Good afternoon, and welcome to the Elastic Second Quarter Fiscal 2020 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Anthony Luscri. Please go ahead..

Thank you. Good afternoon and thank you for joining us on today's conference call to discuss Elastic's second quarter fiscal 2020 financial results. On the call, we have Shay Banon, Founder and Chief Executive Officer; and Janesh Moorjani, Chief Financial Officer. Following their prepared remarks, we will take questions.

Our press release was issued after the close of market and is posted on our Web site, where this call is being simultaneously webcast. Slides which accompany this webcast can be viewed in conjunction with live remarks and can also be downloaded at the conclusion of this webcast on the Elastic Investor Relations Web site at ir.elastic.co.

On this call today, our discussion may include predictions, estimates, or other information that might be considered forward-looking statements within the Safe Harbor provisions of the U.S. federal securities laws.

While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially.

These risks and uncertainties include those set forth in the press release that we issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission, including our forms 10-K, 10-Q, and 8-K, and other filings we make with the SEC from time to time.

You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation.

Please keep in mind that we are not obligating ourselves to revise or publicly release the results or any revision of these forward-looking statements in light of new information or future events unless required by law. In addition, during today's call, we will discuss certain non-GAAP financial measures.

These non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from GAAP measures.

Our non-GAAP measures exclude the effect on our GAAP results' stock-based compensation, employer payroll taxes on employee stock transactions, amortization of acquired intangible assets, acquisition-related expenses, and non-GAAP tax rate adjustments.

You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures in the press release and on our Investor Relations Web site, and the slides accompanying this webcast.

The webcast replay of this call and slides will be available for two months on our company Web site under the Investor Relations link. With that, I'll turn it over to Shay..

Thank you, Anthony. Hello, everyone, and welcome to the call. It's great to be here and share the results of our second fiscal quarter. In Q2, revenue grew 63% year-over-year on a constant currency basis.

We had more than 9,700 subscription customers at the end of the quarter, which included over 525 with annual contract value of more than $100,000, and our net expansion rates continues to be over 130%.

Before Janesh covers our financial performance, I'd like to talk about some highlights in the quarter, and there is no better place to start than with security. In Q2, we completed our acquisition of endpoint security company, Endgame. We also announced our new world [ph] product, Elastic Endpoint Security.

This product integrates what we consider to be the best endpoint protection from Endgame with the best search technology stack from Elastic for a new breed of threat prevention, detection, and response. Its package is a single autonomous agent that's easy to use and built for speed and scale.

It's also one of the only products on the market designed for hybrid environments from Starbucks to submarines, as the team likes to say, so you're protected even if you're not cloud connected. Elastic Endpoint Security is available today under the Elastic license as part of our Enterprise subscription.

It's been validated by many, and recently excelled at third-party tests from AV-Comparatives. It's also tightly integrated with our free Elastic SIEM product, which is also under the Elastic license. Additionally, we announced the end of -- Endpoint pricing.

This aligns with our overall pricing and packaging model, which is a unique model we've had since our company's founding. No pricing per host, per agent, per seat or data ingested, just pay for the resources you use. We've invested in this approach because it promotes growth with flexibility, not friction.

Our customers aren't constrained by their success as they ingest more data. Instead, our model is aligned with the value our customers get from our products, and we've built trust with our customers as we continue to engineer features that help them be most efficient with the resources they have. This message has really resonated with our community.

At our Washington, D.C. Elastic{ON} Tour event Nate Fick, former Endgame CEO and I heard from many CIOs and CSOs who were excited by this. They're often used to vendors asking them to pay more without getting more value in the process.

At Elastic, we focus on providing more value to customers with fast, easy to use, scalable technology that allows customers to grow with us. For example, Texas A&M University is a security customer of ours that came via the acquisition of Endgame.

The speed and scalability of Elastic Endpoint Security has allowed them to drop their meantime to threat remediation from seven days to 30 minutes. To them the combination of Endgame's endpoint technology with the capabilities of the Elastic stack is a compelling way to simplify and automate their security operations.

We see similar benefits coming to our customers as they harness the ability to stop threats with Elastic Endpoint Security, while pairing security event data with Elastic machine learning power anomaly detection. Another example is multinational financial services firm, Barclays.

They've been a customer of ours for years, and powered their enterprise search and observability use cases with Elastic. More recently they've explored utilizing Elastic Security to enhance their security estate.

To further accelerate our efforts in the security space we formed the Elastic Security Team, which combines our Elastic team and the Elastic Endpoint Security engineering work. Nate will lead this effort as the general manager, and I have great confidence in how he will lead and guide the team.

The combination of our security efforts is similar to our approach with observability, which includes logging, metrics, APM, and uptime monitoring. We've developed these products in concert on top of Elasticsearch and Kibana. We build on top of a single technical foundation and this gives us a strategic advantage in the market.

Many of our peers cover together multiple products built with different architectures or underlying foundations. And single UI can give the appearance of cohesiveness, but this doesn't go far enough. There are underlying technical complexities that come with gluing together various architectures and implementation.

Building on one foundation, as we've done at Elastic, gives our users a more integrated experience. For example, the machine learning jobs you run on your log data are the same ones that you run on your APM or security data. Another example is Kibana Lens, a new feature we premiered in our 7.5 release.

Lens is available under the Elastic license and introduces a drag-and-drop experience for building out Kibana visualizations for any kind of data, logs, metrics, security events, and more.

I'm very exited about this because it's a powerful step forward on our journey to further simply the user experience in Kibana, and broaden its applicability to even more users. While I touched on this earlier, it's worth repeating, the single technology foundation simplifies pricing as well.

This is true in the context of eliminating the need to calculate pricing across hosts, or seats [ph], or ingest volumes or whatever other variable, but say a customer wanted to take a single application and break it into 10 micro services, or a single host can break it into hundreds of containers, why make them pay 10 or even 100 times more.

Take cloud content management company, Box, for example. They are integrated into the workflows of millions of customers and have to deliver on strict SLAs to maintain stability, performance, and compliance. To them every logline counts, and they chose Elastic because we make it easier to better manage costs and increase viability into their logs.

To add to the benefits of frictionless pricing and an integrated product experience, building on one foundation is also more efficient for us as a business. There's an economy of scale aspect to it. If we make one part of our stack faster or more secure the entire stack and all use cases benefit from that.

It also lets us push more value to our users faster and more efficiently. We've been leading the charge in the observability space long before it was even called observability. We saw massive adoption of our products for logging and metrics. So we bought an APM company, almost three years ago, that is engineered on the same technology foundation.

This move immediately added value to many, many customers using Elastic for logging and metrics use cases. It's also why we joined forces with Endgame, because while you observe your infrastructure why not protect it. This message is compelling at many levels.

I was at our New York Elastic{ON} Tour event recently, and hosted a customer dinner with CIOs and senior executives from several Fortune 500 companies, and our vision for the interaction between the observability and security spaces through a single cohesive technology stack really resonated with them.

Their reaction is representative of what we will continue to see across our community. It's common for customers to initially adopt us for one use case. For example, in Q2, we closed new business to power the Zelle payment network. Billions of dollars over millions of transactions are moved each quarter via the service, and network uptime is critical.

They replaced their previous solution with Elastic to address challenges with scaling and speed. Now, they can search across large volumes of system logs to diagnose and resolve potential issues quickly.

But there's more value readily available to customers like them, including APM, endpoint security, and more, and that's because of how we've engineered our products' pricing, packaging, and business. This is a powerful story to be able to tell, all within a single stack. We also continue to make strides with our cloud business this quarter.

We have a presence on AWS, GCP, Alibaba, Tencent, and recently launched our Elasticsearch service on Microsoft Azure. Now it's easier than ever for customers who prefer to run their workloads on Azure to get value from our products in the cloud. One such customer is a Fortune 500 manufacturing company.

They closed new business with us in the quarter for their logging and same-use cases. They had evaluated other solutions, like Splunk, but wanted to able to explore their logs and events in a flexible way.

So they tried our free and basic offerings, and they're now an Elasticsearch service customer running on Microsoft Azure, their preferred cloud provider. Audi Business Innovation Group is another customer who closed new SaaS business with us this quarter.

They have been using our Elasticsearch service for logging for some time, and they've now expanded to an enterprise search use case, allowing development team at VW Group to boost their productivity and efficiency. We also expanded our footprint with Google Cloud Platform. First, we announced our availability on Google Cloud marketplace.

This makes it even easier for customers to get our Elasticsearch service on GCP by simplifying procurement and consolidating billing through their GCP accounts. We also announced the availability on new GCP regions, including Sydney, London, and Northern Virginia.

More broadly, we made it even easier for customers to efficiently store more data, up to 60% more in fact in our Elasticsearch service. This was made possible by Elastic License features we've released over the last year or so.

So, things like hot/warm deployment templates, Index Lifecycle Management, snapshot management, and data rollouts, these gives customers the ability to store millions of additional log messages, APM transactions, server metrics, audit trails, and even endpoint data while continuing to grow with us over time.

In the Enterprise Search space, we continued to close new business. I met with one of the five largest banks in the United States a few weeks back about their Elastic Use case. They closed new business with us in the quarter for a few projects, one of which is Enterprise Search managed through our Elastic Cloud enterprise product.

They're also building out real time tracking of electronic payments and customer account records history by quickly searching and analyzing billions of documents and transactions. Earlier this year, I mentioned how excited I am about our Enterprise Search efforts.

Elastic Enterprise Search unifies enterprise data and documents through an easy to consume search experience. The team shipped another fantastic preview release in the quarter, we added new connectors for data sources like Zendesk, GitHub Enterprise, Office 365, and ServiceNow. We also introduced document content extraction.

This is a powerful feature that makes it easy to find information on the fifth slide of a PowerPoint deck stored on Dropbox or in Page 78 of the sales proposal worked on last week in Google Docs. We also introduced document level permissions of custom sources.

This type of security means an engineer only gets the results they have access to and a financial analyst gets access to a different set of results. It just depends on the document permissions. As we like to say, even our minor releases be like majors, and this release was no different.

Looking back on the quarter, I am humbled by the tremendous work of the team and the results that have come out of it. We continue to execute on a vision and strategy that we believe is setting our company and customers up for the long run.

We're differentiated through our investments in commercial IP, staying true to the value we provide to our customers via our products and unified frictionless pricing model, and continuing to be where our users are so that we can grow together.

The bottom line is that we believe the value is in data, and search is the best way to get that value, and by building on one technology stack that can house all of your data, we make it easy, efficient, and scalable to search, analyze and understand your data through multiple lenses.

It's incredibly powerful when you can bring all the pieces of the same story that you might want to tell into one place. We make that possible. That's all for me. I'll now hand it over to Janesh..

Thanks, Shay. We're pleased with our revenue growth in the second quarter, which reflects continued execution against our large market opportunity. We've now crossed the $100 million mark in quarterly revenue thanks to our customers, users, partners and employees.

Total revenue for the second quarter was $101.1 million growing 59% year-over-year as reported or 63% on a constant currency basis, 43% of our revenue came from outside the United States reflecting the strength of our bottom up community-based adoption model. We view this geographic distribution as a long-term strength of our business model.

Subscription revenue totaled $91.7 million, an increase of 57% year-over-year as reported or 61% on a constant currency basis, and comprise 91% of our total revenue.

Within subscriptions, revenue from our SaaS products was also strong at $20.6 million, growing 106% year-over-year as reported or 114% on a constant currency basis, once again faster than the growth rate in overall subscriptions.

We saw continued strength in our Elastic Cloud offerings with particular strengthen in our monthly SaaS business, which now makes up almost 50% of our SaaS revenue or almost 10% of our total revenue. As a reminder, in this part of the business, there is no deferred revenue or remaining performance obligations.

We also saw strength in Elastic Cloud and some of our large enterprise accounts with a few deals over $1 million. Our largest deal in the quarter was a multimillion dollar SaaS when we remain very excited about the SaaS opportunity ahead of us. Professional Services revenue was $9.4 million, an increase of 83% over the same period last year.

As a reminder, professional services revenue can fluctuate from quarter-to-quarter based on projects and delivery timing. Overall, we've seen strong adoption of our training and consulting offerings which continue to be enablers of subscription growth.

Moving on to calculated billings, calculated billings in Q2 grew 41% year-over-year or 45% on a constant currency basis to $125.3 million. Note, this calculation does not include the benefit of deferred revenue acquired from end game To provide a bit of geographic color, APJ was the fastest growing region followed by EMEA.

Within the United States, we saw strength in some areas, but also experienced some delays in our federal government business as some deals moved out of the month of October. We remain confident about the opportunity ahead of us with the U.S. federal government as well as governments worldwide.

At the end of Q2, the mix of short term deferred revenue was 89% of total deferred revenue. Remaining performance obligations totaled approximately $410 million, up 53% year-over-year, which includes approximately $9 million acquired from Endgame.

Although we do not actively manage the business to a target contract length, contract lengths continue to be approximately one and a half years on average. Turning to customer metrics, as of the end of Q2, we had over 9700 subscription customers compared to over 8800 such customers at the end of Q1.

We saw similar strength in new customer additions in Q2 as we have seen in prior quarters. We also ended the quarter with more than 525 customers with annual contract values above $100,000, compared to more than 475 such customers at the end of Q1.

Endgame added fewer than 100 net new subscription customers, of which only a handful of customers have over 100K in ACV. Our existing customers continue to expand their relationships with us, reflecting increased spend for existing use cases and adoption of new use cases. In Q2, our net expansion rate remained over 130%.

Overall, we are pleased with our customer metrics as we continue to execute against a significant market opportunity ahead of us. Now turning to profitability, which is non-GAAP. Gross profit in the second quarter was $75.2 million representing the gross margin of 74.4%. Total subscriptions gross margin was 18.6% up slightly sequentially.

We are tracking well relative to our expectations. In the near-term, we will continue to invest in our SaaS business, which will remain a modest headwind to gross margin overall. Our professional services gross margin was 13.7%. I referenced the fluctuations associated with the timing of service delivery earlier.

Since the professional services businesses small, even relatively insignificant amounts can swing the gross margin in either direction. So we expect that the gross margin and professional services will fluctuate significantly from quarter-to-quarter.

Turning now to operating expenses, in Q2, we remain focused on investing to drive top line growth and scaled our investments through organic hiring activities as well as the acquisition of end game. Sales and Marketing expense for Q2 was $47 million, up 48% year-over-year representing 46% of total revenue.

We will continue to add sales capacity and expand market coverage as we drive growth and expect to realize leverage gradually over the longer term as we scale. R&D expense in Q2 was $31.7 million, up 55% year-over-year, representing 31% of total revenue.

As we said before, we are increasing our investments in R&D this year, as we continue to invest heavily in both existing and new products and features. G&A expenses $14.9 million, up 63% year-over-year, representing 15% of total revenue.

This includes costs associated with our global expansion and continuing to build the infrastructure to support our growth.

Our operating loss in the quarter was $18.4 million, with an operating margin of negative 18% which was better than expected, primarily due to the strong revenue performance in the quarter and to a lesser extent timing as some anticipated expenses shifted from Q2 to Q3.

We remain focused on managing to full-year operating margin, which I'll discuss in a few minutes. The FX impact on operating margin was insignificant since we have natural hedges as we encoder expenses globally as a distributed company. Net loss per share in Q2 was $0.22, using $77.8 million weighted average shares outstanding.

This compares to a net loss per share in Q2 of last year of $0.38. Turning to free cash flow, free cash flow was negative $1.4 million in Q2, compared to a negative $1.4 million in the same period a year ago. We look at free cash flow and free cash flow margin primarily on an annual basis.

Since there are both seasonal and timing effects in any quarter, that can also be some lumpiness to inflows and outflows. We ended the second quarter with approximately $305.2 million in cash and cash equivalents. We remain comfortable with our cash position from an operating perspective.

Lastly, we ended the quarter with 1,886 employees, adding 286 people in the quarter across all functions, including 140 from Endgame, consistent with our approaches making investments now to address the longer-term market opportunity we see. Before I turn to guidance, let me talk about Endgame.

We closed the transaction on October 8, which was earlier than expected; the addition of Endgame was insignificant to revenue in the second quarter. As a reminder, our primary investment thesis is to integrate the Endgame product into the Elastic stack and apply our community-based go-to-market model do it.

As a result, the revenue opportunity for us is much longer-term in nature and the pre-acquisition levels of Endgame revenue are not discreetly additive to our revenue for future years.

We are excited to further accelerate our ability to address the security market opportunity together with the Endgame teams, particularly since we are eliminating for endpoint pricing and applying a unified resource-based pricing model to endpoint security. Turning to guidance for the third quarter and the full-year fiscal 2020.

Our guidance includes the anticipated financial impact related to Endgame. In particular for the rest of this fiscal year, we continue to forecast and significant revenue impact given the effects of purchase price accounting. We also continue to anticipate an approximate two percentage point negative impact to full-year operating margin.

Over the last several quarters, we have accelerated headcount related investments in R&D and sales capacity and coverage globally to drive growth. Some of these investments were intended to secure growth this year, while others particularly in R&D will help drive growth over the long-term.

As we look at the second half of the fiscal year, we plan to invest with discipline in innovation coverage and scales in order to drive future revenue growth. For the third quarter fiscal 2020, we expect revenue in the range of $106 million to $108 million representing 51% year-over-year growth at the midpoint.

We expect non-GAAP operating margin in the range of negative 26% to negative 24% and non-GAAP net loss per share in the range of $0.36 to $0.34, using between $80.5 million and $81.5 million weighted average ordinary shares outstanding.

For the full-year fiscal 2020, we expect revenue in the range of $415 million to $417 million representing 53% year-over-year growth at the midpoint.

We expect non-GAAP operating margin in the range of negative 23% to negative 22%, which as I mentioned earlier includes approximately 2% operating margin dilution from Endgame and non-GAAP net loss per share in the range of $1.24 to $1.17, using between $78 million and $80 million weighted average ordinary shares outstanding.

Finally, we have demonstrated improvement in free cash flow margins over the past two years and we expect to do the same in fiscal 2020. However, as I've said before, we expect only modest improvement in free cash flow margin for the fiscal year. This is mainly because of the dilution from the Endgame acquisition and related transaction expenses.

In closing, I'm pleased that we delivered strong revenue growth in Q2, while investing to address the rich market opportunity ahead of us in so many different use cases. I look forward to sharing our progress with you as we move forward. With that, let's open it up for questions.

Operator?.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Matt Hedberg with RBC Capital Markets. Please go ahead..

Hey, guys. Thanks for taking my question. First, I'm going to start with Janesh. The overall quarter looks strong, and it looks like you're raising the full-year more than the revenue base [ph] this quarter. That said, a lot of proceeding [ph] questions on calculated billings, and to me, I've got a couple of questions there.

First of all, it seems like deferred revenue on the balance sheet, that change of $7 million was more than a change on the cash flow statement, seems to be maybe even more of an FX impact.

I'm wondering if you can help us with the delta there, and then as your SaaS -- business continues to ramp, obviously you said there's no impact to deferred revenue or RPO, I'm wondering what's the right way to think about growth, it would appear that calculated billings could be negatively impacted by your SaaS business..

Hey, Matt, yes, so let me take both of those questions. First off, in terms of the deferred revenue on the balance sheet versus the statement of cash flows, I'll remind you that we closed the acquisition of Endgame here in Q2, so we acquired a little bit of deferred revenue through that transaction, and that explains the biggest piece of that.

So, we had about a little bit more than $6 million of total deferred revenue that we acquired through the Endgame acquisition, and then as I think about the right way to think about growth and the metrics going forward, I think the two main metrics that we've used until now, revenue and calculated billings, still continue to be important metrics for us as we think about the business overall.

Revenue is probably the single most meaningful metric, because it captures all of the different ways in which customers consume our technology across all of our different formats.

Billings is also a really important indicator, but it can of course vary from quarter to quarter based on deal timing as well as deal size, and monthly SaaS, as I mentioned, does not impact deferred revenue. So, the SaaS business and the monthly component of that has been growing nicely for us.

We've had really strong growth here this past quarter, so we wanted to call that out and give you a sense of how big that is for us at this point in time.

We will continue to track that, and as that becomes a bigger piece of business or if it becomes a bigger piece of the business then we'll provide appropriate metrics that help you understand that in the future..

That's helpful. And then one for Shay, your new Endpoint offering, first of all, you mentioned on the call, [indiscernible] customers that -- as you're monitoring assets it makes a lot of sense to also protect, I'm wondering if you could talk about what type of customers you're going to be targeting.

And then second, at some point could you envision putting the Endgame offering also on servers?.

Yes, great question, Matt. So, I'll start with saying that our mission is to protect every single piece of Endpoint out there, and that's a mission that is shared with the Endgame team when we discussed and talked about it, when we joined forces.

Our initial implementation and the Elastic Endpoint Security offering that we just launched means that you deploy the existing Endgame platform next to the Elastic stack, and we built the native integration between the two.

Our goal over the next year is to fold the Endgame product into our Elastic stack to become a native part of it, which means that every deployment of the Elastic stack will have built-in Endpoint protection within it.

So, I'm very excited about being able to bring that unified protection and unified story, first of all, to the security solutions space that we have where it combines SIEM and endpoint security, but also being able to bring this endpoint security to all of our observability users, and that definitely includes services as much as laptops and endpoint computing..

Thanks, guys..

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

Thanks for taking my question.

Shay, can we -- you mentioned observability as a theme, and you guys have been doing it, but it's also like the new buzzword in the industry, can you talk a little bit about the things that you guys bring to the table, I'm thinking like cloud and on-premise as a way here -- just help us understand this a little bit better, because SaaS -- we're getting brainwashed by every vendor, and everyone is doing observability now, just help us understand that a little bit better..

Yes, happy to.

So, I'll start with saying that our regions, if you will, started from the logging space, and we've developed a complete and end-to-end solution when it comes to IT operation logs, and I would argue that we have the best solution out there today, both from a functionality, technical implementation, and both -- the reactions that we're getting from users, but three years ago or so we saw that the story is much bigger than that.

I think the reason why we saw it so early, was thanks to the fact that when we look at the problem or the opportunity, we look at it through a search perspective, and then we said, "Well, if you search for logs or while you observe, why not observe metrics and APM and other type of datasets," and really try to solve the customer needs, which is just making sure that their infrastructure is up and operational.

So, we went down this path of having metrics and APM, and now we have a fully integrated solution that combines the three together, and we're leading the pack when it comes to doing that.

I'm super excited, as I mentioned on the call about the fact that all of that is implemented on top of a single technology stack, which means that you can weave machine learning algorithms to custom visualization, especially using the new way to visualize data using Kibana Lens across all of these three data aspects natively.

I will admit that observability is somewhat of a buzzword, and what we see happening in practice is that there used to be three concrete silos within organizations, one of them doing logs, one of them doing metrics, and one of them doing APM, and we see now day in day that these silos are collapsing and users are realizing that it's actually different aspects of the same challenge or opportunity that they're trying to solve, and we're trying to lead the pack when it comes to help users solve that..

If I can….

Okay, perfect. Go ahead..

Yes, so I was just going to add a customer example around that actually that can bring that to life even more. So, Raimo, I talked about our largest win in the quarter being multimillion dollar SaaS win, and that was the poster child [ph] for our technology and vision are resonating with customers.

At the tip of the spear there in fact was a competitive win in observability the customer bought into our vision, APM was the initial use case, and what was really neat about that was not only did we win against an APM competitor, but the customer actually moved off AWS Elasticsearch, because they saw the value in the proprietary features that we brought.

So it's opened the door for a much broader opportunities for us within the customer as well, so quite excited about that win..

Okay, congratulations there. And then, a quick follow-up, you mentioned the two lead contract, usually every quarter has puts and takes, was there anything special about these that you kind of [indiscernible]? And the typical hedge fund question would be like they closed already, what's the status? Thank you..

Yes, as I step back and look at the quarter, there were many things that were positive for us. We delivered strong performance in Q2 on many different fronts in terms of revenue growth, in terms of our customer metrics, customer accounts, and so forth. Deferred revenue growth is also strong as was noted earlier.

So, there's a lot for us to be pleased about. Against that backdrop, as I mentioned, there was some delays in the federal business or some deals moved out of October. I'll point out that these are only timing delays, there were not competitive losses. The timing of deals as you know and the federal government can be incredibly difficult to predict.

So, it's hard to identify exactly when these deals will land, but we remain confident in our federal business overall. We are continuing to drive growth not just in the federal business, but in our business in its entirety, and our outlook for the year reflects that. So, we're quite confident..

Perfect. Congratulations..

Our next question comes from Kash Rangan with Bank of America Merrill Lynch. Please go ahead..

Hi, congratulations, team Elastic. Question for you, Janesh, and one for you, Shay.

Janesh, when I look at the billings, the average I was trying to learn it over the past four to five quarters, there is definitely deceleration, I am curious if you can help us parse through that, is it just a function of size of the company grows bigger, obviously things slow down, or is there other factors that will need, particularly pointed to fasten our 50% monthly billings.

So that would if I just take your SaaS revenue and just split it into two and took that monthly and multiply it by three that should roughly give me the extra amount that could have been billed. Maybe I'm doing something hugely wrong with that calculation.

Maybe can you just parse out the pieces of the business, how the business model is shifting, vis-à-vis the fact that the company is just larger and billings will ultimately slow. If you could help us understand, what is systemic versus not, that would be great. And then I have a question for Shay, I'll pause here for a second..

Yes, Kash, on the calculated billings, as I mentioned, I think the main effect there was the result of those federal transactions slipping.

In terms of the dynamic on monthly SaaS that you talked about, while monthly SaaS was stronger for us, we've got so many different areas that we're investing in, and we've doubled down quite heavily on monthly SaaS. We've expanded our availability. We've even shifted some of our marketing dollars to focus on the SaaS business in the entirety.

So, we're quite pleased with the way SaaS is growing. But in terms of a shift, I wouldn't say that we're seeing a significant shift in the underlying base itself. So there might be some customers who prefer to have tried the monthly SaaS offering rather than committing to an annual self managed or annual SaaS contract, but that's anecdotal.

We have some of that every quarter. So I wouldn't call it unusual. The monthly SaaS revenue was stronger this quarter than what we've seen before.

So that's something that we'd obviously keep an eye on, and if we start to think that there's something broader that's happening, we'll certainly call that out, but this quarter, I think the sense was that it was primarily attributable to federal..

Got it, got it, but certainly if we didn't see that shift towards monthly SaaS, your deferred revenues would have been on paper better than what you printed, just want to make sure that financially I'm not going off the wrong direction..

Yes, you're absolutely right in thinking about it that way. Monthly SaaS has been growing for us and Q2 was stronger growth than what we've seen before..

Got it. If you did an ARR equivalent, I think the numbers would tell a different story.

Anyway, Shay, it looks like there is about five or six companies, the public domain that increasingly are talking about how the product sets are addressing broader set of problems, so they want to call it DevOps or monitoring or whatever you want to call it, at one level, as a generalist, if you look at it, it feels like everybody's beating up on each other and saying that we do all the same things, right, but I'm sure the truth is different.

What do you make of this, is it, and you guys are all putting up good performance, is it because the TAM is growing, and there are more customers that realize that they should be doing this, or is it really the beginning of just competitive bravado and can really -- that you feel that that your solution set is competitive and you are knocking down competitive wins, and it could end up being a broadly zero sum [ph] game? So, somewhere between the big spectrum how do you see it playing out? Thank you..

Yes, definitely, great question. So first of all, I would say that, whenever silos break within a use case or a TAM, you tend to probably see more competitive pressure compared to otherwise, and definitely we see silos in observability between logs, APM, and metrics breaking down, and that makes the environment feel more crowded.

I will say that based on what I see, when I'm talking to users and community and going to conferences is that more users are also realizing the fact that they need to observe their infrastructure.

So, I do see as these silos converge, that I do think that the opportunity actually increases over time, when it comes to the observability space, tools are becoming simpler, tools are becoming more efficient.

We are -- I would argue again, leading the pack when it comes to being able to go and observe every piece of the infrastructure when it comes to a single technology stack in a same pricing model that doesn't hinders you from going and instrumenting your applications or gathering and collecting data from it.

We even as I mentioned in the previous answer, we've been taking it a step further and our vision once we collapse endpoint security into our stack is to also protect that. So, bring security capabilities into that story.

So we're actively working towards that level of breaking down the silos, but I do see the opportunity increases over time versus the single level opportunity and TAM that exists between the three discrete silos that existed in the past.

I will say that, we're living here, and we're seeing the observability movement, and we're talking to all the thought leaders and early adopters, but in practice, I would say that a large portion of the user bases are still using the silo solution.

We are still being adopted primarily for the logging use case, and we're doing our best to try to bring to our users as quickly as possible and educating them to make sure that they know that they can actually use us for metrics and APM, and they can actually have a much bigger story about this..

Wonderful. Happy holidays, congratulations..

Yes, thank you, Kash..

Thanks, Kash..

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

Yes, thank you very much. Janesh, I think you're the second or third software company, which has recently seen a little bit of softness in the federal government business and so I guess I'm just wondering if there could be some commonality.

Was there anything that those agencies are communicating to you about the delays and then do you have any comments on th0e magnitude of that business that pushed out of the quarter?.

Hey, Mark, so yes, nothing specific that I would share in terms of a common theme across those, there were several deals, they were across the different agencies, so nothing unique that I'd call out there other than the fact that the procurement cycles there can be quite uncertain. And sometimes, the smallest change can trigger significant delays.

In terms of the sizing, I'll say that it was significant enough that it impacted billings, which is why we called it out. And we will continue to track those deals and see when they might land but we remain confident that that our federal businesses going to perform well overall..

Okay. And then Shay for you, the Google Cloud platform seems to be gaining real momentum under the leadership of Thomas Kurian. And just given you have a strong, very strong partnership there. I know you've had some new product announcements there as well.

Is your traction strengthening for Elasticsearch on GCP? And, and then is there any way you can approximate the size of that revenue stream maybe relative to some of your other revenue streams?.

Yes, great question. So, first of all, I would say that our investment, when it comes to the various cloud providers is similar in nature, which is we want to be there for users wherever they are. So if the user exists on Google Cloud, we want to be there for them in an integrated fashion, if they want to be on Microsoft Azure, the same way or in AWS.

So, our investment is spread across all the various cloud providers and making sure that we our goal is to be there where they are natively integrated, whether it's from a product perspective or from a billing perspective and marketplace integrations. We do have a bit of a head start when it comes to Google Cloud.

Thanks to the close relationship with Thomas and the Google Cloud team, I would say that we have a similar relation with Microsoft Azure.

On Google Cloud itself, we announced native integration with the billing system, which means that if you go and spend money with Google Cloud, you can redirect some of these funds directly into Elastic through their market billing integration, which I'm excited about, and in the future, we hope to have even deeper integrations directly into the Google Cloud Console.

When it comes to specific change quarter-over-quarter, completely for adoption, compared to Google Cloud versus other Cloud providers, I don't see any significant trend. Obviously, there's differences between quarters based on some deals that we signed, but nothing to call out..

Okay, very good. Thank you very much..

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

Hi, thank you. I wanted to ask you about the SaaS business and Janesh I think you mentioned that the monthly SaaS business is around half of the overall cloud business and I was just curious how that compares historically, my thought was, it was much smaller than that.

So wondering, kind of what's driving the inflection there in the monthly I know, you have recently announced the version of Elastic SaaS on Azure and obviously the new pricing changes may then opened up new use cases.

But just kind of curious where that monthly SaaS business has been as a percent historically and then what drove the strong growth there this quarter? Thank you..

Yes, Tyler it's looking back the monthly SaaS business has always been in the single digits for us and even out remains just under 10%. It's been growing nicely though, over the last several quarters inching up gradually.

And so in Q2 here at we saw some strong growth, and it's now approaching half the total SaaS business or close to 10% of total revenue, which is why we thought it would be worth highlighting for you.

In terms of what's driven that growth, I would say it's largely been the investments that we've been making in the business, expanding our presence across different cloud hosting providers, not just with Azure, but also GCP and even AWS expanding the regions in which we are.

As I mentioned earlier, we even double down with some of our marketing investments to stimulate that part of the business. And all of that has been working quite nicely for us. So that's what's been driving the growth..

Great and then a follow-up, just on now that the end game is closed, and you kind of talked about some of the integration you're doing.

Maybe just give us an update on how you're thinking about that from a go-to-market perspective, obviously the pure endpoint security market is extremely competitive, and I think you've talked about shying away from going into that in full force, but maybe just post-acquisition closing, how you are thinking about the go-to-market strategy, and possibly what that contribution could be either this year or next year? Thank you..

Yes, of course, I can tell you that. So that the first part is that we announced our Elastic endpoint security product that is available today.

And that is of a more limited fashion basically allowing to have the Endgame platform as it exists today, natively integrated into sorry, integrated into our Elastic stack, but they still if you will exist as two separate installations and two separate departments.

It still provides one of the best endpoint protection systems in the world today, integrated into one of the leading threat hunting SIEM tools, if you will, with the Elastic Stack. So I'm excited to provide the ability and the features that users can go and use when these two systems are deployed side-by-side.

Our goal over the long-term, let's say, one to two years is to bring our bottom up adoption model when it comes to the security space in general and obviously endpoint security. And we're going to do it in multiple steps.

The first step is to take the Endgame platform and the technical implementation and re architecture of folding it into the Elastic Stack and making it into a native feature of the Elastic Stack.

We do aim to have basically our vision is that every Single Elastic stack deployments will include endpoint protection in it pre-built and shipped and ready to go, whether it's on the cloud or whether it's on-prem. Once we have these technical capability and implementation and that's going to come in phases.

As you can imagine, we plan to bring our bottom up adoption model to it and provide that level of investments and growth within it. We think that we can bring a few unique aspects of the security world and one of them is this highly fragmented top down.

Security market can change I think with something like ours in a solution like ours, that will take time to go and deploy. The team is excited about this vision and the Endgame team definitely is excited about being able to bring endpoint protection to as wide as possible audience as possible, and we're excited to go and execute on that..

Our next question comes from Richard Davis with Canaccord. Please go ahead..

Hi, thanks.

Just kind of a general question, I guess, in the end, the job your engineers write great software, but you're in a much broader company than you were a few years ago, but where do you guys draw the line between kind of what's open source and what isn't? And what do you contribute there, and how do you see that evolving over time?.

Yes, great, great question. So I will start with saying that, that we made significant investments in open source. But historically, we've also created something called the Elastic license. And the Elastic license has multiple paths in it or multiple layers in it.

And one of them is a free and open code, but not open source, layer, or tear, if you will, that we have there, and we've made significant investment in that year over the over the past year and a half since we announced it as an example.

Kibana Lens, which is the ease of use and simple to use a way to build visualization in a drag and drop experience, it's almost like think about it like a tableau for Elasticsearch. That's something that is under our Elastic license and under our proprietary IP.

We are making investments there and a big portion of our investment has moved towards that lane and we will continue to make that investment..

Go it. That's super helpful. Thank you so much..

Our next question comes from Heather Bellini with Goldman Sachs. Please go ahead..

Hi, this is Dan. Sure, John for Heather Bellini thanks for taking my question.

I guess just following on that line of questioning, it sounds like that multimillion-dollar SaaS when you also managed to migrate customer of AWS Elasticsearch, so can you kind of expand on how the investments you made over the past year-and-a-half and the free tier to expand that gap and how that's translated into customer wins? And have you seen any change in the competitive landscape there?.

Yes, of course I can take that. So I'll start with saying that that was a great indication to our vision when it comes to observability.

The customer was using us in several areas around the logging use case, and then started to look at us when it comes to the APM space and they really bought into the vision of logging an APM and metrics late living in a single place.

I was happy to see also that our APM product beat one of the leading APM vendors out there today that has spent several years just focusing on building an APM tool. I think it's fixed to the maturity and the great work that the team has done in building a great APM product.

Obviously, the APM product has significant portions of it under our Elastic license and users won't be able to have access to it under Amazon Elasticsearch, so that made the discussion easy also, when it comes to moving to our SaaS solution versus Amazon Elasticsearch because that simply doesn't have the APM capabilities out there.

They're also excited about the arc of being able to use us in the context of security, there it really resonated with them that the same pricing model or same pricing skills that they've signed today going to enable them to have access to endpoint security down the road.

And that's obviously also on their proprietary license that they'll have access only when they engage with us..

Helpful thanks.

And then, just on the same product understanding if it's still fairly early, just how is it tracked all of the expectations? What has been the customer feedback? And then, when you look at the roadmap and in kind of incremental functionality like behavioral analytics or even vulnerability management, how are you thinking about organic development versus M&A?.

Yes, great question. So I'll start with saying that today what I see as being used in the context of the same place -- same space is basically in what is called the threat hunting world.

If you think about it, I see as being used either on really significant nation level defense or, or big companies that take us and just use our tools because any other seen product just can't provide them with the answers, and the ability to go and hunt for that specific needle in a haystack, and we're specializing, especially in that when it comes to our search heritage.

It will make sense. We also think the adoption coming from the bottom up adoption model in the same space. Users and thought leaders are demoing building products and leading the pack when it comes to threat hunting tools built on top of the Elastic Stack.

Our goal is to formalize that to our Elastic SIEM product, and then go the extra mile and start to provide the obvious built-in capabilities when it comes to, as you mentioned, behavioral analytics, vulnerability management and detection rules and rule engines and things along those lines.

We're making significant investments there that I expect to see, to start to see adoption of it and deployment of it over the following year.

When it comes to thinking about M&A versus not our strategy has always been just to look around and we're excited about people building on top of our stack, and we'll go in and pick and choose if we can the best integrations with the best teams.

I will say that now we have the Elastic security team, I feel good about our internal people and an investment there to be able to go and execute against our vision, and I will also say that when you acquire a company, a big part of it -- a big part of the work is happening obviously before the acquisition, but even more work happens after the acquisition, and there's a lot of responsibility to the Endgame team that we have to make sure that this acquisition goes well.

Culturally, I think we're in a great match. And it's wonderful to see the teams working together, but we have to be intentional and make sure that will focus on making it successful. And that's the thing that we're going to focus over the next half a year or a year..

Helpful, thank you..

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

Thanks.

Sorry to dwell on the monthly SaaS number, but when you think about the modeling going forward, how are you modeling the SaaS business over the next year in a monthly versus, versus the annual basis, how does that shake out?.

Great question, Brent. So, as I think about it, as I mentioned over the past several quarters, we've seen the monthly SaaS business continuing to improve in terms of or increase in terms of the mix of revenue that we have, we continue to emphasize both the monthly and the annual pieces of the SaaS business.

As I mentioned, we also reverted some of the investments towards monthly SaaS. So, I would expect that continues to grow.

Although the in terms of the mix the shift has been so gradual that it hasn't been -- it hasn't been meaningful enough for us to call out until this time, so I do think that it will continue to grow, but probably at a relatively modest pace in terms of mix.

I think you'll see that reflected broadly in the SaaS mix overall, which we've said we expect to continue to grow faster than self-managed..

Okay, thanks.

And then just with the growing portfolio and the complexity of your product line growing, the go-to-market, many questions around how you're going to simplify and make sure that you have no clear line of sight with the quarter reps combined with the right pre-sales engineers, and can you just walk through how you think the evolution of the go-to- market is changing, how you think you guys are adapting to this, obviously very growing complex product line?.

Yes, it's a great question. Broadly speaking, the go-to-market model for us has been premised on the idea of bottom up community-based adoption. So, with the rapid innovation cycle, we've gotten the rapid releases that we do of all of our different offerings.

We drive the adoption primarily through the community initially, and then as customers start to adopt that and use that, that drives greater usage of those technologies.

So, fundamentally, that we're sticking to the core of that bottom up community-based model, but also helps quite a bit when it comes to thinking about the sales rep, and what a sales rep does in front of customers as they represent the broad portfolio.

There is obviously when a sales rep engages with a customer, the customer is typically already familiar with the technology at that point, because they've been using it, and so that makes the conversation a lot easier.

That said, there are some technologies as I think about security, which have dedicated buying centers and different groups of customers, I think it becomes important for us to continue to elevate those relationships, and that's one of the areas that we focused on.

In the past, we've -- I think shared our thoughts around specialists and how we think about the need for specialists within the business, and we've taken the position that from a technology perspective, it's really the technical specialization around the essays and engineering resources that are more helpful in the initial stages.

That doesn't mean that we won't have overlays or specialist resources on the sales side, in certain pockets and in certain parts we might do that, but fundamentally, the go-to-market strategy is largely unchanged from where it was and what's made us so successful until now..

Great, thanks..

Our next question comes from Brent Bracelin with Piper Jaffray. Please go ahead..

Hi, this is Parker Snook on for Brent. My first question was, I was wondering if you could add any more color on international revenues, APJ is the strongest, I was wondering if you could add any color around EMEA or other regions if you're seeing anything different out there..

Yes, happy to take that. So in terms of the revenue mix, the reference to APJ and EMEA was really in the context of the overall business that we saw. As I think about the revenue mix overall, the U.S.

has continued to be fairly strong for us at 57% this past quarter, and as I think about the breakdown of EMEA and APJ, the majority of that international revenue does come from EMEA, as you might well expect.

We had some pretty strong performance in APJ, both in Japan as well as within Asia-Pac as well, but that remains a fairly small part of the business overall..

Perfect, thank you.

And then my last question is just more general, you guys are getting into endpoint and a lot of different areas, obviously log management is one of your strongest points, where are you seeing the most traction and most growth out of all of your new initiatives over the past three to six months?.

Yes, happy to take it. So, it is still -- the main use case that people start to use us and adopt us for is the logging use case within the observability space. We're definitely starting to see, as I mentioned, an increase in metrics and APM especially as the story of observability cement itself.

The second after that is our Enterprise Search Solutions that includes enterprise search, site search, and app search. When it comes to growth, it's still -- the logging space is still -- there is a lot of Greenfield in front of us when it comes to getting adopted, and we see quite a bit of adoption when it comes to it.

I'm excited about the security space moving forward. We're still in the early stages of it, as I mentioned, but it feels like it starts to pay off, and it's definitely going to pay off in the long-term for us.

That really resonates well with our user base, and in the observability space itself, I think, as I mentioned, also the opportunity just increase with the observability market versus the strict silos that used to have there, and that's another area of growth-wise..

Yes. Thank you..

That concludes our question-and-answer session. I would like to turn the conference back over to Shay Banon for any closing remarks..

Yes, thank you all for joining the call. Q2 was a strong quarter for us. We remain focused on a large market opportunity and continuing to deliver both innovation and value to our customers. We look forward to seeing many of you at the Barclays Conference next week. Take care..

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