Release Date: August 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Total revenue in Q1 grew 18% year-over-year, with cloud revenue growing 30% year-over-year.
- Elastic NV (ESTC, Financial) delivered a non-GAAP operating margin of 10.7%, outperforming the high end of their revenue and profitability guidance.
- The company saw strong momentum in generative AI opportunities, accelerating growth in their search business.
- Elastic NV (ESTC) ended Q1 with over 1,300 customers using Elastic Cloud for generative-AI use cases.
- The company continues to strengthen its position as the platform of choice for building real-time gen-AI applications, with significant customer wins in various industries.
Negative Points
- The overall volume of customer commitments closed in Q1 fell short of expectations.
- Sales segmentation changes at the beginning of Q1 impacted deal progression, particularly in the Americas.
- Tighter customer budget constraints in EMEA led to delays in closing deals.
- The company underestimated the impact of account transitions, affecting sales execution.
- Elastic NV (ESTC) had to update its guidance to reflect the first quarter performance and current outlook, indicating a cautious stance on future deal closures.
Q & A Highlights
Q: Ash, you touched on in the prepared remarks, but I just wanted to double-click on what you think maybe some of the most important items you're doing to improve the sales execution as a result of segmentation. What seems like it makes a lot of sense longer term. Is there any way to think about how long you're going -- how long it's going to take us till we should see improvements in terms of accelerating growth?
A: 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 have 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. And 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 -- 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 gen-AI, 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 gen-AI 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.
Q: 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. Do you think that the channel can also leverage to maybe accelerate these replacements?
A: 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 ES|QL, 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.
Q: 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?
A: 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.
Q: 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?
A: 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
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
