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Elastic N.V. (ESTC) is a company that specializes in providing a platform for search-powered solutions. The company primarily generates revenue through the sale of subscriptions to its platform, which includes various paid subscription tiers offering different levels of access to proprietary features and support. Elastic also offers consulting and training services to complement its subscription offerings.
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Subscription - Offers access to Elastic's platform through various paid tiers, providing different levels of proprietary features and support. Subscriptions are available on both term-based and consumption-based models, with Elastic Cloud being a significant component.
- Elastic Cloud - Provides cloud-based access to Elastic's platform, allowing customers to utilize its services on a consumption basis.
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Services - Provides consulting and training services to help customers effectively implement and utilize Elastic's platform.
What went wrong
- Flat RPO (Remaining Performance Obligations) sequentially from Q1 to Q2, while competitors are growing RPO at twice the speed, indicating potential lag in bookings and future revenue growth.
- Muted RPO sequential growth, even after deals pushed out from Q1 closed in Q2, suggests that booking cadence is improving but not yet back to historical norms.
- Management indicates a need to balance between accelerating growth and maintaining profitability, which may imply limited growth without increased investment in sales capacity.
Q&A Summary
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Strong Consumption Trends
Q: Are the strong consumption trends among large customers sustainable?
A: Management noted that overall consumption was strong in Q2, especially among larger customers, who accelerated their consumption. This is reflective of their efforts over the past several quarters. They view the strength as broad-based and not onetime, but are being prudent in their guidance as consumption rates can fluctuate. -
Sales Execution Improvement
Q: What drove the improvement in sales execution this quarter?
A: The company made strategic changes at the beginning of the year to focus more on the enterprise segment and high-propensity mid-market segments. The benefits of these changes are now materializing, with pipeline creation and progression returning to normal levels and strong win rates boosting confidence in future performance. -
Generative AI Growth and Large Deals
Q: How is Elastic's generative AI business progressing, and are large deals materializing?
A: Generative AI is the fastest-growing part of the business, with commitments nearly doubling quarter-over-quarter. The company secured three generative AI deals exceeding $1 million in annual contract value. While they don't have a separate AI SKU, they are seeing significant traction and expect to benefit from large deals as generative AI experiences come to fruition. -
Revenue Mix and Search Acceleration
Q: Has the revenue mix between search and observability changed?
A: Search has been accelerating, benefiting from trends in generative AI, although all parts of the business grew this quarter. While the overall business mix changes gradually, search is currently gaining more share. -
SIEM Opportunity and AI in Security
Q: What opportunities does Elastic see in the SIEM market?
A: Elastic is experiencing momentum in SIEM, with AI becoming essential in security analytics for improving detection and remediation. They are winning both greenfield and displacement deals, leveraging their strengths in AI and vector databases to differentiate in the market. -
RPO Trends and Sales Execution
Q: How does management reconcile flat RPO with satisfaction in sales performance?
A: Although RPO was roughly flat year-over-year due to the Q1 shortfall impacting cumulative RPO, sequentially it increased slightly, which is better than the usual seasonal decline. Management is pleased with sales progress and expects continued execution to reflect in future metrics, including RPO and revenue. -
Investment in Sales Capacity
Q: Will Elastic increase sales capacity to drive future growth?
A: Given the revenue outperformance in Q2, the company is increasing investments in the second half, including in sales capacity. They aim to balance adding margin and investing for growth, ensuring they have the right amount of productive selling capacity entering the next fiscal year. -
Competition in SIEM and GenAI
Q: Who are Elastic's main competitors in SIEM and generative AI?
A: In SIEM, Elastic faces incumbent vendors like Splunk, QRadar, and ArcSight. In generative AI, they position themselves as the platform for retrieval augmented generation, aiming to be the vector database of choice. While they compete with other vector database providers, their strength lies in handling unstructured data. -
Greenfield Opportunities
Q: How is Elastic progressing with greenfield opportunities?
A: The company has assigned sellers to distinct greenfield territories. While it's early, they are seeing pipeline creation and progression returning to historical levels, and they continue to build momentum in these areas. -
Binary Quantization Differentiation
Q: How significant is Elastic's innovation in binary quantization for GenAI use cases?
A: Management believes their advancement in better binary quantization is a game changer, offering high efficiency with minimal impact on accuracy. This innovation enhances performance and scalability in generative AI applications, and they plan to drive this advantage hard in the market.
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Given that customer commitments related to generative AI almost doubled quarter-over-quarter and you have over 1,550 customers using Elastic for GenAI use cases , but you don't have a separate SKU or a way to parse out GenAI revenue , how can investors track your progress in this critical area? Will you consider providing more detailed metrics or disclosures on the financial contribution of GenAI to your business?
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Despite improved sales execution in Q2 with pipeline creation and progression returning to normal levels , your guidance implies an exit growth rate of 11% in fiscal Q4 , suggesting conservatism or lingering impacts from earlier sales challenges. Can you elaborate on the factors influencing your guidance and the confidence you have in sustaining the improved sales momentum?
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As competition intensifies in both the GenAI space, with pure-play vector databases and other data platforms developing vector functionality , and in SIEM, with incumbent vendors and market disruptions , how do you plan to differentiate Elastic and maintain your competitive edge? What are the key risks you see in these markets?
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You observed stronger-than-expected consumption among larger customers in Q2 , but you are not factoring this into future guidance due to prudence and historical fluctuations . Is there a risk that you are being overly conservative and potentially underestimating your growth potential, especially if these consumption trends continue?
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With plans to increase investments in the second half of the year, particularly in GenAI , how do you balance the need for increased investment to capture growth opportunities with your commitment to improving operating margins? Do you believe your current level of investment is sufficient to capitalize on the significant market opportunity in GenAI without sacrificing future growth?