Q1 2024 Elastic NV Earnings Call
Yeah.
Good day and welcome to the Alaska first quarter fiscal 2024 earnings results Conference call.
All participants will be in listen only mode.
Should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
I ask a question you May press Star then the 100 telephone keypad.
To withdraw your question. Please press Star then two.
Please note today's event is being recorded.
I would now like to turn the conference over to Janice <unk> with Investor Relations. Please go ahead.
Thank you good afternoon, and thank you for joining us on today's conference call to discuss our classics first quarter fiscal 2020 for financial results on the call. We have Asheville, Kearny, Chief Executive Officer, and you're not sure 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 are supplemental to the call can also be found on the elastic investor relations website at IR Dot elastic Dot C O.
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 included in the slides posted on the Investor Relations website 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 webcast replay of this call will be available on our company website under the Investor Relations link our second quarter fiscal 2024 quiet period begins at the close of.
Business on Tuesday October 17, 2023.
On September 5th 2023 we will be participating in the Goldman Sachs commuter Copia technology conference with that I'll turn it over to ash.
Thank you Janice and thank you all for joining us today.
Pleased with how we performed this quarter, we had a strong start to our fiscal year with our performance exceeding our stated expectations across both revenue and non-GAAP operating margin.
In Q1 revenue grew 17% year over year with elastic cloud growing 24% year over year.
We ended the quarter with more than 1190 customers with annual contract values over 100, K as customers continued to adopt elastic as their data analytics platform of choice for addressing multiple real time search use cases.
And we continue to manage the business with discipline to deliver our non-GAAP operating margin of nine 9%.
Elastic has always had a singular mission.
Enabling everyone to find the answers that matter from all data in real time at scale.
The versatility of our platform the built in AI capabilities, such as the elastic search relevance engine or as Rick and our ability to excel at multiple real time use cases across search Absorbability and security.
On our data analytics platform have all made elastic a natural choice for our customers as a core element of their it stack.
Our land and expand strategy continues to serve us well and our long term opportunity remains robust.
In Q1, we saw two distinct trends within our business.
The first is around gender debate.
Gender debate and it's intuitive approach to interact with massive amounts of information and generate new content is driving a resurgence of excitement around enterprise search.
Businesses are recognizing the opportunity to create new customer and employee experiences and drive efficiencies in various business processes through the use of AI powered search.
This is opening up new opportunities for elastic.
To build a generative AI applications that work within their environment and with their proprietary data.
Businesses need the ability to provide accurate context in real time to large language models or LLS.
And to do so in a way that doesn't violate their privacy or security policies.
This requires a platform that can allow businesses to use their own or third party ml models to generate embedding from their data irrespective of the type of data.
Store these embedding in a vector store at very large scale.
And then efficiently search across these vectors in real time.
Enhance LLM responses by providing context using retrieval augmented generation.
The platform needs to ensure that this vector retrieval enforces data privacy with document level permissions and takes context, such as user privileges personalization geolocation and other factors into account.
Platform also needs to be flexible enough to enable hybrid search using a combination of vector symantec and textual search techniques to ensure the most relevant results possible.
The last six search with SRA delivers this entire set of capabilities in a single platform.
It does show in the same platform that is already being used by tens of thousands of organizations worldwide for real time search use cases.
Our proven scale performance and advanced enterprise features like document level permissions built in security and hybrid search, but the rest of peripheral rank fusion.
Makes us a highly differentiated an ideal choice for these generative AI use cases.
In Q1, we saw significant activity around generative AI.
With a number of customers choosing.
As their platform for building generative AI applications, using our vector search and hybrid search capabilities.
As an example, a U S based fortune 100, global media and technology company as integrated as they did their own locally hosted large language model to enable their ticketing system to now deliver contextual answers to questions from their customers.
This is projected to enable their team to solve about 50% of that helped us tickets through this automation made possible by the power of generative AI.
Another example is a leading file sharing service that is using elastic hybrid search capabilities to power, our new AI powered universal search to the.
The combination of vectors search and textual search enables them to bring a significantly superior search experience to their customers across all subsidiaries and applications with.
With elastic degenerative AI and machine learning capabilities added score, it's still learns and evolve alongside its users continuously improving as they use it.
Another example is the leading AI platform label box that uses elastic to power one of its most popular tools label box catalog.
Enabling teams to accelerate and streamline machine learning model development through optimized search experiences with.
With elastic fast enrich search capabilities label box customers can undertake unstructured data searches in a fraction of the time compared to its previous search solution, which ultimately helps them to capitalize on the possibilities of AI.
Similarly companies are also using elastic to enable things like forensic video analysis at scale.
One leading telecom equipment company is using their own large language model, coupled with elastic vectors such capabilities to power their cloud based video search solution.
Enabling them to better identify bad actors and provide real time security.
These are just a few of the many examples of customers using us for generative AI today.
Elastic search is the most popular platform for search.
As customers build contextual gender dovey applications. They are naturally choosing elastic search and as rate to provide relevance and context based on their private data.
Today, we have hundreds of paying customers using as it is for vector search and the conversations we're having with our customers gives us confidence about our continuing traction in this space.
We anticipate that as customers start to put more and more of these use cases into production.
Generative AI will be a real tailwind for our business.
The second distinct trend in our business is the continued push by customers to consolidate onto the elastic platform for multiple use cases in.
In Q1 customers continue to make large multiyear commitments as they sought ways to lower their total spend without sacrificing innovation by bringing more workloads from other incumbent solutions onto elastic.
We continue to leverage our competitive strengths in our core areas of search log analytics and security analytics to drive our land and expand strategy.
As an example in Q1.
Those are multi year deal the Texas A&M University for elastic cloud on AWS.
University previously deployed a competitor solution, but moved to elastic for security and absurdity.
The customer chose elastic for ease of use of a single platform without needing multiple licenses and search results and high speed and relevance for all their data, enabling them to rapidly and effectively solve their business challenges.
They use elastic to search through analyze and secure all of their data from a unified platform, while optimizing costs and meeting compliance requirements.
We also closed a multiyear deal.
For elastic absurdity, but one of the largest multinational communications and entertainment companies in the world.
They started with a small deployment of elastic next to a competitor solution, but consolidated onto elastic to become the enterprise standard for its absurdity platform.
This company chose elastic for its flexibility and scalability across different data types and Leverages advanced features such as searchable snapshots and machine learning to help them take an AI ops approach to the data ingesting into elastic.
This quarter, we also renewed and expanded business with one of the worlds, leading internet domain registrar and the web hosting companies.
A longtime elastic customer the company previously used a competitive solution, but moved to elastic and then Q1 signed a multiyear contract for elastic cloud on AWS. The company has consolidated multiple tools across logs metrics and APM and elastic absurdity to effectively mom.
There are thousands of online services for customers.
While reducing meantime to resolution and streamlining operational costs as its business continues to scale.
As we have discussed previously our customers routinely tell us that our platform delivers a much higher value than competitive offerings and these advantages along with our innovative AI power data analytics platform are enabling us to compete very well in this environment.
Now onto our products.
In Q1, we continued our focus on innovation and delivered on several key capabilities to our platform and our solutions.
The most significant announcements in Q1 was the release of the elastic AI assistant powered by <unk>.
This AI assistant, which helps guide analyst investigations and remediation is in beta for security and in technical preview for absurdity.
Continued to enhance capabilities and necessary and delivered new hybrid search capabilities with the industry, leading implementation of reciprocal ranked fusion, our R&R F to combine vector keyword and semantic techniques for better results.
We are also continuously improving the speed and performance of the elastic search platform and.
And we did work in Q1 in this area that resulted in faster and more relevant outcomes for search aggregations.
Cross cluster search and for dense vectors search.
This included support for native implementations of vectors search using hardware accelerated Cindy instruction sets, which yields even faster queries and 30% greater indexing throughput.
In the area of elastic absurdity.
Integrated our time series data streams Rts D S capability with popular elastic absurdity integrations, such as Kubernetes Nginx AWS can assist and Lambda.
Enabling the potential to reduce storage needed for metrics data by up to 70% in the air.
Areas of elastic security, we extended support for advanced entity analytics with the general availability of lateral movement detection.
On the go to market front, we continue to focus on our partnerships with the major cloud Hyperscale.
And I'm pleased to highlight that we recently earned top accolades from each of the three Hyperscale is Microsoft AWS and Google Cloud.
Specifically, we were named the Microsoft commercial marketplace partner of the year.
And the AWS U S suite rising star partner of the year.
And just this week, we were honored to receive the Google Cloud Global technology partner of the year Award.
These awards from all the three cloud Hyperscale.
Reflection of the strength of our relationships with these cloud partners the deep product integrations, we have built with them.
And the success, we are achieving together and driving growth for our businesses in the market.
Customers are making significant multi year commitments to our platform through these cloud marketplaces as they leverage elastic.
<unk> AI powered data analytics platform for multiple real time use cases across search absurdity and security.
Finally, I would like to again highlight that Q1 was a continued demonstration of our commitment to managing the business with discipline.
We delivered a non-GAAP operating margin of nine 9% for the quarter.
Which was significantly better than our expectations and we remain on track to deliver on our non-GAAP operating margin target for the full fiscal year.
In closing I want to thank our team for their dedication and continued focus on execution I also want to thank our customers partners and investors for their continued support and confidence.
Our conviction in the long term opportunity in front of us remains strong.
It is based on the strength of our relentless innovation.
And continued customer confidence in elastic.
<unk> is opening up new opportunities for us that we expect to capitalize on in the coming quarters and years.
And as cloud optimization is stabilizing we expect to continue making progress on our stated goal of driving growth with profitability.
With that I'll turn it over to <unk> to go through our financial results in more detail.
Thanks Ash, we are very pleased with the strong results that we delivered in the first quarter, marking an excellent start to the new fiscal year. We once again came in above the high end of our guidance for the quarter for both our topline and bottom line.
In Q1, we delivered 17% year over year growth in total revenue with elastic cloud yet again, driving our results with 24% year over year growth.
Importantly, we delivered non-GAAP operating margin of nine 9% demonstrating both a strong investment discipline and the operating leverage inherent in our business model.
As <unk> mentioned, we saw increased engagement around generative AI use cases in the first quarter, which led to customer dialogue at the highest levels with the C suite being deeply engaged on the topic.
Our advanced capabilities enable customers to build generative AI solutions, leveraging the benefits of our data analytics platform, including its native Victor database capabilities as they address multiple real time search use cases.
And this positions us exceptionally well to be a leader in generative AI long term, which we believe will ultimately drive meaningful revenue for us in the coming years.
We also saw continued strong contractual commitments during the quarter, particularly among our larger customers as they consolidated use cases on elastic and benefited from the value of our platform.
In addition, we began to see signs of improvement in consumption patterns as customers increase their consumption against the commitments that they had previously made.
We will monitor this ramp against the backdrop of broader consumption optimization trends, which still might take a couple of quarters to play out but we are pleased with the early signs we saw during the quarter.
As we look out over the rest of the year, we continue to expect that the compelling value proposition for customers of our platform combined with the strong engagement, we've seen for generative AI will drive our overall business momentum.
Lets get deeper into the results for Q1 and our outlook.
Total revenue in the first quarter was $294 million up 17% year over year on an as reported and constant currency basis.
Subscription revenue in the first quarter totaled $270 million up 17% year over year or 16% year over year in constant currency and comprised 92% of total revenue.
Within subscriptions revenue from elastic cloud was $121 million growing 24% year over year on an as reported and constant currency basis.
The cloud represented 41% of total revenue in the quarter up from 39% a year ago.
Elastic cloud revenue based on month to month arrangements contributed 15% of total revenue compared to 16% in the prior quarter.
Professional services revenue in the first quarter was $24 million growing 29% year over year on an as reported and constant currency basis.
Although professional services may fluctuate across quarters based on the timing of services delivery, we do not expect it to very significantly in mix over time.
To add more context around overall deal flow EMEA grew fastest during the quarter followed by the Americas and APG, we continue to see a healthy balance across the business based on geographies solutions and verticals and this diversification reflects the breadth and popularity of our platform.
Moving onto customer metrics.
We ended the quarter with over 1190 customers with annual contract values more than $100000.
Looking at customer additions more broadly we ended the quarter with over 4170 customers above $10000 in HCV and approximately 20500 total subscription customers.
Our net expansion rate, which as you know is a lagging indicator was approximately 113% in line with our expectation for the quarter and consistent with our prior comments.
Overall customers continue to adopt elastic is the AI powered data analytics platform of choice for addressing multiple real time search use cases.
Customers across industries and across the globe are adopting and growing on elastic, particularly elastic cloud and we remain excited about the opportunity ahead of us.
Now turning to profitability for which I will discuss non-GAAP measures.
Gross margin in the quarter was 76, 5% versus 76, 3% in the prior quarter.
I'm very pleased with how the team managed discounting in the field during the quarter and also drove efficiencies in running our operational infrastructure.
Our operating margin in the quarter was nine 9%, which was better than expected.
The strong operating margin performance was driven by our revenue outperformance and our continued focus on managing our expenses.
Diluted earnings per share in the first quarter was 25 cents.
Free cash flow on an adjusted basis was $49 million in the quarter or 17% adjusted free cash flow margin.
This represents our highest adjusted free cash flow margin to date as we continue to drive operational focus on the business.
The strength in adjusted free cash flow was partly due to timing benefits of approximately $20 million primarily related to the timing of cash collections and payments that we had previously expected in the second quarter, but occurred during the first quarter.
Looking at the adjusted free cash flow outlook for the second quarter.
The timing of cash flow shifting from Q2 to Q1 will impact adjusted free cash flow in Q2.
Additionally, we anticipate $13 million of one time payments that relate to previously completed acquisitions that will be due in the second quarter.
Although we don't usually provide a specific quarterly outlook on cash flow given some of the puts and takes in Q2 I'll share that we expect adjusted free cash flow in the current quarter to be in the range of approximately negative $10 million to breakeven, reflecting these two items.
As we've said before cash flow on a quarterly basis will fluctuate given timing issues around the inflows and outflows as well as seasonality impacts. So we continue to look at cash flow primarily on a full year basis.
For the full fiscal year, there was no change in our prior outlook and we continue to expect free cash flow margin on an adjusted basis for fiscal 'twenty four to be slightly above the non-GAAP operating margin for fiscal 'twenty four.
We continue to maintain a strong balance sheet.
We ended the first quarter with cash cash equivalents in marketable securities of $957 million.
Turning to guidance.
While we were very pleased with our outperformance in Q1, we continue to be prudent as we plan for the rest of the year the.
The macroeconomic climate has been stable. So we continue to assume that macroeconomic conditions will remain unchanged.
Additionally, although we are seeing customers ramp their consumption for new workloads. They are consolidating onto elastic. We believe it is appropriate to anticipate that consumption patterns may continue to fluctuate in the near term.
Accordingly, we are raising the low end of our total revenue guidance for the full fiscal year by $4 million at this time, resulting in an increase of $2 million at the midpoint.
Since it is still early for us in the fiscal year, we are going to monitor these trends for another quarter before further evolving our outlook.
In terms of operating expenses, we continue to invest with discipline in the business.
Over the past several quarters, we've continued to drive efficiency in the business and that focus will not change.
At the same time, we see an opportunity to invest in development and marketing around generative AI as we solidify our leadership in this space.
We continue to balance investing for growth against profitability and we will carefully monitor our progress each quarter.
We are raising our non-GAAP operating margin guidance by 25 basis points at the midpoint at this time.
For both fiscal 'twenty, four and fiscal 2005, we expect to grow revenue faster than overall expenses, expanding our non-GAAP operating margin each year.
With that background for the second quarter of fiscal 'twenty four we expect total revenue in the range of $303 million to $305 million, representing 15% year over year growth at the midpoint or 13% on a constant currency basis.
We expect non-GAAP operating margin for the second quarter of fiscal 2004 in the range of nine 5% to 10% and non-GAAP earnings per share in the range of 23 to 25 cents using between 101, five and $102 5 million diluted weighted average ordinary shares outstanding.
For full fiscal 2004, we expect total revenue in the range of one point to four 2 billion to $1.25 billion, representing 17% year over year growth at the midpoint or 16% on a constant currency basis.
We expect non-GAAP operating margin for full fiscal 2004 in the range of 10% to 10, 5% and non-GAAP earnings per share in the range of $1 <unk> to $1 11, using between $102 million and 104 million diluted weighted average ordinary shares outstanding.
In summary, we had a strong start to the year, we are executing well and we are excited about the rest of this fiscal year and beyond and with that let's go ahead and take questions operator.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If your question has already been addressing like to remove yourself from queue. Please press Star then two okay.
At this time, we will pause momentarily to assemble our roster.
And our first question today comes from Jonathan Bock.
J P. Morgan. Please go ahead.
Hey, guys. This is Noah on for Haynesville and thanks for taking our questions.
Curious if you could maybe expand on the performance of both of you.
Mobility and security practices and how that's stacking up against the competition at this point and I just had a quick follow up thanks.
Yeah. This is accurate I can take that thanks for that question. So in terms of our ability to compete and differentiate in the market on both absurdity in security that continues to stay very strong I'm just even in this quarter like I like I talked about you know one of the trends that we are seeing in the business.
This continued consolidation onto our platform.
A lot of those consolidations tend to be around observe ability and security. The examples that I gave in my prepared remarks were around that.
The capabilities that we've been delivering in this area, especially.
The some of the newer AI assistant functionality.
For security, what's in beta now and its an early preview for absurdity those are driving a lot of excitement in our customers as they see not just the functionality that we've built but the way we can help them take advantage of generative AI and do things in a very differentiated manner, you really analyze all there.
Data and.
Insights that other platforms arent able to give them like that's continuing to play well and towards our strength. So the.
The win rate continues to be very strong and I'm very excited about both these segments for us.
Thanks, and then just a quick second question.
It sounded.
A little bit more incrementally positive around the consumption trends youre seeing so far and totally understand.
The understanding that there could be.
<unk> for the remainder of the year, but how are you sort of thinking about that as you.
The guidance for the rest of the year. Thanks.
Yeah, I can take that so look the way we think about about the guidance for the year as I mentioned, it's relatively early for US we are very happy with the momentum that we saw in Q1 the quarter played out nicely for us across the top line across the bottom line.
But as I said earlier, because it's still a little bit early in the year. We think the best thing to do at this stage is just to continue to be prudent.
We continue to guide based on what we know and we also continue to build in some protection for the things that we don't know and although we saw some positive signs of customers ramping here in Q1.
Conceivable that consumption may fluctuate in the near term. So we just think it's best to consider that possibility in our guidance.
And that's what we've done here for Q2 and for the full year and beyond Q2, as I look out to the back half of the year, we don't anticipate any worsening in the second half we simply want to be measured in our approach to the full year outlook. Since it's a it's early in the year. So given the results that we had here in Q1, which were quite strong we raised the guidance by $4 million on.
The low end as you saw there.
Because we no longer we no longer see the likelihood that that will end at that lower end of the range. So that's why we raised the bottom end of the range and we're looking forward to Q2 and the rest of the year and we'll update you again on our next call.
Thank you and our next question today comes from Tyler Radke Citi. Please go ahead.
Yes. Thank you very much for taking the question Greg.
Great to hear about the hundreds of customers using the new every product could.
Could you just talk about the monetization of that I know, there's kind of several ways you can monetize in terms of <unk>.
On the enterprise and having to.
Turn on some of the ingestion capabilities, but how significant could could that be in terms of <unk>.
Driving revenue would you would you expect to kind of see the impacts this year or is this more of a next year event. Thank you.
Thanks for the question Tyler I can I'll address that so this is last year. So.
As you think about our consumption model. The way you should think about it is as customers use the functionality.
Theyre doing multiple machine learning.
Tasks in there, they're effectively taking their data and then turning them into Victor embedding, they're storing that data and then using our vector search functionality, they're using things like rest of Brookfield rank fusion for hybrid search combining that vector search with semantic search and textual search and so all of this tends to.
And especially the machine learning stuff tends to be quite compute intensive.
So that is one aspect. The second aspect is for machine learning you have to be on one of our premium tier so either the platinum or the enterprise tier so both of those tend to be ways in which the consumption grows. The second is you know what I'd say is as you think about that.
Our customers are in this journey, you know first and foremost it is beyond exciting right, so generative AI and the possibility.
Of the kinds of experiences that you are able to deliver to your employees to your customers.
And to do it in such a way that it improves the efficiency of your business processes reduces your cost this is absolutely a.
C level discussion the kinds of conversations that we've been having it's exhilarating.
<unk> really driving a resurgence.
For search in so many different ways.
And you know just in the conversations that I'm, having with customers and it's becoming very clear that everybody is looking for ways to do this in different domains across their company now where they are starting in most cases is with internal facing applications applications that their employees might be accessing which gives them.
A little bit of control over things allows them to make sure. The day, you know really get comfortable with the large language models in the generation functionality all of these capabilities are relatively new.
So that's that's where we are as more and more workloads go into production as the volumes of data in these systems grows all of that is also going to drive the consumption and the revenue that comes from it. So in terms of the way we're looking at it the way I look at it we are.
Very early in the journey.
<unk> customers that we have today just gives me tremendous confidence in the traction that we're seeing gives me tremendous confidence in our ability to continue to be a strong leader and to see this become a real tailwind for us in the coming quarters and years, Jim actually I don't know if you want to add anything in terms of Ah you know how youre looking at.
No I'll just reiterate the same level of excitement around the opportunity that you mentioned win.
I hear from customers, our salespeople folks out there the level of excitement around Jennie O is just tremendous so I think it's a great long term potential revenue opportunity for us.
Great and.
Just on the macro environment. It sounded like you saw some encouraging signs of stabilization and improvement could you just give us a sense on how the linearity of the quarter played out in <unk>.
Have those stabilizing or improving trends continued.
In August .
Just any any comments on kind of the timing of when you saw that and obviously youre not not calling the bottom, but just if there was a tenant.
Then consistent into August thank you.
Yeah, Tyler as you know linearity within the quarter can always be affected by the timing of specific deals and this time was no different I think we did really well at the close of business that was on the table before the end of the quarter.
With respect to the consumption patterns that we saw again, we saw consistency during the quarter.
In any given month, we did see some customers go up and down but looking at consumption trends on a monthly basis that it can be a little bit noisy, but overall the themes played out is as we described in terms of the customer starting to consume nicely against the contracts that they had previously committed to.
And in terms of August I think it's just too early to tell we haven't even closed August yet, but I will share that the general tone of customer conversations that we've seen has stayed similar to Q1 with a lot of interest in journey II.
Great. Thank you.
Thank you and our next question today comes from Koji Ikeda with B Riley.
Please go ahead.
Yeah, Hey, guys. Thanks for taking the questions.
I wanted to ask a question digging into the elastic cloud revenue growth here at 24%.
A really strong number there, but when looking at the math.
The cloud revenue that grew it looks like about low single digits and then the net new customer adds 100, K a T V.
Number was a bit lower than in prior quarters. So just kind of thinking through our elastic cloud does that mean that the growth or the strength there is coming from customers.
100, K or is it customers that are well above 100, K, that's driving that that cloud strategy.
It's a combination of both just looking for some more color here.
Yes, Koji, there's a couple of elements in there that you talked about in terms of monthly cloud as well as the customer sizes. So let me try and unpack both of those for you.
In terms of monthly cloud the monthly cloud business as you know is predominantly ourselves. So this motion and the majority of that is SMB that continued to be stable compared to the past couple of quarters. It was not meaningfully different so neither better nor worse and that was as we expected. So we are we anticipate that those are those results.
What you're really seeing in the mix there is that our annual cloud subscription motion has actually performed really well we talked about the increase in consumption that we started to see from the consolidation of workloads and that's all reflected in the annual cloud revenue.
And that then drives the mix of revenue so our strategy to focus on customers that have a higher propensity for growth is working quite nicely. We're seeing those customers expand we are seeing them make make larger commitments and I think that's actually been working quite nicely for us and then if I look at the customer.
<unk> for more than a 100 K.
Maybe just step back and look at the overall results for the quarter.
The overall numbers were really strong for us in terms of both total revenue as well as our cloud growth, but in terms of the customer accounts. We saw as ash mentioned earlier that our customers are continuing to make strong contractual commitments to elastic.
So the additions to that pool of greater than 100, K a C V was a little bit lighter, we did see strong expansion in the larger accounts and that reflects those commitments. So from a dollar perspective, we saw strength there too on the number of net adds in any quarter it might move around a little bit but the underlying drivers continued to remain strong and so that's very consistent with the theme of consolidation there.
We talked about on the continuing commitments.
From the from these customers gives us a lot of confidence in our outlook for Q2 and the rest of the year. So I think we've had good consistent growth in our customer metrics historically, and we expect that that trend will continue over time.
Got it thanks, so much genus and just one follow up here looking at net revenue retention of 113%.
Is it too early to call a potential bottom or how do we how should we be thinking about visibility into the bottom of net revenue retention going forward.
Yes, the net expansion rate in the first quarter. It moved out as we had expected it would youll recall that we had covered this on the prior earnings call as well and where we had said that we would expect it to go down.
And I think the decline in the net expansion rate reflects the two themes that we had mentioned earlier on our commitments and consumption. So if a cloud contract commitments generally don't count towards the net expansion rate while consumption does so the strong commits are not in the number but the slower consumption is and then over time as the consumption against the committed contracts ramps.
That will naturally help the net expansion rate over time.
If I think about that from a different angle our gross retention rates remain very strong and we didn't see any change versus the prior quarter. So a slower net expansion rate has been from from slower expansions.
So as I mentioned is that the.
Consumption against committed contracts ramps that will naturally help the expansion number.
And finally as you know the net expansion rate is a lagging indicator to trailing 12 month measure so as consumption ramps. It will take some time for that to be fully reflected in the net expansion rate will continue to monitor that as we go in but so far it's playing out as we had previously predicted.
Very helpful. Thank you so much for taking the questions.
Thank you and our next question today comes from Jay <unk> with William Blair. Please go ahead.
Hey, Thanks for taking my questions and congrats on the great yourself.
Please go back to those hundreds of paying customers using <unk> vector search how would you characterize kind of the profile of those customers are you seeing that more from existing customers kind of upgrading platform skus and lifting expansion rates or is that actually starting to drive new logo activity to elastic as well.
Yeah severe Ah were.
We're seeing a mix of both right. So yeah, you know keep in mind that our motion has always been a land and expand motion so new customers come to elastic typically onto elastic cloud using the monthly subscription motion as they start to use us for new use cases and as they grow.
Seeing the propensity to grow we will engage with them.
And then move them to an annual contract and they sort of continue to expand from there that that motion remains consistent and even in the monthly cloud use cases that we're seeing we're seeing customers use us for the agenda to be I use cases that are that I mentioned.
The examples that I gave are all customers using us with annual contracts right. So the in my prepared remarks.
And keep in mind that you know when you think about.
The value that we bring in the area of generative I like what I'm hearing from customers is they really there are four key reasons why we tend to win and why we tend to do very well first is that we simply have a really really good vector database implementation.
It performs very well it scales incredibly well and that's something that is key to success and so you know our customers are appreciating. It. The second thing is we've invested a lot in making sure that we don't just stop at a vector functionality of vector implementation, but we have invested in capabilities like reciprocal rank.
Fusion for hybrid search we've invested in.
<unk> functionality that allows you to incorporate context.
In all the the search functionality needed for.
Retrieval augmented generation using personalization using geolocation et cetera as context.
Third Big reason is we keep hearing about the fact that you know the enterprise class capabilities like document level permissions.
<unk> built in security that we've implemented is something that is critical for actually putting these use cases into production.
And that's an area, where many others are you know.
An afterthought for them or do they have and implemented it.
And lastly, and this maybe comes back full circle to the point. The question that you asked we have.
Our position in the market.
Most customers are.
All our customers, obviously, but also a large number of people outside of our customer base are already using elastic search.
For some form of search or another and that just means that there is tremendous familiarity there data is already sitting in some elastic search instance, so if you are an elastic search user. It's just a natural thing for you to look to us for this kind of functionality. So that doesn't mean that you know beyond our beyond getting new law.
Like I said, because there's a massive elastic search community out there that might not be paying us today, they might be using the free version.
But that's that's really the source of our success.
And then some other conversations that I'm having.
A fortune 100 company.
Recently talked to them.
And they told us they evaluated vector capabilities across all the vendors out there did a very detailed evaluation and they were just blown away by what they saw.
Stick, bringing to the table so lots of good traction lots of good momentum across the broad market.
Many of these are existing customers, but also new customers that have had familiarity with elastic search looking to us for this.
Great. That's very helpful. And then when we think about the numbers. When do you think that those will actually go live into production and drive potentially more meaningful consumption of the platform do you think that's a Q4 story or more of a fiscal 2025 dynamic and then on the margin side are there any incremental investment that we should.
Should be just thinking about when it comes to modeling.
Yeah. So let me maybe touch upon the first question first in terms of many of these use cases are already in production right. So the examples that I gave.
In my prepared remarks, but even beyond that there are customers, who have spoken publicly together with elastic on behalf of elastic just earlier this week at the Google next event.
Cisco co presented with us and talked about the work that they have done on building an internal search application that goes across over 50 internal applications and they have some wonderful stats of what they were able to do in terms of saving hours for their support engineers in making their job a heck of a lot.
Easier and better. So there are lots of production use cases already I think what's important to understand is when does this become a big enough customer group. That's in production with data having grown to scale that this shows up as a as a major tailwind and I, we feel very confident that that's going on.
And in the coming quarters and years, but discreetly we are not looking at that as a significant impact for fiscal 'twenty four.
Yes, and just to touch on the investments real quick.
I mentioned earlier in the prepared remarks that we are increasing some of our investments in gen AI, particularly oriented towards marketing and development.
And that's all reflected in the operating margin guidance for the full year that I provided within that you'll see that if you look at the total spending that was implied in our model for the full year at the start of this year and you compare that to the total spending implied in the guidance and the current guidance that we're providing it's about the same in the aggregate so.
What we're really doing is being efficient and saving in some parts of the business to create room to invest in growth areas like Jenny I end and that's what you see reflected in the guide.
Yeah.
Great. Thanks for taking my questions and congrats again on the great results.
Thank you.
Thank you and our next question today comes from Matt Hedberg with RBC capital markets. Please go ahead.
Yeah. Thank you. This is Matt on for Matt Hedberg, and I'll Echo my congratulations as well.
Ashwin kind of focused on two things during the prepared remarks. It was the Gen. AI and then the consolidation and I was wondering if you could just talk to maybe how interrelated. These two things are now or maybe in the future basically when you are having their C level conversations how much does gen AI in things like vector search come up in terms of who they wanted to.
<unk> two when they are trying to kind of future proof this decisions.
That's a great question and the way I look at it as you know effectively Jenny.
Jenny I and the the very differentiated capabilities, we are able to provide is really helping us in.
In a in a significant way, but just brand recognition with the C level audience that generally you know in the past we have not had too many conversations with and that is a wonderful thing because that then allows us to continue that discussion of the platform story and how you know there are so many things that when it come.
Ams to real time search use cases, whether it be for observatory or security Israel, we can add tremendous value to their organization by becoming a key element of their IP infrastructure and that's really something why I believe that the gen. AI tailwind is this this builds up in the coming quarters and years is going to be.
Very meaningful for us because it'll affect everything that we are able to do with the platform including.
The work that we're doing observed at the insecurity.
That's that's helpful. One other thing you talked about wins.
The time to value being kind of a core value proposition and when thinking about new products or advancements like the time series data streams and cost savings for storage could you just talk about in this macro how important ROI, there and customer conversations and maybe if that's influencing either product development ore.
The broader go to market.
Yeah, absolutely is incredibly important so you know we have seen as Dinesh mentioned stabilization instead of the consumption optimizations that we had seen.
In prior quarters, but you know the reality is that customers even today care about may.
Making sure that they are spending wisely, they are being thoughtful about how they spend but they wanted to do it without sacrificing innovation and that's really the place that we are leaning in with our.
Our the value that we offer for our price tends to be incredibly strong we heard that over and over again, we offer tremendously differentiated capabilities will allow you to bring in all of your different data types.
Analyze it in real time at scale. The performance is fantastic and the more we can do to help you optimize your costs with things like time series data streams with things like searchable snapshots, even the improvements that we keep making in the platform itself that allows you to reduce your <unk>.
Overall cost whether it be for vector search or something else like all of these things matter because that helps them reduce their infrastructure spend.
On hardware or what they are leasing from cloud providers and that is incredibly important to them and to be able to do that with a single platform. There's just a great value proposition and I've talked about this now for a couple of quarters that we've been leaning into this both from the product side and the go to market side, because we see.
This is an opportunity to take share in the market in this time and we are absolutely doing that that's what's really driving a lot of the large commitments that were seeing because we were able to get a customer to see how they can do more with elastic and that results in a displacement of some incumbent.
And overtime that just increases our share.
Thank you.
Thank you and our next question today comes from Raimo <unk> with Barclays. Please go ahead.
Hey, Thank you.
And I might have missed it earlier, but like.
Can you speak to if I think about vector.
Sure.
George I'll, just leave it better search and there's a lot more compute involved in before like what do you mean, what are you guys seeing in terms of consumption trends and our customers are working with it.
I mean for you guys in terms of the you know the.
Momentum there because clearly one.
One contract and the customer is using the resources, but they seem to be like a bigger.
Resource consumption that you get from these newer.
Technology, So could you speak to that please and I had one follow up.
Yes sure Raimo. This is asher I can touch upon that first one so.
So you're exactly right that you know when youre dealing with a vector search and or even semantic search really semantic search is all about.
Doing search based on the meaning as opposed to just text and what that requires you to do is to take the data that you have and run it through an ml model and that our mental model you know doing that work.
This is effectively a significantly higher in terms of compute.
Then just storing that data, but effectively you have to take all your data run it through animal model create vector embedding.
And then use our you know.
Everything that you've built to then search against whatever that debt.
Information might be that you're searching for using that semantic information as opposed to just the textual information.
And that tends to be much more compute intensive than traditional.
Actual search and as you know for US it's not just about consumption, but it's also the fact that ml is in a higher paid tier so you either need platinum or enterprise and that that is the second way in which we monetize so both of those come into the picture for us for either vector searches semantic search.
And that's really where we're seeing the progress so like I mentioned, we have hundreds of customers now that are using us for our Victor search capabilities and that's really a very exciting for us.
Okay.
Very exciting thank you and then.
I think about the evolution.
On the profitability side.
How do you.
How do you think about investment.
Think about growing kind of maybe.
You talked about a stabilization on the macro side, a little bit how do you think about like investments into sales and marketing et cetera.
Because of all of these need to be much earlier than.
The real revenue coming through because people need.
For example, as you go life et cetera.
Should we think about the progression of investments as Eagle Ford Yeah. Thank you and congrats from me as well.
Yeah. Thanks, Raimo, So look as I look back at Q1, we are very pleased with the operating margin result in the quarter I think that just reflects the hard work and focus of all of our employees to ensure that we manage the business with discipline.
And you know as we've shared before we have natural operating leverage that's inherent in the model and that was visible here in the Q1 results. We will continue to grow expenses slower than revenue on a full year basis as we invest in the business and.
And that will be sufficient to then help us achieve our near term goal for fiscal 'twenty four.
In terms of investments in the business. We entered this year with the right amount of selling capacity for this fiscal year and that was a focus area for us a couple of quarters ago as Youll recall, and we continue to selectively invest in enterprise and commercial selling capacity. We're also investing appropriately here against the journey.
The opportunity as I mentioned, so we're continuing to make investments throughout the business in areas that we feel are appropriate and that are best positioned to drive growth. The rest of this year and into fiscal 'twenty. Five we obviously don't want to compromise on topline growth, but it is about ensuring balanced growth and profitability and that's what we're committed to doing.
Okay alright, thank you.
Thank you.
Thank you and our next question comes from Andrew Nowinski with Wells Fargo. Please go ahead.
Hi, This is Stephen Schwartz on for Andy Thanks for taking my question.
Wanted to ask.
The vendor consolidation that you've talked to that thing is there any commonality among.
Customers, who tend to consolidate with you either in terms of size or vertical or NGL.
Yeah.
There is no specific trend in any geo I mean, we've seen that trend playing across multiple kinds of verticals are across multiple geos.
What tends to be the typical drivers.
When these customers are paying extremely high rates for incumbent solutions and then they see what elastic is able to do which is not only much more differentiated much more capable in terms of the performance the kinds of data we can handle the kinds of analytics that we can do the machine learning functionality that we built in.
Now with degenerative AI capabilities like it just becomes a no brainer and usually what what is needed is.
That inflection point, where they see that the value they would get in the price that they would get it is meaningful enough that it justifies the effort to do the conversion.
The move from their incumbent vendor to us and that's really the inflection point and in the current environment, where customers are continuing to be thoughtful and mindful of their spend areas.
And they want to make.
Make sure that they're driving innovation, but.
Also with the cost controls and constraints, it's a perfect setup for us.
Got it thank you very much and congrats.
Thank you.
Thank you and our next question today comes from Brent Thill with Jefferies. Please go ahead.
Hey, guys. This is Brent.
Brent Thanks for taking the question I wanted to ask about.
Commendations and customer behavior.
Can you talk about the dynamic between customers focusing on optimizing their near term consumption, but.
Also bring on more workloads and elastic.
To drive <unk> savings is that increase in workload.
Being offset by optimization on their workload or how should we be thinking about those dynamics.
It's a this is asher so it's really.
Difficult to sort of tease apart.
The exact dynamics in any one customer on how these things are moving but in the aggregate what I'll. What I'll say is what we are seeing is that.
You know the majority of customers are generally when it comes to the.
The consumption optimization that people were doing theyre generally where they want to be at this point you know this it started a few quarters ago as you know we've talked about it.
And it's gotten to a point where customers have done all the things that you know they generally believed that they need to do data continues to grow the kinds of use cases that we play in are tend to be incredibly important. So it's not like they can just walk away from them.
And so we see.
You see that kind of stabilization in the consumption optimization that people have been doing at the same time.
We've talked about with you in the last several quarters.
Been leaning in in this current environment to really drive consolidation onto our platform really showcase all the things that customers can do on our platform and that's reflecting that's resulting in customers, bringing newer workloads consolidating multiple things.
And you know.
Those are new workloads are also now starting to ramp up so both those factors are playing in and you know that's a it sets us up quite nicely as we look ahead.
Thank you.
Thank you and our next question today comes from Rob Owens with Piper Sandler. Please go ahead.
Hey, Thanks for taking my questions you cannot for Rob.
Wanted to ask around how important the channel is when it comes to selling these.
Selling.
And Jenny high functionality, especially as we think about you selling into these really large organizations and when they get to Paul. Thank you.
Yeah. So you know.
The channel tends to be important but keep in mind that for newer areas. Like this the reality is that you know these are areas, where we tend to have direct conversations with these customers.
And the channel can often help us.
Brokers some of those conversations but its you know we tend to be the experts. So we tend to have a lot of these conversations there.
The relationships the partner relationships really become wonderfully important then and are helping us is the relationships we have with the cloud hyperscale.
As you saw from some of the the accolades that would be one that we talked about in this in this earnings call.
We have our our relationship with our with Google with Microsoft with AWS.
They are strong and they're continuing to grow stronger.
And that just means that when customers are talking to them you know what allows us to go and jointly with these partners and have these kinds of conversations where customers are looking to do things that are on the leading edge and those are the relationships that we believe are really critical at this phase.
And that's where we have a lot of strength, so I'm excited about that.
Thank you. Thank you and our next question comes from.
Canaccord. Please go ahead.
Alright. Thank you for taking my question I wanted to talk through consolidation wins.
Are these picking up for you and then how often is the case that logging is leading the consolidation motion and how often would you see your customer essentially adopt APM during this process.
The consolidation trend has definitely been strong in the last couple of quarters like we've talked about.
And you know a lot of it in my opinion has to do with the fact that as people have as a CIO is in companies that become more thoughtful about their spend envelope.
They're looking to see where they can save and.
And we have a value proposition that allows them to do that while at the same time.
Doing even more.
And you know getting the kinds of innovative technology that we've been bringing out in market. So it's working very nicely in our in our favor.
Now what we typically tend to lead with like we've talked about in the past tense to be log analytics tends to be security analytics and tends to be search and then we progressed from there right. So we have lots and lots of customers now.
That are using US you know thousands of customers that are using us for APM.
And that's all many of those customer started with us with logs to begin with and then they moved from logs and realize that they could get a much better picture of their overall absurdity.
Manscape by not just bringing logs into elastic, but also bringing APM traces and then they eventually will bring on metrics and other things do your user metrics and so on.
And that's that's the pattern that we see or what in Oregon. So the consolidation pattern tends to be one where we might start with log analytics and security analytics and search, but then will invariably going to other elements of absurdity and other elements of security.
So on.
Great. Thank you Ross.
One brief follow up for Jim if I may make sense to be prudent on the guide, but could you walk us through how consumption.
Month by month in Q1, and then how does that first of all in August .
Hey, Kingsley.
Mentioned, a little bit earlier, I think it can vary from month to month, there's always going to be a little bit of noise in the monthly data and so what we generally saw was consistency through the course of the quarter and overall I think the themes. Just played out is as we described over the course of Q1 and then specifically for August as I mentioned.
And we are done with August yet so hard for me to talk about that but I will share that the general tone of customer conversations is similar to where it was in Q1.
Okay. Thank you.
Thank you and today's last question comes from China.
Baird. Please go ahead.
Hey, Thanks for taking my question a great quarter. Congrats so sensitive touched upon on the annual cloud subscription motion performed quite well ash and.
Highlighted some of the prominent organization the fortune 100, and the leading Flytower service leveraging our capabilities.
It appears that you are.
C level engagement strategy and to your earlier point on the Hyperscale or partnerships working quite well, but then I think John as Nelson mentioned that the net adds to the 100 case U S. A bit lighter. So just if you guys can kind of help reconciling and health, perhaps unpack like how much of the business as is currently being drilled.
By this this stopped on our enterprise focus motion that you guys are strategically kind of moving towards that you highlighted a few quarters back.
And then I have a quick follow up.
Yeah, I'll just touch on that real quick in the interest of time, we've continued to see strong contractual commitments to elastic and we saw that here in Q1. It continued a trend we've seen for a few quarters now so overall I'd say our investments in the enterprise selling motion.
And everything we bring to that including the partnerships and so forth that you touched on I think that's actually working quite nicely keep in mind that in our land and expand motion. The initial lands tend to be very small and then we tend to expand with customers over time and so within that pool of of over 100, K customers that you mentioned, although the number of additions was a bit low.
Sure we did see very strong expansion in the larger accounts and that reflects those commitments. So we felt very good about how this all played out and I do expect that we will have consistent growth in our customer.
Customer metrics over a over a overtime its been a good a good driver for us in the past and I do expect that trend will continue over time.
Got it thanks, a lot of generation and just very quickly I mean, I know there was earlier question around consolidation correlation with.
With multiple use cases, including Gen. AI I was just wondering like are you also seeing a direct correlation with this kind of enterprise focused stopped down motion and consolidation as well and and are you guys kind of going about it in a strategical fashion not just like as I said targeting industries or verticals, but.
Just kind of all in terms of kind of larger commitments and triangle target accordingly.
Yeah, I mean, so like.
Like we've talked about rate and in prior calls as well our focus on enterprise selling has been strong and you know we've talked about the fact that we've been very strategically focusing on customers that have greater propensity to grow with us and.
And that includes customers in the enterprise segment that includes customers in the commercial segment.
And one of the levers that we have been really focused on is our ability to deliver highly differentiated value at a incredible price for our customers because of the strength of our platform and its ability to deliver on multiple real time search use cases, whether it would be for <unk>.
<unk> observed that your security incredibly well and so we've been leaning into that as a motion irrespective of vertical and geography.
So you know we've been driving that motion with our sales organization and it's paying off its being often larger commitments, it's being off in more workloads coming onto our platform and us taking share and it's reflecting now in some of the benefits that we're seeing in revenue.
Thank you and ladies and gentlemen. This concludes our question and answer session I would like to turn the conference back over to Ashwin pardon me for any closing remarks.
Alright. Thank you all very much for joining our call today, we had a strong start to our fiscal year and I'm really excited about the opportunity and our position in the market as a leading AI if our data analytics platform for multiple real time search use cases.
We will be hosting our elastic on AI conference in San Francisco in a few weeks and I'm looking forward to seeing our customers. There as we talk about all the exciting things we're doing in this space have a great rest of the evening. Thank you.
Thank you.
Today's conference call. Thank you all for attending today's presentation.
You may now disconnect your lines and have a wonderful day.
Yes.
[music].