Q2 2025 Elastic NV Earnings Call
Good day and welcome to the last week's second quarter Cisco 2025 Earnings Results conference call. All participants will be in listen-only mode. 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.
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Speaker Change: Please note, this event is being recorded. I would now like to turn the conference over to Anthony Luscri, Vice President, Investor Relations. Please go ahead.
Anthony Luscri: Thank you. Good afternoon and thank you for joining us on today's conference call to discuss Elastic's second quarter fiscal 2025 financial results. On the call, we have Ash Kulkarni, Chief Executive Officer, Janesh Moorjani, Chief Financial Officer and Chief Operating Officer, and Eric Pringle, our incoming interim CFO. Following their prepared remarks, we will take questions.
Anthony Luscri: Our press release was issued today after the close of market is posted on our website. Slides, which are supplemental to this call, can also be found on the Elastic Investor Relations website at ir.elastic.co.
Anthony Luscri: 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.
Anthony Luscri: 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 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.
Anthony Luscri: 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 Luscri: The webcast replay of this call will be available on our company website under the Investor Relations link.
Anthony Luscri: Our third quarter fiscal 2025 quiet period begins at the close of business on Friday, January 17, 2025.
We will be participating in Scotiabank's global technology conference on
December 10, and the Needham Growth Conference on January 16.
That will turn it over to Ash.
Ash Kulkarni: Thank you, Anthony, and thank you, everyone, for joining us on today's call. Elastic delivered a strong second quarter, supported by solid sales execution and customer commitments. In Q2, we meaningfully exceeded guidance across all revenue and profitability metrics.
Ash Kulkarni: Revenue grew by 18% year-over-year. Cloud revenue grew by 25% year-over-year and we delivered a non-gap operating margin of 18%. We also increased the number of customers spending over 100k with us to 1420.
Ash Kulkarni: At the start of this fiscal year, we made sales segmentation changes to increase the focus on our key enterprise and high-potential mid-market customers.
Ash Kulkarni: After some unexpected disruption in sales performance in Q1, we are now starting to see the benefits of the changes we made take hold.
Ash Kulkarni: Our performance in Q2 reaffirms our confidence in our strategy and shows that we are well on our way to returning to the strong pace of sales execution that we have demonstrated in the past.
Ash Kulkarni: In Q2, we saw strong customer commitments, with key wins across all of our solution areas, especially in Search, powered by Generative AI.
Ash Kulkarni: We also saw continued consolidation onto the Elastic platform for security and observability, with many customers displacing incumbent legacy products and migrating onto our Search AI platform.
Ash Kulkarni: Turning to generative AI. Our momentum in this area continues to build.
Ash Kulkarni: Our clear product differentiation and our relentless pace of innovation is helping us become a natural choice for customers building Gen-AI applications. We are seeing adoption and winning deals across many different industries and for use cases that seek to automate a wide variety of business processes.
Ash Kulkarni: In Q2, we saw continued acceleration in our search business, with significant tailwinds from Gen-AI.
Ash Kulkarni: In Q2, new customer commitments with GenAI almost doubled in dollar volume as compared to what we saw in Q1, with three of the deals we signed being greater than a million dollars in annual contract value.
Ash Kulkarni: We now have over 1,550 customers on Elastic Cloud using us for GenAI use cases, with over 240 of these amongst our cohort of customers spending 100K or more with us annually.
Ash Kulkarni: For example, this quarter, a U.S.-based global leader in the automotive industry expanded its relationship with Elastic in a multi-year, seven-figure deal by selecting our Elastic Search AI platform.
Ash Kulkarni: The company has standardized on Elastics Vector Database as the backbone for their retrieval augmented generation and chatbot applications.
Ash Kulkarni: Elastic's vector database powers over 30 chatbot clusters used for both internal employee support and customer facing interactions to enhance efficiency by providing real-time relevant answers and driving improved productivity for the organization's workforce.
Ash Kulkarni: Beyond chatbots, the company is leveraging Elastic's hybrid search capabilities, combining keyword and semantic search for broader applications.
Ash Kulkarni: We also signed an expansion deal with a leading sporting goods retailer in North America to support their omni-channel experience.
Ash Kulkarni: Using the Elasticsearch AI platform, the retailer will improve search relevance by adopting semantic search and using advanced AI relevance capabilities like learning to rank to improve margins and profitability in-store and online.
Ash Kulkarni: The company chose Elastic for a deep expertise in retail search transformation and our integrated machine learning and search AI capabilities, all within a single platform.
Ash Kulkarni: In addition to GenAI, the other secular tailwind that we have been benefiting from is customer consolidation onto our platform for multiple use cases.
Ash Kulkarni: Our ability to help customers reduce complexity and drive efficiency at a lower total cost of ownership.
by consolidating onto the elastic platform.
for multiple use cases.
is helping us secure strong customer commitments.
and become an increasingly strategic part of their IT infrastructure.
Ash Kulkarni: And we continue to invest in capabilities and incentives that make it possible for customers to migrate easily from incumbent solutions to elastic.
Ash Kulkarni: Last quarter, I talked about the Elastic Express migration program and our Search AI-powered automatic import functionality. And I'm pleased to say that we are seeing significant momentum from customers who are leveraging these to migrate off of legacy offerings onto our platform.
Ash Kulkarni: These incentives and offerings were critical in helping us win over 40 competitive deals in Q2, where we either displaced incumbent solutions or onboarded new workloads through platform consolidation.
Ash Kulkarni: This quarter, an online marketplace for short- and long-term homestays selected Elastic Security to replace its existing SIM solution, marking a strategic shift towards a more scalable and AI-driven security approach.
Ash Kulkarni: This seven-figure expansion deal involves replacing a complex and inefficient solution, unable to keep up as the company's threat landscape and data footprint grows.
Ash Kulkarni: The Elasticsearch AI platform, including ESQL and our AI assistant, will help the company streamline its security operations and ensure faster, more accurate threat detection.
Ash Kulkarni: In another seven-figure deal, we signed a new agreement with an insurance provider displacing two competitive solutions for their cybersecurity operations.
Ash Kulkarni: The company chose Elastic Security, leveraging our AI assistant and ATT&CK Discovery to strengthen their threat detection, incident response, and vulnerability management as part of their broader digital transformation efforts.
Now turning to product innovations in Q2.
Elasticsearch now supports bit vectors.
Ash Kulkarni: SIMD acceleration, and INT4 quantization to improve performance. And now, Elastic is the first vector database to offer better binary quantization. Now in tech preview.
Ash Kulkarni: BBQ, as we refer to it, offers a 32x lower memory footprint compared to storing and searching full precision vectors.
Ash Kulkarni: It also surpasses traditional methods like product quantization, delivering faster vector search at lower costs without compromising accuracy.
Ash Kulkarni: Initial benchmarks are showing 30x less quantization time. This is a game-changer for navigating the usual vector search trade-offs between costs and accuracy, and is only available from Elastic.
We also announced the general availability of Auto Ops.
Ash Kulkarni: the outcome of our acquisition of Opster, which significantly simplifies Elasticsearch cluster management with performance recommendations, resource utilization, and cost insights, as well as real-time issue detection and resolution paths.
Ash Kulkarni: By analyzing hundreds of Elasticsearch metrics, configuration, and usage patterns, AutoOps recommends operational and monitoring insights that deliver real savings in administration time and hardware costs.
Ash Kulkarni: In security, AI continues to transform the SIEM landscape, with the SIEM fast evolving to an AI-driven security analytics solution for the modern SOC.
Ash Kulkarni: We expect this new generation of solutions to not only subsume traditional SIEM functionality, but also consolidate extended protections for various parts of the IT infrastructure, which today require separate tools.
Ash Kulkarni: providing threat detection and response and contextual investigation to protect cloud environments, all within a unified set of workflows already familiar to our SIM users.
Ash Kulkarni: As part of this capability, our users can benefit from detection rules that combine cloud telemetry with other relevant logs collected by the SIM, and from context gained from correlating other events and entities to perform streamlined, yet informed investigations.
Ash Kulkarni: Since this capability is fully integrated into our SIEM, CDR users can now benefit from all of Elastic's unique differentiators in the areas of query speed, data management, and relevance-focused AI.
Ash Kulkarni: In the area of observability, Elastic is now 100% OpenTelemetry or OTEL native. As you know, OTEL enables observability users to move from proprietary data ingest mechanisms to an open standard format.
Ash Kulkarni: As of Q2, all OTEL-compliant data is now stored in Elastic without data translation, which removes the need for SRE teams to worry about data formats. Our entire observability suite now works out-of-the-box for OTEL-compliant ingested data.
Ash Kulkarni: In addition, we introduced our hotel-based Kubernetes integration and dashboards, providing users with instant visibility into clusters and application metrics, logs and traces, all without the need for any manual configuration.
Ash Kulkarni: Elsewhere, we expanded our LLM observability capabilities to include Amazon Bedrock.
This adds to our previously announced support for Azure OpenAI.
Ash Kulkarni: On the go-to-market front, we kicked off our Elasticon events in Q2, and to date have held events in San Francisco, Bangalore, Munich, and New York.
Ash Kulkarni: Our Elasticon events have drawn thousands of attendees, and we are looking forward to hosting six more events across the globe during fiscal Q3 and Q4.
Ash Kulkarni: Elasticons give us the unparalleled opportunity to meet with thousands of customers, partners, prospects, and developers to share ideas and showcase elastic innovations.
Partners play a critical role in our success.
Ash Kulkarni: This quarter, we launched the new Elastic AI ecosystem as part of our vision to transform, simplify, and accelerate how enterprise developers build and deploy generative AI applications.
working with leading technology providers including Alibaba Cloud
Ash Kulkarni: Amazon Web Services, Anthropic, Cohere, Confluent, DataRobot, Detaiku, Galileo, Google, HuggingFace, LangShane, Lama Index, Microsoft, Mistral, NVIDIA, OpenAI, ProtectAI, Red Hat, Unstructured, and Vectorize.
Ash Kulkarni: We have built a comprehensive set of integrations with our Elasticsearch Vector Database to help developers speed up the time to develop Gen-AI applications.
Now, switching to some organizational news.
Ash Kulkarni: Janesh has been a key part of our leadership team over the past 7 years, first as CFO and more recently as CFO and COO.
Ash Kulkarni: And his tenure here has included a number of major milestones for the company, including leading our IPO back in 2018, and more recently, helping guide the business across the billion-dollar mark.
Ash Kulkarni: Personally to me, Janesh has been a trusted colleague and a friend over the years, and I want to thank him personally for all that he has done during his time here. I'm looking forward to seeing all that he can accomplish in the years ahead.
Ash Kulkarni: With this change, I'm happy to have Eric Prenger, Elastic's Group Vice President of Finance, taking on the role of Interim Chief Financial Officer, effective December 14th, while the company conducts a search for a permanent replacement.
Ash Kulkarni: Eric has been with Elastic for the past two years and has already made significant contributions to Elastic with broad responsibility for various FP&A and business partnership functions.
Ash Kulkarni: Prior to joining Elastic, Eric spent nearly 10 years at JPMorgan in various investment banking leadership roles and he was involved with Elastic even then having worked on our IPO.
Speaker Change: I have worked closely with Eric during his time here and I am confident in his discipline, leadership and ability to excel in this role. As such, and not surprisingly, Eric will also be considered as a candidate in our search process.
Speaker Change: In closing, I am pleased with our strong performance this quarter. I want to thank our team for their focused execution. And I also want to thank our customers, partners, and investors for their continued support and confidence.
Speaker Change: We are seeing positive signs that we are well on our way to returning to historical levels in terms of our pace of execution. And our Q2 performance is a strong indication of this progress.
Speaker Change: The innovations we are building into our Search AI platform, the momentum we are gaining around Generative AI, and the traction we are seeing with customers consolidating onto our platform, gives us great confidence in our future and in our ability to build a multi-billion dollar business over time.
Speaker Change: With that, I will turn it over to Janesh to go through our financial results in more detail.
Thank you, Ash, for those kind words.
Speaker Change: It's been a privilege to have been part of Elastic's growth journey for the past seven years. I am proud of our successful track record and I firmly believe that the future for Elastic has never been brighter. It's been an incredible partnership with you personally and I am deeply grateful for your trust and friendship.
Speaker Change: While I'm sad to leave behind such a talented team, many of whom are now good friends, I am excited about my next opportunity and confident that the business will be in great hands with Eric. He has been my right hand for almost two years and has proven himself to be an exceptional and disciplined leader. I'll let him say a few words before I get into our results.
Eric: Thanks Ashton, Janesh. I really appreciate it. In the almost two years I've been at Elastic, it has been a pleasure to partner with both of you.
Speaker Change: From my time working on the IPL, I was impressed with the differentiated technology and strong culture that Elastic has.
Speaker Change: Since joining, it has become even clearer to me that we have an opportunity to be a truly generational company. Janesh, you have shaped so much of Elastic, and I very much appreciate that I got the opportunity to work closely with you.
Speaker Change: I wish you the absolute best in your next role, and I'm excited to be stepping into this role with all that is in front of Elastic.
Janesh Moorjani: Thanks, Eric. I'm sure you'll knock it out of the park. Let's get into our Q2 results.
Speaker Change: With a challenging first quarter behind us, we were pleased that we improved our sales execution in the second quarter with strong customer commitments, as Ash described, and also outperformed against the high end of both our revenue and profitability guidance.
Speaker Change: Total revenue in the second quarter was $365 million, up 18% year-over-year as reported, and up 17% year-over-year in constant currency.
i
...as reported and in constant currency.
Speaker Change: Elastic Cloud represented 46% of total revenue in the quarter. Aggregate consumption trends in the second quarter remained healthy, with enterprise and commercial customers generally continuing to consume as anticipated against their commitments, and with stronger-than-expected consumption among some of our larger customers.
Speaker Change: Revenue from our Elastic Cloud month-to-month motion, which is driven mainly by self-service SMB customers, was consistent with our expectations and remained flattish in dollar terms, coming in at 13% of total revenue.
Speaker Change: Consumption revenue can fluctuate across quarters, and we've seen such fluctuations in the past, so we will continue to monitor this closely.
Speaker Change: As a reminder, professional services revenue may fluctuate across quarters based on the timing of services delivery.
Speaker Change: We saw healthy growth across our solutions where search grew the fastest year over year, given the strong traction we've seen in Gen-AI that Ash described.
Speaker Change: The quarter strength was also balanced across geographies where the Americas grew the fastest, followed by EMEA and APJ.
Speaker Change: Customers continue to make strong mouthier commitments to us, reflecting their preference for Elastic as they consider platform consolidation and reflecting our increasing relevance to their business.
Turning to customer metrics.
Speaker Change: We ended the second quarter with over 1,420 customers with annual contract values more than $100,000.
Speaker Change: We continue to be focused on customers with a higher propensity for growth and target such customers in the enterprise and commercial segments.
Speaker Change: These larger customers provide a strong foundation for our land and expand motion as we continue to scale.
Speaker Change: Looking at customer additions more broadly, we ended the quarter with over 4,480 customers above $10,000 in ACV and approximately 21,300 total subscription customers.
Speaker Change: Our net expansion rate was approximately 112% which was in line with our expectations.
Speaker Change: Now turning to profitability and cash flow, for which I'll discuss non-GAAP measures.
Speaker Change: Gross margin in the quarter was 76.9%, consistent with the past several quarters.
Speaker Change: Our operating margin in the quarter was 17.6%, which was significantly better than expected, driven primarily by our strong revenue outperformance and continued discipline in spending.
Speaker Change: Diluted earnings per share in the second quarter was 59 cents.
Speaker Change: Adjusted free cash flow was approximately $38 million in the second quarter, which translated to 10% adjusted free cash flow margin.
Speaker Change: Cash flow on a quarterly basis fluctuates given timing issues and seasonality, so we continue to look at this primarily on a full year basis.
Speaker Change: Although we don't formally guide to cash flow, we continue to expect adjusted free cash flow margin for Fiscal 25 to be slightly above the non-GAAP operating margin for Fiscal 25.
Speaker Change: As you know, our adjusted free cash flow is on an unleveled basis.
Turning to guidance.
Speaker Change: Looking ahead, our market opportunity remains large. The Elasticsearch AI platform is highly differentiated. Our Gen AI traction is strong and customers are continuing to consolidate workloads onto our platform.
Speaker Change: Given the revenue outperformance in the second quarter and our conviction around our opportunity ahead, we are raising our full year total revenue outlook.
Speaker Change: As we look into the second half of Fiscal 25, we assume that the current business environment will remain similar to the first half of the year.
Speaker Change: We remain focused on execution and believe that we are well positioned for long-term growth and profitability.
Speaker Change: I'll highlight some of the factors we considered in our guidance.
Speaker Change: First, while our most recent performance gives us confidence in our improving sales execution, the shortfall on customer commitments we experienced in the first quarter of this year will remain a headwind to year-over-year revenue growth in the back half of this year.
Speaker Change: Second, we have considered that consumption revenue on both annual contracts and in the month-to-month motion can fluctuate.
Speaker Change: Since we've seen such fluctuations before, we have been prudent in our assumptions on consumption rates on annual contracts for the remainder of the year. We also continue to expect revenue from our month-to-month motion on Elastic Cloud will remain somewhat flat for the rest of this year.
Speaker Change: Third, we have considered the revenue headwind from the recent strength in the U.S. dollar. Finally, in terms of seasonal effects in the third quarter, professional services revenue is typically impacted by the holiday season.
Speaker Change: With respect to Gen-AI, as Ash described in his remarks, customer interest around generative AI use cases remains very strong. The strength of our technology and our pace of innovation underpins our position as a market leader in this space.
Speaker Change: We are still in the very early stages of capturing the substantial and rapidly growing market opportunity and we continue to believe this will be a significant growth driver for us over the long term.
Speaker Change: As we consider investments in the business, we plan to continue to balance investing for revenue growth with profitability.
Speaker Change: Given the improvements we saw in our sales execution in the second quarter, we are selectively increasing some investments in the second half of the year.
Speaker Change: We will continue to prioritize investments towards areas intended to drive growth, particularly in Gen-AI.
Speaker Change: With the operating leverage inherent in our business model, we are also raising our profitability guidance for the year. We remain well positioned to drive higher operating margins as we scale the business in future years.
Speaker Change: With that background, for the third quarter of Fiscal 25, we expect total revenue in the range of $367 million to $369 million.
Speaker Change: This represents 12% Eurovia growth at the midpoint on an as-reported basis and 13% Eurovia growth at the midpoint in constant currency.
Speaker Change: We expect non-gap operating margin for the third quarter of fiscal 25 to be approximately 15% and non-gap diluted earnings per share in the range of 46 cents to 48 cents using between 106 million and 107 million diluted weighted average ordinary shares outstanding.
Speaker Change: For full fiscal 25, we expect total revenue in the range of $1.451 billion to $1.457 billion.
Speaker Change: This represents 15% Eurovea growth at the midpoint, both on an as-reported basis and in constant currency.
Speaker Change: We expect non-GAAP operating margin for FF25 to be approximately 13.5% and non-GAAP diluted earnings per share in the range of $1.68 to $1.72, using between 106 million and 108 million diluted weighted average ordinary shares outstanding.
Thank you.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two.
The first question comes from Matt Hedberg.
RBC Capital Markets. Please go ahead.
Speaker Change: Great. Thanks for taking my questions, guys. Congrats on the results. Really nice bounce back quarter.
Speaker Change: You know, there's a lot of things that stood out to me. I think, you know, the success in cross-selling, but also, Janesh, you said something about larger enterprise, particularly their consumption patterns accelerated. I'm wondering if you could double-click on that. Was there any commonality there that drove that trend?
Speaker Change: Hey, Matt. So just digging into that consumption number, overall consumption was quite strong across Q2. We were very pleased with the results that we saw, and that was across enterprise and commercial. It was across the different geos as well, across the solution areas. We did see some strength among some of our larger customers that accelerated their consumption, and that was really encouraging because they're continuing to use the Elasticsearch AI platform for both new and expanded workloads.
Speaker Change: In terms of whether there was, you know, any particular commonality there or similarity to the past...
Speaker Change: We have seen consumption be stronger in prior periods as well, but it's not necessarily the same customers that are always stronger, so there can be some variations there.
Speaker Change: From our standpoint, as we built our guidance for Q3, although we are very pleased with the consumption rates that we saw in the second quarter, we have seen these rates fluctuate in the past.
Speaker Change: So we built our guidance quite prudently, and just for clarity, we've not actually seen any change in the business so far. We're simply considering the possibility that consumption patterns may revert to what we previously experienced prior to Q2. So that's the way we've approached it.
Speaker Change: Well, that's great. Well, it seems like there's others that are also talking about better consumption trends from last night. Maybe just to ask for you, it was great to see the sales force bounce back here. I'm wondering, you know, is there anything that you put your finger on that drove to that better sales execution? I know there was a lot of changes in one queue, but...
Speaker Change: Curious if you if you can understand sort of what the positive change factor was this quarter And I know Janesh is being conservative and back half guidance But you know the opportunity for continued improvement there just sort of curious on on your thoughts there
Speaker Change: Yeah, Matt, thanks for the question. So, you know, even in last earnings call, in the Q1 earnings call, like I'd mentioned, you know, we felt pretty confident that
Speaker Change: The changes that we had made at the beginning of the year were the right changes and what we've seen is, you know, with rigor as we've been inspecting the pipeline and making sure that we are doing all the right things with discipline, a few things have already happened or are happening at the pace that we want them to.
Speaker Change: We have seen that the pace of pipeline creation and pipeline progression has come back to normal level. So we are really happy about that. The second thing that we have seen is...
Speaker Change: and the benefits of those are now starting to take hold. And just as our reps have had more time to work on their accounts, to work with their accounts...
Speaker Change: We have started to see all the right kinds of behaviors that we were expecting to see and that's what gives me a lot of confidence going forward. And, you know, as we've said...
Speaker Change: The thing that happened in Q1 was a near-term impact, and I'm really happy that the team really delivered in Q2, and we are moving in the right direction.
Speaker Change: Great. Thanks a lot. And Janesh, it's been great working with you. Best of luck in your future endeavors.
Speaker Change: The next question comes from Pendulum Bora with J.P. Morgan. Please go ahead.
Pendulum Bora: Great, thanks for taking our questions and congrats on the quarter Janesh. From me as well, great working with you and all the best. And Eric, congrats on the interim role.
Ashutosh Kulkarni, Janesh Moorjani, Anthony Luscri, Ashutosh Kulkarni, Anthony Luscri,
Speaker Change: It is something that I am personally very excited about. Our team is very excited about it. Like you correctly pointed out, quantization is always a tradeoff between accuracy and efficiency or performance. And better binary quantization, we are the first to really deliver this capability. And what it does is it delivers an absolutely amazing level of efficiency, everything from how much memory is required to the time it takes to do the actual quantization to even query performance. And all of those
Speaker Change: with very little impact on accuracy and that's what's so great about this algorithm like I mentioned in my prepared remarks.
Speaker Change: You know, this we feel is a true game changer, and at this phase, you know, we are still in the very early phases of the whole AI revolution, the way I see it, the way we see it. This is the time when we want to make sure that we are delivering the kinds of asymmetric
Speaker Change: innovations that will allow us to really gain maximum share in this market and so I'm personally very excited in the applicability is pretty broad and you know we are just going to drive this hard
Speaker Change: Yep, understood. Janesh, one question for you. It seems like a very strong cloud consumption quarter, but when I look at the RPO numbers, especially on the sequential trend, it seems a little bit muted given that a number of deals pushed out of last quarter. You noted you had closed a lot of those. So maybe how would you characterize kind of the bookings cadence at this point?
Speaker Change: Versus historical norms, given the changes that you see, it's improving but we are not there yet.
Speaker Change: Pinchulam, we were actually very pleased with our overall sales execution in Q2. Really happy to see that the team bounced back and the additional measures that we had taken following Q1, they are having the desired effect and sales reps have also had more time to engage with their new accounts. So I think all of that played quite nicely for us.
Speaker Change: While there were many deals that moved out of Q1 that we closed in Q2, those were not the main driver of strength for us in the second quarter. But overall, looking ahead, I think we feel pretty good about the outlook for the rest of the year. With respect to the RPO timing and the quarter-over-quarter changes in RPO, that was consistent with what we've delivered before, and in fact, probably even slightly higher than the sequential change that you may have seen in the year-ago quarter.
Speaker Change: Next question comes from Tyler Rottke with Citi. Please go ahead.
Speaker Change: Thanks for taking the question and Janesh, it's been great working with you and all the best. Good to see you leave on a high note here. Ash, I wanted to go back to some of the Gen AI use cases.
Speaker Change: You know, very strong quarter in terms of commitments, the doubling quarter over quarter.
But I'm curious how you're kind of seeing those...
Speaker Change: of use cases unfold. It sounded like you referenced some use cases where you're kind of the backbone, you know, in terms of being the vector database supporting 40 different use cases.
with agents and chatbots.
and then some other use cases just around semantic search.
Speaker Change: Maybe help us understand, are you kind of orienting the sales force around kind of discrete go-to-market motions, particularly around Gen-AI to serve those use cases? Just give us a flavor of kind of how you're standardizing the Gen-AI go-to-market and use case evaluation here.
Speaker Change: Yeah, that's a great question, Tyler. So, you know, the first thing I'd say is...
Speaker Change: As we look at the market broadly, across pretty much every industry and every vertical, what we see is that there are a lot of processes.
Speaker Change: Business Processes that depend upon You know unstructured data being you know manually processed and moved from? You know one step of the process to the next step and all of those have the ability to be automated through generative AI I'm so we are looking at that and effectively our strategy is to be
Speaker Change: that runtime platform for retrieval augmented generation for anybody building those kinds of...
Janesh Moorjani, Janesh Moorjani, Anthony Luscri
that then automate that process. [inaudible]
Speaker Change: And we just want to be the underlying layer, the underlying platform for all of those things. And so instead of taking a vertical-by-vertical approach, we're basically taking a platform approach. And as you know, that's been really something that has worked very, very well for us in the past. And our motion around this is very simple. Our field just goes in and talks about semantic search.
Sajjan Kulkarni, Janesh Moorjani, Anthony Luscri
Speaker Change: and external as people are getting more and more comfortable. I think that's exciting.
Thanks, Ashton. Janesh, for you,
large customers consumption in the quarter.
I guess if you think about the...
Speaker Change: stronger-than-expected trends that you saw. Would you say that that was kind of one-time-in-nature? Or do you, you know, was this kind of onboarding new use cases? And just to clarify, you're saying that you're seeing these strong trends continue, you're just not embedding it into the guidance? Just wanted to clarify that. Thank you.
Speaker Change: Hey Tyler, yeah so in terms of what we saw absolutely we saw the strength be broad-based
Speaker Change: I wouldn't characterize it as one time. It was just some of our larger accounts consumed at a faster pace, and that was really encouraging to see.
Speaker Change: We've talked about the momentum that we've seen in Gen AI. We've talked about the platform consolidation. So I think that there's a lot of goodness in terms of what the teams have been driving, which has translated into higher consumption rates.
Speaker Change: So it was higher than what we expected, but I wouldn't characterize it as one time.
Speaker Change: In terms of what that means for the future and the assumptions that we're using for the future, you're right, we have not seen any change in the business, we have not seen anything adverse, but we're just being prudent in terms of how we build our forecast, because we have seen historically consumption rates can fluctuate, and we think we just want to be careful with that and not get ahead of our ski tips.
Speaker Change: Yeah, I guess you're guiding before Thanksgiving for the first time, so a lot more days in the quarter. That's right, exactly right.
All right, thanks Janesh, all the best.
Thank you, Tyler.
Speaker Change: The next question comes from Koji Ikeda with Bank of America. Please go ahead.
Speaker Change: Hey guys, thanks for taking the questions. Hey Ash, Janesh, thanks for everything. All the best to you. And Erica, looking forward to working with you. So, I have a question on the sales organization, and I guess the question is on a scale of 1 to 10.
Speaker Change: How would you rate where you are today with the sales org? You know, 10 being back in business and fully ramped on the new strategy. Where are you at today? And if it's less than 10...
Speaker Change: So I'm just wondering if we're we could still see effects of the sales org change playing out over the coming quarters Or is there just massive conservatism embedded in the guide?
Speaker Change: Hey Koji, thank you very much for the question. So, you know, I'm not a huge fan of...
Speaker Change: putting anything on a scale, but here's what I'll say. First of all, I'm really happy not only at the way we performed.
Speaker Change: But the metrics that I look at internally are effectively, are we creating pipe at the right pace, and are we progressing pipe at the right pace?
Speaker Change: And in both of those areas, I've seen that, you know, our pace of pipeline creation and our pace of pipeline progression has come back to normal. Also, our win rates continue to be incredibly strong. And that's really, you know, those are the fundamentals, right? When you think about your sales strategy, all of those things are working as they should.
Speaker Change: and the Q2 results from that perspective give me a lot of confidence about where we are. Now in terms of the guide and so on, why don't I ask Eric and Janesh to maybe weigh in?
Yeah, sure, I'll take this.
Janesh Moorjani: And as you think about our guidance for the rest of the year, in terms of the year-over-year revenue growth, you need to keep in mind that the effects of the shortfall on customer commitments in the first quarter are going to have an ongoing impact on the year-on-year growth.
Janesh Moorjani: of the business. For self-managed, that's already playing through in the second quarter, and so it'll be similar. But for cloud, there's going to be an increased headwind in the second half, given it usually takes several months to fully ramp cloud consumption.
Janesh Moorjani: This dynamic is something we anticipated and we've considered and it is in our outlook as we've shared it. So that's the way I'd think about it. There's also a slight headwind year-over-year on year-over-year growth in the back half from currency effects.
Janesh Moorjani: Most importantly, I think that our focus is to maintain our sales execution the way it was in Q2 so that we can continue the positive momentum that we saw and continue to secure customer commitments.
Thank you.
Speaker Change: Yeah, Koji, I'll just add that obviously it's too early to talk about 26 specifically, but as you think about that exit growth rate, our revenue next year will largely be determined by sales activity from here on out in Q3 and Q4. And we feel pretty good about where we are on that trajectory, as Ash said.
super impressive there. The question here is, are these four
Speaker Change: specific generative AI projects and what I'm trying to understand is that we've been waiting for you know these big commitments to come and so if these are for specific generative AI contracts, does that really imply that
Speaker Change: As experiences, generative AI experiences come to fruition, I mean, Elastic could be a beneficiary of lots of these big, big six, seven-figure deals for very specific generative AI projects. Thank you.
Speaker Change: Yeah, that's a great question. And what I'd say is, first of all, generative AI is sort of the fastest growing part of our business at this point, like we are seeing a lot of traction in it.
Speaker Change: You know, keep in mind, Koji, that we don't have a discreet...
Janesh Moorjani, Janesh Moorjani, Anthony Luscri
Speaker Change: We've shared, right, the fact that we are now seeing commitments...
Speaker Change: and that's the reason why like our focus now is to continue to execute like we did on the sales front in Q2 so we can keep building that up and you know keep progressing.
Thanks Ash, thanks for taking the question guys.
Thank you.
Speaker Change: The next question comes from Brent Bill with Jeffries. Please go ahead.
Brent Bill: Thanks, Ash. On the go-to-market, I guess I'm confused. You say that you're pleased with your sales team, yet your RPO is flat. You want a Q2. Your competitors are growing RPO twice the speed of you.
Brent Bill: and so I'm just I'm trying to reconcile this is it you're pleased with the pipeline that's building back because it hasn't converted into backlog yet so I just I just want to make sure we clarify what you mean by that.
Speaker Change: in year-over-year terms, it's roughly flat, but in year-over-year terms, keep in mind that RPO is a point-in-time cumulative measure of all prior activity.
Speaker Change: So the Q1 shortfall from commitments does impact the Q2 year-over-year growth rate in RPO.
Speaker Change: But if you think about more current activity from Q2, and you consider the sequential growth...
Speaker Change: It is up a little bit and usually in Q2 sequentially RPO has gone down. So if you look at last year for example, RPO was a little bit lower in Q2 than in Q1.
Speaker Change: So we were actually quite pleased, and again, we're not declaring mission accomplished on the sales execution side, we've said that we've...
Speaker Change: We are pleased with the progress that we've made in terms of our return to that and you see that reflected in these numbers and you see that reflected in all of the other indicators of the business as well, RPO being just one of the several indicators of the business that we all look at collectively.
Speaker Change: Okay, and when you think about search as a percent of total revenue versus broader observability, is it still roughly a 30-70 split or does that change?
Speaker Change: Yeah, let me maybe touch upon that and I'll ask Janesh and Eric to also weigh in, but look, the overall mix of the business...
Speaker Change: Search has definitely been accelerating for us and I've talked about that in Q1. It was the same in Q2. This quarter, all parts of our business grew. When I look at the actual customer commitments that we got and the way we are seeing our business grow, I feel good that in all three solution areas.
Speaker Change: We are taking share, but search is definitely benefiting more given the trends that we are seeing in generative AI.
Great, thank you.
Speaker Change: The next question comes from Raymo Lentzschow with Barclays. Please go ahead.
Speaker Change: Perfect. Thank you. Can I stay on search? Maybe one more question. Ash, if you think about the offering there, and you have a very large install base in search, because that's kind of where you guys started out.
Speaker Change: How do you think about the opportunity there in terms of going back to all of them Or to a lot of them and just kind of seeing okay, like look we have hybrid search now You can get to better outcomes
Speaker Change: as kind of a starting point for doing more stuff around GenAI than anyway. But like, where are we on that journey of the whole client-based understanding, what you can offer now, and kind of working on that one? Because it does feel like it's still very early.
Speaker Change: Yeah, Bramo, what I'd say is that that is the natural motion for us and as you can imagine...
You know for our customer base
Speaker Change: The data is already in Elasticsearch, so for us to go to them and make that case that now they can get even better, more relevant results.
Speaker Change: is a pretty straightforward thing. So, you know, for sales teams...
Speaker Change: When you see a motion, when you see a sales motion that is natural, that your customers relate to, where you already have a good setup because the data is in Elasticsearch already, like that's just a natural place for them to go and we are seeing that happen. We are seeing our sales teams do that naturally. A big part of the success that we are seeing in generative AI is because of that.
Speaker Change: We have gotten there this quickly because that is the motion that our sales team is driving. Lots more to go, but very excited and happy about the progress.
Speaker Change: Yeah, perfect. And then one follow-up from me was, you mentioned, Ash, you talked earlier about the Sim opportunity. Obviously, there's been a lot of disruption in the market with some of the take-outs, etc. What are you seeing there in terms of customer engagement with you guys around Sim? Thank you, and Janesh, it was an honor working with you.
Speaker Change: To your point, what we're really seeing happening is AI is now becoming not just a nice-to-have but almost a must-have.
When people think about security analytics in SIEM,
and people are looking at...
Ways in which AI can be used
Speaker Change: In terms of leaning in with AI, just given our core strengths and vector database and so on, we've seen a tremendous opportunity and we're seeing that momentum.
Bill, so I'm quite excited about it.
Speaker Change: Things like the Express Migration Program that we launched are also helping because some of these are greenfield opportunities, but many of them are ones where there is a displacement opportunity. So I would expect that you should expect us to continue pushing hard in this area in security and also leaning into the whole AI space to allow us to win.
Okay, perfect. Thank you.
Speaker Change: The next question comes from Itay Kidron with Oppenheimer. Please go ahead.
Speaker Change: Thanks, and Janesh, my thanks to you as well, and good luck on the next move. Ash, I wanted to ask again about the Search AI. I'm sorry, getting back to this. 1550 customers, it's quite impressive and quite nice, but can you tell us
Speaker Change: How many of these customers were historical search customers, meaning just added the AI capabilities, or were net new to the company, and perhaps, what's the penetration right now of AI within your search base?
Thank you.
Very good. And then maybe on the competitive front...
Speaker Change: You know, what do you view as your toughest competition here on the Gen AI side and on the SIEM? Like, who are the one or two vendors that you see most frequently? And when you talk about the displacements, I think you talked about it more in the context of SIEM on the call. Where are the greatest displacement opportunities that you see right now?
Speaker Change: Yeah, look, when it comes to displacement opportunities, you know, there's a whole host of...
Speaker Change: You know, everybody from a Splunk to a QRadar to an ArcSight, I mean, there's a pretty large set of players that have been in this space.
And for us, the way we describe ourselves...
Speaker Change: We are a modern, next-generation SIM. We think of ourselves as a security analytics product. The way our customers are able to do ad hoc, AI-based analysis on our platform is something that's incredibly differentiated. And because of the flexibility of our back-end, we are able to bring in data from just about everybody, and that's a big part of why we are succeeding in this area. When it comes to Gen AI, we don't have our own large-language models, so we partner with just about everybody. You saw the announcement that we made about the AI ecosystem. So we are partnering with a lot of players that provide their own large-language models.
Speaker Change: Our core place, the way we want to position ourselves, is as the platform for retrieval augmented generation. We want to be the vector database of choice.
and then also provide some of the capabilities around it.
That data is always best suited to bring into Elasticsearch.
Speaker Change: And we have, you know, the best vector database to support those kinds of use cases. And that's a massive...
Janesh Moorjani, Janesh Moorjani, Anthony Luscri
I appreciate it. Thank you.
Speaker Change: The next question comes from Howard Ma with Guggenheim Securities. Please go ahead.
Speaker Change: Great, thank you. My question is for Janesh and or Eric. So it sounds like you did not make up for the Q1 shortfall in commits and customer commits in Q2 despite the bounce back. But when you factor in the acceleration in consumption trends,
Speaker Change: It sounds like maybe you were back on track with your revenue targets before the cut last quarter and that you're just being a bit conservative with your fat cap assumption. So is that true? Or maybe just ask another way. Had you known you would achieve the Q2 performance that you did, both commits and consumption, would you still have lowered your full year guide last quarter?
Speaker Change: Thanks Howard and I think what I'd say to that is that
Speaker Change: You know, given the headwind that we saw in Q1, it's going to impact the full year, and I think we still would have lowered our guidance. Q2 is obviously strong, and we're very happy with the outcome in Q2. But what happened in Q1 is, unfortunately, going to play out over the rest of the year. And particularly, as we said before, cloud is going to have a little more of a headwind in the back half, specifically, versus what it had in Q2, given the timing of the customer commitments. So, while we were very happy with the performance in Q2, we would have still made the same decision that we did.
Speaker Change: Okay, thanks for clarifying that Eric. I just have a follow-up for Ash.
Speaker Change: When you look over the last 12 months, how would you describe the pace of adoption of vector database, L-search, hybrid search for Gen-AI use cases, and compare that to how you expect the pace of adoption will play out over the next 12 months? And on a related note,
Speaker Change: Could you, in the next few quarters, you know, next quarter or the quarter after, could we start seeing a disclosure of AI contribution to total revenue, you know, maybe when it hits 2%, 3%, 5%? Like, you know, is that perhaps in the works?
Thank you.
Speaker Change: Yes, so let me let me touch upon the first first and then I Might invite Janesh and Eric to also talk about the second piece
Speaker Change: There's a lot of design work that goes in. You want to be baked into those designs. People are still trying to figure out how many of those go into full-scale production versus not. We saw a lot of that about 18 months ago and so on. Since then, we've started to see people actually take many of these into production. First, it was internal-facing applications. Now, it's also external-facing applications.
Speaker Change: This is very similar to the pattern that we would have expected. What I'd say is it's happening in a much more compressed time frame. So, you know, the time it's taken from this being sort of early to now, you know, people building these applications and deploying them, it's happened much faster than anybody would have expected. So that's been the exciting part.
talk to us
and now it's into the more sophisticated stuff.
Speaker Change: In terms of the metrics, your second question, I'll just say one thing that, keep in mind that we don't have a separate skew, right?
Speaker Change: But with that, Eric, any thoughts, Eric or Janesh? Yeah, to Ash's point, we don't have a separate SKU. And what we have done is we've always tried to give appropriate indicators and color around the traction that we're seeing in generative AI. We shared that we have 1,550 of our cloud customers who are using generative AI, and that of those 1,550, 240 of them are 100K-plus customers. Ash also shared some of the traction that we saw this quarter
Speaker Change: commitments more than almost doubling relative to what we saw in Q1. So it is something that will be evolving what we share, but it is not something that we have a specific skew on to that point.
Okay, great. Thanks, and great to see the bounce back.
Thank you.
Speaker Change: The next question comes from Austin Dietz with UBS. Please go ahead.
Speaker Change: Thanks, guys. Maybe just another question on RPO. Janesh, it sounded like you felt good on the trajectory of the business in Q3 and Q4. Could you maybe talk about the second half, what you're seeing, and is it possible, especially as we have more time for that sales execution motion to continue to improve, could RPO see an uptick on a sequential dollar growth basis in the second half, especially relative to last year? Thanks.
Speaker Change: Hey Austin, yeah, happy to talk about that. So look, as we continue to execute in the back half of the year, you know, especially if we if we execute well, you will see that reflected in all of the metrics that we talk about.
Speaker Change: As I was talking about the guidance and the specific assumptions I've used for building the guidance, I laid them all out earlier, so I won't repeat them necessarily here. Fundamentally, you're right. If we execute well, you will see that reflected not only in RPO, but in all the other metrics, including in revenue.
Speaker Change: Okay, great. And then let me just last, Ash, as a part of those go-to-market changes, it seemed like there was more of a focus on green-filled opportunities, new logos. Can you update us on how that's progressing? Thanks.
Speaker Change: and assigned sellers to go pursue those. You know, as you know, typically it takes a lot longer.
Speaker Change: So, what I'd say is that we are still in the early days.
Speaker Change: But when I look at the overall pipeline creation and progression, I feel very good about the pace coming back to what we've seen historically. And the area of Greenfield territories, we're going to just keep tracking it and make sure that we continue to build the momentum in those areas.
Okay, great. Thanks, guys.
Speaker Change: The next question comes from Kash Young with Goldman Sachs. Please go ahead.
Speaker Change: Hey, thank you very much Janesh. Good luck with the next gig here. One for you, Ashutosh, maybe two things. One is...
Speaker Change: When you talk about the GNI progress, what are the metrics that you are tracking?
Speaker Change: You do not have a revenue to disclose to us. You talk about use cases.
Speaker Change: But how would you define Gen AI success in a way that we can say okay, you know That makes sense relative to say a Microsoft or a ServiceNow that seem to be talking about Gen AI bookings or AI bookings
Speaker Change: And also another question for you, when you look at the go-to-market motion, you sell a platform, so you do not really know the use cases instance by instance.
Speaker Change: How does that percolate into having the right go-to-market strategy, granted that Gen-AI is emerging as a use case?
Speaker Change: do we not know what the sales force is hunting for and they come back and tell you and then sometime later when the implementation happens you find out that it's implemented for search versus observability versus
Speaker Change: Sim versus AI whatnot. So trying to understand how, if you do not know what the sale is for, how do you articulate and fine-tune the go-to-market strategy. Thank you so much.
Speaker Change: That's a great question. I'm glad that you asked it Kash. So let me let me clarify
First and foremost, let me address your first question.
Speaker Change: The second thing that we look at is the customer commitments that are being made that are related to generative AI use cases.
Speaker Change: There, it is all based on the information that we get from our sales teams at the time of the deal closure, right? So, you know, we know that a particular deal is related to semantic search or it's related to somebody in that company that I talked about, you know, building a chatbot or several chatbots.
Speaker Change: So, at the time of the sale, we know what that customer commitment is related to.
Speaker Change: Now, that is customer commitments, but when you think about revenue, once the customer has purchased something from us and they are, you know, running, they've stood up a cluster of Elasticsearch and they are, you know, now, let's say, doing semantic search or RAG on that cluster, at some point of time, they might decide that they also want to do some observability workload on that same cluster.
If they do that...
Speaker Change: Because we don't have a separate SKU, it's hard to disambiguate. So what we look at is customer commitments. And that's true even for our other solution areas. So that's why when we talk about the solution mix, we always say that it's based on, you know, reported information from our sales teams.
Speaker Change: and there we absolutely do have that clarity that also guides our go-to-market motion. So based on that information we know exactly what is working, where we are seeing success and that's how we guide our sales teams to make sure that we are maximizing the opportunity ahead of us.
Speaker Change: I'm curious, in the long term, how does the go-to-market strategy evolve?
and the product marketing and the product management involves.
Speaker Change: But the real question I wanted to follow up with was, at what point do you feel like you need to add or accelerate the sales capacity growth rate? Because clearly, if things work out the way you would like to, the growth of the company can be better. For that to happen, you need to also have another round of investing in sales capacity go to market. I'm just curious how you look at the trade-off of faster revenue growth rate versus enjoying the market structure that you do currently. Thank you so much, and that's it for me.
Speaker Change: We see our growth opportunity as continuing and just to be very clear, even when at the end of Q1 we said that we are going to be taking some near-term cost control actions, all of them were such that we did not affect our selling capacity.
Speaker Change: Janesh Moorjani, Anthony Luscri, Janesh Moorjani, Anthony Luscri, Anthony Luscri, Anthony Luscri,
Speaker Change: As Ash mentioned, we are staying the course on investments and in fact, as we look at the second half of this year, just given our revenue outperformance in the second quarter, we are actually increasing our investments in the second half a little bit and given the strength of the operating leverage inherent in the model, we're able to do both, add to the margin as well as increase the investments.
Speaker Change: And those investments will go towards a variety of functions, including selling capacity, which, as you know, is important for us to make sure we enter fiscal 26 with the right amount of productive selling capacity as well. So we're definitely keeping an eye towards that growth in the future and investing appropriately towards it.
Awesome. Very good to hear. Thank you so much.
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. Please go ahead.
Ash Kulkarni: Thank you all for joining us today. We are extremely excited about the continued momentum in our business, driven by generative AI, and we look forward to continuing our strong execution. For those of you who will be at AWS reInvent, I look forward to seeing you there. Have a great day.