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Good day and welcome to the Elastic First Quarter Fiscal 2025 Conference Call. All participants will be in a 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, VP 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 first quarter fiscal 2025 financial results. On the call, we have Ash Kulkarni, Chief Executive Officer; and Janesh Moorjani, Chief Financial Officer and Chief Operating 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 are supplemental to the call, can also be found on the Elastic Investor Relations website at ir.elastic.co. Our discussion will include forward-looking statements, which may include predictions, estimates, our 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 posted on the Investor Relations website, 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 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 on our company website under the Investor Relations link. Our second quarter fiscal 2025 quiet period begins with the close of business on Wednesday, October 17, 2024. Over the coming weeks, we will be participating in the Citi Global TMT Conference, Goldman Sachs Communacopia & Technology Conference and the Piper Sandler Growth Frontiers Conference. With that I'll turn it over to Ash.

Thank you, Anthony, and thank you all for joining us today. Total revenue in Q1 grew 18% year-over-year. Cloud revenue grew 30% year-over-year and we delivered non-GAAP operating margin of 10.7%. We once again outperformed against the high-end of our revenue and profitability guidance for the quarter. We continue to focus on our land, expand and consolidate strategy, growing the total number of customers, spending over 100K with us to more than 1,370. We also continued to drive strong momentum around generative AI opportunities. And this helped us accelerate growth in our Search business. Furthermore, our platform consolidation message continues to resonate with customers. Despite this strength, we view this as a mixed quarter for us, because the overall volume of customer commitments we closed in Q1 fell short of our expectations. In terms of the issues that affected the total customer commitments closed in Q1, we were impacted by sales segmentation changes we made at the beginning of Q1 to increase focus on our strategic enterprise and high-potential mid-market customers. To be more specific, at the start of the fiscal year, we expanded our strategic segment, created more focus on selling into our largest accounts by reducing the number of accounts per sales rep and created distinct greenfield territories to focus on landing new customers, both in the enterprise and commercial segments. All these changes will help us grow our customer relationships and in time increase our wallet share with customers through our platform consolidation motion. However, we underestimated the impact of the account transitions that occurred with these changes. This was especially true in the Americas where we had the largest territory changes and we just didn't progress deals fast enough to bring them over the finish line. Separately, and to a lesser degree, tighter customer budget constraints led to delays in closing deals in EMEA. None of these deals were lost and we expect to close these in due course. Working with Mark Dodds and his sales leadership team, I have significantly heightened the monitoring of deal progress in the areas where we had the biggest segmentation changes. With this increased rigor, the deeper focus on our largest accounts and quite simply, as reps have had more time to cover their new accounts, we are already seeing encouraging signs of deals progressing through the sales funnel. Our enterprise engagements, particularly with our largest strategic accounts can drive significant large deals for us over the next several quarters and beyond. These customers also have the largest budgets. Looking ahead, we remain extremely confident in both the market opportunity and our ability to successfully capture the opportunity. Our innovations are expanding our competitive differentiation. We continue to strengthen our position as the platform of choice for building real-time GenAI applications. Our value and price advantage will continue to be a strength for us, as customers consolidate onto Elastic for multiple use cases. Turning to generative AI, the level of customer enthusiasm and demand for generative AI is intensifying, as companies continue to progress from ideation to testing and adoption. GenAI's immense potential to drive business transformation, reinforces our conviction in our strategy and in our position as a long-term beneficiary of this enormous technology shift. I am very pleased that we ended Q1 with over 1,300 customers using Elastic Cloud for generative AI use cases and with approximately 200 customers amongst our cohort of greater than 100K customers using us for GenAI. Also, as I mentioned earlier, we saw an overall acceleration in our Search business as more customers chose Elastic to build-out their AI-powered generative AI use cases. All of this bodes incredibly well for our future as the Search AI company with the leading platform for building real-time GenAI applications. As an example, in Q1, a leading sales enablement software company signed an expanded deal to use Elastic to incorporate GenAI across its platform. The company's Copilot now leverages ELSER, Elastic's proprietary machine-learning model for Semantic search to enable each of their customers to create personalized and tailored content through more precise and faster retrieval augmented generation capabilities. This has improved the satisfaction of their customers and has led to a more than twofold increase in their Elastic consumption over the last six months. The company chose the Elasticsearch AI platform for our hybrid search capabilities and seamless integration that doesn't require extensive model training or retraining. Another win in Q1 was with a global leader in the transportation industry that signed an expansion deal with Elastic, through the Google Cloud Marketplace to upgrade its security architecture and incorporate GenAI across all cybersecurity operations. The company will deploy our AI-driven security analytics capabilities such as the Elastic AI Assistant, Attack Discovery, and ESQL aiming to increase their event processing capacity by 20%. These innovative capabilities enable the organization to automate detection, prioritize actionable intelligence and efficiently manage security threats, significantly reducing manual effort to enhance operational efficiency. A large American law firm has signed a new deal with Elastic, displacing an incumbent solution for vector search and retrieval augmented generation. The firm will use Elastic to enhance case preparation for their paralegals and lawyers with a new internal search application. The application will find similar cases for benchmarking, applicable case laws and correct misclassified cases, which aims to ultimately boost revenue per case and improve win rates for their clients. Elastic was chosen to displace the incumbent solution, based on performance and ability to scale as the organization currently has nearly 40 million documents and is adding approximately 2 million every month. The value Elastic brings comes through in every customer conversation I have, which is why we also continue to win in platform consolidation. We continue to add capabilities to make it easier for customers to migrate from incumbent solutions and adopt the Elasticsearch AI platform. In the last several quarters, we have led with ESQL, our powerful piped query language and with our AI assistance for security and observability. In Q1, at the Black Hat Security Conference, we went a step further by launching the Elastic Express Migration, a new incentive program, which packages up all the migration services a company needs and helps mitigate dual vendor costs to move away from legacy SIEM and log analytics vendors to adopt the Elasticsearch AI platform quickly and efficiently. We are pleased with our continued focus and efforts to displace incumbent solutions. For example, we closed a seven figure deal in the quarter with a leader in data security and compliance via the AWS marketplace, displacing a competitive solution. The company uses the Elasticsearch AI platform to search, analyze and visualize massive volumes of data across cloud environments, enabling their customers to detect, mask and manage sensitive data to ensure compliance and mitigate risk. The speed and efficiency of the organization's data operations has already improved, outperforming their previous solution by up to 120 times. Elastic was chosen based on a rapid search capabilities in detecting security breaches, meeting the complex needs of the demanding security environments in the world's largest and most influential companies. Also in the first quarter, a leading data analysis and business intelligence platform signed the new deal to replace an incumbent solution with Elasticsearch AI platform. The company's open-source intelligent solutions ingest, enrich and analyze data from disparate sources around the globe, empowering law enforcement, government agencies and businesses to save lives and protect what matters most. By choosing Elastic to help streamline and consolidate disparate data sources and deliver more relevant search results, they can reduce costs, increase developer productivity and improve search outcomes. Now turning to innovations in Q1. Our team continued to deliver capabilities to further expand our competitive advantage in the areas of Search, GenAI, observability and security. In Search, we continue to extend our leadership position as a vector database and in the retrieval augmented generation or RAG use case. In the first quarter, we further optimized scalar quantization, resulting in faster query speeds and dramatic reduction in memory requirements. And we have added support for binary vectors. We also introduced the Semantic underscore text field type, which automates the process of chunking large documents and creating text embeddings for each chunk, resulting in a significantly simpler experience for GenAI developers. Finally, we expanded our Semantic reranking capabilities, which improves our natural language search capabilities for all users with a wider variety of AI model providers. We also introduced Playground to accelerate RAG application development with Elasticsearch, all through an intuitive low-code UI-based workflow. With Playground, developers select any of their data in Elasticsearch to experiment with and refine conversational queries with a generative model of choice. After experimentation, Playground can export production-ready code to simplify RAG implementations grounded by proprietary data. On a related note, Elastic has always embraced the power of open-source and is demonstrating this with our announcement today that Elasticsearch will be adding the AGPL as an option to license the free part of our source code that is available under the SSPL License today. AGPL is an OSI-approved open-source license. And with this, Elasticsearch will be officially considered open-source again. This will drive even greater engagement and adoption for Elasticsearch in areas including vector search within our large community, further increasing our popularity as the runtime platform for RAG and building GenAI applications. This exciting change will be incredible for our users and for our business over the long-term. In Security, AI is transforming the SIEM landscape. With the traditional SIEM fast evolving to an AI-driven security analytics platform for the modern SOC, building on Attack Discovery to automate threat investigations and triage, which we had discussed on our prior call, we continued our leadership in this area with our launch in Q1 of Search AI-powered Automatic Import. Automatic Import is a powerful new capability to automate SIEM data onboarding by using AI to enforce schemas and automatically generate the rules to ingest data accurately. It complements our AI Assistant that customers can continue to use to convert their existing SIEM rules to Elastic. And all of this taken together greatly reduces the risk and effort to consolidate onto the Elastic platform. In the area of observability, we continue to deliver enhancements that improve the overall AI Assistant experience and increase choice for our customers, adding support for Google Vertex with Gemini Pro Model 1.5 Connector and Custom Index Support for AI Assistant knowledge base, giving customers more flexibility in how they leverage the AI Assistant. Finally, we were pleased to be ranked as a leader in the 2024 Gartner Magic Quadrant for Observability Platforms. Partners are an essential part of our go-to-market strategy and we are delighted to be recognized as the 2024 Microsoft US Partner of the Year, which not only underscores the strength of our partnership, but also reflects our shared focus to help customers accelerate their AI journey without sacrificing the privacy and security of their proprietary data. In closing, we are very focused on improving our sales execution in the coming months. The opportunity in front of us, our technology platform, our community, our large customer base and our team give us an incredibly strong foundation to build upon. We remain committed to building a multi-billion dollar business over time with a focus on growth and profitability. With that, I'll turn it over to Janesh to go through our financial results in more detail.

Thanks, Ash. In the first quarter, we once again outperformed against the high-end of both our revenue and profitability guidance for the quarter. I'll first discuss the results for the quarter before describing our outlook for the second quarter and full year. Total revenue in the first quarter was $347 million, up 18% year-over-year as reported and in constant currency. Subscription revenue in the first quarter totaled $324 million, up 20% year-over-year as reported and in constant currency. Within subscriptions, revenue from Elastic Cloud was $157 million, growing 30% year-over-year as reported and in constant currency. Elastic Cloud represented 45% of total revenue in the quarter. Aggregate consumption trends in Q1 played out as we expected with enterprise and commercial customers continuing to consume against their annual commitments. Revenue from our self-service motion, which is driven mainly by SMB customers on month-to-month arrangements remained somewhat flat versus the prior quarter. Elastic Cloud revenue based on month-to-month arrangements came in at 13% of total revenue. We will continue to monitor consumption trends closely. Professional Services revenue in the first quarter was $24 million, growing 1% year-over-year as reported and in constant currency. Although Professional Services revenue may fluctuate across quarters based on the timing of services delivery, we do not expect it to vary significantly and mix over time. To add more context around deal flow during the quarter, we did not close deals to the extent we expected. This was mainly due to account transitions caused by the segmentation changes we intentionally made in our sales organization, particularly in the Americas, and to a lesser extent, tighter budget constraints that we did not anticipate in EMEA. Since our contract signings tend to be back-end loaded in the quarter, these issues became more visible to us in July. As Ash mentioned, none of these deals were lost and we expect them to close over time. Ash already described the specific steps we are taking in response to that. We are progressing with these actions in Q2 and we feel confident that we are on our way towards a return to better execution. Our market opportunity remains large, the Elasticsearch AI platform is highly differentiated, our GenAI traction is strong, and customers are continuing to look for tool consolidation opportunities in the current environment. In terms of growth across the regions, APJ grew faster than EMEA and Americas. We did not see any significant change in the competitive environment during the quarter. Our strategy of focusing on customers with a higher propensity for growth is working as evidenced in our customer metrics. We ended the first quarter with over 1,370 customers with annual contract values more than $100,000. These larger customers provide a strong foundation for our land and expand motion as we build a multi-billion dollar company over time. Looking at customer additions more broadly, we ended the quarter with over 4,430 customers above $10,000 in ACV and approximately 21,200 total subscription customers. Our net expansion rate was approximately 112%, which was in line with our expectation for the quarter. Our retention rates during the quarter also remained strong. Now, turning to profitability and cash flow for which I'll discuss non-GAAP measures. Gross margin in the quarter was 76.3%, in line with our expectations. Our operating margin in the quarter was 10.7%, which was better-than-expected, driven by our revenue outperformance and continued discipline in spending. Diluted earnings per share in the first quarter was $0.35. Free cash flow margin on an adjusted basis was 18% or approximately $64 million of free cash flow in the first quarter. Finally, though we don't formally guide to cash flow, we continue to expect adjusted free cash flow margin for fiscal '25 to be slightly above the non-GAAP operating margin for fiscal '25. As you know, our adjusted free cash flow is on an unlevered basis. Cash flow on a quarterly basis will fluctuate given timing issues and seasonality, so we continue to look at this primarily on a full-year basis. Turning to guidance. While we continue to see significant opportunity across all our solutions and believe we are well-positioned to capture this opportunity, we are updating our guidance to reflect our first-quarter performance and current outlook. In terms of our guidance assumptions for the rest of the year, we are assuming the macro-environment will remain the same as what we saw in the first quarter. That includes EMEA where we are not expecting significant changes in the broader environment. The shortfall on customer commitments in Q1 will directly impact both self-managed and Elastic Cloud revenue this fiscal year. Looking ahead, we are taking actions to address the issues we experienced in our sales execution and are seeing good indications of progress, which gives us confidence on this front. However, we are maintaining a prudent stance on our assumptions on deal closures for the rest of this year. To expand a bit further on Elastic Cloud revenue, although we continue to expect customers will consume against their commitments as we've seen for several quarters now, the slower start to the year on securing commitments will impact Elastic Cloud revenue. And we continue to assume that our self-service motion on Elastic Cloud will stay flattish in dollar terms for the rest of the year. As we consider investments in the business, we've said before that we will balance revenue growth and investments and we are taking steps to do that. Since we believe the issues we face are near-term and don't affect our core view on the market opportunity or our long-term growth potential, the actions we are taking to reduce investments are similarly measured. We are prioritizing investments towards areas best position to drive near-term and long-term growth, particularly in GenAI. Specifically within R&D, we will continue to invest in our platform roadmap. Our product differentiation is core to our long-term success. Within sales and marketing, we will continue to build sales capacity, but with a focus on those regions where we see the greatest opportunity. We will drive efficiencies in certain other sales and marketing investments that are not customer-facing, where we can reduce or delay investments in the near-term without sacrificing our long-term growth. And finally we will drive greater efficiencies in the G&A functions as well. All these steps will help us reduce fiscal '25 dollar spend by more than the revenue reduction, resulting in higher non-GAAP operating margin for the year and do so without compromising our long-term growth opportunity. With the operating leverage inherent in our business model, we also continue to be well-positioned to drive higher operating margins as we scale the business in future years. With that background, for the second quarter of fiscal '25, we expect total revenue in the range of $353 million to $355 million. This represents 14% year-over-year growth at the midpoint, both on an as-reported basis and in constant currency. We expect non-GAAP operating margin for the second quarter of fiscal '25 to be approximately 13% and non-GAAP diluted earnings per share in the range of $0.37 to $0.39 using between $105.5 million and $106.5 million diluted weighted average ordinary shares outstanding. For full fiscal '25, we expect total revenue in the range of $1.436 billion to $1.444 billion. This represents 14% year-over-year growth at the midpoint both on an as-reported basis and in constant currency. We expect non-GAAP operating margin for full fiscal '25 to be approximately 12.5% and non-GAAP diluted earnings per share in the range of $1.52 to $1.56 using between $106 million and $108 million diluted weighted average ordinary shares outstanding. In summary, while we are not satisfied with our Q1 performance, we remain confident in our growth potential and that we are still in the early stages of our growth journey. We are focused on improving our sales execution in the coming months and will continue to drive profitable growth going forward. And with that, let's go ahead and take questions. Operator?

We'll now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. And our first question today comes from Matt Hedberg with RBC Capital Markets. Please go ahead.

Great. Thanks guys for the questions. Ash, I'll start with you. You touched on it in the prepared remarks, but I just wanted to double-click on what you think maybe some of the most important items are you're doing to improve the sales execution as a result of segmentation, which seems like it makes a lot of sense longer-term. And is there any way to think about how long you're going to -- how long it's going to take until we start to see improvements in terms of accelerating growth?

Yeah. Thanks for the question. This is something that I've been reflecting on a lot, as you can imagine, what could we have done differently and what we are doing differently. And so the three things that we are doing already. First is, I've significantly increased the monitoring that we are doing of deal progression through the sales funnel. I'm working personally with our CRO, Mark Dodds, and his sales leadership team on this. The second thing that we've been doing is just driving deeper focus on our enterprise accounts. These tend to be our largest accounts, the ones that have the largest budgets, and that's been a big part of what we've ramped up. The third thing is, and this is less so an action per se, but more just the fact that as time is progressing, our reps are adapting to their new territories. They are building those relationships and already we are seeing signs of progress as deals are moving through the sales pipeline in these accounts. Now apart from these three things that I talked about, there are a couple of other things that we were doing irrespective. In the first, we've been talking about our platform consolidation motion for some time. It's been a motion that's worked very well for us to sort of continue accelerating that in this past quarter at the time of Black Hat -- at the Black Hat Conference. We launched the Elastic Express Migration program that brought together all the customer incentives, all the services incentives, and everything that we needed in terms of technology to help customers quickly migrate onto the Elastic platform and really do that with minimum risk and minimum effort. The other thing that we've been doing for GenAI given all the success that we've been having there is we've stood up a small specialist team, a technical specialist team that's helping our customers with building their GenAI applications, helping them ramp up faster, the demand for their skills has also been exceptional. So all of these things give me confidence that in the next couple of quarters, we are going to get back to our strong state of sales execution that we've had in the past. This is my absolute number one priority and my commitment.

Very, very comprehensive. Thank you for that, Ash. And then, maybe if I could just squeeze one other one. I know we've all been focused a lot on the competitive opportunity and it really does feel like you've noted a number of wins in the quarter and new migration technology. I guess, I'm curious, is there any way for you to quantify maybe growth in that pipeline? And I guess I'm curious on what specifically are some of these migration tools doing. Are these things that the channel can also leverage to maybe accelerate these replacements?

Yeah. So let me start with the technology and then talk about how we are scaling these things. So in terms of technology, we've had ESQL, our query language, which made it really easy for customers to really switch some of their, the logic, the rules, the alerts that they've built in incumbent technologies and move it to Elastic. We also had the Elastic AI Assistant that can help with moving all of those rules and alerts and dashboards and so on. And then we recently launched Automatic Import, which is a capability that allows you to very quickly move data streams like onboard data sources and bring that data into the Elastic platform. And it effectively uses large language models, it uses AI to infer the schema and create all the mappings that you need to onboard those data sources very, very quickly. So all of that technology really helps. The second thing that we've been doing, like I mentioned, is the program itself. So customer incentives because a big part of the challenge for customers tends to be the double cost that they have to pay in the period of transition. And the program helps with incentives to sort of make that easier. Now how we scale that, it's obviously our sales team that is leaning in, the pipeline has -- the focus and the excitement around it has been very strong. We kicked that off the Express Migration program at Black Hat. Since then, we've been seeing a lot of interest in it. In terms of partners, that is a natural thing. And as we work with hyperscaler partners, as we work with other partners, our goal is always to make sure that we leverage those partners to use the same kind of motion and then help drive that momentum into opportunities.

Thanks a lot, Ash.

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

Ash, I think everyone would love to hear more about the segmentation changes. I guess when you think about what percent of your go-to-market team you changed out, is it an easy way to describe like we changed 50% of reps, 20% of our reps focus on different accounts? Is there an easy way to simplify this to understand what this means?

Brent, the area where the impact was the greatest was in the Americas in all verticals except US public sector. US public sector for us is a separate team. And given the nature of those territories, we did not touch anything in that territory, but outside of that in the Americas, pretty much all the teams were affected. And the simple answer there is the way I look at these changes, the changes I still believe are the right changes. As we've looked at it, as we've analyzed it in every way possible, these are the right changes, because this brings us to industry best practices in a lot of ways in terms of the number of accounts that each rep carries, that just drives greater focus. What we got wrong was the execution of those account transitions. And if I were to redo this, I would stagger those changes a little more and do them a little more gradually. And that's now what we're focusing on. What we're focusing on is just making sure that we really inspect all of those accounts, make sure that we are working with those reps as they gain familiarity with their accounts to make sure that they are ramping up quickly and building that progression of the pipeline. And it's just, to me, it's a temporary interruption, but we are well on our way. And in the couple of quarters, I expect that we'll be back to that level of sales execution that we've been accustomed to.

Okay. I just want to make sure I heard this right. You changed every vertical except Fed?

In the Americas.

And I guess the natural follow-up is given the magnitude of that disruption, Janesh, I guess why wasn't there a higher-level of cushion embedded in the guide to ensure that you gave your guys -- you gave yourself some more room.

Yeah, Brent, it's a great question. As we built the guide and thought about the approach and the guidance assumptions, we anticipated some degree of change associated with this. And look, as Ash said, segmentation changes happen as almost a standard practice in almost every enterprise software company. The magnitude of what we did obviously was much larger. And we did factor that into a degree as we built the guidance. We anticipated some of that. But a lot of the impact that we saw was really late in the quarter. We saw it only in the month of July and it was a little bit too late to try and recover from that there in Q1. And so as Ash described, we then put the corrective actions in place and we've started to see initial encouraging signs already and we expect to return to our historical track record of stronger execution in the next couple of quarters.

Great. Thank you.

Our next question comes from Pinjalim Bora with JP Morgan. Please go ahead.

Hey, thank you for taking the question. Just again double-clicking on the changes and everything, specifically, on the lower-than-expected commitments. It seems like it's impacting both cloud and self-managed. I'm trying to understand if there is a plurality of commitments on one or the other. Was there any element of an impact from the price adjustments to self-manage that went into effect, I believe, in May? And in terms of macro, did you see any kind of increasing scrutiny on deals that might have worsened in July or later or would you say it's largely sales execution?

Pinjalim, this is Janesh. Maybe I'll take that. You're right, the impact was across both cloud and self-managed. It was not isolated to one format because it reflected the broader sales execution. In terms of the price increase that we did at the start of Q1 and whether that had any impact, I don't believe it did because it was a single-digit price increase and was based mainly on the technology enhancements that we had delivered. So we didn't see a meaningful impact to customer commitments solely related to that issue. If anything, I think, the shortfall in customer commitments was a broader sales execution issue. Even in terms of revenue, as I think about both Q1 revenue as well as the outlook for the year, the price change was not intended to be a meaningful driver of revenue for us this year, in part because it was a relatively small change or single-digit percentage increase. And it will also start to come into renewal contracts only at renewal time. And you'll know that we signed multiyear contracts as well. So that wasn't much of a driver for us here on the impact in Q1.

Yeah. Understood. One more follow-up, Janesh, to you. Can you talk about the actual consumption run rate among your annual cloud customers? And how that has been tracking essentially relative to the committed consumption run rate? And maybe talk about the linearity of the cloud consumption trends in the last three months and into August? Thank you very much.

Yeah, happy to touch on that as well. I think annual cloud consumption trends played out quite nicely for us as we expected in Q1. In both the enterprise and the commercial segments, customers continued to consume nicely against the commitments that they've already made to us. I think that's just a great indication that customers that adopt cloud continue to see a lot of value from our platform. And I think the issue on cloud for us looking ahead is that because we have a lower degree of new commitments that we secured in Q1. That will -- that was again related to the sales execution issues. I think that impacts our broader revenue outlook. But in terms of the rate of consumption, I think, that was fine. In terms of the linearity within the quarter, you know, as we've traditionally not broken out a monthly view of the business just because there can be some natural fluctuations in consumption patterns across customers. So we tend not to rely too much on a single month of data. And so I won't disaggregate that here or share details about August. But I'll just say it played out consistent with what we've seen before and as we expected going into the quarter.

Thank you.

Our next question comes from Mike Cikos with Needham & Co. Please go ahead.

Hey, guys. Thanks for taking the questions here. I'm also going to circle up on the segmentation topic, but just want to make sure I'm hearing this right. So it sounds like you identified this issue relatively late in the quarter. Again, just how the quarter played out. And I'm trying to get a sense the changes that you guys have implemented. When did those actually go into effect? Was it like in August 6 or was this in late July? The reason I'm asking is, I'd like to hear if possible. I know we're four to five weeks out from the end of the July quarter, but has there been any notable change that you guys can see on your side given some of these changes on the segmentation front?

Yeah. Thank you for the question. So just to be very clear, the segmentation changes that were made at the beginning of the fiscal year. So this was on May 1st that all of the changes were rolled out. And just to be clear like every year as is typical for most software companies, most enterprise companies like ours, there will be some level of territory changes that happen. It's a pretty regular practice. In our case, like I mentioned, this time the changes were greater. And now when we -- as we -- as Janesh talked about, we realized the impact that it was having in -- later in July. As soon as we started to see that, we started to put some of the corrective action that I talked about. The rigor that we started to put in into the monitoring of the pipeline, really engaging with the reps that had the most number of account changes, really inspecting the movement and progression of the pipeline in those accounts, the focus on the enterprise accounts and so on. And since then, as we've been progressing, we are already seeing positive signs. We are seeing deals progress better through the pipeline. Because again, the deals that slipped out of the quarter, out of Q1, they weren't lost. They just did not close in time many of them. And some of them have since closed and we expect the remaining to close in due process. So that's our focus to make sure that we are getting all these actions in place quickly, and we are already seeing that progress. We are seeing the positive signs and that's what gives me the confidence that we will be back to our prior state of strong sales execution in a couple of quarters.

Awesome. Thank you for that, Ash. And just to make sure, again, I'm clear here. So it's a combination of these changes that you guys have implemented around the segmentation, as well as, the lower degree of new commitments secured in Q1, which is really informing your view when we think about the guidance now over the rest of the year and the fact that this does feel like it's -- I should take a couple of quarters to play out here.

Yeah, Mike, it's the same issue. The sales execution issues were reflected in the fact that we had lower commitments. We just didn't get enough deals over the finish line. So it's the same issue. And you're absolutely right that our belief and expectation is that with all of the actions that we're taking. We will return to our prior state of stronger execution over the next couple of quarters.

Thank you very much. I'll cede the floor. Thank you guys.

The next question comes from Tyler Radke with Citi. Please go ahead.

Yeah. Thanks for taking the question. So I guess I just want to go back and understand the specifics of the shortfall a little bit better. So it sounds like it was mostly within the Enterprise segment, which presumably these are large renewal deals, and so are existing customers at least. And I guess if you aren't seeing any challenges on consumption, is the implied cut to cloud is that just conservatism because you have sort of less backlog visibility or do you believe that the push out in these deals sort of delays new use cases and new ramps coming onto the cloud and it's sort of a timing because we need those commits in order for these use cases to ramp up. Just help us understand that because it sounded like consumption was okay, but yet you're cutting kind of consumption expectations for the full year?

Tyler, maybe I'll take a stab at that. So first off, in terms of where we saw the impact, it was not only in the large enterprise accounts, because as part of all the segmentation changes, as Ash said, we made changes across the entire Americas team except public sector. So that impacted a number of commercial accounts and relationships and there were changes there too. So it was more broad-based. The impact obviously has felt more on the enterprise segment because those tend to be larger accounts with larger deals and larger transactions and you have a little bit more velocity on the commercial side. In terms of the mix of new workloads versus expansions and renewals, our gross retention rates stayed incredibly strong. Those were healthy. We felt pretty good about the renewals and how we closed that business. And so that piece was strong. I think it was really the additional workloads, either net-new workloads that rep was trying to drive in existing accounts or net-new accounts that we were trying to land, that's where we saw a little bit more of the impact. And then in terms of consumption revenue and how that plays out, in our annual cloud motion, as you know, we contract with the customer and the customer makes a commitment to us and then they burn those commitments down over time as they consume against the commitments that they've made. And so the assumptions that we've got going into the model and into our guidance are that the rate of consumption that customers have against their existing commitments. That was healthy and we expect that will continue to be healthy going forward. But the fact is that we missed on securing new commitments here in Q1. Our sales execution issues are going to take us a couple of quarters to work through. And so you won't see that addition to the pool in the form of new and expanded commitments at the same rate at which we've historically seen. And then that limits the amount of burndown that you can have and therefore limits the cloud revenue. So that's the model and that's the way we've actually built out the guidance and the assumptions that we've got embedded there for the rest of this year.

Thank you for the detailed explanation, Janesh. I know there's a lot of moving pieces. The follow-up question, I wanted to ask you Ash, just around open-source, so obviously, in the GenAI ecosystem, open-source is super important. I saw I think a couple of minutes before the earnings release came out, there was -- you announced the open-source license basically adding AGPL for the source code. Can you just talk about the significance of that announcement and just how you're sort of thinking about the strategy here particularly with the importance in the GenAI market?

Yeah. Thanks for that question. Look, this is, I think, it's hopefully clear to everybody that our ethos has always been open-source. We've always acted and operated with that kind of mindset. But with the license changes that we made about three years ago, we could not call ourselves open-source, and so we used the terminology free and open. And we had done that for very specific reasons. As you know, since then, a lot has changed. There is AWS sort of forked and created OpenSearch and our own competitive differentiation against not only OpenSearch, but everything that's out there in the market has been just growing. And so that's been very, very positive for us. And the big opportunity that we see ahead of us is GenAI, and what it means to be the vector database of choice that is embedded and used in every modern GenAI application that's being built. We see a tremendous opportunity. You saw from the data that I shared that we're already seeing a lot of success and we want to keep accelerating that. So the addition of AGPL as a license now means that in all the forums, in all the places where developers typically go to get access to open-source software, we can now proudly have Elasticsearch as an open-source option available for them. And the more adoption we see of Elasticsearch for these vector database vector search use cases, the greater our ability to capitalize on the GenAI market in the years to come. So it is key to us. It is very strategic and I'm very excited about it.

Thank you.

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

Perfect. Thank you. And the -- you commented on the earlier part of the call already, Ash, about like the S3 and how people are working with that. What do you see in terms of those initial trials starting to convert over? And how is that helping -- could that help you with kind of second half and kind of reacquiring of new workloads like is that already a factor that kind of could help us there? Then I had a follow-up for you guys.

Yeah. No, thanks for the question, Raimo. Look, one of the things that I mentioned even in the prepared remarks is the fact that we saw our Search business accelerate this quarter. And when I think about all the factors that are behind that, the reality is that Search is seeing a resurgence of interest because of generative AI. We are seeing a lot of customers implement these Semantic search and RAG use cases. And we've talked about it in the past that the important early steps is to be incorporated in the design of these applications and then these use cases and workloads grow. And you saw this quarter, as I mentioned, that we are seeing acceleration in our Search use cases and that is very heartening. That makes me feel very good about our strategy that makes me feel very good about our competitive differentiation, and the fact that we are succeeding. And so we are leaning in. And in the long-term, I feel that this is going to be incredibly valuable for us as a company.

Okay, perfect. And then one for Janesh. If you like, look, if you think about it, a lot of your sales guys will kind of probably need like need to restart the year or you have to think about that. Like what are you thinking about cost and investments for the year and how that will flow out in the different quarters as well? Thank you.

Yeah, Raimo. As I mentioned earlier, we've always maintained the view that we will balance revenue growth with investments and today we are taking steps to do that. But since the issues we are facing are near-term issues, we want to be measured in the approach that we're taking on expenses. So as I think about the investments that we're making in the business, we're going to stay focused on areas where we can continue to stay invested and make investments to drive growth both in the near-term as well as longer term. And a big part of that investment goes into R&D, particularly in everything associated with GenAI. And then on the sales and marketing side, we're going to make investments in areas, where we can target specific growth and I think we will make, go a little bit slower in areas that were not directly impacting growth. So for example, some non-selling roles or other kinds of investments, for example, investments in the brand program and so forth. And then we will continue to drive efficiencies on the G&A side as we always do. I think that's just a continuing journey. And so through all of that, we're expecting to actually reduce our spending for the year on a full-year basis, by more than the revenue reduction, which then leads to a slight increase in non-GAAP operating income and margin. And that's the approach we've taken. And as we navigate through the rest of this year, as we see ourselves returning to stronger execution over the course of the next couple of quarters then we will develop a view on the investment philosophy beyond that. But looking ahead, I do continue to see room for us to expand operating margins in future years because there is operating leverage inherent in the business model.

Okay. Perfect. Makes sense. Thanks for that.

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

Yes. Hey, guys. Thanks for taking the questions. And to go back to the sales execution part of the equation, I know, there's been a lot of focus on the Americas side, but you do have a pretty big international business too. And so the question is on the international go-to-market strategy, specifically, was there a similar strategy that was going to happen in international? And was that put on pause or were the learnings that you've learned -- that you've seen over the past few months within the Americas, are you taking those learnings and maybe implementing a similar change internationally? Just trying to understand what to anticipate from an international go-to-market strategy.

Yeah, Koji. Thanks for the question. And so the way we have organized our international teams is largely by countries, right. So we have teams in different large countries and then we sort of bucket some of them into regions. Given the size of the business in the Americas, the changes that we felt were needed for the long-term were a lot more relevant in the Americas because you have a very -- a much larger scale. In international regions, in countries, the way they were organized, we felt pretty good about the way things were. And so no changes were planned and no changes were made. Even in the Americas, in the public sector, given that public sector tends to be very different in terms of how things are organized between state and local versus Federal, and in Federal, you have Civilian, DoD, et cetera, those were not touched. It was all-in Americas, outside of public sector where we have the strategic segment, the enterprise segment, and the commercial segment. And in those we expanded the strategic segment. We brought more focus to larger customers in the enterprise segment by reducing the number of accounts per rep and then we created distinct greenfield opportunities to drive better new logo acquisition. Those were the changes and it was largely in the Americas as opposed to in EMEA or APJ.

And Koji I'll just add as we mentioned earlier in the remarks that, you know, to a lesser extent, we did see some deals push out in EMEA towards the end of the quarter because of customer budget constraints. But that was to a lesser extent and it's too early to say if that's related to the macro or anything of the sort.

Got it. Thank you. And then just a follow-up for Janesh. When I look at the RPO sequential growth in the first quarter, down from the fourth quarter. And when I look historically, when the first quarter starts off down, the self-managed portion of subscription does follow somewhat of a predictable pattern. So just curious if you could add some color to how we should be thinking about RPO in relation to self-managed revenue. Thank you.

Yeah, Koji, it's a good question. I mean, if I look at the RPO overall, I think that just reflects the issues that we've talked about in terms of our overall Q1 performance. And as we said, there's nothing that's fundamentally changed about our longer-term opportunity or our approach to the market. So we look forward to returning to that stronger execution. Specifically thinking about what that means around self-managed, there isn't a particular connection that I would draw. As I mentioned, the issues that we saw here in Q1 related both to cloud and to self-managed. And over time, as we return to a stronger execution, I would expect to see recovery in both of those. You know if you think about the revenue recognition patterns, the upfront component of a self-managed subscription is a relatively small piece of our overall revenue at this point in time. So it doesn't draw -- it doesn't drive any big shifts for us in terms of lumpiness and revenue recognition.

Got it. Thanks, Ash. Thanks, Janesh. Thank you.

Our next question comes from Patrick Colville with Scotiabank. Please go ahead.

Hi. This is Joe Vandrick on for Patrick Colville. Ash, you mentioned that Search accelerated in the quarter. So I'm wondering, does that mean security and observability performed slightly worse than expected?

Well, I think the way I would think about it is effectively all businesses, all areas of our business, search, observability and security were affected by the fact that the total number of customer commitments was lower in the quarter. So the sales segmentation changes affected everything. It was not just for certain use cases versus others, everything was impacted. In spite of that, we saw an acceleration in our Search business and that's largely because of the success that we've been seeing in GenAI use cases.

That makes sense. And for my follow-up, I guess, can you just talk a little bit about the competitive environment in AI Enterprise Search, why Elastic tends to win? And then also what will it take to more significantly penetrate your customer base for these kind of GenAI Search use cases? Thanks.

Yeah. Thank you. No, absolutely. So first of all, like this is an area that we have an extremely strong brand reputation in, right? We are known as Search experts and we are known as the Search AI company. And so from that perspective like this is a very natural area for us. What's exciting is the area where we have the greatest brand recognition is the area that is really seeing a tremendous resurgence of interest, a growth of interest because of GenAI. A lot of the data that ends up getting used in these kinds of GenAI RAG-style applications is already sitting in Elasticsearch, which means that it's very easy for customers to leverage our vector database functionality to turn that data into vector embeddings and then use it in Semantic Search or RAG kinds of use cases. So there's a real strength that comes from incumbency. But we also have what I would consider to be one of the best vector databases out there just in terms of the performance, the scalability, and what our customers tell us is. One, we have a really strong vector database product. Second, we have a lot of enterprise features, just the overall set of capabilities around hybrid search, reciprocal rank fusion, everything that we've added and the developer-focused capabilities that make it easier for developers to adopt and use our product in this space, all of this tends to give us the kind of competitive differentiation that we believe is going to be a very sustained differentiation over time.

Got it. Thank you.

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

Yeah. Thanks for taking my question. Want to drill down a little bit more on the Security side and the Elastic Express Migration. And just what you're seeing competitively, especially since I think a decent chunk of that Splunk base is potentially up for grabs what you're seeing competitively and customers' willingness to switch? Thanks.

Yeah. Thanks for the question, Rob. So the competitive environment is -- hasn't really seen any changes in that in terms of our ability to win and there is a lot of interest that customers have been showing to sort of move away from incumbents. And what the Express Migration is designed to do is bring together not just the technologies I talked about in the past, I've talked about ESQL, I've talked about Attack Discovery, but the capabilities that we recently have announced around Automatic Import are designed to make it easier for customers to bring those data flows, those data sources onto Elastic. And then the program also includes customer incentives. So what we want to do is reduce the risk, reduce the effort and make it easier for customers to switch over and that's what we've been leaning in. And this then gives our sales teams also a lot to go and talk to customers about. It's just a very natural thing for them to lead with. And so I'm very confident that this momentum is going to continue. And like I said, the impacts, the near-term impacts that we saw from some of the segmentation changes, the fixes are within our control. We are already acting on it. And with these kinds of things that we are doing for driving migrations and consolidation onto our platform, I particularly am very confident and excited.

Any thoughts on mirroring this -- mirroring this, excuse me, on the observability side as well.

We are doing it for both security and observability. Now obviously, in observability, the focus is on log analytics, and in security, the focus is on SIEM, but this is not just restricted to security. And the same patterns we are seeing them apply across both, Rob. So it's a great question, and that's exactly how we are approaching it.

Thank you.

Our next question comes from Andrew Nowinski with Wells Fargo. Please go ahead.

Thanks. I'll just keep it quick. Can you guys quantify how many deals or the quantity -- or the magnitude of the deals that slipped out of the quarter? Just trying to get an understanding of maybe what the quarter could have looked like and what kind of cushion you have going into next quarter.

Yeah, Andy, I'll take that. So just as a general matter, we tend not to disaggregate the amounts of customer commitments and orders and so forth. But I'll just say it was significant, as you can see that it obviously caused us to move the revenue amount here quite meaningfully. And while these deals are progressing nicely through the sales funnel, I would not expect all of them to close in Q2. Many of these will take a while to close out. And we're also continuing to work through the corrective actions, while we've seen a lot of encouraging signs initially. As we said, it will take a couple of quarters for us to get back to a stronger level of execution that we've seen in the past. And so, as I think about the revenue guide for the year, it considers that period of time as well. So those are some of the things that went into how I thought about the impact of the miss that we had here in Q1.

Thank you. And just as a follow-up, I guess, if you're worried these deals aren't going to close over the next take more than a couple, more than one quarter to close, it sounds like it may be somewhat out of your control, it's not necessarily self-inflicted with the simple salesperson change to the account. I mean is there -- are you concerned about competition of any of these accounts with the deals that slipped?

No. So this is not about competition. Let me describe it this way. Every time there is an account transition, the incoming rep has to now establish those relationships and sort of pick up the handoff needs to be clean and that's where we had the stumble and that's what we've been focusing on now. So when we say that it's -- we expect to be back to our -- back to full strength in terms of the sales execution. What we're really talking about is just that time that it takes for a rep to establish, pick up and continue to drive. It is not about competition because we haven't seen any of these deals vanish or turn into losses. It's just been about bringing them over the line in Q1 and we are actively working on that now.

Okay. Got it. Thank you.

Our next question comes from Joel Fishbein with Truist Securities. Please go ahead.

Thanks for taking the question. I guess, Janesh, just as a follow-up to Andy's question, how did you go about formulating the guidance and what confidence that you can give us that the numbers are achievable for the 2Q and the full year?

Yeah, Joel. So in terms of the approach that we took to guidance, first off, we obviously considered the impact of all of the transactions that we were expecting in Q1 that did not close. That's all reflected in the revenue guide. And now that we are aware of this issue and started to put the corrective actions in place in July. We've obviously reflected that in a more conservative view internally in terms of how we expect deals to close. I referenced that in some of my earlier comments as well, where I talked about prudent assumptions on deal closures for the rest of this year. And we factor that in accordingly into the guidance. So I think about the overall approach to building guidance, that has not changed. We've continued to maintain a prudent approach to it, not fundamentally changed the philosophy. But across the actions that we've taken, we are seeing encouraging signs where deals are progressing nicely through the sales funnel. We're seeing lots of deep customer engagements as people focus on enterprise accounts. And as Ash said, reps are settling now nicely into their territories and building those relationships. But despite that, we are not assuming an immediate return to normal in terms of our overall performance. We are assuming that this will take a couple of quarters to fix and that's the approach we've taken in terms of how we've built the guide.

Great. Thank you so much.

All right. Thank you very much for joining our call today. We are extremely focused on improving our sales execution and this will remain my number one priority in the coming months. We remain confident in our growth potential and market opportunity. Thank you very much and have a good evening.