Good afternoon, and welcome to the Elastic Second Quarter Fiscal 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.

Thank you. Good afternoon, and thank you for joining us on today's conference call to discuss Elastic's second quarter fiscal 2021 financial results. On the call, we have Shay Banon, Founder and Chief Executive Officer; and Janesh Moorjani, Chief Financial Officer. Following their prepared remarks, we will take questions. Our press release was issued today after the close of market and is posted on our website. Slides which accompany this webcast can be viewed in conjunction with live remarks and can also be downloaded at the conclusion of the webcast on the Elastic Investor Relations website, ir.elastic.co. Our discussion will include forward-looking statements, which may include predictions, estimates, or expectations regarding the impact of the COVID-19 pandemic and other information. These forward-looking statements are based on factors currently known to us, speak only as of the date of this call, and are subject to risks and uncertainties that could cause actual results to differ materially. We disclaim any obligation to update or revise these forward-looking statements unless required by law. Please refer to the risks and uncertainties included in the press release that we issued earlier today, included in the slides accompanying this webcast and those more fully described in our filings with the Securities and Exchange Commission. We will also discuss certain non-GAAP financial measures. Disclosures regarding these non-GAAP measures, including reconciliations with the most comparable GAAP measures can be found in the press release and slides. Webcast replay of this call will be available for the next 60 days on our company website under the Investor Relations link. Our third quarter fiscal 2021 quiet period begins at the close of business on Friday, January 15, 2021. We'd also like to inform you that we will be virtually participating in the Barclays Global TMT Conference on December 9 and the Goldman Sachs Technology and Internet Conference on January 12. With that, I'll turn it over to Shay.

Thank you, Anthony. I'm glad to be here with everyone today and share the results of our second fiscal quarter. The end of 2020 is upon us, and what a year it has been. As we closed out Q2, I reflected on the importance of empowering our community of customers, partners and users with the same resilience we strive for as a company. We are building the business for the long run, a business that is there for our customers today and tomorrow. And I feel fortunate to say that I believe we are well on our way. We had a great second quarter, as total revenue grew 43% year-over-year. We ended the quarter with more than 12,900 subscription customers including over 650 with ACV of more than $100,000. I'm proud of how well the team executed in an ongoing mixed demand environment, delivering a strong quarter for us. This can't be done alone. So thank you to our entire community for joining us on this journey. In the quarter, it was fantastic to see so many of our users come together during our first virtual conference, ElasticON Global, more than 25,000 registrants from more than 80 countries signed up to participate. We had more than 300 sessions that showcased how our solutions help customers drive outcomes with data, insights and action. We were pleased to have our strategic partners Google and Microsoft participate as sponsors and presenters at the event. I was especially excited to have Google Cloud's CEO, Thomas Kurian, speak about our continued partnership during the opening keynote. It's wonderful to have that level of executive engagement. I was also happy to see so many of our customers speak and share their stories at ElasticON Global, including Cisco, Audi, Rocket Homes and Wells Fargo, all of whom…

Thanks, Shay, and thanks again to everyone who joined us on our Inaugural Financial Analyst Meeting some weeks ago and for joining us today. Q2 was an excellent quarter for Elastic. We once again delivered strong performance on all our key growth and profitability metrics. During the second quarter, the demand environment remain generally similar to the first quarter. As expected, we saw some headwinds from COVID-19 related to overall spending and slightly longer sales cycles as compared to pre-pandemic levels, offset by tailwinds in cloud and adoption of our solutions. Our execution against this backdrop remained consistently strong. Let's jump into the numbers. Total revenue for the second quarter was $144.9 million, growing 43% year-over-year. 45% of our revenue came from outside the United States. We believe our geographic distribution continues to be a long-term strength of our business model. Subscription revenue totaled $134.2 million comprising 93% of total revenue. The strength in subscription revenue growth at 46% year-over-year, despite the pandemic demonstrates the importance that customers place on our Enterprise Search, Observability and Security solutions. Within subscriptions, revenue from Elastic Cloud was again strong at $37.4 million growing 81% year-over-year. We saw strength in both our annual SaaS business, as well as our monthly SAS business. Elastic Cloud continues to be a key strategic area for us. We have rich feature advantages over other cloud offerings and continue to invest in expanding our reach and our partnerships. We remain confident in continued strong growth in Elastic Cloud looking ahead. Professional services revenue was $10.7 million comprising 7% of total revenue. As I've said before, services revenue can fluctuate across quarters depending on the timing of projects and delivery. Moving on to calculated billings; calculated billings in Q2 grew 42% year-over-year to $177.7 million. In terms of geographic growth,…

We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Brent Thill with Jefferies.

Thanks. Good afternoon. Curious if you could just characterize the demand environment? And what you saw later in the quarter as you went through October, and I'm curious if anything dynamically has changed for you in terms of how the customers are feeling or extra signatures to sign off where you've seen kind of more of the same behavior, you've seen earlier in the year? Thank you.

Brent, this is Janesh, and maybe I'll start with that. So first half as I just reflect back on Q2, we saw really strong execution across segments and geographies. So we were really pleased with that approach. In terms of the demand environment, I'd say it was steady, it was very similar to Q1, and generally it remained mix as we expected with headwinds and tailwinds similar to what we've talked about before in the form of slightly longer sales cycles, but customer spending generally shifting towards areas where our solutions are very well positioned. And so we've seen continued momentum in the business. Our pipeline and our top of funnel activities, all of that continued at a pretty good pace throughout the course of the quarter. And we also expect that looking ahead customers will continue to be similarly careful as they've been in the first half of the year, they'll take a similar approach we expect in the back half. So let's say, so far the year has played out largely as we expected, and we do expect that as I had mentioned in the prepared remarks that the Macro [ph] will stay similar in the back half to what we've seen so far. In terms of linearity and how the quarter played out, it played out pretty well. Q2, for us followed normal patterns. August is usually a little bit slower and September is a little bit -- a little bit faster than that because of the federal year-end. And as with any other software company, we have a typically stronger third month. So we saw it played out again normally and as we expected. But overall, it was a really strong quarter and we're looking ahead to the back half and feeling pretty good about it.

And just a quick follow-up on federal, maybe just give us a sense, did that exceed or kind of meet your expectations? Any color on the overall execution there would be helpful? Thank you.

Yes, it was a really strong quarter in federal as well, and congrats to our team for delivering yet again. The Fed business as we know can be a bit lumpy and our performance is not all these types of federal fiscal year. But despite that, I think the team did a remarkable job. In fact we also put [ph] in a few million dollars of business that was expected in Q3. And so the team did a really good job on that front. Overall, we are proud of the way the team has delivered. We are continuing to invest in federal and I really excited about the opportunity and not just Fed but public sector globally for us.

Thank you.

Yes.

Our next question comes from Raimo Lenschow with Barclays.

Hey, this is [indiscernible] for Raimo Lenschow. I wanted to ask you about your grades. It looks like they've been pretty strong, but your peers are seeing some of those rates fall off. So kind of wondering how much of the strength that you're seeing is coming from some of the e-commerce tailwinds [ph]?

This is Janesh. You cut off in the earlier part, you mentioned some rates. Can you just repeat the earlier part of the question?

Sorry, your net dollar expansion rate?

Got it. Yes. So I'm happy to talk about that. We've got -- we've had a pretty strong track record of driving expansion within the customer base and we saw that again in Q2, both with the growth in the customer count over 100K ACV as well as our net expansion rate being over 130% once again. The net expansion rate did dip a couple of points in Q2, just reflecting the broader demand trends that we referenceable headwinds and tailwinds. But looking ahead in terms of customer dynamics across verticals, we expect that the second half will be similar to what we've seen in the first half. The verticals that are more adversely impacted by COVID like hospitality and transportation continue to be soft, and verticals that have been beneficiaries spending in areas like e-commerce continues to be strong. But overall, as I think about the customer dynamics and the impact of the pandemic that can come, that can impact new business, renewals and expansion that just mineral [ph] customer spending more broadly. So I'm not discretely thinking about a specific percentage or number in any of those areas. But just as we think about the business in the aggregate, we just feel really good about the relevance of our solutions and how well they are aligning with customer priorities at this time. So we feel pretty good about the longer-term opportunity we have.

Thank you. And I was hoping you could give us an update on the competitive dynamics around observability area. How much of you having that security pieces that's helping you win deals.

Yes, I'm happy to take it. Hi, Shay here. So first of all, when it comes to our observability use cases, we feel very good about it. We feel we're leading the pack, if you will, when it comes to the applicability of the broad-based observability market, which is the consolidation of multiple market historically from IT question logs to APM to infrastructure monitoring. We have been investing in it for years. We have invested heavily on the technology stack, single technology stack. We're treating them as features and not as product with the unified pricing model and it really resonates with our customer base because they really see the need, the outcome is the same, the ability to absorb the infrastructure and then act on it. Whether when something goes wrong sadly sometime, I'll be in front of some of the challenges that they might have; so that's one aspect. As you mentioned also though we do see the overlap between observability and security. If you look at operational logging where we started as a company and where we were the strongest now. Every log event is also security event. So that's why we're investing heavily in the security market and we're actually seeing customers being and users being really excited about the ability to treat observability Peter asked security data. And the fact that they can do it is, thanks to our investments in a single technology stack that kind of get everything we stored in the same place that you would kind of lead in through this datasets whether you talk about them as observability or security using a single search query that's extremely powerful. And that's what we're delivering to our customer base and is reflected by the adoption of our software.

Thank you. And congrats on the great results.

Thank you.

Thank you.

Our next question comes from Mark Murphy with JP Morgan.

Hey, this is Pinjolim [ph] on behalf of Mark. Congrats on the results, and thank you for taking our questions. Shay, I just want to ask you about Schema on Read. We have always heard that Schema on Read is something that Splunk and Sumo has in Elastic does not have that kind of results in a better ease of use for those platforms versus Elastic. But now you have Schema on Read. So how should investors think about that. I mean do you think it elevates the ease of use of the platform versus competition and makes it much more consumable to non-developer audience or does it actually increases the latency first.

Yes, of course, happy to touch on it. So we announced our investment in Schema on Read, we call them runtime fields in our ElasticON Global Conference. I'll just mention that we haven't released it yet. It's slated to be released and then mature over the next few quarters. We're very excited about principal, about the teacher because we are implementing it in a way that it's completely seamless to the user, and they can go and use these fields to query on if you will, whether they are indexed and Scheme on Read or whether they're being done on Read. And then with a single click be able to transform it from Schema on Read to Schema on Write. When it comes to our investments in it, we start always from fast. It's easier to start fast and go slower. It's really hard to start slow and go fast. So we always start with fast. We start with fast when it comes to schema on write and I would say that we've been innovating quite a bit when it comes to our investments there. We index everything by default. It's magical. No other system does that. And it's reflected in how fast we are. But we will give our users the flexibility and with schema on read we will give them even more flexibility to make that choice between indexing everything by default versus being slower by doing it that we time. And that can help some usability aspects in ease of use, of course, but we still deeply believe that schema on write and the capabilities that it provide, provides the best user experience when it comes to speed, ease of use, dashboards being loaded in a snap, threat hunters being able to find attacks in milliseconds, and out of complete boxes responding as you type and not having to wait for it. That's one of our powerful aspect. I will add a bit on technical level that I think it's an interesting aspect. We also announce searchable snapshots that's the ability to store the same data, the same structures that we have in Elastic search, not on SSDs and obviously provides this snap responses. But on cost-effective measures like S3 and object stores, and the fact that we have schema on write, and as you uploaded to this more cost of active optic stores, even now that's going to be slower due to the fact that it's not SSDs. It's still going to be considerably faster compared to any other system that is doing something similar on something like S3. So schema on write reflect itself in the -- and the benefits of it reflect itself, not only on how fast it is for hot beta or for snappy dashboards, but also how cost effective it is when it comes to long-term storage.

Understood. Thanks for that explanation. And Janesh, one quick question for you. When I'm looking at the guidance, obviously you came in well above your guidance this quarter. You came in well above last quarter. But the guidance in the back half seems like calls for a big slowdown, but it seems like you're saying that the environment that you saw in the first half would be similar in the second half. So I'm trying to kind of put both of that together. Maybe the question is, I mean what surprised you positively in the first half and in the October quarter, but what your guidance was -- what were you expecting and then what gives you caution in the second half for that slowdown to happen?

Yes, it's a great question. Overall, as I step back and think about the first half, we executed really strongly, and that was I think one of the main drivers for the over performance that we delivered here in the second quarter as well. We also saw strength in SaaS overall and that included the monthly SaaS business. We saw a little bit of stronger quarter-over-quarter growth in the services revenue as well. But you know, as I step back and look at the back half of the year, despite the success we had here in Q2 across all dimensions and we're really proud of that, what we see out there is that the demand environment continues to be unchanged. You will recall that at the start of the year, when we first laid out our guidance, we had said that we would -- we were modeling the second half of the year to improve. And at this point, we are just expecting that it will stay status quo in terms of the macro backdrop. So, we've seen customers continue to spend with us. We're very comfortable with the way our solutions are relying with their priorities. But it does take them a little bit longer to get there and they are a little bit more thoughtful about that. And sales cycles as we expected were a little bit longer similar to where they were in the prior quarter. So all of those factors lead into the thought around the Q2 guidance -- excuse me, the back half guidance. But as I said, we've raised the full year by quite a bit more -- certainly more than the Q2 be. So effectively we've actually raised the back half of the year relative to the prior expectations that we had, and that just reflects the performance that we had in the first half. So overall we think that the guidance for the back half suitably balances the near-term opportunities as well as the near-term risks, and we are confident in the outlook for the year and quite excited about the long-term opportunities that we have.

Great. Thank you so much.

Yes.

Our next question comes from Matt Hedberg with RBC Capital Markets.

Hey, it's Dan Bergstrom on for Matt Hedberg. Thanks for taking our questions. So new customer additions ticked up -- ticked back up nicely this quarter versus the first quarter. I know top of the funnel had remained strong. You called that out, the number of proved that out. Is it just seasonal strength here in the second quarter? Are there more specifics around the higher number of new customers versus last quarter?

Yes, we are actually quite pleased with the new customer additions that we had in the quarter, especially in light of COVID-19. It was consistent with prior quarters, we've continued to add many customers on both Elastic Cloud as well as in our self-managed business. In terms of trends that we saw in the quarter, I'd say, again it was a pretty clean quarter straight down the middle of the fairway. In terms of new customer adds, we are quite pleased with that. A lot of our new customer adds were on the monthly SaaS business, where also we saw pretty consistent trend. So nothing specific to call out in terms of seasonality. I think we just continue to execute the playbooks that we have and sales team continued to do a pretty remarkable job bringing business home.

Great, thanks. And then maybe could you talk a little bit more about the opportunity in the installed base? What's driving new product adoption for customers? And then what would help or is driving adoption of multiple product categories for those 100,000 type ACV customers, how does that work more towards the levels of the $1 million plus ACV customers?

Hey, this is Shay here. Happy to take it. So first of all, our go-to-market relies heavily on what we call bottom up adoption model. We communicate and engage and work with creator class, the developers, the threat hunters, the security practitioners, the people that go and hands on keyboard to go and implement a search box on our website, make sure that the infrastructure stays up because there SRE or the DevOps, make sure that they go and do threat hunting, right, and implement the right level -- company level security that is needed to do that. And as that adoption happens in, it's important to note that that adoption happened thanks to value, or it's like they go, they use the software, there's mainly products around it. But they choose us, thanks to the value that it brings to them. And those are the people that are actually hands on a keyboard doing the work. We started to grow and they deployed some cloud or download and run our free and open distribution and then they start to adopt us through it. As we grow, we grow in multiple factors. The first one is, you know projects become mature. We start to be using more and more within the projects, more data gets aggregated to it. And then thanks to that, more resources are being used on our cloud, for example, and then we grow with the customer. We also sometimes grow because the same use case for example logging is being used, not only for one application, but for multiple applications. So that's another vector of growth that we love. We can't grow. We see growth because someone that decided to use us for logging, now decides to use us for APM. That has matured significantly over…

Great. Thanks so much.

Our next question comes from Tyler Radke with Citi.

Hi, good afternoon. This is [indiscernible] dialing in for Tyler today. I have a quick question on like competitively, it looks like Splunk missed the number, so let's stop it now, and like some of the growth decelerated rapidly meanwhile for you guys is growth been holding steady and is not like going up. Have you guys seen anything shifted competitively with this plant for the quarter?

Yes. Generally for our side, the competitive dynamic which Splunk remained the same. We're very happy with where we stand in the two fronts that we tend to see Splunk, whether it's in the logging market or the IT operational logs that has evolved to an Observability solution and in the security markets where our SIM efforts have matured with GA product and we believe that in the next few quarters we are actually have the full feature set to do a wholesale replacements for incumbents, but we're being adopted as you noticed in our earnings call we did already. So in that aspects, we're very bullish about the capability that we have. I think we're ahead of the pack when it comes to really treating a single unified product with a single unified pricing versus a combination of multiple products and multiple user experiences. We heard that reflected with our customer base, they're super excited about the innovation that we continue to deliver, not only within Observability and Security, but also being able to invest in endpoint security, for example, in the security markets and such pull that into the stack with our Endgame acquisition. And also with our continuous innovation to be able to give them the right levels and leverage of choice whether it's with Schema on Read that was mentioned before or the ability to store more data at cheaper cost on object storage like S3. So all of these innovations are just amazing and the team is delivering on products that ends up delivering value and that's reflected in our adoption and the customer reaction is good.

Thank you. I also want to touch on the margins question. It looks that you guys are going down way faster than before. I just want to ask you how should we be thinking on the cadence of these margins going back for next year, if you're going to see stay here [ph] and go back up, or how are you guys thinking for next...

So, I'll talk a little bit about our investment philosophy for this year. In terms of thinking about it for next year, we will talk a bit more about that when we are ready to talk about fiscal '22. But at the start of this year we deliberately had slowed the pace of investments as we were in the early months of the pandemic. We talked about that back in Q1, and then we decided to continue to increase the pace of the investments, which is what we said we would do, and that's exactly what we've done here in the second quarter. And then looking out over the back half we will continue to invest quite heavily in the business adding people across all functions as we continue to invest for scale and to drive growth even more into the future as we prosecute the longer-term market opportunity. Broadly speaking, when I think about the signs from our customers is that their spending priorities are aligning well to our solutions. So it makes sense for us to continue to increase the pace of investment in the business in that direction. I will point out that the strength that we saw here in Q2 on the operating margin was really a function of the revenue beat, and we continue to invest as we had said we would. So despite the headwinds that we faced from the pandemic, we think it's important for us to invest through this pandemic. So that on the other side of this, we'll be even better positioned to capture the longer-term opportunity. So we will continue to execute here in the near term and then talk a little bit more about FY '22 a bit later.

All right, thanks. Congrats on the results.

Thank you.

[Operator Instructions] Our next question comes from George Iwanyc with Oppenheimer.

Thank you for taking my question. Janesh just following up on your comment about continuing to invest, maybe can you give us a broad feel about your hiring plans? And where you feel that you're doing most of the addition to this kind of balance between R&D and sales?

Yes. So, I think, stepping back, as I look at the strength we've seen in the first half, we're investing across all the functions that includes investing in sales to drive coverage and near-term growth, that includes investments in R&D to drive the right product and long-term growth, as well as investing in the G&A functions for scalability, and marketing is a big part of our go-to-market investments as well. And so, if I step back and think about the overall approach we've taken around investments, we've proven that we can be nimble in hiring and dial the level of investment in the business. We are continuing to do that looking ahead. As we think about the back half, you will see us investing both on the R&D and the go-to-market functions as well as investing appropriately in G&A to secure scale for the future. So it's really across the board. If I think about it in terms of geographies as well as it's really distributed reflecting the opportunity that we see. From our perspective, the demand environment is -- COVID-19 is a universal global phenomenon and the longer-term demand that we see, as well the market opportunity we see, as well as global, so we've continue to invest globally to prosecute that.

Yes, thank you. And Shay, can you maybe share some perspective on how you feel about the evolving capabilities from AWS and the other cloud service providers, and kind of the balance of competitive dynamics versus the health of the partnerships?

Yes, of course. So I mean I will start with saying that our strategy when it comes to cloud is to run on all three cloud providers AWS, Google Cloud and Azure. We integrate better with all three of them and we have very strong partnership with Google Cloud and Microsoft Azure, and even double down on these integrations with them. So we are very happy with the integration that we have with all of them, and obviously with the capabilities of our products. As you can imagine, our areas are at the forefront of the needs of companies, whether it's the ability to put a search box on a website, we want to well place the ability to take a search box and put it on the infrastructure to absorb it. The ability to take a search box and put it on your company to protect it. And we feel like we're ahead of the pack on all three when it comes to the maturity and the future readiness of our products and that's reflected, I think by the usage of it. And the fact I think that we provided across all cloud providers as well as on-prem, and the ability to run hybrid across it with a single search requests we able to search across all of them if you want to as a customer that resonates really well with our customer base and we're very happy about it.

Thank you.

This concludes our question-and-answer session. And I'd like to turn the call back over to Shay Banon for any closing remarks.

Thank you all for joining us today. Q2 was an excellent quarter for Elastic. We continued to see customers spending priorities aligned with our solutions, and a large market opportunity ahead of us. We look forward to catching up with you in the near future. Stay healthy, stay safe. Appreciate you joining us. Ciao.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.