Q3 2024 Elastic NV Earnings Call

Good afternoon, and welcome to the elastic third quarter fiscal 'twenty 'twenty four earnings results Conference call.

Operator: Good afternoon, and welcome to the Elastic 3rd Quarter Fiscal 2024 Earnings Results Conference Call. All participants will be in listen-only mode.

All participants will be in listen only mode.

Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star key, then 1 on your touchtone phone.

Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

To ask a question you May Press Star then one on your Touchtone phone.

Operator: To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Anthony Luscri, vice president of investor relations. Please go ahead.

To withdraw your question. Please press Star then two.

Please note this event is being recorded.

I would now like to turn the conference over to Anthony less Gray Vice President of Investor Relations. Please go ahead.

Anthony Gray: Thank you good afternoon, and thank you for joining us on today's conference call to discuss elastic third quarter fiscal 'twenty 'twenty four financial results on the call. We have Ash Kulkarni, Chief Executive Officer, and International Johnny Chief Financial Officer, and Chief operating Officer.

Anthony Luscri: Thank you. Good afternoon, and thank you for joining us on today's conference call to discuss Elastic's third quarter fiscal 2024 financial results. On the call, we have Ash Kulkarni, Chief Executive Officer, Janesh Moorjani, 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 the 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.elastic.co. Our discussion will include forward-looking statements, which may include predictions, estimates, our 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.

Anthony Gray: Following their prepared remarks, we will take questions.

Anthony Gray: 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 does seal.

Anthony Gray: 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.

Anthony Gray: Revise these forward looking statements unless required by law.

Anthony Luscri: 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.

Anthony Gray: 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.

Anthony Gray: This release and slides the.

Anthony Luscri: The webcast replay of this call will be available on our company website under Investor Relations. Our fourth quarter fiscal 2024 quiet period begins at the close of business on Tuesday, April 16th, 2024. We will be participating in the Morgan Stanley Technology, Media, and Telecom Conference on March 6th and the Wells Fargo Software Symposium on April 10th. With that, I'll turn it over to Ash. Thank you, Anthony. Good day, everyone.

Anthony Gray: The webcast replay of this call will be available on our company website under the Investor Relations link our fourth quarter fiscal 'twenty 'twenty four quiet period begins at the close of business on Tuesday April 16th 'twenty 'twenty four we will be participating in the Morgan Stanley Technology Media and Telecom conference on March six and the Wells Fargo software Symposium on April 10th with that I'll turn it over to ash.

Ashutosh Kulkarni: Thank you Anthony Good day, everyone and thank you for joining us on today's call.

Ashutosh Kulkarni: And thank you for joining us on today's call. Elastic delivered another strong quarter. Our results reflect our continued execution, our ability to deliver differentiated product innovations, our maniacal focus on our customers, and our attention to managing the business with discipline. The trends we saw over the first half of the fiscal year continue to drive momentum in our business in Q3. First, customer interest in generative AI remains strong, and as customers become more educated about what it takes to build generative AI applications, they are increasingly able to appreciate the advantages of our platform relative to pure play vector database vendors. Second, we saw continued momentum in platform consolidation as customers chose the Elasticsearch platform to replace incumbent solutions for multiple use cases, particularly in log analytics and SIEM. Lastly, we saw continued stability in cloud consumption patterns as customers increased their consumption against their previous commitment.

Ashutosh Kulkarni: Elastic delivered another strong quarter, our results reflect our continued execution our ability to deliver differentiated product innovations.

Ashutosh Kulkarni: <unk> will focus on our customers and our attention to managing the business with discipline.

Ashutosh Kulkarni: The trends we saw over the first half of the fiscal year continue to drive momentum in our business in Q3.

Ashutosh Kulkarni: First <unk>.

Ashutosh Kulkarni: Customer interest in generative AI remains strong and as customers become more educated about what it takes to build generative AI applications. They are increasingly able to appreciate the advantages of our platform relative to pure play vector database vendors.

Ashutosh Kulkarni: Second we saw continued momentum in platform consolidation as customers chose the elastic search platform to displace incumbent solutions for multiple use cases.

Ashutosh Kulkarni: <unk> and log analytics and Sim.

Lastly, we saw continued stability in cloud consumption patterns as customers increase their consumption against their previous commitments.

Ashutosh Kulkarni: These trends reinforce our confidence in the business and in our future growth as more companies choose our search analytics platform as a core part of their IT infrastructure stack for log analytics, SIEM, and Gen AI applications. I'll talk more about these trends and share some customer success examples driving our growth in a few minutes. First, let me start with a review of our financial performance. I'm pleased with our strong momentum and execution that drove our third quarter results. In Q3, revenue grew 19% year-over-year, with Elastic Cloud growing 29% year-over-year, driven by continued customer traction in the cloud and consolidation onto the Elasticsearch platform. We also exceeded our profitability guidance with a non-GAAP operating margin of 13%. Turning to the broad trends we saw this quarter, as I met with customers around the world, I saw a strong desire to leverage AI to improve business processes and elevate customer experiences. But at the same time, companies remain focused on finding ways to reduce costs. In a sense, it's all about gaining efficiency without sacrificing innovation. This is where Elastic shines.

Ashutosh Kulkarni: These trends reinforce our confidence in the business and in our future growth as more companies choose our search analytics platform as a core part of their IP infrastructure stack for log analytics Sim and Jenny I applications.

Ashutosh Kulkarni: I'll talk more about these trends and share some customer success examples driving our growth in a few minutes.

Ashutosh Kulkarni: First let me start with a review of our financial performance.

Ashutosh Kulkarni: I'm pleased with our strong momentum and execution that drove our third quarter results.

Ashutosh Kulkarni: In Q3 revenue grew 19% year over year.

Ashutosh Kulkarni: With elastic cloud growing 29% year over year, driven by continued customer traction in the cloud and consolidation under the elastic search platform.

Ashutosh Kulkarni: We also exceeded our profitability guidance with a non-GAAP operating margin of 13%.

Ashutosh Kulkarni: Turning to the broad trends, we saw this quarter.

Ashutosh Kulkarni: I met with customers around the globe I saw a strong desire to leverage AI to improve business processes and elevate customer experiences.

Ashutosh Kulkarni: At the same time companies remain focused on finding ways to reduce costs in a sense, it's all about gaining efficiencies without sacrificing innovation.

Ashutosh Kulkarni: This is their elastic shines with.

Ashutosh Kulkarni: With the Elasticsearch platform, businesses can unlock the full potential of all their data to gain insights that drive innovation, optimize customer experiences, and inform strategic decisions. In the area of generative AI... Customers are starting to advance their capabilities in leveraging retrieval-augmented generation, or RAG, patterns for building Gen-AI applications using existing and emerging languages. This is leading them to fully explore the total set of functionalities needed to build enterprise-class Gen AI applications. Advanced features like hybrid search, personalization, and re-ranking with reciprocal rank fusion, document level permissions, security, and much more. All of these capabilities, in addition to our leading vector search functionality, and the fact that we are already the incumbent platform for data for tens of thousands of customers, means that we are able to significantly lower the barrier for businesses to build their own generative AI applications. This is our asymmetric advantage.

With the elastic search platform businesses can unlock the full potential of all their data to gain insights that drive innovation optimize customer experiences and informed strategic decisions.

Ashutosh Kulkarni: In the area of generative yeah.

Ashutosh Kulkarni: Or is that starting to advance their capabilities and leveraging retrieval augmented generation a rag patterns for building Jenny I applications, using existing and emerging language models.

Ashutosh Kulkarni: This is leading them to fully explore the total set of functionalities needed to build enterprise class Jenny I applications.

Advanced features like hybrid search personalization and re ranking with retro Brookfield rank fusion.

Ashutosh Kulkarni: Occupancy level permissions security and much more.

Ashutosh Kulkarni: All of these capabilities in addition to our leading vector search functionality and the fact that we are already the incumbent platform for data for tens of thousands of customers means that we are able to significantly lower the barrier for businesses to build their own generative AI applications.

Ashutosh Kulkarni: This is our asymmetric advantage and as generative AI and drag are becoming better understood. Our edge is becoming more pronounced.

Ashutosh Kulkarni: And as generative AI and RAG are becoming better understood, our edge is becoming more pronounced. In the third quarter, we once again added several hundred customers using the Elasticsearch Relevance Engine, or Esri. Esri allows customers to build generative AI applications quickly without complicated and expensive model training.

Ashutosh Kulkarni: In the third quarter, we once again added several hundred customers using the elastic search relevance engine or <unk>.

Ashutosh Kulkarni: <unk> allows customers to build generative AI applications quickly.

Ashutosh Kulkarni: Without complicated and expensive module training. This is a big reason why customers turn to us regenerative AI.

Ashutosh Kulkarni: This is a big reason why customers turn to us for generative AI. One example of this is our long-term customer Consensus, an AI-powered search engine that aggregates and distills insights from more than 200 million peer-reviewed papers from the Semantic Scholar database. They use Elastic Cloud for advanced AI, semantic, and text search. Consensus 2.0 is powered by Elsweyr.

Ashutosh Kulkarni: One example of this is our long time customer consensus.

And AI powered search engine that aggregates and distills insights for more than 200 million peer reviewed papers from the semantic scholar database.

They use elastic cloud for advanced artificial intelligence semantic and tech search.

Ashutosh Kulkarni: Consensus <unk> is powered by elsewhere.

Ashutosh Kulkarni: Their users have benefited from increased accuracy and relevance of search results and new Gen-AI features, such as a summary of the top 10 studies based on integration with OpenAI's GPT-4 model. In Q3, we also expanded our business with Stack Overflow, the largest and most trusted online community for developers, which replaced its previous vector database with Elastic. The company chose Elastic Cloud for its scalability, differentiated functionality, and integration across the ecosystem. Stack Overflow is leveraging Elastic's vector and semantic search capabilities to deliver a more human-like, generative AI-powered question-and-answer experience to developers via its Overflow AI product. We also continue to see customers choose our platform because they expect to use our Esri functionality in the future. In other words, they see us as the right choice for their needs today as well as for the future. As an example, a cloud-based document management company for legal professionals signed a multi-year deal with Elastic this quarter.

Ashutosh Kulkarni: Their users have benefited from increased accuracy and relevance of search results and new Gen. AI features such as a summarization of the top 10 studies based on integration with opening is GBT for model.

Ashutosh Kulkarni: In Q3, we also expanded our business with stack overflow the largest and most trusted online community for developers.

Ashutosh Kulkarni: <unk> replaced its previous vector database with elastic.

Ashutosh Kulkarni: The company chose elastic cloud for our scalability differentiated functionality and integration across the ecosystem.

Ashutosh Kulkarni: Stack overflow is leveraging elastic vector and semantic search capabilities to deliver a more human like generative AI powered question and answer experience to developers.

Ashutosh Kulkarni: Overflow AI product.

Ashutosh Kulkarni: We also continued to see customers choose our platform because they expect to use our <unk> functionality in the future and.

Ashutosh Kulkarni: In other words, they see us as the right choice for their needs today as well as for the future.

Ashutosh Kulkarni: As an example, our cloud based document management company for legal professionals.

Ashutosh Kulkarni: Find a multiyear deal with elastic this quarter.

Ashutosh Kulkarni: With over six billion searchable documents, the company chose Elastic for its innovations, performance, and ability to power search across their entire platform. Previously using a competitor's offering, they moved to Elastic because of our market leadership and to modernize the search experience to align with their customers' expectations by leveraging Elastic's vector search capability to enhance the user experience. Beyond generative AI, we noted that customers are continuing to replace incumbents and consolidate onto the elastic platform for observability and security, which is the second trend I talked about earlier. The Elastic observability and security solutions are built on top of our search analytics platform with Elasticsearch as the foundation.

Ashutosh Kulkarni: With over 6 billion searchable documents the company chose elastic, but our innovations performance and ability to power search across their entire platform.

Ashutosh Kulkarni: Previously using a competitor's offering the move to elastic because of our market leadership and to modernize the search experience to align with our customers' expectations by leveraging elastic vectors such capability to enhance the user experience.

Ashutosh Kulkarni: Beyond generative AI.

Ashutosh Kulkarni: Notice that customers are continuing to displace incumbents and consolidate onto the elastic platform for observed lithium security, which is the second trend I talked about earlier.

Ashutosh Kulkarni: The elastic observed and security solutions are built on top of our search analytics platform with elastic search as the foundation.

Ashutosh Kulkarni: Our platform has the unparalleled ability to quickly ingest all kinds of data, index it at extreme speed and at petabyte scale, make it searchable, and then allow for all kinds of advanced correlations, AI-powered searches, and ad hoc analytics. This gives customers the ability to centralize onto a single platform for all use cases that require this kind of advanced search and analytics. This is a big reason for our success in displacing incumbent solutions, especially around log analytics and SIP or security analytics. Our recent innovations, including AI assistance for observability and security, are making it even more compelling for customers to move to our platform. This quarter, we closed several multi-million dollar deals where we displaced incumbent solutions for observability and security.

Ashutosh Kulkarni: Our platform is the unparalleled ability to quickly ingest all kinds of data to an exit at extreme speed and at petabyte scale and make it searchable.

Ashutosh Kulkarni: And then allow for all kinds of advanced correlations AI powered searches and AD hoc analytics.

Ashutosh Kulkarni: This gives customers the ability to centralize onto a single platform for all use cases that require this kind of advanced search and analytics.

Ashutosh Kulkarni: This is a big reason for our success in displacing incumbent solutions, especially around log analytics, and Sip or security analytics.

Ashutosh Kulkarni: Our recent innovations, including our AI assistance for absurdity and security are making it even more compelling for customers to move to a platform.

Ashutosh Kulkarni: This quarter, we closed several multimillion dollar deals where we displaced incumbent solutions for observed lithium security.

Ashutosh Kulkarni: Our value and our innovation is responding across industries as we continue helping customers save on their overall IT spend while helping them gain even greater value from our innovation. As an example, a top US-based bank chose Elastic as a desired sim platform to replace their legacy vendor. The drivers behind the selection included platform speed, performance, scale, and Elastic's rich set of security features.

Ashutosh Kulkarni: Our value and our innovation is resonating across industries as we continue helping customers save on their overall it spend by helping them gain even greater value from our innovations.

Ashutosh Kulkarni: As an example, a top U S. Based bank chose elastic is it designed sim platform to replace their legacy vendor.

Ashutosh Kulkarni: The drivers behind the selection included platform speed performance scale and elastic rich set of security features. They also chose elastic for our innovative storage tearing searchable snapshots capability, which allows the bank to retain important security logs for longer.

Ashutosh Kulkarni: They also chose Elastic for our innovative storage-tiering searchable snapshots capability, which allows the bank to retain important security logs for longer regulatory retention periods at dramatically reduced storage costs. We also expanded business with the U.S. State Department for Elastic Security. The agency initially started with Elastic for Search and then, in Q3, chose Elastic to replace their legacy security vendor for SIEM, enabling them to increase support for their security operations center. The scope of Elastic's ingest capabilities, search speed, platform functionality, stability, and reporting capabilities allows the agency to gain and maintain visibility across their environment and multiple agency branches and correlate alerts across a broad security tool set. Now, turning to products and innovation. We continue to invest in capabilities that make it possible for customers to migrate easily from incumbent solutions to Elastic.

Ashutosh Kulkarni: <unk> regulatory retention periods at dramatically reduced storage costs.

Ashutosh Kulkarni: We also expanded business with the U S State agency for elastic security.

Ashutosh Kulkarni: Agency initially started with elastic for search and then in Q T chose the elastic to replace their legacy security vendor for Sip.

Ashutosh Kulkarni: Enabling them to increase support for their security Operation Center.

Ashutosh Kulkarni: The scope of plastics ingest capabilities, such speed platform functionality stability and reporting capabilities allows the agency to gain and maintain visibility across their environment and multiple agency branches and correlate alerts across a broad security tool set.

Speaker Change: Now turning to products and innovation.

Speaker Change: We continue to invest in capabilities that make it possible for customers to migrate easily from incumbent solutions to elastic.

Ashutosh Kulkarni: On our last call, I mentioned the launch of our powerful new piped query language, Elasticsearch Query Language, or ESQL. Even as we continue to enhance this new capability, we have seen tremendous interest from our customers, with approximately a thousand customers trying it out since we launched it in November. Our latest release of Elastic 8.12 in January also included several key enhancements, including scalar quantization, which is a vector search optimization technique that delivers performance improvements across several critical metrics.

Speaker Change: On our last call I mentioned, the launch of a powerful new piped query language elastic search query language or SQL.

Speaker Change: Even as we continue to enhance this new capability, we have seen tremendous interest from our customers with approximately 1000 customers trying it out since we launched in November.

Speaker Change: Our latest release of elastic $8 12 in January also included several key enhancements, including scalar quantization.

Speaker Change: Which is a vector search optimization technique that delivers performance improvements across several critical metrics.

Ashutosh Kulkarni: It dramatically improves enterprise-level scalability, allowing customers to store four times as many vectors in RAM while also improving overall indexing speed and reducing query latency by up to 2x. Additional enhancements to search concurrency resulted in speed-ups across a very broad set of query types, including vector similarity and full-text search, as well as a 40% reduction in latency for analytical queries. In Elastic Observability, we brought several capabilities to general availability, including the enhanced Elastic AI Assistant for observability, SLO monitoring, and mobile APM support based on OpenTelemetry.

Speaker Change: It dramatically improves enterprise level scalability, allowing customers to store four times as many vectors in Ram.

Speaker Change: While also improving overall indexing speed and reducing credit latency by up to two X.

Speaker Change: Additional enhancements to search can currency resulted in speed ups across a very broad set of credit types, including vector similarity and full text search as well as a 40% reduction in latency for analytical queries.

Speaker Change: In elastic absurdity, we brought several capabilities to general availability, including the enhanced elastic AI assistant for Observatory.

Speaker Change: Ausiello monitoring and mobile APM support based on open telemetry.

Ashutosh Kulkarni: In Elastic Security, we continue to enhance our market-leading Elastic AI Assistant for Security, introducing real-time alerts with natural language interactions that enhance the way security analysts approach alert triage. This results in a more efficient, effective security operation that is adept at navigating the complex cyber security environment. In cloud security, we added support for Microsoft Azure in addition to our existing support for AWS and Google Cloud for cloud security posture management.

Speaker Change: And elastic security, we continued to enhance our market leading elastic AI assisted for security introducing real time alerts with natural language interactions that enhance the way security analysts approach a luxury RJ.

Speaker Change: This results in a more efficient.

Speaker Change: <unk> security operation that is adept at navigating the complex cyber security environment.

Speaker Change: In cloud security, we added support for Microsoft Azure. In addition to our existing support for AWS and Google Cloud for cloud security posture management.

Speaker Change: On the go to market front, we drove continued momentum in Q3 through our participation in AWS re invent.

Ashutosh Kulkarni: On the go-to-market front, we drove continued momentum in Q3 through our participation in AWS reInvent and our Elasticon conference events that allowed us to connect with thousands of customers, prospects, and users worldwide. We have now concluded six of these Elasticon events and will be holding another six in our fiscal Q4. And as a final but important highlight for the quarter, I was pleased to announce that Mark Dodds joined Elastic as our new Chief Revenue Officer. Mark leads all of Elastic's customer-facing functions, including global sales, customer success, solutions architecture, professional services, ecosystem and partnerships, and sales operations.

Speaker Change: And our elastic on conference events that allowed us to connect with thousands of customers prospects and users worldwide.

We have now concluded six of these elastic on events and we'll be holding another six in our fiscal Q4.

Speaker Change: And as a final but important highlight for the quarter I was pleased to announce that Mark <unk> joined the elastic as our new Chief revenue Officer.

Speaker Change: Mark leads all of elastic customer facing functions.

Speaker Change: Including global sales customer success solutions architecture professional services ecosystem partnerships and sales operations.

Ashutosh Kulkarni: Mark brings extensive go-to-market experience to our executive team as we continue to drive momentum in generative AI and growth across all segments of our business. I'm excited about everything that Mark will do for us in the coming years as we push to capture the full opportunity ahead of us as a company. In closing, I'm very pleased with how we performed this quarter. The innovations we are driving into our search analytics platform, the momentum we are gaining around generative AI, and the traction we are seeing in customers consolidating onto our platform are continuing to increase our confidence in our future. We see a future where our search analytics platform becomes a core part of every IT infrastructure stack for gaining insights from all data, especially in the context of generative AI. I want to thank the Elastic team for their resolute focus and the entire Elastic community for their unwavering commitment. Now, with that, let me turn the call over to Janesh. Thanks, Ash.

Speaker Change: Mark brings extensive go to market experience to our executive team as we continue to drive momentum in generative AI and growth across all segments of our business.

Speaker Change: I am excited about everything that Mark will do for us in the coming years as we push to capture the full opportunity ahead of us as a company.

Speaker Change: In closing I am very pleased with how we performed this quarter.

Speaker Change: The innovations we are driving into our search analytics platform. The momentum we are gaining around generative AI and the traction we are seeing and customers consolidating onto our platform is continuing to increase our confidence in our future.

We see a future where our search analytics platform becomes a core part of every infrastructure stack, we're gaining insights from all data.

Speaker Change: Especially in the context of generative AI.

Speaker Change: I want to thank the elastic team for their resolute focus and the entire elastic community for their unwavering commitment.

Now with that let me turn the call over to Jaenisch.

Jaenisch: Thanks Ash, we are pleased that we delivered a strong quarter driven by our consistent focus on execution.

Janesh Moorjani: We are pleased that we delivered a strong quarter, driven by our consistent focus on execution. We once again came in above the high end of our guidance for the quarter, both on the top line and the bottom line. The third quarter largely played out as expected.

Jaenisch: Once again came in above the high end of our guidance for the quarter, both on the topline and the bottom line.

Jaenisch: The third quarter largely played out as expected, we delivered 19% year over year growth in total revenue in the third quarter with elastic cloud growing 29% year over year.

Janesh Moorjani: We delivered 19% year-over-year growth in total revenue in the third quarter, with Elastic Cloud growing 29% year-over-year. We continued our focus on profitability, delivering a non-gap operating margin of 13%. Our performance in the quarter reflects both our success in the market and continued investment discipline. We executed well to deliver strong growth in both self-managed and Elastic Cloud revenue. As in prior quarters, we saw a number of customers consolidate onto the Elastic platform to lower their total spend without sacrificing innovation.

Jaenisch: We continued our focus on profitability delivering non-GAAP operating margin of 13%.

Our performance in the quarter reflects both our success in the market and continued investment discipline.

We executed well to deliver strong growth in both self managed and elastic cloud revenue as.

Jaenisch: As in prior quarters, we saw a number of customers consolidate onto the elastic platform to lower their total spend without sacrificing innovation.

Janesh Moorjani: We also saw healthy cloud consumption growth as customers continued to consume against their contractual commitments. As Ash mentioned, we continue to see strong customer interest in generative AI use cases. Customers express a strong desire to use Esri to build Gen AI applications since it provides a comprehensive and enterprise-ready platform to ground large language models with their private business content.

Jaenisch: We also saw healthy cloud consumption growth as customers continue to consume against their contractual commitments.

As Ashley mentioned, we continue to see strong customer interest around generative AI use cases.

Jaenisch: Customers expressed a strong desire to use <unk> to build jet AI applications. Since it provides a comprehensive and enterprise ready platform to ground large language models with their private business context.

Janesh Moorjani: While it will take some time for Gen AI Spend to become a significant driver of our revenue, we continue to expect that Gen AI will present a meaningful revenue opportunity for us in the longer term. Let's get into the results for Q3 and our outlook. Total revenue in the third quarter was $328 million, up 19% year-over-year, or 18% year-over-year on a constant currency basis.

Jaenisch: While it will take some time for Jennie O spend to become a significant driver of our revenue. We continue to expect that journey I will present, a meaningful revenue opportunity for us in the longer term.

Speaker Change: Let's get into the results for Q3 and our outlook.

Speaker Change: Total revenue in the third quarter was $328 million up 19% year over year or 18% year over year on a constant currency basis.

Janesh Moorjani: Subscription revenue in the third quarter totaled $308 million, up 20% year-over-year or 19% year-over-year in constant currency, and comprised 94% of total revenue. Within subscriptions, revenue from Elastic Cloud was $143 million, growing 29% year-over-year on an as-reported and constant currency basis, reflecting the trends I mentioned previously. Elastic Cloud represented 44% of total revenue in the quarter, up from 40% a year ago. Elastic Cloud revenue derived from month-to-month arrangements contributed 14% of total revenue. Professional services revenue in the third quarter was $20 million, up 7% year-over-year on an as-reported basis and 6% year-over-year on a constant currency basis.

Speaker Change: Subscription revenue in the third quarter totaled $308 million up 20% year over year or 19% year over year in constant currency and comprises 94% of total revenue.

Speaker Change: Within subscriptions revenue from elastic cloud was $143 million growing 29% year over year on an as reported and constant currency basis.

Speaker Change: Afflicting the trends I mentioned previously.

Speaker Change: Elastic cloud represented 44% of total revenue in the quarter up from 40% a year ago.

Speaker Change: Elastic cloud revenue derived from month to month arrangements contributed 14% of total revenue.

Speaker Change: Professional services revenue in the third quarter was $20 million up 7% year over year on an as reported basis and 6% year over year on a constant currency basis.

Janesh Moorjani: As we've said before, professional services revenue may fluctuate across quarters based on the timing of service delivery, and we do not expect it to vary significantly in mix over time. To add more context around overall deal flow, EMEA grew the fastest during the quarter, followed by the Americas and APJ. We continue to see a healthy balance across the business based on geography, solutions, and verticals, and this diversification reflects the breadth and popularity of our platform. Moving on to customer metrics, We ended the quarter with over 1,270 customers with annual contract values of more than $100,000.

Speaker Change: As we've said before our professional services revenue may fluctuate across quarters based on the timing of service delivery and we do not expect it to very significantly in mix over time.

Speaker Change: You add more context around overall deal flow EMEA grew the fastest during the quarter followed by the Americas and APG.

Speaker Change: We continue to see a healthy balance across the business based on geography solutions and verticals and this diversification reflects the breadth and popularity of our platform.

Speaker Change: Moving onto customer metrics.

Speaker Change: We ended the quarter with over 1270 customers with annual contract values more than $100000.

Janesh Moorjani: Looking at customer additions more broadly, we ended the quarter with over 4,290 customers above $10,000 in ACV and approximately 20,800 total subscription customers. We are pleased with this quarter's customer additions in the greater than $100,000 category, which reflects our focus on the highest-value customers who are the primary driver of the business. Our net expansion rate, which as you know is a trailing 12-month lagging indicator, was approximately 109%, consistent with Q2 and in line with our expectation for the quarter. Now turning to profitability, for which I'll discuss non-GAAP measures. Our non-GAAP results for the third quarter exclude, among other things, a discrete income tax benefit of $207 million from the release of a valuation allowance for GAAP purposes.

Speaker Change: Looking at customer additions more broadly we ended the quarter with over 4290 customers above $10000 in ECB and approximately 20800 total subscription customers.

Speaker Change: We are pleased with this quarter's customer additions in the greater than 100 key category, which reflects our focus on the highest value customers who are the primary driver of the business.

Speaker Change: Our net expansion rate, which as you know is a trailing 12 month lagging indicator was approximately 109%.

Speaker Change: <unk> with Q2 and in line with our expectation for the quarter.

Speaker Change: Now turning to profitability for which I will discuss non-GAAP measures our non-GAAP results for the third quarter exclude among other items, a discrete income tax benefit of $207 million from the release of evaluation allowance for GAAP purposes.

Janesh Moorjani: This did not impact any of our operating results, non-GAAP earnings per share, adjusted free cash flow, or cash and cash equivalents. Gross margin in the quarter was 77% versus 76.8% in the prior quarter, reflecting a slightly higher subscription margin. Our operating margin in the quarter was 13%, which was better than expected. The strong operating margin performance was driven by revenue outperformance and our continued focus on managing expenses as we invest with discipline to drive future growth. Diluted earnings per share in the third quarter were $36.

Speaker Change: This did not impact any of our operating results non-GAAP earnings per share adjusted free cash flow or cash and cash equivalents.

Speaker Change: Gross margin in the quarter was 77% versus 76, 8% in the prior quarter, reflecting a slightly higher subscription mix.

Speaker Change: Our operating margin in the quarter was 13%, which was better than expected with strong operating margin performance was driven by revenue outperformance and our continued focus on managing expenses as we invest with discipline to drive future growth.

Speaker Change: Diluted earnings per share in the third quarter was 36 cents.

Speaker Change: Our free cash flow on an adjusted basis was $63 million in the quarter or 19% adjusted free cash flow margin.

Janesh Moorjani: Our free cash flow on an adjusted basis was $63 million in the quarter, on a 19% adjusted free cash flow margin. For the full fiscal year, there is no change in our prior outlook, and we continue to expect free cash flow margin on an adjusted basis for fiscal 24 to be slightly above the non-gap operating margin for fiscal 24. Turning to guidance, while we are very pleased with our execution and our outperformance thus far in FY24, our guidance philosophy remains unchanged. We continue to be prudent in the near term. Despite the many moving parts in the broader macro climate, we anticipate that business conditions will remain largely unchanged.

Speaker Change: For the full fiscal year, there is no change in our prior outlook and we continue to expect free cash flow margin on an adjusted basis for fiscal 2004 to be slightly above the non-GAAP operating margin for fiscal 'twenty four.

Speaker Change: Turning to guidance.

Speaker Change: While we are very pleased with our execution and our outperformance thus far in FY 'twenty for our guidance philosophy remains unchanged.

Speaker Change: We continue to be prudent in the near term. Despite the many moving parts in the broader macro climate, we anticipate that business conditions will remain largely unchanged.

Janesh Moorjani: In addition, we believe it is appropriate to anticipate that consumption patterns may fluctuate in the near term. With that in mind, for the fourth quarter of Fisco 24, we expect total revenue in the range of $328 million to $330 million, representing 18% year-over-year growth at the midpoint on an as-reported and constant currency basis. We expect non-GAAP operating margin for the fourth quarter of Fiscal 24 in the range of 7.4% to 7.8% and non-GAAP earnings per share in the range of $0.18 to $0.20, using between 105.5 million and 106.5 million diluted-weighted average ordinary shares outstanding. For the full fiscal 24, we are raising our outlook and now expect total revenue in the range of $1.260 billion to $1.262 billion, representing 18% year-over-year growth We expect the non-GAAP operating margin for FF24 to be approximately 11% and the non-GAAP earnings per share in the range of $1.15 to $1.18, using between 103 million and 104 million diluted weighted average ordinary shares outstanding.

Speaker Change: In addition, we believe it is appropriate to anticipate that consumption patterns may fluctuate in the near term.

Speaker Change: With that background for the fourth quarter of fiscal 'twenty. Four we expect total revenue in the range of 328 million to $330 million, representing 18% year over year growth at the midpoint on an as reported and constant currency basis.

Speaker Change: We expect non-GAAP operating margin for the fourth quarter of fiscal 2004 in the range of seven 4% to seven 8% and non-GAAP earnings per share in the range of 18 to 20.

Speaker Change: Using between $105 5 million and $106 5 million diluted weighted average ordinary shares outstanding.

Speaker Change: For full fiscal 2004, we are raising our outlook and now expect total revenue in the range of $1 260 billion to $1 $262 billion, representing 18% year over year growth at the midpoint or 17% on a constant currency basis.

Speaker Change: We expect non-GAAP operating margin for full fiscal 2004 to be approximately 11% and non-GAAP earnings per share in the range of $1 15 to $1 18, using between $103 million and 104 million diluted weighted average ordinary shares outstanding.

Speaker Change: Okay.

Janesh Moorjani: Finally, looking ahead to Fiscal 25, we are in the middle of our planning process. While it is too early to provide specifics, especially around revenue outlook, I will share our thoughts on how we are approaching next year from an investment perspective. We've already demonstrated that our business model has inherent operating leverage, and this year, we've expanded our non-gap operating margin even faster than we had initially expected. As we go through our planning process, we expect to balance investing for long-term growth against near-term profitability.

Speaker Change: Finally, looking ahead to fiscal 2005, we are in the middle of our planning process. While it is too early to provide specifics, especially around revenue outlook I will share our thoughts on how we are approaching next year from an investment perspective.

Speaker Change: We've already demonstrated that our business model has inherent operating leverage and this year, we've expanded non-GAAP operating margin even faster than we had initially expected.

Speaker Change: As we go through our planning process, we expect to balance investing for long term growth against near term profitability.

Janesh Moorjani: Given the significant opportunity we see in generative AI, we are planning to accelerate investments in Fiscal 25 to help capture this large and expanding market. We expect these investments to be broad-based across the business and are intended to drive meaningful revenue growth over the longer term. Therefore, we expect to expand non-GAAP operating margin only modestly in Fiscal 25, relative to our current non-GAAP operating margin guidance for Fiscal 24.

Speaker Change: Given the significant opportunity we see in generative AI, we are planning to accelerate investments in fiscal 2005 to help capture this large and expanding market.

Speaker Change: We expect these investments to be broad based across the business and are intended to drive meaningful revenue growth over the longer term.

Speaker Change: Therefore, we expect to expand non-GAAP operating margin only modestly in fiscal 2005 relative to our current non-GAAP operating margin guidance for fiscal 2004.

Janesh Moorjani: We expect these investments will be likely to be more front-end loaded in Fiscal 25. We will provide more formal guidance around Fiscal 25 on our Q4 earnings call. In summary, we are pleased with our strong performance so far in Fiscal 24 and are confident in our outlook for the fourth quarter. 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 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key.

Speaker Change: We expect these investments are likely to be more front end loaded in fiscal 'twenty five.

Speaker Change: We will provide more formal guidance around fiscal 'twenty five on our Q4 earnings call.

Speaker Change: In summary, we are pleased with our strong performance so far in fiscal 2004 and are confident in our outlook for the fourth quarter and with that let's go ahead and take questions operator.

Speaker Change: We will now begin the question and answer session.

Speaker Change: To ask a question you May press Star then one on your telephone keypad.

Speaker Change: If you are using a speakerphone please pick up your handset before pressing the keys.

Operator: To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster, and our first question will come from Pinjalim Bora of J.P. Morgan. Please go ahead.

Speaker Change: To withdraw your question. Please press Star then two.

Speaker Change: At this time, we will pause momentarily to assemble our roster.

Speaker Change: And our first question will come from Tim Johnson.

Tim Johnson: J P. Morgan. Please go ahead.

Tim Johnson: Oh, great. Thanks, guys for taking my question and congrats on quarter.

Pinjalim Bora: Oh, great. Thanks, guys, for taking the question. Congratulations on the quarter.

Tim Johnson: Digging a little bit on the elastic cloud side.

Tim Johnson: This year it seems like so far we have seen a little bit of a different seasonality Q2.

Pinjalim Bora: I want to dig in a little bit on the Elastic Cloud side. Janesh, this year seems like so far we have seen a little bit of a different seasonality. Q2 was a much higher sequential uptick versus Q1, which is typically the opposite. And then Q3 seems like it was a little bit of a downtick versus, which is again, typically opposite. Was there anything unique about Q2 which did not repeat in Q1? Thank you. Hey Pinjalim.

Tim Johnson: Much higher sequential uptick versus Q1, which is typically the opposite and then Q3 seems like with a little bit of a downtick versus Q2, which is again typically opposite.

Tim Johnson: Was there anything one time in Q2, which did not repeat in Q3 or did you see slightly more consumption rate versus last quarter or maybe it seems like the.

Tim Johnson: I caught that correctly, 14% monthly it seems like the variability was a little bit of a drag so maybe any color there would be helpful and how do you kind of thinking about the sustainability of that growth at 29, 30% for total cloud.

Janesh Moorjani: Yeah, let me unpack that for you. So, you know, first off, if I just step back, we were actually very pleased with our overall performance in the quarter, including on cloud coming in at 29% year-over-year growth. Broadly speaking, I'd say it played out as we expected it would. If I think about the pieces in that, you know, first off, there was nothing unusual or unusual in Q2 that didn't recur in Q3 to just take that off the table. But if I think about the performance during Q3, as we look at our performance across the segments, we did really well in both commercial and enterprise, which, as you know, is our sales-driven motion, and then we drive the consumption after we've secured the commitments. And then on the SMB side, which is predominantly in the self-serve motion, that piece remained soft. And that's been soft for a little bit of time now, so even that hasn't played out as we expected it would.

Speaker Change: Hey, pendulum, yes, let me unpack that for you. So first off if I just step back we were actually very pleased with our overall performance in the quarter, including on cloud coming in at 29% year over year growth broadly speaking I'd say it played out as we expected it would.

Speaker Change: If I think about the pieces in that first off there was nothing unusual or one time in Q2 that didn't recur in Q3 to just take that off the table, but if I think about the performance during Q3.

Speaker Change: As we look at our performance across the segments, we did really well in both commercial and enterprise, which as you know is our sales led motion and then we drive the consumption. After we've secured the commitments and then on the SMB side, which is predominantly in the self serve motion that piece remained soft and that has been soft for a for a little bit of time now so even that played out as we expected.

Speaker Change: It would but it was basically consistent with with where it's been.

Janesh Moorjani: But it was basically consistent with where it's been. And so just given the relative growth in monthly cloud versus the rest of our cloud revenue, that's what drove monthly cloud to 14% of revenue versus 15% in the prior quarter or 16% in the year-ago period. So I'd say, broadly speaking, our sales motions are actually working quite well both in terms of securing the initial commitments and then, of course, working with those customers to ramp up their consumption. If I think about the seasonality and all the different elements you called out, you know, in fact, and in a way, that's just reflective of the nature of consumption, which, as we've said, can fluctuate from time to time.

Speaker Change: So just given the relative growth in monthly cloud versus the rest of our cloud revenue, that's what drove monthly cloud to 14% of revenue versus 15% in the prior quarter rose 16% in the year ago period. So I'd say broadly speaking our sales motions are actually working quite well both in terms of securing the initial commitments and then of course working with those customers.

Speaker Change: To ramp their consumption.

Speaker Change: If I think about the seasonality in all the different elements you called out <unk> in fact and in a way that's just reflective of the nature of consumption, which as we've said can fluctuate from from time to time.

Janesh Moorjani: If I think about consumption patterns across the quarter, though, you know, I'd say Q3 was generally stable across the board, as we mentioned earlier. And so overall, when I look back at all the moving parts, we were actually quite pleased with our cloud performance, and we look forward to delivering a strong Q4. Understood. Just one follow-up, a slightly technical question for Ash. How should we think about the future of RAG in the context of the expanding context windows for tokens for LLMs? I'm wondering if that latter kind of eats into some of the use cases for RAG, or is cost going to be basically the primary driver of how people kind of architect these solutions? Hey Pinjalim, thank you for the question.

Speaker Change: I think about consumption patterns across the quarter, though.

Speaker Change: I'd say Q3 was generally stable across the board as we mentioned earlier and so overall when I look back at all of the moving parts. We were actually quite pleased with our cloud performance and we look forward to delivering a strong Q4.

Speaker Change: Understood.

Speaker Change: One follow up a little bit technical question for Ash.

Speaker Change: How should we think about the future of Reg in the context of the expanding.

Ashutosh Kulkarni: Tax windows for tokens for LLS.

Ashutosh Kulkarni: I'm thinking does that kind.

Ashutosh Kulkarni: Kind of eat into some of the use cases for <unk> or <unk>.

Ashutosh Kulkarni: Our is cost going to Bbs can lead the primary driver of how people kind of architect these solutions.

Pendulum: Hey, pendulum. Thank you for the question so.

Ashutosh Kulkarni: So, you know, we believe very strongly, and we are seeing this being confirmed by our customers, the customers that I'm speaking with, that our team is working with, that drag or retrieval-augmented generation is a pattern that's not only going to continue, but it's a pattern that will, that is looking to establish itself as the predominant pattern going forward. And the primary reason for that is, like you said, there are two factors. One problem is that the cost continues to grow as you send more and more tokens to these context windows. And, you know, as people are building, you know, real-world enterprise applications, that is definitely something that they worry about. And RAG helps them control that price.

Pendulum: We believe very strongly and we are seeing.

Pendulum: Seeing this being confirmed by our customers the customers that I'm speaking of is that our team is working with that drag on retrieval augmented generation is a pattern that is not only going to continue but it's a factor that will that is looking to establish itself as the predominant pattern going forward and.

Pendulum: The primary reason for that.

Pendulum: Like you said there are two factors one is that.

Pendulum: <unk> continues to grow as you said more and more to consider as context windows.

Pendulum: As people are building real world Enterprise application that is definitely something that they worry about.

Pendulum: And drag helps them control that price and second when you think about how our training or even refinement of our model works.

Ashutosh Kulkarni: And second, you know, when you think about how training or even refining a model works, you know, at some point, you have to stop that training and then put it into production. But your internal data, your proprietary data that you're trying to build your responses on, is constantly changing. It's changing by the millisecond. So for you to be able to provide responses that are actually contextual and accurate, you need RAG, no matter what.

Pendulum: Some point you have to stop that training and then put into production, but your internal data. Your proprietary data that you are trying to build your responses on is constantly changing it's changing by the many second so for you to be able to provide responses that are actually contextual and accurate you need that no matter, what and so those are the reasons why.

Ashutosh Kulkarni: And so those are the reasons why RAG is really becoming the primary way for people to build these enterprise applications. And we feel very good about our position in there. Very clear. Thank you very much. The next question comes from Brent Thill of Jeffreys. Please go ahead. Are you there?

Pendulum: Reg is really becoming the primary way for people to build these enterprise applications and we feel very good about our position in there.

Speaker Change: Very clear thank you very much.

Speaker Change: The next question comes from Brent Thill.

Brent John Thill: Of Jefferies. Please go ahead.

Brent John Thill: You bet.

Brent John Thill: Hey, Brian Hey, there.

Operator: Hey Brent, are you there? Operator, let's move to the next caller. Okay, the next question comes from Tyler Radke of Citi. Please go ahead. Yeah, thanks for taking the question so helpfully. Hey Tyler, you're breaking up. We can't hear you.

Speaker Change: Operator, let's move to the next caller.

Speaker Change: The next question comes from Tyler Radke of Citi. Please go ahead.

Speaker Change: Okay.

Tyler Maverick Radke: Yes, thanks for taking the question hopefully.

Tyler Maverick Radke: Hey, Tyler Youre breaking up we cant hear you.

Tyler Maverick Radke: Okay, how about now that does that but yes, yes, it's better go ahead guys.

Operator: Okay, how about now? Is that better? Yes, yes, that's better. Go ahead, please. Okay, great. Janesh, can you just frame for us how we should be thinking about the moving pieces in Q4? Q3 saw stronger other subscription growth. How should we think about the relative growth between other subscriptions and Elastic Cloud?

Speaker Change: Okay great.

Speaker Change: Can you just frame for us how we should be thinking about the moving pieces in Q4 Q3 saw stronger other subscription growth.

Speaker Change: How should we think about that.

Speaker Change: The relative growth between the subscription and elastic cloud and then secondly, I apologize I missed it should we think about Q4.

Tyler Maverick Radke: And then secondly, apologies if I missed it, should we think about Q4 exit growth? Is the right top line growth for FY25 as a starting point? I realize you're not providing guidance, but just any color on that would be helpful. Thank you. Yeah, Tyler. I'll cover all of those.

Speaker Change: Exit growth.

Speaker Change: Top line growth for FY 'twenty five as a starting point realizing upfront in guidance, but just any color on that would be helpful. Thank you.

Speaker Change: Yes, I'll cover all of those so first off I think about the other subscription of the self managed business and the strength that we saw there in the quarter, maybe just to start with I'll, just remind folks that whether a customer chooses cloud ourself managed really depends on their own posture on deployment.

Janesh Moorjani: So first off, if I think about the other subscriptions in the self-managed business and the strengths that we saw there in the quarter, you know, maybe just to start with, I'll just remind folks that whether a customer chooses cloud or self-managed really depends on their own posture and deployment format. We've seen good momentum on both. And while we prefer the cloud, and we think it's better for the customer and better for us, it is ultimately the customer's choice. So the mix of businesses, you know, is generally partly a function of deal flow in the quarter. And importantly, we did not see any kind of shift from customers trying to move from cloud to self-managed. I think it's just more a function of the deals that we saw across the geos and segments and timing of renewals and so forth. We had also shared on the prior call already that we actually expected to see an increase in self-managed revenue this quarter. So it was not a surprise to us.

Speaker Change: Matt we've seen good momentum on both and while we prefer cloud and we think it's better for the customer and better for US. It is ultimately the customer's choice.

Speaker Change: The mix of businesses.

Speaker Change: Generally partly a function of deal flow in the quarter and importantly, we did not see any kind of shift from customers trying to move from cloud to self managed I think it's just more a function of the deals that we saw across the geos and segments and timing of renewals and so forth.

Speaker Change: We had also shared on the prior call already that we actually expected to see an increase in self managed revenue. This quarter. So it was not a surprise to us in fact in Q3 in the year ago period, we saw a similar pattern where that self managed business was was a little bit strong.

Janesh Moorjani: In fact, in Q3 of the year ago period, we saw a similar pattern where that self-managed business was a little bit strong. And so if I look at it even in terms of year-over-year growth, I think self-managed grew 13% year-over-year compared to 11% in the prior couple of quarters. So it really wasn't a big deviation. And so as I think about then, you know, how that's factored into our guidance for Q4, one way to think about it is that the guidance for Q4 sequentially is only a million dollars higher than what we reported here for Q3. So there's just not a lot of moving parts in there.

Speaker Change: So if I look at it even in terms of year over year growth I think self manage grew 13% year.

Speaker Change: Year over year compared to 11% in the prior couple of quarters. So it really wasn't a big deviation.

Speaker Change: And so as I think about then.

Speaker Change: How that's factored into our guidance for Q4.

Speaker Change: One way to think about it is the guidance for Q4 sequentially as only $1 million higher than what we reported here for Q3. So there's just not a lot of moving parts in there. So I don't expect much movement. We obviously don't guide to the individual pieces around cloud and self managed but thats roughly how I think about it and just keep in mind that in Q4, we have.

Janesh Moorjani: So I don't expect much movement. We obviously don't guide to the individual pieces around cloud and self-manage, but that's roughly how I think about it. And just keep in mind that in Q4, we've got two fewer days because we have 90 days versus 92 days that we typically have in Q1 to Q3. And so that presents a little bit of a headwind of call it roughly six to seven million dollars of revenue in Q4. And that's also what we've already factored into the guide. And that's just something to keep in mind as you think about sequential growth rates. And then finally, in terms of thinking about growth for fiscal 25, look, I think it's just too early at this stage.

Speaker Change: Got two fewer days, because we have 90 days versus 92 days that we typically have in Q1 to Q3.

Speaker Change: And so that that presents a little bit of a headwind of call it roughly $6 million to $7 million of.

Speaker Change: Revenue in Q4, and that's also what we've already factored into the guide and that's just something to keep in mind is as you think about sequential growth rates and then finally in terms of thinking about growth for fiscal 2005 look I think it's just too early at this stage right. We've seen really strong performance from the business in 2004.

Janesh Moorjani: We've seen really strong performance from the business in 24 so far, and we've been very pleased with our execution. We're still in the middle of the planning process for 25.

Speaker Change: So far we've been very pleased with our execution, we're still in the middle of the planning process for 25. So it's too early to have a concrete view on the revenue outlook for now we're just focused on delivering a strong Q4, and we will talk more about 25 on the next call.

Ashutosh Kulkarni: So it's too early to have a concrete view on the revenue outlook. For now, we're just focused on delivering a strong Q4, and we'll talk more about 25 on the next call. Thank you. And to follow up for Ash, the customer example of displacing the vector database, which I am, You know, for the customer in reference that I've drawn a blank on the name, but the coding repository company, can you just talk about maybe the decision on why vectors are pretty early in terms of the nascent industry? How common are these displacements, and what were the main factors that that drove them to evaluate an alternative and choose the elastic one?

Speaker Change: Thank you and to follow up for asset.

Speaker Change: The customer example, displacing Dr database, which.

Yes.

Speaker Change: The customer and references.

Speaker Change: John It Blake on the name, but the coating repository company can you just talk about.

Speaker Change: Maybe the decision on why.

Speaker Change: Okay vectors are pretty early in terms of this nascent industry.

Speaker Change: How common are these displacements and what were the main factors that drove them to evaluate an alternative chose elastic. Thank you.

Ashutosh Kulkarni: Thank you. Yeah, thanks, Tyler. So, you know, as customers are getting more educated about everything that goes into building generative AI applications, we are seeing that our core differentiators, things that we've talked about in the past, are really beginning to not only shine, but become very obvious to customers. And as I talk to customers, you know, think about the customer examples I gave last quarter, whether it was DocuSign in the past, Cisco, and so on. This time, Stack Overflow and ConsenSys.

Speaker Change: Yes, Thanks, Tyler so.

Speaker Change: As customers that are getting more educated about everything that goes into building generative AI applications.

Speaker Change: We are seeing that are core differentiators things that we've talked about in the past.

Speaker Change: Really beginning to not only shine, but become very obvious to customers.

Speaker Change: As I talk to customers.

Speaker Change: Do you think about.

Speaker Change: The customer examples I gave last quarter, but the <unk> in the past Cisco and so on this time stack overflow consensus.

Ashutosh Kulkarni: You know, what's standing out to these customers is, I'd say, roughly four things. First is our vector database implementation that's built on top of the scene. It's just an incredibly good implementation. Like, customers really see us perform well, especially in terms of scalability. And I've talked about the kinds of new innovations that we've driven in that area around scalar quantization that's making the system perform even better, scale even better, and be less intensive in terms of memory requirements. So, just the vector performance is one thing, the first thing. The second thing, which is very powerful, is all the, you know, capabilities, the enterprise capabilities that we've delivered into the product. You know, things like the ability to do document-level permissions, the security capabilities that we have, the ability to use other facets of search, like personalization and geolocation, and so on, which really become important when you're building these enterprise applications. The third thing, which is now becoming very popular, is hybrid search. So, hybrid search is a mechanism where you use a combination of vector search and semantic search and lexical search and use re-ranking to come up with the most relevant answer.

Speaker Change: What's standing out to these customers I'd say roughly four things are first is our vector database implementation that's built on top of the scene.

Speaker Change: It's just incredibly good implementation like customers really see us perform well, especially in terms of scalability.

Speaker Change: I've talked about the kinds of new innovation that we've driven in that area around scale monetization, that's making the system perform even better scale, even better be less intensive in terms of memory requirements. So just the vector performance is one thing the first thing the second thing which is very poor.

Speaker Change: It has all the.

Speaker Change: Capabilities, the enterprise capabilities that we have delivered into the product things like that.

Speaker Change: The ability to do document level permission the security capabilities that we have the ability to use other assets of search like personalization and geo location, and so on which really become important when you're building. These enterprise applications. The third thing rich.

Speaker Change: It is now becoming very popular is hybrid search to hybrid search as a mechanism where you use a combination of better search and semantic search and Mexican search.

Speaker Change: Use re ranking to come up with the most relevant answer like that is for customers that they are becoming more sophisticated in this area. They're recognizing that it is incredibly important to get the right relevant to use those kinds of hybrid techniques and then the last thing is just incumbency.

Ashutosh Kulkarni: Like, that is for customers; as they are becoming more sophisticated in this area, they're recognizing that it is incredibly important to get the right relevance to use those kinds of hybrid techniques. And then the last thing is just incumbency. You know, we, all of these customers, like, if you think about Elasticsearch and how broadly we are spread out in the ecosystem, tens of thousands of customers and then many more that are familiar with and using Elasticsearch, like, the fact that our data is already on that platform, their data is on our platform, just means that it becomes that much easier for them to take all of that data, very quickly, create vector embeddings, and And I fully expect that as this whole area continues to mature, those trends are going to become bigger factors for us to continue to be winners in this space. Thank you. The next question comes from Matt Hedberg of RBC Capital Markets. Please go ahead.

Speaker Change: All of these customers like if you think about elastic search and how broadly they are spread out in the ecosystem tens of thousands of customers and then many more there are familiar with and using elastic search.

Speaker Change: The fact that our data is already on that platform. Their data is on our platform. This means that it becomes that much easier for them to take all of that data.

Speaker Change: Very quickly.

Speaker Change: Create vectren embedding and then use it in all the regenerative AI applications, those four things are becoming stronger and stronger.

Speaker Change: It's for us to differentiate and I fully expect that as this whole area continues to mature those strengths are going to become bigger factors for us to continue to be a winner in this space.

Speaker Change: Thank you.

Speaker Change: The next question comes from Matt Hedberg of RBC capital markets. Please go ahead.

Matthew George Hedberg: Great. Thanks for taking my questions. Congratulations on the results, guys.

Matthew George Hedberg: Great. Thanks for taking my questions. Congrats on the results guys.

Ashutosh Kulkarni: Ash, you know, obviously, a large firewall vendor, talked about a plan to bundle offerings, including free trials. And, you know, I'm wondering if that eventually shows up as industry pricing pressures and things like logs or SIM. Yeah, thanks, Matt. We haven't seen any change in the competitive dynamics.

Matthew George Hedberg: As you know obviously, a large firewall vendor talks about a plan to bundle offerings, including free trials and I'm wondering if you think that eventually shows up as industry pricing pressures and things like logs or Sim.

Speaker Change: Yes, Thanks, Matt.

Speaker Change: So we haven't seen any change in the competitive dynamics, but what I will say is the whole idea of platform consolidation.

Ashutosh Kulkarni: But what I will say is the whole idea of platform consolidation, as I talk to customers, you know, what I'm seeing is that every CIO that I'm meeting is still very conscious about their overall budgets. So, you know, budget pressures are continuing. And there is tremendous excitement in terms of wanting to do more around generative AI. So that's becoming a bit of a double whammy.

Speaker Change: As I talk to customers what im seeing is that every CIO that I'm meeting.

Speaker Change: Is still very conscious about their overall budgets so.

Speaker Change: Pressures are continuing and there is tremendous excitement in terms of wanting to do more.

Speaker Change: Around generative AI, so that's becoming a bit of a double whammy and thats incentivizing customers to want to do more on a few platforms that they trust that they see as being innovative that this year is having the ability to not only help them today, but also future proof their direction.

Ashutosh Kulkarni: And that's incentivizing customers to want to do more on a few platforms that they trust, that they see as being innovative, that they see as having the ability to not only help them today but also future-proof their direction. And we are one of the beneficiaries of that, you know; the fact that we can deliver tremendous innovation; we have been delivering innovations like generative AI, or AI assistance for observability and security, and doing it with our pricing model that makes it possible for customers to both consolidate and do that at a much better overall value to investment is something that's enabling us to win and displace incumbents. So that consolidation motion; we are leaning into it. We have been leaning into it for, you know, several quarters now, and we're seeing the benefits of it.

Speaker Change: And we are one of the beneficiaries of that the fact that we can deliver tremendous innovation, we have been delivering innovations like generative AI or AI assistance for observed in security and doing it with our pricing model that makes it possible for customers to both consolidate and do that at a much better overall.

Our value to investment is something that is enabling us to win and displaced incumbents. So that consolidation motion. We are leaning into it we have been leaning into it for several quarters now and we.

Speaker Change: We're seeing the benefits of it.

Speaker Change: Really really good to hear and then maybe just.

Ashutosh Kulkarni: Really, really good to hear. And then maybe just, you know, There's obviously a lot of talk about vector and gen AI usage, and it feels like a lot of those are within like enterprise search or, you know, app or site search. I'm curious, to what extent do you think vector technology makes its way into sort of broad observability or, or, you know, security search? Sam?

Speaker Change: Yeah.

Speaker Change: There's obviously a lot of talk about vector and <unk> usage and it feels like a lot of those are within like enterprise searcher or after site search I'm curious to what extent do you think.

Speaker Change: Vector technology makes its way into sort of broad absorbability or security search with them.

Speaker Change: That's a great question.

Ashutosh Kulkarni: That's a great question, and although we very strongly believe that generative AI and vector search and so on is going to materially increase the overall addressable market size for search in the long term, we are also seeing our ability to differentiate and compete better in the areas of observability and security. So, you know, just to give you some sense of how that plays out, typically, in terms of security, we've gone through several Elasticon events now. And the thing that consistently gets everybody super excited in the audience when we are talking to security customers is our security AI assistant, the fact that they can now see real-time alerts and, you know, really interrogate the system and ask questions about how to deal with those alerts. And the AI assistant is able to help guide them through all of that.

Speaker Change: Although we very strongly believe that generative AI and better search and so on is going to materially increase the overall addressable market size for search in the long term.

Speaker Change: We're also seeing our ability to differentiate and compete better in the areas of observed in security.

Just to give you some sense of how that plays out typically in terms of security.

Speaker Change: We've gone through several elastic on events now and the thing that consistently gets everybody Super excited in the audience and when we are talking to security customers is our security AI assistant. The fact that they can now see real time alerts and really integrate the system and ask questions about how to deal with that.

Speaker Change: And the AI assistant disable to help guide them through all of that that is incredibly powerful because it reduces the bar on water security analysts needs to know the level of experience and expertise they need to possess should that is making it that much easier for us to compete and win in these deals and displaced incumbents.

Ashutosh Kulkarni: That is incredibly powerful because it reduces the bar on what a security analyst needs to know, the level of experience and expertise they need to possess. So that is making it that much easier for us to compete and win in these deals and displace incumbents. So we feel it's giving us that edge already, and I expect that edge to, you know, only continue growing in the future. And that's the reason why we are so excited about everything that we're doing around generative AI. It's great to hear.

Speaker Change: So we feel it is giving us that edge already I expect that edge to only continue growing in the future and Thats. The reason why we are so excited about everything that we're doing around generative yet.

Speaker Change: Great to hear thanks, guys.

Matthew George Hedberg: Thanks, guys. The next question comes from Raimo Lenschow of Barclays. Please go ahead.

Speaker Change: The next question comes from Raimo <unk> of Barclays. Please go ahead.

Raimo Lenschow: Hey, thank you. Congratulations from me as well. Two quick questions.

Raimo: Thank you congrats from me as well two quick questions one with the change in leadership now on on the go to market side.

Raimo Lenschow: One, Ash, with the change in leadership now at... GoToMarket. Are there any kind of changes you've seen on the journey to kind of evolve GoToMarket but any changes we should anticipate as we kind of get ready for the new year? And then I had one follow-up for a young, Absolutely. So, you know, we're very excited about Mark's addition. I mean, even in the short time that he's been here, he's just been a wonderful partner.

Raimo: What kind of changes you're seeing on the journey.

Raimo: To kind of evolve quarter market, but any any changes we should anticipate as we kind of getting ready for the new year, and then I had one follow up for Jonathan.

Raimo: Absolutely.

Speaker Change: We're very excited about box edition I mean, he's been even in the short time that he's been here. He's just been a wonderful partner and it's impressive to see how these really dived into the.

Ashutosh Kulkarni: And it's impressive to see how he's really dived into the job, he's working very closely with the team members. And the natural leadership that he's demonstrating is wonderful. Look, you know, what I'd say is the direction that we are on, our focus on the enterprise and commercial segments, our overall go-to-market strategy, I expect that to remain the same. We are seeing a lot of success with that. You know, Janesh touched upon that earlier.

Speaker Change: The job he is working very closely with the team members.

Speaker Change: And then the natural leadership that is demonstrating is wonderful.

Speaker Change: What I'd say is the.

Speaker Change: The direction that we are on our focus on the enterprise and commercial segments. Our overall go to market strategy I expect that to remain the same we are seeing a lot of success with that <unk> touched upon that earlier.

Ashutosh Kulkarni: And we are very excited about the expertise that Mark brings to those areas. And we know that, as the business continues to do well in areas like generative AI, in terms of platform consolidation, Mark's skills are only going to help us do even better. And at this point, I'm not expecting any change. It's really like the progress that we've made and the direction that we have set. I feel that Mark's going to add to it as opposed to make any changes. Okay, perfect. Yeah, that makes sense. And Janesh, for you, thanks for the initial look into 25. And I know you're not quite there yet.

Speaker Change: We're very excited about the expertise that mark brings in those areas and we know that.

Speaker Change: The business continues to do well in areas like generative AI in terms of platform consolidation Mark skills are only going to help us do even better.

Speaker Change: And at this point I'm not expecting any change.

Speaker Change: I really like the progress that we've made.

Speaker Change: The direction that we have said I feel that mark is going to add to it as opposed to make any changes.

Speaker Change: Okay, Yeah that makes sense for.

Speaker Change: <unk>.

Speaker Change: Thanks for the initial look into 2005, and I know, you're not guiding yet, but if I breakdown the investment areas a little bit further how should we think about it as kind of a.

Janesh Moorjani: But if I break down the investment areas a little bit further, how should we think about it? Is that kind of a mixture between sales, and you need to kind of think about building sales capacity if you think about recovery? So you need more sales guys, and they take time to get productive. And then on R&D, like, there's obviously a lot of stuff going on with, you know, not changes in industry with AI. So it's just like across the board, or are they kind of focus areas we could think about? Thank you and congrats.

Speaker Change: A mixture between Ceos and you need to kind of think about building sales capacity. If you think about a recovery. So you need more sales guys and they take time to get productive and then on R&D like Theres, obviously, a lot of stuff going on with no changes in the industry.

Speaker Change: So it's just like across the board or are they kind of focus areas. We could think about thank you and congrats again.

Speaker Change: Thanks, Raimo, yes, so as I think about fiscal 'twenty five we're going to continue to obviously focus on growing profitably and specifically, we will grow our revenue faster than our expenses, but as we are going through the planning process. Now we do expect that we will balance investing for long term growth against near term profitability and that's why.

Janesh Moorjani: Thanks, Raimo. Yes, as I think about fiscal 25, we're going to continue to obviously focus on growing profitably and specifically grow our revenue faster than our expenses. But, you know, as we are going through the planning process now, we do expect that we will balance investing for long-term growth against near-term profitability. And that's why I called out the relatively modest up margin expansion that we expect for next year.

Speaker Change: I called out the.

Speaker Change: Relatively modest op margin expansion that we expect for next year. So over the course of this past year, we've seen a pretty significant opportunity ahead of us in terms of the increasing importance of journey II and and the massive opportunity that we can go capture and so we really do plan to accelerate our investments in this area too.

Janesh Moorjani: So, you know, over the course of this past year, we've seen pretty significant opportunity ahead of us in terms of the increasing importance of Gen AI and the massive opportunity that we can go capture. And so we really do plan to accelerate our investments in this area to go capture that market opportunity. And I think the investments will actually be broad based across the business. We'll want to fund engineering, there'll clearly be some go to market investments and support capabilities in order to unlock this opportunity and really execute well in the longer term. But we do expect that these investments Raimo will support our longer term growth trajectory. And that's why I indicated that we will be making the investments now and that will have a little bit of an impact on non gap up margin for next year. And the investments will also be a little bit more front end loaded in fiscal 25. And we'll provide a little bit more color and formal guidance on that when we get to the to the next earnings call. Thank you. The next question comes from Andrew Nowinski of Wells Fargo. Please go ahead. Thank you. Good afternoon.

Speaker Change: Capture that that that market opportunity and I think the investments will actually be broad based across the business.

Speaker Change: We want to fund engineering, there will clearly be some go to market investments and support capabilities in order to unlock this this opportunity and.

Speaker Change: And really execute well in the lung and the and the longer term, but we do expect that these investments will support our longer term growth trajectory and and that's why I indicated that we will be making the investments now and that will have a little bit of an impact on non-GAAP op margin for next year and the investments will also be a.

A little bit more front end loaded in fiscal 'twenty, five and will provide a little bit more color on formal guidance on that when we get to the to the next earnings call.

Speaker Change: Okay. Okay. Thank you.

Speaker Change: The next question comes from Andrew Nowinski of Wells Fargo. Please go ahead.

Andrew James Nowinski: Thank you good afternoon.

Andrew James Nowinski: Two questions. The first one I wanted to ask was about ESQL. So you talked about one of the advantages of Elastic Spectre Search is that you already have a lot of customer data on your platform. Do you think ESQL could be a tool for bringing more data onto your platform if it reduces the friction from leaving Splunk? Yeah, that's a great question, Andrew.

Andrew James Nowinski: Two questions first of all I want to ask was on SQL. So you talked about one of the advantages of elastic factors searches that you already have a lot of the customer data on your platform.

Andrew James Nowinski: Think yes, QL could be a tool for bringing more data onto your platform. If it reduces the friction from leaving Splunk.

Speaker Change: Yes, that's a great question, Andrew and like I mentioned in the prepared remarks, I'm Super excited about <unk>.

Ashutosh Kulkarni: And, you know, like I mentioned in the prepared remarks, I'm super excited about DSQL. We already have, you know, around 1000 customers trying it out, and it hasn't been that long since we introduced it. What it does is it makes us even more developer-friendly, in terms of how the language is designed. It's a very easy to use language.

Speaker Change: We already have.

Speaker Change: Around 1000 customers trying it out and hasnt been that long since we introduced it.

Speaker Change: What it does is it makes us even more developer friendly in terms of how the language is designed it's very easy to use language.

Ashutosh Kulkarni: It's got these piping semantics, which allows for iterative development, and developers love it. And the other thing that it does is it makes it very easy for customers to move from, you know, incumbent legacy SIM solutions onto our platform because some of those solutions have had similar capabilities with these kinds of pipe semantics and so on. And now that, you know, that barrier is gone. You know, customers are able to quickly take advantage of it. And when you take ESQL and add to it our AI assistance, which is allowed, which is able to map, you know, other languages onto ESQL, it just makes that entire process very easy. And that's one of the reasons why I feel so excited about our continued ability to take share and, you know, make it possible for customers to switch from incumbent solutions onto Elastic, consolidate onto our platform, and grow. So, in the long term, I definitely believe this is going to bring more data onto our platform and allow us to become that much more critical to our customers' overall infrastructure. Okay. Thank you. That was great!

Speaker Change: It's got despite being symantec's allows for iterative development and developers love it.

Speaker Change: And the other thing that it does is it makes it very easy for customers to move from.

Speaker Change: Incumbent.

Speaker Change: <unk> solutions onto our platform because some of those solutions have had similar capabilities with these kinds of pipe semantics and so on and now that that barrier has gone customers that are able to quickly take that and when you take SQL and add to it our AI assistant which are.

Speaker Change: Which are able to map other languages onto esqr. It just makes that entire process very easy and that's one of the reasons why I feel so excited about our continued ability to take share.

Speaker Change: And make it possible for customers to switch from incumbent solutions onto elastic consolidated onto our platform and grow it in the long term I definitely believe this is going to bring more data onto our platform and allow us to become that much more critical to our customers' overall infrastructure.

Speaker Change: Okay. Thank you that's great just one quick follow up question given all the functionality that you've added to the platform now with <unk> and elsner and SQL et cetera.

Ashutosh Kulkarni: Um, just my one quick follow-up question, you know, given all the functionality that you've added to the platform now with Esri and ELSR and ESQL, etc., have you changed your pricing to account for all these new capabilities? Yes, so one of the things, Andrew, as you know, we price in terms of multiple tiers. And, you know, depending upon the tier that you're in, you basically unlock different kinds of functionality.

Have you changed your pricing to account for all of these new capabilities.

Speaker Change: Yes, so one of the things Andrew as you know is the.

Speaker Change: The price in terms of multiple tiers.

Speaker Change: And depending upon the tier that you're in.

Speaker Change: Basically unlock different kinds of functionality. So as an example, the AI assistance.

Ashutosh Kulkarni: So as an example, the AI assistants are in our topmost tier, the enterprise tier, some of the Esri functionalities in our platinum tier, so on and so forth. So customers have to shift up a tier to get all of these additional capabilities. In terms of price increases, we increase prices from time to time. And, you know, we've done that at times for self-managed; we've done that at times for cloud. But it's really, you know; we will do that when it makes sense, given the functionality that we add. Let me see if Janesh has anything to add to that. No, nothing, Ash.

Speaker Change: Our R&R top most year the enterprise tier.

The sum of the SBA functionalities in our platinum tier so on and so forth. So customers have to shift up a tier to get all of these additional capabilities in terms of price increases we increased prices from time to time.

Speaker Change: And we've done that at times for self managed we've done that at times, where cloud, but it's really we will do that when it makes sense given the functionality that we add let me see if <unk> initiatives anything to add to that.

No nothing Ashley I think you've covered it quite nicely.

Janesh Moorjani: I think you covered it quite nicely. Okay, thanks guys. The next question comes from Patrick Colville of Scotiabank. Please go ahead.

Speaker Change: Okay. Thanks, guys.

Speaker Change: The next question comes from Patrick <unk> of Scotiabank. Please go ahead.

Patrick: Alright. Thank.

Patrick Edwin Ronald Colville: All right. Thank you very much for having me on the call. And really great to be part of the Elastic story. I guess I want to ask about cloud revenue. You know, 29% constant currency in 3Q is pretty terrific. You called out some drivers.

Patrick: Thank you very much.

Patrick: On the call and really great to power their elastic story.

Patrick: I guess I want to ask you about cloud revenue, 29% constant currency in <unk> is pretty terrific.

Patrick: You called out some drivers.

Patrick Edwin Ronald Colville: Gen AI was one, observability and security consolidation, and then consumption coming back to committed levels. I guess my question for you, Ash, is can you rank order those three drivers you called out? Which in 3Q was the most important?

Patrick: Gen II was one observer ability and security consolidation and then consumption coming back to committed levels.

Patrick: I guess my question for you is can you just rank order those.

Patrick: Those three drivers you called out.

Patrick: <unk> was the.

Patrick: The most important.

Speaker Change: Yeah. Thanks for the question, what I'd say is that in terms of.

Ashutosh Kulkarni: Yeah, thanks for the question. You know, what I'd say is that in terms of generative AI, it has had, it's definitely contributing in terms of revenue, but given our overall size, I'd say the contribution is still in the early days. In terms of the consolidation that we are seeing on our platform, incumbent solutions being displaced by customers, and customers consolidating onto our platform for observability and security, you know, that's a play that we've been running for several quarters now. And as it typically takes some time for these workloads once they come on to ramp up, as you can imagine, since we've been doing it for a few quarters, that has been a very And the fact that consumption is stable also helps.

Speaker Change: Generative AI it has it has had.

Speaker Change: It's definitely contributing in terms of revenue, but given our overall size.

Speaker Change: I'd say the contribution is still in the early days.

Speaker Change: In terms of.

Speaker Change: The consolidation that we're seeing on our platform.

Speaker Change: Incumbent solutions being displaced by customers and customers consolidated onto our platform for absorb lithium security.

That's the play that we've been running for several quarters now and as it typically takes some time for these workloads once they come on to ramp up as you can imagine since we've been doing it for a few quarters.

Speaker Change: That has been a very strong contributor to.

Speaker Change: The growth of the business and the fact that consumption is stable also have so if you will that's how I would think about it. So the consolidation is probably the biggest.

Janesh Moorjani: So, you know, if you will, that's how I would think about it. So, consolidation is probably the biggest thing, and the cloud consumption being stable is probably the thing that, you know, just equalizes things, if you will. But, Janesh, I don't know if you can add anything to that. Yeah, I'd agree with that ranking, Ash.

Speaker Change: The cloud consumption being stable is probably the thing that.

Speaker Change: Just equalizes things if you will.

Speaker Change: But generally I don't know if you alright.

Speaker Change: Yes, I'd agree with that ranking ash.

Ashutosh Kulkarni: Thanks, Ash. And I guess, Janesh, my follow-ups for you, please. So 3Q non-GAAP margins of 13%, you know, nothing to sniff out at all.

Speaker Change: Thanks, and I guess my follow Up's for you. Please.

Speaker Change: So three to non-GAAP op margins of 13% nothing to sniff out of coal.

Janesh Moorjani: You know, based on my inbound calls, some investors are nitpicking that, look, that's only the same as 2Q levels, and guidance indicates a leg down in 4Q. Can you just double-click on, you know, what's going on in terms of profitability? Are there one-offs to call out in 3Q? You know, why this leg down in 4Q?

Speaker Change: Based on my imbalance from investors Nitpicking, but look that's only the same as <unk> levels.

Speaker Change: And guidance indicates a leg down in <unk> can you just double click on.

Speaker Change: Whats the whats going on in terms of profitability or the other one offs to call out in <unk>.

Speaker Change: Hi, this is <unk>.

Janesh Moorjani: Yeah, I'm so happy to cover that. You know, if I think about the change from the third quarter to the fourth quarter, we're obviously pleased with the outperformance that we delivered in Q3. But in the fourth quarter, one of the things that we had called out last time is that we have approximately $12 million higher in seasonal expenses in Q4.

Speaker Change: Yes, so happy to cover that.

Speaker Change: If I think about the change from the third quarter to the fourth quarter were up.

Speaker Change: Mostly pleased with the outperformance that we delivered in Q3, but in the fourth quarter. One of the things that we had called out last time is that we have approximately $12 million higher than seasonal expenses in Q4 I had mentioned this on the prior call. This relates to the timing of employee benefits and our engineering all hands events.

Janesh Moorjani: I mentioned this on the prior call; this relates to the timing of employee benefits and our engineering all-hands events. And then also, as I mentioned a little bit earlier on this call, since we have two fewer days in the quarter, we've got a natural headwind of approximately $6 to $7 million on revenue. So those two factors come together. And that's why Q4 is lower. The seasonal items affect only Q4.

Speaker Change: Also as I mentioned, a little bit earlier on this call since we have two fewer days in the quarter. We've got a natural headwind of approximately $6 million to $7 million on revenue. So those two factors come together and that's why Q4 is lower.

Speaker Change: The seasonal items affect only Q4 and so from our from our perspective, we really focus on managing the full year number and as you saw here we've raised our outlook for the full year, we had raised it even earlier in the year end.

Janesh Moorjani: And so from our perspective, we really focus on managing the full year number. And as you saw here, we've raised our outlook for the full year. We had raised it even earlier in the year, and we're very pleased that we can outperform even against our prior commitments. And we expect to finish the year strong. All right, nice to be part of the story, and thank you for having me on.

Speaker Change: Very pleased that we can outperform even against our prior commitments and we expect to finish the year strong.

Speaker Change: Alright.

Speaker Change: Thank you Pat O'neill.

Patrick Edwin Ronald Colville: Thank you. The next question comes from Brent Thill of Jefferies. Please go ahead. Janesh, I know RPO bounces around, but did the cell do anything underneath the surface that we should be aware of?

Pat O'neill: Thank you.

Pat O'neill: The next question comes from Brian <unk> of Jefferies. Please go ahead.

Brian: Gene I know RPM bounces around but it did the cell.

Brian: Seeing underneath the surface that we should be aware of.

Brent John Thill: Hey, Brent. So overall, I'd say we were actually very pleased with the annual contract swelling motion, including how sales successfully delivered a very strong Q3. We've talked about some of the trends in the business that we saw, including platform consolidation and so forth, and all of those reflect that success. If I think about RPO, you know, maybe the one thing I'd call out is that contract lengths were similar to what we've previously seen in the business at roughly one and a half years, but they were slightly shorter than the year-ago period. And so RPO can vary a little bit based on the terms of the deals that we sign. In a consumption business, you've also got variations as customers try to match the timing of their renewals and expansions with how quickly they are consuming. So tracking it on a quarter-to-quarter basis can be a little bit noisy. But there is nothing else I would actually call out.

Brian: Hey, Brent So overall I'd say, we were actually very pleased with.

Brian: The annual contract selling motion, including household successfully delivered.

Speaker Change: Very strong Q3.

Brent John Thill: We've talked about some of the trends in the business that we saw including platform consolidation and so forth and all of those reflect that success. If I think about <unk> you know maybe the one thing I'd call out is that contract lengths for similar to what we've previously seen in the business at roughly one and a half years, but they were slightly shorter than the year ago period.

Brent John Thill: And so our people can vary a little bit based on the terms of the deals that we sign in a consumption business. You've also got variations as customers try to match the timing of their renewals and expansions with how quickly. They are they are consuming so tracking it on a quarter to quarter basis can be a little bit noisy nothing else I would actually call out fundamentally.

Janesh Moorjani: Fundamentally, RPO growth was in line with revenue growth and all the other measures, and it was generally in line with the rest of the business. And, as we've shared before, we look at revenue as really the primary indicator of the success of our business, and we are very pleased with the outcome there. Okay, great. And then for Ash on AI, you know, some of these early wins, you mentioned it's still obviously really early. But are there any common threads you can pull out in terms of verticals or dive scope, you know, geos?

Brent John Thill: ARPA growth was in line with revenue growth in all the other measures.

Brent John Thill: It was generally in line with the rest of the business and as we've.

Brent John Thill: Shed before we look at revenue is really the primary indicator of the success of our business and we are very pleased with the outcome.

Speaker Change: Okay, Great and then for Ash on AI some.

Speaker Change: Some of these early wins you mentioned, it's still obviously really early.

Ashutosh Kulkarni: But are there any common threads you pull in terms of verticals or.

Ashutosh Kulkarni: Scope.

Ashutosh Kulkarni: Geos.

Ashutosh Kulkarni: What are the commonalities that you're starting to see in, I guess, is there anything you can do to kind of step on the gas in terms of awareness? You've seen others start boot camps and do smaller deployments, and it seems to be resonating with others in the industry. Anything you're learning and taking and pushing forward as you go through this AI wave? Yeah, thanks.

Ashutosh Kulkarni: What are the what are the common commonality that youre starting to see.

Ashutosh Kulkarni: I guess is there anything you can do to kind of step on the gas in terms of awareness and you've seen others start boot camps, and do smaller deployments and it seems to be resonating with others in the industry and anything you're learning and taking and pushing forward as you go through this AI wave.

Speaker Change: Yeah. Thanks, Thanks for the question so.

Ashutosh Kulkarni: Thanks for the question. So, you know, some of the patterns that we're definitely seeing is one that's pretty broad-based across industries. I've tried to give some examples in my prepared remarks, you know, if you think about some of the tech companies like Stack Overflow, you know, Cisco that I've talked about in the past, you look at some of the others that are in the document management space, which is the one that I mentioned. The consensus, which is all about research, scientific research, it's completely broad-based. A lot of the use cases are still internal facing as customers are continuing to become more and more confident about their ability to manage the risk of hallucinations. And obviously, the rag pattern, which they use elastic to build, really gives them the best chance of reducing hallucinations.

Speaker Change: Some of the patterns that we are definitely seeing is one it's pretty broad based across industries.

Speaker Change: I've tried to give some examples in my prepared remarks, if you think about some of the tech companies like.

Speaker Change: Stack overflow.

Speaker Change: Cisco that I've talked about in the past you look at some of the others that are in the document management space, which was the one that I mentioned.

Speaker Change: Yeah.

Speaker Change: Consensus, which is all about research scientific research.

Speaker Change: It's completely broad based a lot of the use cases are still internal facing.

Speaker Change: Customers are continuing to become more and more confident about their ability to manage the risk of hallucinations and.

Speaker Change: And obviously the lag factor in which they use elastic to build.

Speaker Change: Really gives them the best chance of reducing hallucinations, but that's that's something that customers are still making sure that they that they grow into so that's the second factor and that is still a lot of internal facing staff.

Ashutosh Kulkarni: But that's something that customers are still making sure that they grow into. So that's the second pattern: it's still a lot of internal facing stuff. And that will eventually change, right?

Speaker Change: And that will eventually change right now in terms of how we are driving this and how we are taking the store customers look I've mentioned now in the last three quarters that every quarter, we've been adding.

Ashutosh Kulkarni: And now, in terms of how we are driving this and, you know, how we are taking this to our customers. Look, I've mentioned now in the last three quarters that every quarter we've been adding, you know, several hundred customers that are now using us, using Esri for these vector search use cases, storing dense vectors, doing vector similarity searches. I talked about the adoption of our ELSR sparse encoding model.

Several hundred customers incrementally there are now using us using <unk> for these vectors search use cases, storing dense vectors vector similarity searches are I've talked about the adoption of our <unk>.

Ashutosh Kulkarni: So we are very excited about the traction that we are seeing here in terms of customer adoption. And the way we are driving this is, you know, effectively through our sales organization and the marketing events that we are doing. We've gone through six out of our 12 Elasticon events for this fiscal year, and we've got six more in this fourth quarter.

Speaker Change: <unk> coding model. So we're very excited about the traction that we're seeing here in terms of customer adoption and the way. We are driving this is effectively through our sales organization and the marketing events that we're doing we've gone through six out of our 12 elastic on events for this fiscal year and we've got six more in this fourth quarter.

Ashutosh Kulkarni: And, you know, Gen AI is front and center, and we are doing boot camps. We are doing, you know, Gen AI workshops in a box with our customers. These have been wildly successful.

Speaker Change: <unk>.

Speaker Change: And Jenny is front and center and we are doing boot camps were doing.

Speaker Change: Jenny I workshops in a box with our customers. This has been wildly successful so I'm very excited about that.

Ashutosh Kulkarni: So I'm very excited about the early momentum. Like you said, it's going to take some time for this to build up. So we are still in the early innings, but over the long haul, I believe this is going to be a very material increase in time for us. Thank you. The next question comes from Andrew Sherman of TD Cowan. Please go ahead.

Speaker Change: The early momentum.

Speaker Change: Like you said.

Speaker Change: It's going to take some time for this to build up so we are still in the early innings, but over the long haul I believe this is going to be a very material increase in Tam for us.

Speaker Change: Thank you.

Speaker Change: The next question comes from Andrew Sherman of TD Cowen. Please go ahead.

Andrew Sherman: Alright, Thanks, Hey, guys, Jim Snee annual cloud number seemed pretty strong stable at mid forties growth.

Ashutosh Kulkarni: Oh, great. Thanks. Hey guys.

Andrew Michael Sherman: Janesh, the annual cloud numbers seemed pretty stable at mid-40s growth. So is it really just that S&B pressure that's kind of dragging down the overall number? And what are you assuming in that segment going forward? Hey, yeah, I mean, I think the math that you're doing is pretty straightforward there. And you're right. Fundamentally, we've been very pleased with the annual cloud selling motion, which is a sales-led motion. And both the commitments that we've secured, as Ash has been talking about, and also the consumption that we've driven against those commitments. And if I think about the SMB portion, as I mentioned a short while ago, that remains soft, it was consistent with where it's been before.

Andrew Sherman: It really just that SMB pressure, that's kind of dragging down the overall number and what are you assuming in that segment going forward.

Yes, I mean, I think the math that you're doing is pretty straightforward.

Speaker Change: And you're right I mean fundamentally we've been very pleased with the annual cloud selling motion, which is a sales led motion and the.

Speaker Change: The both the commitments that we've secured as ash has been talking about and also the consumption that we've driven against that.

Speaker Change: Against those commitments and if I think about the SMB portion as I mentioned, a short while ago that remains soft it was consistent with where it's been before.

Ashutosh Kulkarni: And, you know, in terms of thinking about the future, we won't unpack the segment-based view on cloud here. But, fundamentally, if I think about our cloud business overall, we continue to be really excited about the opportunity set there and expect that it will continue to grow faster than the rest of the business. Great, thanks. And then Ash, are you seeing anything yet in the pipeline, potentially more customers reaching out to you because of potential disruption? Your largest logs competitor? Hey, thanks for the question, Andrew. You know, look, there's no specific disruption or change that I'd call out.

Speaker Change: And in terms of thinking about the future we won't unpack the segment based view on cloud, but fundamentally if I think about our cloud business overall, we continue to be really excited about.

Speaker Change: Opportunity set there and expect that it will continue to grow faster than the rest of the business.

Speaker Change: Great. Thanks, and then as you're seeing anything yet in the pipeline potentially more customers, reaching out to you because of potential disruption.

Speaker Change: <unk> largest logs competitor.

Speaker Change: Thanks.

Speaker Change: Hey, Thanks for the question Andrew.

Speaker Change: There's no specific.

Speaker Change: Disruption or change that I'd call out what I will say the whole motion.

Ashutosh Kulkarni: What I will say is the whole movement to get customers and prospects to consolidate onto our platform by displacing incumbents. We've been driving that for a while now. You know, we see this as a tremendous opportunity. We have so many strengths when it comes to log analytics, SIEM, and search. And we always land with those.

Andrew: To get customers and prospects to consolidate onto our platform by displacing incumbents, we've been we've been driving that for a while now we see this as a tremendous opportunity we have so many strength when it comes to log analytics and Sim and search.

Speaker Change: All of these land with those.

Ashutosh Kulkarni: And then once we are in there, that gives us the opportunity to expand even further beyond that. And you know, everything that's going on in the market, but also our innovation, the ability for customers to now use capabilities like ESQL. We've talked to you in the past about FrozenTier, which is tremendously beneficial for customers.

Speaker Change: And then once we are in there that gives us the opportunity to expand even further beyond that.

Speaker Change: Everything thats going on in the market, but also our innovation the ability for customers to now use capabilities like E. SQL, we've talked to you in the past about frozen tier, which is tremendously beneficial for customers, our AI capabilities around our absurdity in security AI assistant.

Ashutosh Kulkarni: Our AI capabilities around our observability and security AI assistance, all of those are big factors why customers are now very comfortable and confident about moving over to our platform. And that's really exciting.

All of those are big factors why customers are now very comfortable and confident about moving over to our platform and that's really exciting.

Speaker Change: Great. Thanks, guys.

Ashutosh Kulkarni: Thanks, guys. The next question comes from Koji Ikeda of Bank of America. Please go ahead.

Speaker Change: The next question comes from Koji Ikea of Bank of America. Please go ahead.

Koji Ikeda: Hey guys, thanks for taking the questions. In the past, when we think about business in terms of enterprise search, security, and observability, you've talked about ways to think about growth... So, I'm wondering if you could maybe get a little granular here. Let us know how you're thinking about growth, uh... between the three categories of the medium term to think about, Koji. Maybe I'll take a stab at this and then invite Ash to add more. You know, if I think about the mix across the solution areas, overall, Q3 was consistent with what we've generally seen in the last year in terms of ACV. But I think it bounces around a little bit based on deal flow and renewal contracts, timing, and so forth.

Koji Ikeda: Hey, guys. Thanks for taking the questions.

Koji Ikeda: In the past when we think about the business in terms of enterprise search security and observe ability in the past you've talked about ways to think about the growth rates between those three categories. So wondering if you could maybe get a little granular here and let us know how you're thinking about growth rates.

Koji Ikeda: Between these three categories over the medium term to think about kind of your your medium term growth aspiration.

Speaker Change: Of course, you maybe I'll take a stab at this and then invite ash add more even if I think about the mix across our solution areas.

Speaker Change: Overall Q3 was consistent with what we've generally seen in the last year in terms of HCV I think it bounces around a little bit based on deal flow and renewal contract timing and so forth. If I think about the medium term all three solution areas are growing nicely for us.

Janesh Moorjani: If I think about the medium term, all three solution areas are growing nicely for us. If there is any mix shift, if it occurs, we'll take time. So we're not actively looking to change the mix.

Speaker Change: If there is any mix shift if it occurs will take time, so we're not actively looking to change the mix.

Janesh Moorjani: You know, as I think out over the future, search should benefit from Gen AI. As we've shared before, we view that as an expansion of the TEM. And so that presents a significant opportunity for us. But we also see a pretty significant opportunity to drive growth and security and observability with the consolidation motion that we've been seeing, as well as with the strength of the Gen AI capabilities that we build into the stack. They actually have an effect on helping both security and observability as well, for example, with the assistance of the AI assistance that we've launched and have talked about before. So that's the way I think about it for the medium term. Ash, anything you'd add there? No, I think you nailed it, Janesh.

Speaker Change: As I think out over the future so it should benefit from <unk>.

Speaker Change: As we've shared before.

Speaker Change: We view that as an expansion of the Tam and so that presents a significant opportunity for us.

Speaker Change: We also see a pretty significant opportunity to drive growth in security and observable at the with the consolidation motion that we've been seeing as well as with the strength of the.

Speaker Change: <unk> capabilities that we build into the stack they actually have.

Speaker Change: In effect in helping bolster security and availability as well for example, with the assistance that the AI assistance that we've launched and have talked about before so that's the way I think about it for the medium term ash anything you'd add there.

No I think you nailed the Danish nothing more to add.

Ashutosh Kulkarni: Nothing more to add. Thanks, guys. Thanks, Koji.

Speaker Change: Great guys. Thanks for the nice cadre.

Brad Robert Reback: The next question comes from Brad Reback of Stiefel; please go ahead. Great, thanks very much. Janesh, as part of these investments that you're talking about for next year and beyond, do you need to make COGS investments to support all this AI functionality? Brad, as I think about our investment profile for the future, we will see a natural increase in COGS. I think that's more a function of the cloud growth that we see. We're not expecting to see anything structurally significantly different. You know, that said, as we launch our serverless offering over the coming months, there may be some initial investments that we have related to that, but we will factor that into the model when we provide guidance more formally for Fiscal 25. But there's nothing major I would call out at this stage. Perfect. Thanks very much.

Speaker Change: Thank you.

Speaker Change: The next question comes from Brad Reback of Stifel. Please go ahead.

Brad Robert Reback: Great. Thanks, very much Dinesh as part of these investments that you're talking about it for next year and beyond.

Brad Robert Reback: Do you need to make Cogs investments to support all this AI functionality.

Brad Robert Reback: Brad as I think about our investment profile for the future. We will see a natural increase in Cogs I think thats more a function of the cloud growth that we see.

Speaker Change: We're not expecting to see anything structurally significantly different.

Speaker Change: As we launch our service offering over the coming months there may be some initial investments that we have related to that but when you factor that into the model. When we provide guidance more formally for fiscal 'twenty five, but theres nothing major I would call out at this stage.

Speaker Change: Perfect. Thanks, very much if I might just quickly add to that one of the things that I want to I want to make sure that.

Ashutosh Kulkarni: Janesh, if I might just quickly add to that, one of the things that I want to make sure that everybody understands is, you know, we don't need things like GPUs for us to be, you know, able to deliver the RAG functionality. You know, we run our capabilities very, very efficiently on CPUs, and we have instance types in the cloud that are optimized for that that are just, you know, regular instance types, high-memory instance types. And so from a Cogs perspective, one of the reasons why customers really love our offering in the area of Gen AI is because of its overall efficiency. So, you know, I'll just make sure that I add that because I want to make sure that, you know, if there are any questions around GPU usage and so on, that there's some clarity around that. Great, thank you. The next question comes from Mike Cikos of Needham & Co. Please go ahead. Hey, thanks for getting me on here, guys. Two Porters here.

Speaker Change: Everybody understands it.

Speaker Change: We don't need things like Gpus for us to be.

Speaker Change: Able to deliver the <unk> functionality.

Speaker Change: We run our capabilities very very efficiently.

Speaker Change: On Cpus and we have instance types in the cloud that are optimized for that that are just.

Speaker Change: Regular instance, Type-high memory instance types and so from a Cogs perspective.

Speaker Change: One of the reasons why customers.

Speaker Change: Really love our offering in the area of <unk> is because of the overall option fee. So.

Speaker Change: Yes, I'll just make sure that I.

Speaker Change: Is that because I want to make sure that.

Speaker Change: If there are any questions around gpus and so on that there's some clarity around it.

Speaker Change: Great. Thank you.

Speaker Change: The next question comes from Mike <unk> of Needham <unk> co. Please go ahead.

Mike: Hey, Thanks for getting me on here guys, a two parter here.

Michael Joseph Cikos: And I guess the first question is for Janesh, but I know earlier we were talking about how their pricing changes are possible, but really, it seems like you guys are using the multiple tiers to drive adoption up here for some of the new functionality. And I just wanted to get a better sense, when we look at the revenue growth that Elastic's demonstrating today, is there a reason to think that there's a more significant contribution coming from customers up tiering? Is that worth calling out right now? Or is that still relatively small in the grand scheme of things?

Mike: And I guess the first.

Mike: For <unk>, if I could.

Speaker Change: But I know earlier you were talking about.

Mike: Other pricing changes are possible, but really it seems like you guys are using the multiple tiers to drive adoption of up here for some of the new functionality and I just wanted to get a better sense. When we look at the revenue growth that elastic is demonstrating today.

Mike: Is there reason to think that there's a more significant contribution coming from customers of hearing.

Mike: Is that worth calling out right now or is that still relatively small in the grand scheme of things and I'll. Just ask my second question now while I have you but for.

Janesh Moorjani: And I'll just ask my second question now while I have you. But for Ash, I know we were highlighting ESQL as really helping streamline some of the migration issues from legacy incumbents. And I just wanted to make sure I'm thinking about that properly. And can you help me think through, if I'm using ESQL, is that a good way for me to start? Is this bringing over maybe newly generated data or driving new use cases, or is this actually porting over entire workloads? and Data Estates that were previously locked up with those legacy incumbent SIEM offerings? Hey, maybe I'll start with the first question and keep it brief in the interest of time. In terms of the higher tier and the upsell there, we've generally seen a pretty steady increase in the adoption of our higher tiers over time, particularly the enterprise tier. We've seen that for several, years of Elastic Cloud looking ahead. So there's no particular inflection that I'm expecting or modeling.

Mike: Rash.

Speaker Change: No we were highlighting <unk> is really helping streamline some of the.

Speaker Change: The migration issues.

Speaker Change: From legacy and pump it and I just wanted to make sure I'm thinking about that properly.

Speaker Change: Could you help me think through if I'm using ESG.

Is that a way for me to start.

Speaker Change: Bringing over maybe newly generated data or or drive it new use cases or is this.

Speaker Change: Actually.

Speaker Change: Porting over entire workloads and.

Speaker Change: And data is states that were previously locked up with those.

Speaker Change: Those legacy incumbent Sim offerings.

Speaker Change: Hey, maybe I'll start with the first question on keep it brief in the interest of time in terms of the higher tier and the up sell there.

Speaker Change: We've generally seen a pretty steady increase in the adoption of our higher tiers over time, particularly the enterprise tier we've seen that for several quarters.

Speaker Change: Of elastic cloud looking ahead, so theres, no particular inflection that im expecting or.

Speaker Change: Our modeling, it's just consistent with what we've been seeing for quite some time already.

Janesh Moorjani: It's just consistent with what we've been seeing for quite some time already. We routinely add additional features to our higher subscription tiers. Our sales team demonstrates the value of that to customers. It's just part of our regular upsell motion. And let me quickly touch upon ESQL. So, you know, ESQL is not about bringing in data from incumbents.

Speaker Change: Routinely add additional features to our highest subscription tiers, our sales team demonstrate the value of that to customers. It's just part of our regular upsell motion.

Speaker Change: And let me quickly touch upon SQL so SQL.

Speaker Change: It's not a it's not about bringing in data from incumbents.

Ashutosh Kulkarni: You know, it's always been easy for us to do that. But, you know, incumbents have had query languages that allowed people to do interactive development using piped query semantics. That just meant that for those users, switching to the elastic platform was a bit of a hurdle because they were used to doing things a certain way. And now we are able to just translate their already built rules into ESQL and give them that ESQL query language, which is something that they're very familiar with. That style of development is something that they're very familiar with, and that's what's enabling people to switch over that much faster.

Speaker Change: Always been easy for us to do that but incumbents have had query languages that allowed people to do interactive development using pipe query semantics that just meant that for those users switching to the elastic platform was a bit of a hurdle because they were used to doing things a certain way and now we are able to.

Speaker Change: Translate theyre already built rules into esqr and give them that SQL query language, which is something that they are very familiar with that style of development is something that they are very familiar with and thats whats, enabling people to switch or that much faster.

Ashutosh Kulkarni: This concludes our question and answer session. I would like to turn the conference back over to Ash Kulkarni for any closing remarks. Thank you very much. Thank you for joining our call today. We are pleased with our Q3 performance and strong execution, as our focused sales motion in the enterprise and commercial segments is paying dividends. We are excited and confident about Q4 and the strength of the business heading into FY25.

Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Ash Kulkarni for any closing remarks.

Ashutosh Kulkarni: Thank you very much thanks.

Ashutosh Kulkarni: Thanks for joining our call today, we are pleased with our Q3 performance and strong execution as our focused sales motion and the enterprise and commercial segments is paying dividends, we're excited and confident about Q4 and the strength of the business heading into FY 'twenty pipe. Thank you again and have a great day.

Thank you again and have a great day. The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect. Copyright 2020 Mooji Media Ltd. All Rights Reserved. No part of this recording may be reproduced without Mooji Media Ltd.'s express consent.

Speaker Change: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

Speaker Change: Okay.

Speaker Change: [music].