Good day and welcome to the Elastic Third Quarter Fiscal Year 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. And I would now like to turn the conference over to Janice Oh. Please go ahead.

Thank you. Good afternoon and thank you for joining us on today’s conference call to discuss Elastic’s third quarter fiscal 2022 financial results. On the call, we have Ash Kulkarni, 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 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 are 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. The webcast replay of this call will be available for the next 60 days on our company website under the Investor Relations link. Our fourth quarter fiscal 2022 quiet period begins at the close of business, Friday, April 15, 2022. With that, I will turn it over to Ash.

Thank you, Janice. Hello and welcome everyone. I am honored to join you on my first earnings call as Elastic’s CEO. Since assuming the CEO role in January, I have spent time with many of our teams across the company, learning, understanding and speaking with as many Elasticians as I possibly could. It has been tremendous to be welcomed so warmly by them. I am continually impressed with the passion of our organization, the knowledge of the team, and most importantly, their commitment and dedication to serving our users and customers. I would also like to thank Shay Banon for building an amazing foundation here at Elastic, a foundation that we will continue to grow and expand upon, especially as we accelerate our opportunity in the cloud, a growth area where I have strong conviction. I am very excited about the contributions that Shay is already making in his return to the role of Elastic’s CTO, driving even greater innovation as we continue to increase our cloud focus. Q3 was a strong quarter. We delivered revenue of $223.9 million, up 43% year-over-year. I am very pleased about our performance in cloud, where increasing consumption trends, fueled cloud revenue of $80.4 million, up 79% year-over-year. We will spend a fair bit of time talking about our Q3 results and business momentum. And there are three key messages to take away from today’s discussion. First, the markets we operate in are immense and growing, a $78 billion opportunity and we are well-positioned to succeed. Second, our focus in Elastic Cloud will be a major driver of growth for our business as more organizations embrace the cloud. Third, our team has both the drive for innovation and the operational expertise needed for success and that will continue to show in our results. I…

Thanks, Ash. We were very pleased with our third quarter results, and in particular, with the momentum in Elastic Cloud. We are building a great long-term business in the cloud and are still early in our journey. Total revenue in the third quarter was $223.9 million, up 43% year-over-year. We performed better than expected with robust consumption in Elastic Cloud. 44% of our revenue was outside of the United States. Subscription revenue in Q3 totaled $209.6 million, comprising 94% of total revenue. Within subscriptions, revenue from Elastic Cloud was again strong at $80.4 million growing 79% year-over-year, driven by customer growth and usage. And as Ash said, Elastic Cloud comprised approximately 36% of total revenue, up from 29% a year ago. As a reminder, the vast majority of Elastic Cloud revenue is now derived from consumption-based arrangements in which a customer can bring unlimited data into our platform. They can consume resources flexibly as needed. And in terms of the commercial model, they can either go month-to-month and simply be invoiced for actual consumption at the end of a month or they can purchase credits upfront and consume those over time. These three factors, the scalability of the platform, the flexibility of consuming resources as needed, and the choice of the commercial model all reduce customer friction. We believe this makes the consumption business model superior to a traditional ratable model. Also in the consumption model, we recognize revenue based on the actual consumption in a period and not based on a preset time-based schedule. This makes revenue a more current measure of customer activity and business performance. Revenue grows as consumption ramps for new and existing customers and we believe this sets us up nicely for durable long-term growth. Accordingly, going forward, it is important to focus on revenue…

[Operator Instructions] Pardon me, thank you for standing by. The first question comes from Tyler Radke with Citi. Please go ahead.

Hi, good afternoon. Thanks for taking my question. Maybe first question for you, Ash and congrats on the first earnings call as CEO here. How are you thinking a little bit more about the go-to-market strategy here? Obviously, that was a huge focus for you. It’s one of your priorities taking over the top seat here. And especially, how are you thinking about organizing the sales force into FY ‘23 as you’re really focusing on cloud, just any thoughts since you taking over? Thank you.

Thank you very much for that question, Tyler, and good afternoon to everyone. So it’s been wonderful to see the team execute very strongly in Q3. And in the last couple of months, I’ve been spending a lot of time traveling in regions, meeting with customers, meeting with our teams. And fundamentally, what I have developed even stronger conviction in is that from a fundamental strategy standpoint, the markets that we are in are absolutely the right markets for us. The opportunity in these markets is massive. And specifically in areas like log analytics for observability for SIM in security, there are tremendous opportunities to displace incumbents. So as we think about what we are doing today, we are continuing to make sure that from a go-to-market standpoint, we focus, first and foremost, on cloud, where there is demand in our customer base new customers are coming to us on cloud, existing customers as they increase workloads, they are tending to increase them disproportionately on the cloud, and that’s good for customers, and it’s something that we absolutely are leaning into. In terms of FY ‘23, you should expect that we will continue the intentional bias towards cloud that we have been doing for a while. We see that as a growth engine. We see that as something that’s good for customers, that’s good for our business, and we’re going to continue that, not only in the go-to-market side but also in the relationships that we formed with the cloud hyperscalers and also on the R&D side, of course. And organizationally, as I’ve spent time immersing myself with the go-to-market teams, I’ve been very excited to see the depth and strength that we have in the teams – and as I have explained at the time when I spoke to several of you around the CEO transition, all our selling teams report to Michael Kremin. And Mike and the teams have done a fantastic job in Q3. They are focused on driving Q4 to a strong year-end. And we’re going to continue on that journey. And in terms of organization, I’m loving what I see in the team, and we’re just going to continue that drive.

Great. And maybe a follow-up for Janesh. So obviously, it sounds like you’re focusing investors on total revenue, just kind of given the moving parts between billings and monthly staff. I guess, maybe two questions. First, if we look at the monthly SaaS revenue line, was there anything to call out from a seasonality usage impacts, some others in the space have kind of called out longer holiday period. Did that have any impact on the quarter? And then secondly, on billings, just anything to help us think about that metric, both for the quarter in Q4, just some of the moving pieces given the cloud kind of consumption model that doesn’t always get billed in advance. Thank you.

Hey, Tyler, happy to answer those. So on the consumption side, we did not see any particular trends around demand patterns over the holidays. We were not expecting any unusual trends either. So the quarter played out as we expected. And when you think about our solutions overall, particularly for observability and security, those are persistent. Security threats don’t vanish over the holidays as an example. So we did not see any significant variations around those. And then with respect to billings, look, as you saw, we’re very pleased with the numbers we posted here in Q3. It was a strong print we had many successes across the business. You see that reflected in all the numbers, the revenue numbers as well as the customer metrics. So there is a lot for us to be pleased about in that. And as I said in my remarks earlier, revenue, I think, is a better indicator of business performance for us since it is a much more current measure of customer usage of our technology and particularly in the consumption model. In terms of order flows, I’d say the quarter played out as expected. We did provide the details on billings in the press release for those folks that want to look at that, but we did deliver a strong growth. It was stronger than the first half as we said it would be. And so we did deliver against that expectation. And if you think about it in constant currency terms, it was even stronger than the numbers we had posted in the first half. So if I think about the business going forward, we will continue to focus on revenue, particularly because when you look at the monthly cloud business, which is now 17% of revenue, that has no deferred revenue, and that’s a significant enough portion of the business that it just makes the calculated billings conversation less relevant. So I don’t expect us to talk about billings going forward. Again, we will focus on revenue. We had a really strong result here, and we feel very good about the business looking at fiscal ‘22 and beyond, and you see that confidence reflected in the raised revenue guidance for the year.

Thanks so much.

Thank you.

The next question comes from Raimo Lenschow with Barclays. Please go ahead.

Thank you. Two questions, if I may. One for Ash. Ash if you look at the big guys like us like Barclays signing up and being in the cloud with you observability, etcetera, as well, can you maybe talk a little bit about like what is – kind of what’s the message there in terms of how comprehensive your stack is because you obviously, you were known for good lock and log management. But obviously, there is more aspects here like infrastructure monitoring, APM, etcetera, that need to be fulfilled as well. So maybe talk a little bit about how comprehensive your portfolio is and by now. And then one for Janesh, in terms of like the customer adds on the over $100,000, that was kind of a very strong number. I haven’t seen that for quite a few quarters now. Was there anything particular that was driving it? Are you focusing a little bit more on kind of expansion, et cetera? What drove that number? Thank you and congrats from me as well.

Thank you, Raimo, and most importantly, thank you for the continued business and the trust in Elastic. We appreciate it. So let me maybe touch upon the question on absorbability and the completeness of the stack. And this is one of our core strengths. The fact that all the data that we bring in, whether it’s log data, APM TRACE data, metrics, infrastructure metrics data, CICD monitoring data. All of that comes into Elasticserach and I can’t talk about this in my prepared remarks but fundamentally one of our greatest strengths, that when all of that data into Elasticsearch, our ability to run very advanced machine learning rules, our ability to run all kinds of correlations and advanced queries is very powerful. And we can do that at tremendous scale. And when you think about large organizations like Barclays that have very large amounts of data, you are talking about in – for many of our customers, many perabytes of data, that becomes a difficult problem. And that’s where given our roots and given that our core foundation is Elasticsearch, we have a tremendous advantage – and over the years, although we started with log analytics, we’ve been building out our portfolio. Today, we have over 2,000 customers that are using our APM capabilities just on Elastic Cloud. And that’s been growing. Similarly, we’ve introduced capabilities around metrics and infrastructure monitoring. We’ve talked about the work that we’ve done in our ability to monitor CICD pipelines, the integrations that we’ve done with Maven and Ansible and other technologies that form part of the CICD process. Last calendar year, we acquired Optimize. This was an acquisition, a small technology acquisition that really gave us tremendous capabilities in the area of EBPF, which is a new technology that really allows us to look deep into Linux-based systems, and the visibility that we can provide with all of this in the cloud in a very fast, frictionless manner, it’s a big source of our strength. So although we might have started from logging as we see the expansion – and also here, our natural our pricing model, which works very well in allowing a more viral motion has been playing to our strength. So that’s what gives me a lot of confidence and optimism in the overall strength – And then obviously, as many of you know, this convergence as we are seeing between observability and security, which also helps us as customers continue to expand their usage.

Hi, Raimo, this is Janesh. I’ll follow-up on the question about the customers. And look, we are very happy with the metrics on customer accounts. We’ve got, as you saw, more than 890 customers now with more than 100k ACV. And fundamentally, our strategy is working as customers start to use us for one use case or one solution. Their data volumes grow, their needs grow, they ingest data from more sources, they extend into additional solutions and all of this drives significant expansion for us over time. So it’s great to see that customers that start small expand to become customers more than 100k and eventually even larger than that. The other piece I’d call out there is that we’re also calling higher within the enterprise, which, as you know, is an area that we’ve been investing. And our strategy is playing out quite nicely over there, too. We are continuing to see greater awareness beyond departmental buyers, calling on C-level executives and now routinely taking down transactions more than $1 million in size. So with all of that, that’s – those are some of the pieces that I would call out that I think are the highlights that indicate the opportunity ahead of us and the success we’ve had. And if I try and offer another way to think about that opportunity ahead of us, you will recall that we previously shared a stat that if I look at that pool of customers more than 100k ACV, more than half of those customers have still adopted us for only one solution. And if I look at our pool of million dollar plus customers, more than 75% of those have adopted us for two or all three solutions. So that’s just an indication of the room that we have to continue to drive upsell. So we’ve been executing quite well, and we are excited about the opportunity ahead of us.

Okay, perfect. Makes sense. Thank you.

The next question comes from Brent Thill with Jefferies. Please go ahead.

Janesh, I just want to follow-up on the comment you met on the guide. And I think you’d said there is less conservatism in the guide. Can you explain why that is?

Yes, happy to, Brent. So look, obviously, we had very strong results here in Q3. We’ve talked about that quite a bit. Consumption has been stronger than we expected so far this year, and that’s all been reflected quite nicely in the results we posted for the first three quarters. So when I look at the guide that we’ve provided now, we’ve raised the full year by $9 million more than the Q3 outperformance. And if you look at that in terms of quarter-over-quarter growth, typically the way we’ve guided, our guidance increase this time is more than it’s usually been. Typically, for any quarter in the past, the way we’ve guided is just slightly above the prior quarter. And this time, it’s $7 million higher than the prior quarter. And that’s despite the fact that on a quarter-over-quarter basis, we’ve got a headwind of 3 fewer days in the quarter. That headwind in itself is a little bit over 3%, so despite that headwind, we’ve got a nice sequential increase that we are guiding to here. So we are continuing to take a prudent approach, but it’s far less conservative than it was before. We feel really good about Q4 and the full year. Brent, are you still there?

Yes. And can I – just as a quick follow-up on the DR on the current DR, came down considerably, so I just wanted to drill in on the dynamics between current and long term – and I’m sorry, the non-current piece drop more. What’s happening? Is that just the shift to cloud, Janesh?

Yes. I think there is always dynamics associated just with deal flow. And for the most part in our business, we invoice customers only annually in advance. From time to time, when customers request us to have an entire transaction, the full TCV invoice, we will accommodate that request. We saw some of those kinds of transactions last year in Q3, and I think what you’re just seeing now is some of that bleed over from long-term to short term as we lap that year. So as you know, in deferred revenue or in billings more broadly, timing can always be a factor. I think short-term deferred revenue adjust for some of those timing issues quite naturally. And as you noted, that grew 25% Currency is another piece. And if you adjust for currency, it would have been – short-term deferred revenue growth would have been several percentage points even higher. But more importantly, Brent, as I step back, as I said, the monthly cloud business fundamentally does not have any deferred revenue, that’s now 17% of the business. So that starts to make deferred revenue overall, just a lot less meaningful to look at. So that’s why we continue to stay focused on revenue as the most current indicator of spending patterns in the consumption model.

Thanks, Janesh.

Thank you.

The next question comes from Matt Hedberg with RBC Capital Markets. Please go ahead.

Hi, guys. Great. Thanks for taking my question. Congrats, Ash, on the promotion here. I’m curious on the CRO front, obviously, you guys are operating well as is with I think Michael taking on more responsibility. But just wondering sort of what are the thoughts on sort of that role, timing, etcetera?

Yes. Thanks for the question. So from my perspective, I’m really actually enjoying spending time with the teams because to me, as I think about our go-to-market and the fact that we’ve got this massive opportunity in cloud, it’s really important to make sure that I understand and continue to drive the cloud motion, the solution motions that we have that are working so well throughout the organization and define the plan for FY ‘23 that’s going to allow us to make sure that, that bias in the cloud is even greater than what it has been. Now in terms of the sales teams, as I have called out, the selling teams today already report to our Chief Sales Officer, Michael is doing a wonderful job. In the future, it’s – I can imagine a time where we would have a single person leading all of field operations. But honestly, at this point in time, I’m – things are working incredibly well. I’m enjoying working with the team. And I’m not seeing any reason for any immediate changes because we have got such a great working engine and the team is executing wonderfully.

Got it. That makes a lot of sense. And then, Janesh, you maybe I missed it, but did you talk about RPO growth in the quarter?

Hey, Matt, no, I didn’t mention that specifically, but I’m happy to touch on it here. As you saw again just strength overall on the business side on so many different metrics, on RPO specifically, again, just like deferred revenue, you know that the monthly cloud business does not have any RPO either. And so again, RPO just becomes less meaningful for us. But the other important piece in a consumption model, as you realize, is that if a customer is ramping their usage faster and burning down their backlog, that’s actually a good thing. And that’s a big chunk of what we saw. So that will allow us to go back to those customers sooner than expected in the future to increase their commitments based on their higher usage, and that’s obviously not reflected in the RPO today. So that’s just another piece why RPO has been less of a focus area for us. If I look at the reported numbers, RPO growth was 22%. But again, you can normalize that for things like FX, which was several points in terms of a headwind and would have been higher on a constant currency basis. But the main piece, as I said, is as we shift towards the consumption model, there is significant opportunity for us to drive growth with these customers over time, whether they are on the monthly format, or whether they make commitments to us in the future. So for us, we are continuing to stay focused on revenue as a primary indicator of the business.

Got it. Thanks a lot. Best of luck guys.

The next question comes from Kash Rangan with Goldman Sachs. Please go ahead.

Hello. Thank you very much. Congratulations to Ash and Janesh. Ash, a question for you. You want to pivot to the cloud as quickly as you can, right? From a product perspective, what are the things that you are looking to invest in the cloud platform that would make it a no-brainer for an initial customer who might otherwise be predisposed to the on-prem Elastic question because it’s got such a rich legacy. But how do you ensure that the cloud platform is not just on parity, which it probably is, but it’s actually heads and shoulders above the on-prem version that it becomes a no-brainer. And one for Janesh is that as you move to a consumption model, when you look at consumption models like Snowflake and Datadog, they have been able to put up CRPO, RPO growth. So, do you envision when you cut over to the – whatever the optimal point of your consumption oriented cloud business is that you can also see the benefit of RPO, CRPO growth like the other consumption models have? Thank you so much.

Yes. Thank you for the question Kash. So, I want to sort of step back a little bit and talk about the journey that the team has already been on when it comes to cloud. So, we have been on the R&D side, very intentionally driving a lot of investment into our cloud platform. Elastic Cloud, there are lots of advantages of Elastic Cloud, just given the fact that you don’t have to worry about the management aspects and the monitoring aspects, the way you typically would need to if you were doing everything in self-managed. We have delivered capabilities like searchable snapshots that work incredibly well, especially in the cloud. We have got auto scaling that we have already delivered on, that’s true for Elasticsearch and several of the other components. And what all of that has meant over the years is Kash the point that you made not only is it on par, but in fact, Elastic Cloud already is significantly at a stage where it is even less friction kind of way to get started. You can get going faster. You can adopt the technology and all the capabilities in there better. And that’s just a natural reason why we are seeing some of the advantages today in the cloud. We are not having to pivot in the sense that we are not really forcing customers, customers are naturally choosing Elastic Cloud. What we are doing is making sure that we enable our field teams and we educate our customers, and that’s what’s resulting in customers like Barclays that have been traditionally a self-managed customer. And you are talking about a very large organization here at Barclays that has depended on Elastic for a very long time in this self-managed mode, recognizing that all of these investments over the years have actually made Elastic Cloud an incredibly compelling platform. And when I joined Elastic last year as the Chief Product Officer, I saw that this was the trajectory. I had confidence in this trajectory. And I continue to invest more. And now as we sort of not only on the product side, but also on the go-to-market and the partnership side continue to work the cloud focus, I personally am very excited. The organization i s very excited about the future in the cloud. And our customers are very excited about everything that we are doing there. Let me turn it to Janesh for the other question.

We have Cloud 9, right?

Well, we – like I said, we appreciate all our customers, and definitely, Barclays has been – it’s been a wonderful relationship. But Kash, there is no reason why we can’t have the same relationship and continue. I would love to be able to thank all of you in the future for similar reasons.

On that note, Kash, on the remaining performance obligations, look, I think one of the important distinctions between us and some of the other consumption-oriented business models out there, is that customers actually have the choice of signing up on a monthly basis and being invoiced at the end of the month based on that actual consumption or making an annual commitment. And so they can opt for either model, and that’s the monthly cloud piece, which is now, as you know, 17% of the business. And there is no RPO at all in that. So, depending on what form that takes, and how customers on board, which is primarily on the monthly cloud side and when they convert over to annual, you can have a lot of dynamics that come into that RPO number. That’s why it’s perhaps a little bit less meaningful for us at this stage of where we are. And I look more at the revenue number, which is – it’s really the equalizer, right. Revenue measures, the consumption across all the different formats, it adjusts for duration, and it’s the most current measure of how customers are using our technology. So, that’s why, in my mind, that’s a stronger measure.

Wonderful. Thank you so much.

Your next question comes from Mark Murphy with JPMorgan. Please go ahead.

Thank you very much. So Ash, Amazon has been removing the term Elasticsearch from its website. I think as part of the trademark infringement resolution. And you still seem to have a very strong momentum in the AWS partnership. You mentioned it several times here today. Is there a feeling that everyone has kind of made their piece or buried to hatch it? And do you sense a benefit from kind of clarifying your linkage to the term Elasticsearch?

Yes. Thank you very much for the question. So, the relationship and the partnership with AWS is continuing to strengthen. And this is an area where we have intentionally put a lot of effort in making sure that we work with them on tighter product integration. In the press release, you must have seen some of the work that we have done to make it easier for prospects when they come to the AWS marketplace to start a trial for Elastic Cloud and the integrations that we have done for cloud-native data coming from AWS directly into Elastic Cloud, that’s really very valuable to our joint customers, and that’s really helping strengthen that partnership. And as you mentioned, the resolution of the trademark, but even before that, the license change that we made last year, those things have been helping clarify things in the market, and customers see that now. There is only one Elasticsearch, and it’s from Elastic. And as I have been having conversations with customers, it’s becoming more and more apparent that this is helping create clarity in the market. In the long-term, I can see that that’s going to definitely be a tailwind, but even in the near-term, it’s helping AWS and us partner better, which is immediately apparent to us. And I am particularly excited about that.

Excellent. And as a follow-up for Janesh, we have had this unique situation where investors have been assuming that the slowdown in billings in the first half would foreshadow a slowdown in revenue. And yet we look at what happened, it’s the opposite where revenue growth accelerated both sequentially and year-over-year at 43%. And so I am wondering, would you ever consider shifting to an ARR metric or some other type of metric to help us, or is there some approximation to help normalize. For instance, if we see billings growth at 35%, maybe there is a mental model where we could tack on 5 points to 10 points to that, right, if we want to try to account for the shift to consumption. Just kind of wondering if you have any thoughts along those lines?

Yes, Mark, it’s a great question. In terms of – I will answer the second part first. In terms of just thinking about monthly and annual and an apples-to-apples way, it’s still probably best just to look at revenue, particularly since the vast majority of our cloud business is now consumption-based. And revenue reflects just a full three months of current consumption regardless of whether it’s monthly or annual business. So, it addresses the duration quite naturally. It reflects the current consumption patterns rather than a time-based runoff of historical deals. And it’s got the full effect of the adoption of our technology across all the different formats that we offer. So, that’s why I think that’s probably the more meaningful measure for us to focus on looking ahead. And then with respect to ARR, look, there isn’t a perfect measure out there that addresses all the aspects of the business model differences and timing. We think revenue is probably the best of the measures at this point in time. And again, even in a consumption model, keep in mind that it’s harder to use ARR as a revenue predictor just given the variability of consumption patterns and the ramp in consumption that we are seeing, particularly when customers first join. So, cloud is a big portion of that, and that’s largely consumption. So, I don’t want to put a metric out there that’s not reflective of the full business and that may have a short shelf life as the consumption format continues to increase in mix. So, that’s part of the reason why we are staying focused on revenue. I think it’s still the best indicator of our overall business.

Thank you.

The next question comes from Brad Reback with Stifel. Please go ahead.

Great. Thanks very much. Janesh, I know billings isn’t necessarily the best way to look at the business, and we have talked about that a lot this afternoon. That being said, I don’t think you guys reiterated the commentary from last quarter about 2H being ahead of 1H. And it was only 90 days ago. So, I am just trying to figure out if anything has changed on that front and if so, why?

Yes. Great question, Brad. And look, we have spent quite a bit of time talking about billings, as you said, and why it’s a less relevant measure in the business. The way I think about it is in Q3 here, we delivered 35% year-over-year growth compared to 26% in constant currency terms in the first half. So, I think that’s the indication enough. And the way I think about it in the future is, we are pivoting to revenue. It is the best measure. We really aren’t going to focus much on billings going forward.

Great. Thanks very much.

The next question comes from Koji Ikeda with Bank of America. Please go ahead.

Hey Ash and Janesh. Thanks for taking my questions. Apologies if you guys went into this in detail on the prepared remarks, hopping on here a little bit late. But I noticed in the press release with the Elastic 8.0 announcement, the natural language processing is really highlighted there. So, I guess could you help me understand why is this such a big deal? And more importantly, what could this mean from a use case expansion or maybe a usage expansion from the end market? Thanks guys.

Yes. Thanks for the question, Koji, and let me address that. So, first and foremost, 8.0 is truly a fundamental release because we typically have always delivered a lot of innovations, not just in the major release, but in all the minor releases that come on top of it. And so you can expect us to continue to deliver innovations as we always have, in a continuous manner, not only through this calendar year, but beyond. Now with 8.0, one of the big advances is the capabilities that we have introduced in the area of vector search. And there are a whole bunch of other capabilities surrounding it, like natural language processing. And when you take all of those capabilities together, what that really lets you do is for your enterprise search kinds of applications use more natural query more natural language query techniques to get the results that you are looking for, the applicability for enterprise search, both in app search and in workplace search, which are the two kinds of use cases for customer-centric applications and employee-centric applications are tremendous – and this is where we obviously are expecting to continue to drive a lot of momentum. Also, when it comes to vector search, it allows you to do additional more interesting custom search use cases that also depend upon the vector search functionality and all the machine learning that you can apply on top of it. But that’s just for enterprise search. Beyond that, the announcements that we made in terms of additional integrations, cloud-centric integrations, the work that we are doing for observability to make it easy to bring in data into advanced analytics on top of it. All of that benefits from what is inherently in 8.0. So, a lot more to come in observability, security and enterprise search on this platform.

Thanks Ash. I appreciate it.

The next question comes from Rob Owens with Piper Sandler. Please go ahead.

Yes. Thanks for taking my question. I was wondering if you could speak to net new customer adds, which were kind of flattish year-over-year and flat to down a little bit quarter-over-quarter, realizing it’s a rounded number. But with cloud providing more of a frictionless on-boarding motion, why aren’t we seeing an inflection here, or will we see an inflection here in the near future? Thanks.

Hey Rob, this is Janesh. I will take that. So, we were actually quite happy with the pace of new customer additions in the quarter. We have seen a consistently strong rate of new customer additions for many quarters now, and Q3 continued that trend. The majority of our new customer adds – as I mentioned, are on monthly cloud where, again, we saw strong trends from a revenue perspective as well. We have invested quite heavily in cloud, in marketing, in partnerships, in the product. So, it’s actually great to see the results of these investments. And thinking about how we see that growth. I think about average deal sizes in annual subscriptions deal sizes were slightly up year-over-year. So, we are pleased to see that as well. And when I look at the overall data for all of our customer metrics in Q3, I think it was actually quite strong across the board. So, we are happy with the results.

Thank you.

The next question comes from Steven Koenig with SMBC Nikko. Please go ahead.

Hey, great. Thanks for squeezing me in. I wondered if you guys could give us any color on kind of self-managed customers converting to cloud and especially the larger customers. Can that be lumpy at all? And are you able to kind of anticipate their choice of deployment options, and kind of what are the factors that drive them to convert either in part or in whole to cloud? Thank you very much.

Yes. Hey Steve, this is Janesh. And maybe I will start and then see if Ash would like to add anything. But fundamentally, when I think about the business and when I look at self-managed customers, everyone has got their own strategy. It’s not like we are driving some sort of substitution in the business by trying to move customers to the cloud people, move at their own pace. And every customer is unique in that regard. Everyone has got their own story behind it. But when I look at the self-managed business overall or even the cloud business, obviously, very happy with both of those with the growth that we posted. Most of our net new customer additions, as I mentioned, were on cloud. So, the cloud strength was not necessarily from transitions in the customer base. A lot of that is just organic strength that we have driven with the new customers and as those continue to expand. So, cloud is a significant opportunity for new customer growth as well as for expansion. Customers are just spending more in cloud, and that’s what we are seeing. So, we expect that cloud will continue to grow faster for us because that’s where customers are driving their spending pattern. And so it’s more of the opportunity rather than some sort of transition. I think our opportunity is large. Our penetration rates are low, and so we have plenty of room to grow in both formats. Ash, anything you would add to that?

Yes. The only thing that I would add, as I look at all the customers that are continuing to expand, several of them are expanding into the cloud. Others are new into the cloud. But the one thing that is important to understand is the way we have architected our offerings, it makes it very simple for somebody who might have started on-prem in a self-managed environment to start to sort of expand in the cloud and run their queries, create their applications in such a way that they are able to seamlessly take advantage of them. And as they see the frictionless, easier to use, easier to manage, easier to monitor capability and natural attribute to the cloud, that’s where the growth becomes even faster. So, to Janesh’s point, we are not forcing any behavioral patterns in our customers. We are showing them the advantages of cloud and then letting them naturally just make those choices. And we find that to be a much better model than anything else.

Super helpful. Thank you very much.

The next question comes from Blair Abernethy with Rosenblatt. Please go ahead.

Thanks. Thanks for squeezing me in guys and congratulations, Ash. Just a quick question on the security space, the Elastic security solution, you have added a lot of functionality, acquired functionality on that over the last year or so. Just wondering how you see your competitive positioning with that solution? Now how do you go to market and differentiate yourself in the security side of things? And what’s the security demand environment looking like today versus the beginning of the quarter?

Yes. So, the security continues to be a very strong demand driver. If you look at our security business today, security now accounts for over 25% of our overall business. And over the last couple of years, the investments that we have made, both organically and inorganically have set us up very nicely. So, in my prepared remarks, I talked about the fact that we are actively seeing opportunities and involved in opportunities where we are displacing incumbents in SIM. SIM is the most mature part of our security portfolio, and we have expanded from there. And it’s a natural area of strength for us because a SIM effectively requires you to be able to pull in data from all kinds of different sources, run analytics against it, find the patterns that indicate attacks and then take actions on it. And that’s enabled us to expand to XDR, the investments and acquisitions that we made in the area of cloud security. I expect that to start showing up in the product in the next couple of quarters. And most importantly, we have been investing a lot in threat research. So, just as an example, earlier this week, our threat research team detected and started protecting endpoints in Ukraine against a new data wiper, effectively a form of malware that wipes and destroys data on your end systems that we started to observe in Ukraine, and we were able to protect end points there. And we were very proud of that kind of work that we are doing. In December, we discovered a new malware type called blister that was, again, attributed to some Russian crime groups. So, we are doing a tremendous amount of work. I personally could not be happier about the quality and the strength of our teams. And starting with this core strength in Elastic SIM and expanding from there, I see a tremendous amount of potential.

Great. Thanks very much for the extra color.

This concludes our question-and-answer session. I will turn the conference back over to Ash Kulkarni for any closing remarks.

Well, thank you, everyone, for joining us today. As you can tell, we remain very excited about the opportunity ahead. I am also looking forward to meeting many of you in the coming weeks and months. Thanks again, and have a great evening.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.