belt tightening.
And lastly.
Round.
The $2 billion target look what I'll say is.
Our goal Hasnt changed the fundamental strength of our business.
<unk> strong.
And we've always talked about the fact that we are building a generational company. We're building a multi billion dollar company $2 billion was always a milestone in that journey clearly given the business environment that we're dealing with we expect that that's going to be difficult.
And it's going to be harder and.
We acknowledge that we are not reaffirming but we're also not changing any of that guidance. We're going to continue pushing forward like we said fundamentally we are not compromising on growth.
Just being far more focused based on the reality of the macro environment that we're seeing and we want to make sure that we are putting our investments where we believe we can get the best return.
Hey, Tyler I'll just add on because you had a question about how November has played out as well I think cash covered all the other points quite nicely actually November has been steady so far we've continued to see business play out as we expected.
<unk> not seen any meaningful change in terms of customer demand in the month of November so I think that.
We've reflected that obviously in the outlook here for the back half. So we feel pretty good about the number that we've called for the back half and we've tried to incorporate all of these trends specifically into the guidance and suitably derisk the guidance for the back half to accommodate for the so we feel good about the outlook for the back half in and based on what we've seen in November so far.
Helpful. Thanks for all the detail.
Just on the <unk>.
And to do a forced reduction here.
I mean, obviously we've seen.
The the market kind of continue to prioritize profitability over growth, but I guess why now and.
I guess.
If you go into a little bit more more detail the specific areas that you're looking to make these changes and the confidence that this won't necessarily be disruptive.
In terms of your growth aspiration. Thank you.
Yes, Thanks, Tyler as you can imagine these are these are very difficult decisions and.
I'll reiterate that we really.
Could not be more thankful to our employees everything that they do there.
Efforts.
Uh huh.
The just everything that they put into into elastic and our success.
Now having said that.
We like we had told you even during the analyst day, we have been very carefully observing.
The data and the market why now because we've always made decisions based on data and like we told you in September we had not seen.
The impact of the macroeconomic environment affect our business other than the FX piece, which we had talked to you about then.
But we wanted to be very watchful and Thats, what we were doing and once we started to see the impact we were very careful about making sure that we understand the nature of that impact and like I mentioned, the biggest area, where we experience. This is an SMB and in SMB. It was across the board it was.
In all regions.
It was across all use cases, and we've traditionally had a sales assisted motion for SMB and what that means is we would have customers lined on monthly cloud and then we would have an SMB sales team that would spend energy in trying to convert those customers.
Into annual contracts.
And given the environment, what we have been seeing is really that.
That effort that's being spent on the SMB area is really not giving us commensurate returns and we're not expecting the SNB environment to change either in the near future. We expect that that's going to be an area, where there will be continued stress in the economy.
On the other hand, we continue to see on the enterprise side.
Long term opportunity for us to continue to do well and so as we've taken these actions on the go to market side. The majority of it has been centered around SMB. Obviously when you look at the go to market side, it's more than just the sellers.
It's supporting teams like the SDR teams or the sales development.
Development reps, even on the marketing side, one of the big areas of change for US has been to drive more towards digital demand generation, which really works much better in our bottom up adoption motion.
And so that's been the kind of change that has happened in marketing on engineering. The overall change has been very limited and primarily there. The change has been to make sure that we create the focus and rebalance investment towards areas that I've talked about this being a very high priority for us.
And strategically important for us going forward and Thats, all around cloud and server list and the three solution areas continued to remain strong so it's been a.
The changes have been across the board.
But they have been very targeted they've been focused on addressing the areas, where we believe that we can drive the greatest growth and profitability and also making sure that we're not investing or finding more efficient ways to address parts of our business that are not showing the returns.
<unk>.
That we would have hoped for and specifically at <unk>.
Call out of SMB.
And Tyler one thing I'll, just tack onto that is.
As I've said, we're doing this so that we can invest in the right places to drive growth in a part of that is to ensure that we continue to invest appropriately in the second half so that we.
Have the right outcomes in the second half, but also prepared ourselves for fiscal 2004, we want to make sure. We're entering fiscal 'twenty four with the right capacity in the right places ready to go.
Thank you.
The next question will come from pendulum Bora with Jpmorgan. Please go ahead.
Hey, Thanks for taking the question.
<unk>.
Just wanted to understand the guidance a little bit more it seems like it's growing.
<unk> down by about one point of growth constant currency about 200 basis point I think you used the word.
For the second half.
What makes you confident that that the model is de risked at this point.
Hey, pendulum, yeah happy to talk about that so in terms of the.
The approach that we took on the guidance to start with obviously pleased that we came in above expectations.
That we had set for Q2 and both on the top and the bottom line.
In terms of how we thought about the guidance a couple of things. One is we first half factored in the current economic climate, we've assumed that the recent trends from October will continue for the foreseeable future.
As Ashley mentioned considered the trends in the segments, both SMB as well as enterprise, we've considered what we see across the geographies. We've considered the consumption trends that we've seen in the business. We've looked at it from the standpoint of new and expansion motions as well and then we've of course factored in the impact of all of the changes that we announced today also so we.
Suitably factored all of these into our outlook and then.
In case things happened to get worse out there. We've also built in some additional level of protection into our guidance as we always do to balance the risks with the unknown. So theres no court change to our guidance philosophy. There. We don't guide excessively conservatively, but we do guide prudently. So we actually feel pretty good about the outlook and then as I said November has played out nicely.
So far so we feel pretty good about Q3, and the rest of the year.
Understood. Thank you for that and generational one for you the dubner the net retention rate trending down.
Wanted to ask about the retention the gross retention side has that.
Yes.
Getting impacted because of the SMB is that fair to assume.
Or is it mainly on the expansion side.
Yes, it's a great question pendulum, so a couple of thoughts I'll put.
But out there in terms of the net expansion rate so.
In terms of the gross renewals, we actually didn't see any significant change in the gross renewal rate for our subscriptions, we don't break out.
The numbers, specifically because individual projects, obviously and to introduce some level of noise into the measurement, but as we looked at the renewal rates internally they were very consistent with what we've seen before.
And when I think about how that played out in terms of the expansion dynamics.
We did see expansion slow a little bit and I think thats, partly the effect of.
The some of the trends that we talked about that we saw in the month of October within the net expansion rate that does include some effect of SMB and monthly cloud consumption, which is annualized for the purposes of that net expansion rate calculation. So the software SMB performance. In October also would have had an adverse impact on that but the way we think about that.
Is that even at 125% it is still a world class expansion rate and when you look at the customers over 100, K HCV, which was the other way that we think about expansion. We've continued to grow that that number in a pretty solid way and that's a more current data point that indicates the expansion momentum that we're seeing so when I think.
About it more broadly.
The underlying trends continue to play to our advantage where customers continue to adopt us across multiple solutions. We continue to move further up within the enterprise, we're getting closer to the customers and becoming more strategic to their businesses. So for all of those reasons I actually feel quite good about the longer term opportunity ahead of us.
Got it thank you I'll get back in the queue.
Thank you. The next question will come from Joel Fishbein with <unk> Securities. Please go ahead.
Thank you for taking my question.
Would love to just.
Here what happened in monthly customer cohort I know you'd mentioned something about on the call I just want to go a little bit deeper in what percent of businesses that now and where do you think that that trends and then the second follow up to that is just how is the government business for you guys specifically thanks.
Yes happy to take both of those Joe So in terms of monthly cloud performance monthly cloud was about 16% of total revenue and that was a tick down from where it's been in the past in prior quarters. It was roughly 17% of total revenue and I think that just reflects some of the consumption trends that we talked about particularly on the SMB side.
Because a lot of those customers are on monthly cloud and in terms of context, 1% J&J, obviously translates to a few million dollars in revenue. So it is quite meaningful but monthly cloud continues to be a great way for us to acquire and scale new customers. We've talked already about some of the changes that we're making to double down on those and focus.
With even greater investments in digital demand Gen. In particular as one example.
No.
Those are some of the trends that we saw from a monthly cloud perspective, and then in terms of the federal business.
<unk> continues to be.
Very strong practice for us we've invested in the fed business for.
For some time now and that team has.
It has been really successful in prosecuting many use cases and ensuring that were used in mission critical workloads across multiple agencies in.
In Q2, we were actually quite pleased with our performance in fed the team did well to close all of the business that we were looking to close and.
And we're excited about the opportunity in fed looking looking ahead.
Thank you so much.
Our next question will come from Raimo <unk> with Barclays. Please go ahead.
Hi, This is extreme investor argument on for Raimo. Thanks for taking my question.
You had mentioned 30% of elastic costs customers are using APM now just wondering if you could give us a sense of how thats progressed from last quarter or last year and.
From a sales perspective, how do you kind of go about incentivizing more customers in this type of environment, Q try and use and scale up an ATM or security or some of your newer product areas.
Yes, maybe I can touch upon the show.
We don't breakout discretely the growth percentage in terms of how <unk> is being adopted we gave this data point primarily because.
<unk>.
As we've been driving customer adoption, not just across solutions, but within our solution. So absorbability going from log analytics to APM metrics and so on.
There is a growing need that we are seeing growing interest in consolidation and so this data point.
It's one that we have.
Sort of giving for the first time, because it's now pretty clear that our APM solution is one that is gaining a lot of traction has gained a lot of traction metro frankly, one of the customer examples I gave.
In my prepared remarks, the large eight figure deal that we signed with a large financial services institution was really all about APM.
So it is being used at scale, it's being used in very significant ways and the way we tend to drive that.
Spansion motion.
In a couple of areas right. So one is the pricing model tends to be incredibly relevant in that scenario because our pricing model is completely based on consumption. So it's not like the customer has to start with going all in on elastic on any of those newer use cases, we typically tend to suggest that they play with it.
<unk> four.
Instruments, a few applications at a time getting familiarity with the capabilities and then.
Siding, if it's something that they want to rollout across their entire real estate and that's how we've been growing in a very vital manner.
Expansion scenarios and it's gotten to the point now where a significant percentage like I mentioned of our observed 30 customers using APM in some way shape or form.
And we just expect that to continue growing the other thing that we're doing is also making sure that.
That's the place that our sales teams are driving with all our enterprise and commercial customers.
That land and expand motion that we really focus on once the customer lands in the typically tend to land on cloud like we've talked about in the past.
Real focus for the sales teams ends up becoming all around expansion and that expansion is centered around starting from logs and observed beauty to APM two metrics. If the customer starts with security specifically with Sim than going from <unk> to Xdr I also gave some stats about.
The adoption that we've seen around xdr and some of our security use cases, so we're starting to see that that flywheel work quite nicely and thats really going to be the focus going forward as well.
Thanks, I appreciate that and just one more for me I think last quarter, you mentioned that you were seeing.
Too much impact from macro on from the.
The cloud migrations are you seeing an impact there now or is the slowdown mainly attributed to slower expansion like you said from SMB cloud. Thanks.
Hey, maybe I'll take that one so on the self managed side, we're actually quite pleased with the performance. There. It grew 20% year over year in constant currency, which compares favorably to the prior quarter. So we.
We were real pleased with what we saw there in terms of the overall business perspective, there's nothing in particular I would call out other than customers just continuing to express a preference for cloud. So we generally view that as a positive for the business and in fact as you know in Carter's that preference as well, we do think that self managed will continue to grow and that growth.
Over the long term should just mimic their workloads reside so it's not a substitution effect, we're not trying to do with any kind of a forced march.
Cloud workloads are growing faster than on Prem workloads.
The way, we think about it from a longer term perspective is that our opportunity set is large and our penetration rates are low. So we should have plenty of room to grow in both the cloud and the self managed formats.
Understood. Thank you.
The next question will come from Matt Hedberg with RBC capital markets. Please go ahead.
Yes, Thanks, Matt.
That kind of a follow up to the last question around consolidation in the August since you are positive.
This is also making deals maybe a little larger but also more complicated you mentioned the increased scrutiny that we're seeing in this macro could you just talk a little bit about how the consolidation theme might be impacting sales cycles and then.
Went into just kind of things you're doing to streamline this from a go to market perspective.
Yeah, so the the.
Deals that actually.
Ran into more approvals and so on.
Necessarily tied to consolidation per se. So we're not we're not necessarily seeing a correlation between consolidation.
And deals taking longer the fact that certain deals took longer because they were more approvals needed and by the way that is something that our sales teams are now actively accounting for you sort of know that thats going to be like I mentioned more of the norm. So we sort of accounting for that but.
Those were in regions and countries, where the strengthening U S. Dollar has given those customers reason to just be that much more thoughtful.
And several of those deals actually came in into Q3 already. So these are not deals that got affected in terms of us losing them from a competitive standpoint, we did very well. It was just the timing of things. So that was number one the second is.
To the point of consolidation.
We agree that consolidation as an opportunity and thats like I mentioned, that's something that we're really leaning into and the field is.
Activity, having those conversations right because at this point, we see that.
Spend is something that's on everybody's mind, how do customers be a little more thoughtful about what they are spending on and there is a natural desire to ask how can I do more with elastic where else can I use you in such a way that may incrementally. My overall cost of ownership comes down and those are the conversations that really we are driving our sales plays.
Now throughout our organization and I expect that that's going to be.
A greater aspect of what we do going forward, but I am not I am not seeing any correlation between that and.
Deal cycles, because the change that we saw in deal cycles that was somewhat orthogonal.
Yes.
Extremely helpful. I guess, the second part just given that macro and given yes.
Cost sensitivity you mentioned I think I've seen any changes in adoption around here over the last couple of quarters or maybe this quarter either customers migrating down or additional usage of the companies that are in that new elastic.
I have not seen that matter of factly, one of the things that we have seen is.
People, who might have been using the free and I actually mentioned one of these customers are referenced one of these customers a government agency in my prepared remarks, I mean, what we are seeing is.
As a.
The economic environment becomes such that everyone is is inspecting.
Their spend we are seeing customers actually think about the cost of managing things themselves and recognizing that they're better off with a fully managed cloud service as opposed to trying to install and manage everything themselves. So we did we did see customers adopting some of our higher.
Tears.
And we haven't really seen any impact where customers are saying that they want to go to the free tier simply because the motors massive the difference between our premium tiers and the free tier is very significant. So if you are using any of our advanced capabilities, giving all of that up.
Is.
And extremely high hurdle.
And we haven't seen any of that behavior.
And then of course, the other thing I'd just point out that math is around cloud as you know there is no. There is no free tier everything is paid beyond a couple of weeks of the trial period.
I appreciate the color.
The next question will come from Koji Aikido with Bank of America. Please go ahead.
Hey, guys. Thanks for taking my question just one for me here and really kind of trying to focus on this less than 100 K customer.
ACB.
Cohort here, so just given the commentary with the SMB and really thinking about the.
Two components being a fairly big component of the total revenue and really that $2 billion fiscal 'twenty five target.
I really want to understand the growth potential of this category of the medium term.
I heard that you guys are repurposing F&B spend to enterprise sales and a higher focus on self serve for SMB and then some investments for digital demand generation. So there's a lot of puts and takes there. So I guess the question is how should we be thinking about the growth in this.
Sub 100000, K ATV segment here is is the second quarter kind of a net add a good way to think about a sustainable.
Net adds net adds in this category I mean does it go down from here does it go up from here and any sort of help on how to think about this category.
Yes, <unk>, maybe I'll try and unpack that a little bit so a couple of thoughts.
In terms of our customer acquisition motions, we continued as we've done over the past couple of quarters to focus on.
Driving towards customers, who have a greater propensity to spend over time with us which has been focusing on.
Those customers that are above that 10-K, ACB threshold and focusing less on the long tail of smaller customers that might spend just a few hundred dollars a month for example.
And you see that in the numbers. So when you look at the total subscription customer count although sequentially. We added fewer total customers. When you look at the customers that are more than $10000 in HCV.
That customer additions was consistent with what we've done in prior quarters. So we feel pretty good about the new customer acquisition motion and the effectiveness that we're driving as we as we try and work the cost to acquire customers into the calculus as well. So I think thats thats working quite nicely now if you think.
About how those customers and eventually expand into the greater than 100 K category.
I think.
That's fair.
You can look at a couple of metrics obviously, the net expansion rate and then also just the sheer number of customers in the greater than 100 K.
<unk>.
And that in that particular category and again both of US in both of those categories Youll see that the expansion motions are working quite nicely here.
Here in Q2, they were a little bit slower than what we would have ideally liked and I think that just reflects the broader trends that we've talked about from an enterprise perspective.
So what that does for us in terms of continuing to drive growth into the future.
Yes that the areas that have been working nicely for us we need to continue to expand investment in those areas. So for example in digital demand Gen and marketing to continue to acquire customers at the right pace and the right kinds of customers at the right base.
Then to continue to invest in the higher touch selling motion, where we can continue to expand those customers into larger customers over time and those are the two areas, where we are continuing to to shopping and invest a bit further while focusing our.
Pulling back some of the investments in some of the other areas that were less productive in those selling motions.
Thanks, guys. Thanks, Thanks for taking the questions I appreciate it yes of course.
The next question will come from <unk> <unk> with William Blair. Please go ahead.
Hi, Thanks for taking my question I, just wanted to double click on the competitive environment. I believe you said when rates are unchanged, but as you look across your three products can you provide more detail on where you are seeing the most competitive pressure.
And there's a large number of private ventures vendors entering the observer ability space are you seeing any change in who youre coming up against some deals.
Yes, So let me let me maybe touch upon that so in terms of the three different segments.
I mentioned, where we tend to lead with in new accounts is almost always either in log analytics for absurdity or Sim for security or enterprise search and enterprise search, we really haven't seen any change in security and log analytics, we really haven't seen any change either what we have.
<unk> seen is as we land and we expand.
We expect when we are trying to talk about xdr.
And to see the vendors that have already been in the xdr space, but that's where we typically tend to go with that expand motion.
Not with a new customer, but with a customer that's already familiar with elastic platform that's already using us for say Sim and then we basically get the point across to them. The same agents that they've deployed for ingesting data and the same for analytics are the agents that can help them with actual endpoint protection. So it.
Tends to be a different kind of a conversation as opposed to just going head to head against other xdr vendors.
And it's the same thing even an observable at it because we also.
To start with log analytics, which has been an area of extreme strength for us.
It's an area, where we are very well known.
We tend to have the advantage, we compete incredibly well in that area and once we start with log analytics. The progress that we've made on APM has been with existing customers right. So once we land with log analytics will expand from there. We don't tend to just go into completely new.
APM scenarios for APM itself like for APM alone. So it's.
Because of all of those dynamics, we have not seen the competitive environment changing in any meaningful way at all.
That's really helpful and then just a.
Quick follow up.
Well over $800 million in cash and cash equivalents can you update us on how youre thinking about the decision to build versus buy and given the declining valuations in private markets would you be more open to a more transformative acquisition.
Yeah look from from our perspective typically one of the things that we've been very focused on is we want to make sure that we are building a platform not just assembling a portfolio. We believe that that's the right answer in the long term.
When you have a clear well integrated platform.
The land and expand motion tends to work much better.
Overall efficiency.
Hence to only improve over time in terms of how you go to market even in terms of your engineering efforts. So we wonder if you're going to be consistent with that.
And so that's one of the reasons why traditionally we've always done tuck in technology acquisitions.
In the private markets to your point at this point.
I don't think that the private markets have corrected.
We've seen the changes in the public markets.
It will happen in time, that's what history has always shown us.
<unk>.
As that happens when that happens, we're always going to be looking for.
Technology tuck ins that allow us to bring our future forward.
Because we tend to integrate them deeply to make sure that we have a consistent platform. So I don't expect that strategy to change.
Sorry.
When you say transformative as some of those small tuck in acquisitions could end up being transformative just in terms of what that lets us accomplish in new areas that lets us get into and we will always be on the lookout for those kinds of things.
But that's how you should think about our strategy there.
That's helpful. Thanks, guys.
This concludes our question and answer session I would like to turn the conference back over to asphalt Kearney for any closing remarks. Please go ahead.
Well.
So thank you all for joining us.
The thing that I'd say in closing is we are absolutely focused on our execution and.
And we remain confident in our ability to both drive growth and build a generational company and also continue to focus on profitability as we've demonstrated through all the things that we've done. So thank you again have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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