Good day and welcome to Elastic's Second Quarter Fiscal 2022 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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.

Thank you. Good afternoon and thank you for joining us on today’s conference call to discuss Elastic’s second quarter fiscal 2022 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 Elastic’s Investor Relations website, ir.elastic.co. Our discussion will include forward-looking statements, which may include predictions, estimates or expectations regarding the demand for our products and solutions and our future revenue and other information. These forward-looking statements are based on factors currently known to us, speak only as of the date of this call and are subject to risks and uncertainties that could cause actual results to differ materially. We disclaim any obligation to update or revise these forward-looking statements unless required by law. Please refer to the risks and uncertainties included in the press release that we issued earlier today, included in the slides 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 most comparable GAAP measures can be found in the press release and slides. The 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 2022 quiet period begins at the close of business Friday, January 14 2022. On December 8, we will be participating in the Barclays Global TMT Conference, With that, I will turn it over to Shay.

Thank you, Anthony. Hello, and welcome, everyone. I'm happy to be here with all of you today to share our second quarter results. We once again delivered strong performance driven by broad adoption of our offering and the continued growth of Elastic Cloud. In Q2, total revenue grew 42% year-over-year, revenue from Elastic Cloud grew 84% year-over-year. And we once again saw robust customer acquisition and expansion metrics. We ended the quarter with more than 17,000 subscription customers, including over 830 with annual contract value of more than $100,000. The strong performance was fueled by continued adoption of our differentiated solutions, reflecting our increased strategic relevance across our customer base. Organizations across the world continue to accelerate their digital transformation plan, creating massive volume of data. IDC estimates that by 2025, we will be generating 480 exabytes of data per day. And as much as 90% of that data is unstructured. And with endless data comes endless possibilities. At Elastic, we use the power of search to help people and organizations turn these possibilities into results. With our leading platform for search powered solutions, we help everyone organizations, their employees and their customers accelerate the results that matter. Our solutions for enterprise search, observability and security help people find what they need faster, keep mission critical applications running smoothly, and protect against cyber threats. As I get that to spending time in person with customers, something I'm hearing again and again, is that for many organizations, their business strategy heavily relies on their cloud strategy. As organizations embrace the cloud to drive business agility and flexibility, IT systems also become more distributed and heterogeneous. This is because as new workloads are deployed on the cloud, many times across clouds, existing workloads might still run on-premises. And with data having gravity…

Thank, Shay. Q2 was another great quarter, continuing our momentum of strong execution and investments to capture the large market opportunity ahead of us. Elastic Cloud was once again the highlight with strong new customer additions and robust consumption trends. We continue to expect that cloud will remain a tailwind for the longer term. More broadly, our solutions continue to resonate with customers. And we're capitalizing on the clear secular tailwind both around the volume of data and how enterprises more effectively use that data. Let's get into the numbers. Total revenue in the second quarter was $206 million, up 42% year-over-year, reflecting the continued successful execution of our strategy. We're very pleased with our performance, which was better than expected, with stronger than expected consumption rates in Elastic Cloud. 44% of our revenue came from outside the United States, we continue to view the geographic distribution as a long-term strength of our business model. Subscription revenue in Q2 totaled $190.3 million, comprising 92% of total revenue. Within subscriptions revenue from Elastic Cloud was again strong at $69 million growing 84% year-over-year, driven by strong customer growth and usage. Elastic Cloud was approximately 34% of total revenue up from 26% a year ago. The vast majority of Elastic Cloud revenue is now derived from consumption-based arrangements. As you may know, the consumption model faces no limits on how much data a customer can bring into our platform. Additionally, customers have the flexibility to purchase credits based on the amount they plan on using or purchase purely on demand each month. They also have the flexibility to consume credits on actual usage, without wasting credits on for the up and running at full capacity, and without being penalized with higher rates if they consume credits faster than they expected. To limit…

We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Raimo Lenschow with Barclays.

Thank you and congrats on a strong quarter. Shay can you talk a little bit about like the cloud adoption patterns that you're seeing there? Because if I look out into the industry, it seems like all of the vendors are seeing like very, very strong growth. Can you talk a little bit about like that whole notion of competition versus actually a broadening of the market? And what's driving that broadening up the market at this scale? And then I had one follow up for Janesh after.

Yes, of course. Thanks for the question. Happy to answer it. I will answer it in at least two parts on my end. The first part is the move to the cloud. I traveled and visited customers in Europe and in the U.S. And I see more and more both small companies, but many large enterprises, obviously moving to the cloud, they still have some workloads running on-prem. But definitely new workloads are running on the cloud. And when they run on the cloud, especially for large enterprises, they're looking for multi-cloud strategy. This is when we talk to them about our strategy and our investments in running on all the various cloud hyperscalers, our integrations with them and the support for existing workloads that they have on on-prem, they're very excited about the opportunity that presented them. But Cloud is the delivery model, which obviously we're investing in and making sure that we have a best-in-class offering. Our three solutions are well integrated, obviously and delivered best on our cloud offering. And those three solutions are the ones that I think are growing the most when it comes to the opportunity that we have in front of us. Enterprise search, the ability to add a search box to your website observability, the ability to monitor your cloud workloads, as well as your on-prem workloads and infrastructure and security to -- the ability to detect and prevent cyber threats. All of them are markets that are in the midst of convergence. Yes, expansion that I, to be honest, haven't seen over the last few years that I've been, engaging in them, so that I remain very excited. And the combination of these three highly applicable solutions across verticals and across geographies delivered by clouds makes me optimistic about the future.

Yes, perfect. And Janesh, as we think about your business with more and more clouds in the mix, I think billings will be less and less relevant, like, can you kind of -- what's your thoughts going forward in terms of like, what you should really talk to in terms of, RPO, billings, maybe an ARR metrics revenue. Because a lot of like, a lot of the cloud doesn't get captured well, like none of the cloud gets really captured in billings and stuff.

Yes. It's a great question, Raimo. And at the end of the day, there is no perfect measure in these kinds of businesses, which is why, as I've indicated before, I think revenue is the best measure for us to reflect the performance of our business. It includes the full effect of the adoption of our technology across all the different formats that we offer. It's also the best measure to look at, particularly since now, the vast majority of our cloud business is based on consumption-based arrangements. And in a consumption model, revenue reflects customer's current consumption patterns, it's not a time-based runoff of historical deals. So revenue in fact, in a consumption business is a very current measure of customer activity. And calculated billings and RPO provide a bit of a view of billings and backlog but they are affected by the various factors that you talked about, especially because the monthly cloud business does not have any deferred revenue or RPO. So given that I continue to look at revenue as a primary measure when I look at the business internally.

Perfect. Makes sense. Thank you and congrats.

Thank you.

Our next question comes from Brent Thill with Jefferies.

Janesh, I think, everyone is curious, I know you mentioned don't focus on billings or DR. But you did have a pretty sharp de-sell year-on-year on current DR. And was there anything that you take away from that? I think you'd mentioned you expected the second half billings to be higher than the first half. Are you still anticipating that?

Yes. We are Brent. So they reflect back on the quarter and the performance in Q2, we are very pleased with the outcome. I think the team did really well on many different fronts, obviously, the headline numbers that you see in terms of revenue growth and cloud revenue growth at 84%. But there were many successes across the business when you look at the customer metrics and the expansion metrics. So there was a lot for us to be pleased about in the quarter. We had already shared previously that we expected a stronger second half in billings, given that the investments that we started to make in the past couple of quarters should start to bear fruit in the back half of this fiscal year. And that continues to be our expectation. So the year is playing out just as we expected and we're looking forward to the rest of the year. We feel really good about the business looking ahead. And you see that confidence reflected and to raise guidance for the year.

And maybe for Shay, just when you think about the commitment to the platform, it seems like you have numerous engines of growth in this kind of commitment to the Elastic platform versus taking one area for security or another area for search. Are you seeing these bigger enterprise-wide commitments where you're seeing standardization, bigger, enterprise license agreements. Talk to us about just the adoption pattern, what you're seeing, as it relates to the platform adoption?

Yes, of course, happy to. So first of all, I'll start that our focus is on our three main solutions, Enterprise Search, Observability and Security. We've been playing in the observability space for almost 10 years now. And through observability, specifically, through logging, we've started to be used more and more within the security space, even before we invested actively to build user experiences that are curated for security professionals. So all of them are very natural evolution of our product line, the benefit that I believe we have is the fact that all of them are developed into a single unified platform. That means that we can implement certain capabilities in one area and then have them immediately impact the other. I mentioned, for example, our ability to reduce latency, compress network and reduce data storage costs. And those suddenly, once we implemented them, apply to all of our cloud customers across Enterprise Search, Observability and Security. That platform play also helps us with our ambitions and efforts to become the first or second player in each market. Like we did, by the way, from my perspective, at least in the enterprise search market, which was our first solution. So we continue to invest heavily, heavily there.

Great. Thank you.

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

Great. This is [indiscernible] for Matt Hedberg. Thanks for taking my questions. Maybe could you start by talking about the macro environment and the health of your end market. And secondarily, although the details of the new COVID variant are limited, are you assuming any additional conservatism in your model?

Yes, maybe I'll take that. So just in terms of the -- go ahead Shay.

I will talk about the market environment, happy to. So first of all, three solutions that we worked through that works into the single platform. And by the way, I'll talk a bit about the examples of customers that I didn't get a chance to mention before. They help us really address the needs of our customers. Our total addressable market is north of $70 billion. And we think it reflects the expansion and applicability of our software and we're very, very excited about it. Together with our cloud growth, we think that we're serving our customers' needs every single day. And that's very exciting. As I speak to customers every single day, we help to solve their challenges of today's and also have of the next few years. We will just help that and home improvement company with their supply chain challenges, observing it and making sure that they can optimize it and serve their customers. That's very exciting. We help one of our largest customers, start with us in the logging use case, expand to APM, and then adopt our full breadth of observability use cases. And then from there, thanks to their usage and wonderful experience that they had with us, they've expanded and now uses [indiscernible] displacing their existing incumbent vendor within the security space. And I'm excited to also offer them down the road, our endpoint security and cloud security offering. So all of that makes me very excited about what we build. At the end of the day. As companies become more digital, as they move to the cloud, they end up generating large and massive volumes of data. And I consider us to be the leader in providing search experiences across any type of data. And I think that represents a huge opportunity ahead of us. When it comes to COVID, and market conditions, obviously, this is a very volatile situation, we have new variants coming on, countries changing the rules. What we remain focused on is, first of all, making sure that we serve our customers as they go through these difficult times, sometimes turbulent times, we keep our employees safe, and focus on the applicability of our solutions, which doesn't change during COVID or hopefully soon, when COVID passes. The ability to find what you're looking for addresses secular trends that are there, whether COVID exist or not.

And then maybe just to round that out in terms of how we've modeled COVID, specifically into the guidance. We are continuing to see a slightly better environment as Shay said, that was the expectation when we laid out our plan at the start of the year. And we expect that in the backlog things will continue to improve gradually over the course of fiscal '22.

Got it. And then, you reported strong customer net adds for three consecutive quarters now, could you talk about the drivers of that trend? And then how durable are this level of net adds? And then one last question for me. How was the licensing changed from a few quarters ago positively impacting new customer adoption? Thank you.

Sure. So I can take those. And to start with in terms of the customer metrics, we've been very pleased with our customer metrics. I think fundamentally, our strategy is working, as customers start to use us for one solution, the data volumes grow their needs grow, they ingest data from more sources, they then extend into additional solutions. And all of that drives significant expansion for us. So we're also calling higher within the enterprise, which is an area where we been investing quite meaningfully. And our strategy is working quite nicely there as well. We talked about metrics, not just in terms of total customer count, a lot of which come on the monthly cloud format to us, but also the expansion that we've seen in the greater than 100k and greater than million-dollar ACV categories. So the opportunity for us is large and we are continuing to invest. And it's the motions that we've been driving historically, including the cloud partnerships that we have, the investments we've been making internally in the business that are helping us drive that sustained growth in terms of new customer additions, both in terms of total customers, as well as the expansion for the greater than 100k and greater than million-dollar categories. And then, as I think about the other part of your question. In terms of the sustainability of that, again, it comes back to the investments we're making, as we talked about before, the opportunity is really rich out there. We're investing heavily in the business. We feel pretty good about the motions that we have in terms of customer acquisition and customer expansion. And we're looking forward to the rest of this fiscal year.

Great. Thank you.

Yeah, maybe I can chime in, I can chime in for the license change quickly, I think it's a very relevant question. So, first of all, the license change, we've been very happy with the license change. The first and most important part is that our community of users, all the way from practitioners, developers, operations, SREs continue to adopt our software based on every single metric that we track, actually, it's increasing in some areas, like our download numbers which makes me very excited. And also when I end up talking to CIOs and CISOs out there, they take it very naturally and think that, that makes total sense. When it comes to how it plays out in the market, one of the wonderful things that happened with the license change is that there's more clarity in the market. This type of clarity is clarity that we deserve. The fact that the only way to access our innovations and our products is by working with us as a company in a collaborative way. And obviously, when you become a cloud customer, you have access to all of it. And this clarity is now showing over the last few quarters. And I expect this additional clarity to be a tailwind for us over the next few years, especially for our cloud business.

Thanks.

Our next question comes from [indiscernible] with Citi.

Hello?

Again, that's [indiscernible], your line is open.

Hi, guys, can you guys hear me all right?

Yes, we can. Go ahead please.

Yes.

Sorry. Hi, thanks for taking the question, yes. I'm just curious on some of the Elastic Cloud, it looks like it decelerated slightly on constant currency, which is kind of slightly surprising given the strength we've seen on some of the competitors. And could you provide some of the colors as to the numbers, what do you see there some of your new customers' momentum or expansion trends from current customers? And I guess the follow-up to that is search actually, so a blog post regarding the TLS certificate change on Elastic Search website that was completed in the end of October? And just wondering if you guys think there would be any effect on usage trend that we've seen seems to be slowing down a little bit? Yes, there we are. Thanks.

Yes, maybe I can take the first part of your question and I'll let Shay touch on the second part. In terms of the cloud revenue outlook, at 84% growth in cloud in Q2, we were actually very pleased with that performance, both in terms of as reported, as well as constant currency change, the growth rates. So, I think that was a very positive outcome from our perspective. We executed very well on many fronts. We had a large number of net new customer additions and also expansion, as I just talked about the investments that we've made the partnerships, the go-to-market investments that we're driving, the integrations with the hyperscalers, I think all of that is working very nicely for us. So looking at the cloud business overall, we've delivered robust growth now for several quarters in a row. Given our focus and our customers' preference as they adopt Elastic Cloud and start to expand in Elastic Cloud, we do continue to expect that cloud will grow significantly faster than the overall business, and as we laid out to exceed 50% of revenue over the course of the next few years. Shay, do you want to touch on the bit about the blog post.

Yes, of course. I believe that what you referred to is our license change, which I answered in the previous question, we remain excited about it. And he asked about how we look at it as a future driver for our business, we all believe and are excited about the clarity that it drives in the market as we speak, and we think that it's going to be a tailwind for our cloud business over the next few years.

Not the licensing change, I know there's like a TLS certification change for the Elastic Search website that commenced in October, I think it was for the Elastic Cloud or Elastic Search website, there was a certificate change. And then that's because we saw some of the web traffic, it kind of decelerated meaningfully, and we just figured it might be a coincidence that it just tracks just as you guys doing the certification change on your website, on the server?

Oh, I see. There's really no change in our business or web traffic as a company. We continue to monitor it and we haven't seen any change on our end.

Okay, thanks.

Our next question comes from Mark Murphy with JPMorgan.

Oh, great. Hey, thank you for taking the questions. This is Pinjalim sitting in on behalf of Mark. Shay, I wanted to ask you about Optimyze. It seems like it takes you into the observability of cloud native/micro-services-based workloads. Is that entirely a cloud solution, and how does that compare with competitive products like Datadog and SignalFx from Splunk?

Yes, of course. So, first of all, we're very excited about the Optimyze acquisition. It's the investments that we'll make not only on the expected of what our customers need today, like APM and logging and infrastructure monitoring and metrics, but also on emerging technologies. Optimyze is built on top of technology that is continuously evolving and emerging called eBPF, that allows to do continuous profiling at very low overhead without explicit profiling of the application. This technology is Linux operating system technology. So it applies both to -- it applies to any server that runs Linux and runs containers on top of it. And obviously, it's heavily used in cloud native workloads that revolve around tools called Kubernetes and container workloads. So yes, we expect most of the usage of it to happen on cloud native workloads, especially as it can peer into containers workloads and help people continuously profile it at low overhead. It's a technology that evolves as we speak in a -- at a very rapid pace, and we're excited about the ability to adopt it integrated into our platform and offering to our users under the same proxy model that we already have over the next year.

Understood. Does that kind of takes you to parity versus some of the competitive products?

I think that the whole technology around continuous profiling is something that is in the very, very early beginning, so it's hard to say whether there's like parity or not. This is one of the newer aspects of observability. And I think the thing that I'm excited about is the fact that we're building the foundation for us to use that technology, because we believe it's going to be a core foundational aspects of observability moving forward.

Understood. And one for Janesh. Janesh, when I look at the sequential subscription revenue growth seems like about 7%, seems a bit lower if I look at previous Q2 in prior year. Is there anything unusual in terms of linearity in the quarter or maybe your higher consumption based mix now doesn't even make sense to comparing versus prior year, I mean, any color would be helpful?

Yes, happy to talk about that, Pinjalim. Fundamentally nothing unusual in terms of the mix of business or the linearity or things as they played out. I look at the quarter-over-quarter growth, but also look at the year-over-year growth, where as this business gets a lot bigger, obviously, the growth rates are hardest to sustain, but when you look at the year-over-year growth at 84%, I think that's been remarkable for us in terms of the results of the investments that we've made. So we were actually very pleased with the performance. As I mentioned, the usage or consumption on the platform was even higher than we expected at the start of the quarter, and so that's laid out quite nicely and it sets us up very nicely for the back half of the year.

Understood. Thank you.

Our next question comes from Brad Reback with Stifel.

Great, excuse me, thanks very much. Shay, during the prepared remarks, you talked about a free to pay conversion, fairly large customer that moved from a self-managed free to your cloud, your SaaS product. Is this going to be something you see as a long-term opportunity or more as a one-off?

I deeply believe that this is a long-term opportunity for us, yes, especially with our cloud business, there's a few factors playing into it. The first one is that companies are realizing that it's much better to let the people that develop and build the products to run them as well so they can focus on their business. And obviously that is a driver for our cloud business. And we're very proud of our bottom-up adoption and the vast, vast community that we have of users that started with downloading the software and running in themselves. And I think there's an opportunity to tap into that and have them move to us as they move to the cloud and run on the cloud. The other point that I would say is and that was part of the reasons why we changed our license is that I expect the license change to help drive clarity in the market that I already -- I'm already seeing. When it comes to customers that or users, free users that use Elastic Search on-prem, and then as they want to go and move to the cloud, there is very, very clear company and only company that provides Elastic Search as a service and that's us and with the full breadth of capabilities and of our solutions as well. So that's something that I remain excited about. I think that this is going to play out over the next few years, but definitely I view it as a tailwind for our business.

Excellent. Thanks very much.

Our next question comes from Koji Ikeda with Bank of America.

Hey, Shay, hey, Janesh, thanks for taking my questions. I got a couple for you. The first one on the Elastic App Search web crawler announcement with it becoming GA in the 7.15 release, I was wondering if you could talk a little bit about how fast that can get Enterprise Search up and running versus how it was done in the past? And when I first saw the release back at the end of September reading the blog post, I thought that there could be many different use cases for this type of crawler within an organization. I was wondering if that thought process was right, could this crawler be used for anywhere within an organization where data is being updated continuously, like a, like an e-commerce search or maybe an internal workplace or a self-service technology base? And then I want to follow up.

Yes, of course, we're excited about the -- our web crawler technology. This ties into our efforts to continuously simplify and ease data onboarding and usage of our products across our three solutions. And that's a great example of our investments that we do in the Enterprise Search space. Definitely also on our cloud businesses, we, as customers that do adopt and use our web crawler tend to stick around and convert from trials to paid customers significantly more compared to customers that haven't used the web crawler. So that's just a great indication that as we invest in simplicity and ease of use of our products, it means that we will be able to increase the number of customers that we have and increase the consumption that they have over time. It's all about ease of use when it comes to a company that thrives on the ability to build search experiences on data. And a big part of the early part of the interactions with Elastic is the ability to onboard data. And that was a big focus for us over the last few releases, including 7.15, and it's one of the biggest focuses that we have in 7.16 in our upcoming release.

Got it, got it, thank you. And then just one follow up for Janesh, looking at the numbers here on the second quarter results, it looks like it was about a 5% revenue against -- upside against the high end of the guide, whereas the last two quarters were maybe double-digits. I believe against the high end of the guide, just was curious anything to note in the quarter, maybe backend loaded bookings or anything else in the revenue that we should be aware of? Thank you.

Hey, so nothing specific to call out. I will point out though that as we entered the year, we did talk about the fact that we have better visibility and so we were going to lean into that a little bit more. So I think it played out as we expected it would and a little bit better than we expected given the strong consumption patterns that we saw on cloud with respect to the consumption and usage trends for customers. So that's really what you saw here in the numbers. And if I compare that to Q1, you'll recall that in Q1, we had some other benefits in professional services and so forth that helped the number. But this was really the strength of Elastic Cloud consumption that we saw reflected in the numbers in Q2.

Got it. Thanks, Janesh. Appreciate you guys taking my questions. Thank you.

Thank you.

Our next question comes from Kingsley Crane with Berenberg Capital Markets.

Hi, our questions have been answered. This is [indiscernible] on for Kingsley Crane. So we'll cede the floor. Thanks.

And our next question will come from Steve Koenig with SMBC.

Hi, thank you, Elastic. Steve Koenig here. I appreciate you squeezing me in. The -- you've got this goal of getting Elastic Cloud to exceed 50% of total revenue in next few years which looks eminently doable. I'm wondering, when you look ahead to those next three years, what are going to be the key operational challenges or initiatives that you'll need to undertake or changes that you'll have to make, whether it's in product, go-to-market, pricing, et cetera, to make that goal a reality? Thank you very much.

Yes, I'm happy to take it. Our cloud journey started in 2015, and we've been investing in cloud since then. But definitely over the past year or two years, we've invested significantly more, and we mentioned that this year is a year of investment for us. I'll start with the product side. The first part is around the effort of running Elastic Cloud natively on all the cloud hyperscalers, Amazon, AWS, Google Cloud, and Microsoft Azure, that's a lot of work on the product side from integrations with the marketplaces, billing engines, various data sources that they provide and providing a single pane of glass across all of those data sources, all of these cloud providers, sorry, with our cross-cluster search capabilities and the ability to search across all of them from a single location, that really resonates with our customer base, and that's not an easy thing to implement, especially with large enterprises. The other part is continue to invest in more and more ease of use in terms of onboarding data to Elastic. We shine when there's data in Elastic itself. We have such advanced capabilities when more and more data exists in Elastic, like searchable snapshots, the ability to store data over long-term and being able to still search it using the same API and same UI. So the more data comes into Elastic, the more consumption is driven in our cloud which is great, but the more value our customers see. So we continue to invest in ease of use of onboarding data into our cloud service. The other part is our -- and then tons of other aspects that we spoke about some of them when it comes to our various solutions and making sure that we continue to innovate, invest and lead there. When…

Thanks very much, Shay.

Sure.

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

Thank you, everyone. Thank you for joining us today. Q2 was a great quarter for Elastic. We continue to see strong customer momentum for our differentiated solutions and a large market opportunity ahead of us. Appreciate you joining us, ciao.

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