Elastic N.V.

Good day and welcome to the Elastic Third Quarter Fiscal 2023 Earnings Results Conference Call. Today, all participants will be in a listen-only mode. Should you need assistance during today's call, please signal for a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, please press star then one on your touchtone phone. If you would like to withdraw your question, please press star then two. Please note that today's event is being recorded. I would now like to turn the conference over to Nikolai Beliov, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, and thank you for joining us on today's conference call to discuss Elastic's third quarter fiscal 2023 financial results. On the call, we have Ash Kulkarni, Chief Executive Officer, and Janesh Murjani, 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 accompany this webcast can be viewed in conjunction with live remarks and can be also downloaded at the conclusion of the webcast on the Elastic Investor Relations website, ir.elastic.co. Our discussion will include forward-looking statements, which may include predictions, estimates, 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 to the date of this call and are subject to risks and uncertainties that could cause actual results to differ materially. We disclaim any obligation to update or revise these forward-looking statements unless required by law. Please refer to the risks and uncertainties included in the press release that we issued earlier today. included in the slides accompanying this webcast and those 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 for the next 60 days on our company website under the investor relations link. Our fourth quarter fiscal 2023 quiet period begins at the close of business on Friday, April 14, 2023. On March 6, 2023, we will be participating in the Morgan Stanley Technology, Media, and Telecommunications Conference. With that, I'll turn it over to Ash.

Thank you, Nikolai, and thank you all for joining us. I'm pleased with how we performed this quarter in the context of a challenging market environment. We remain completely focused on our customers and our business and continue to be excited about the opportunity ahead of us. Our total revenue in the third quarter grew 27% year-over-year in constant currency, while we managed the business with discipline to deliver a stronger-than-expected non-gap operating margin of 7.9%. Elastic Cloud comprised 40% of total revenue, up from 36% in the year-ago quarter, and grew 40% year-over-year in constant currency. We saw strong customer contractual commitments, and customers continued consolidating on our platform. Before I discuss the key focus areas for our business, I would like to touch on three topics. First, the macro environment. Second, how we are executing in the current environment. And third, the platform consolidation opportunity ahead for Elastic. First, consistent with Q2, third quarter deal cycles continue to be elongated with additional levels of approvals and the SMB segment remain challenging. Also, as we had anticipated, customers continue to optimize their usage We saw this across customers of all sizes and across industries. We anticipate that consumption optimization will continue in the near term. Despite these challenging times for everyone, we are focused on consistent execution. This leads me to the second topic. The steps we have taken to adjust and optimize our investments across the business demonstrate our solid execution and give us continued confidence in the long-term market opportunity. We have continued to selectively invest in our enterprise and commercial sales capacity and have seen those portions of the business perform well with a healthy pipeline and strong customer commitments. On the SMB side, we continue to refine our customer acquisition and expansion motions and remain focused on attracting customers that have a higher propensity for growth. Janesh will touch on this shortly. The balance between growth and margins is a key focus for the company, and we are demonstrating healthy margin expansion as we drive stronger return on investments across our investments. Third, our platform capabilities play to our strengths in this macro environment as customers look to consolidate suppliers without sacrificing innovation. Our land and expand strategy is working, with both expansions within solutions and across solutions, bolstered by continued innovations in our underlying platform. We win by helping customers deliver better business outcomes, not limiting what data they can bring into Elastic, while at the same time lowering their total cost of ownership. Elastic is mission critical for customers who need unified visibility across their business to keep their systems secure, reliable, and performing at scale. Now, I'd like to share our progress across our three key focus areas, driving durable growth, widening the competitive moat, and fueling profitable growth. Starting with durable growth, we believe the consolidation of IT budgets is benefiting the Elastic platform as customers are looking to Elastic to simplify the environment, reduce costs, and increase productivity and visibility. Over the past quarter, I met with dozens of customers across our key geographies, and they consistently expressed their desire to do more with Elastic as a central pillar of their IT infrastructure. We also continue to see strong growth in customers adopting Elastic Cloud and expanding across solutions. Our revenue through the cloud hyperscaler marketplaces doubled year over year, including multiple transactions over $1 million ACV. As an example, this quarter we closed an eight-figure deal with the Fortune 100 financial services provider that is using Elastic Cloud on AWS to consolidate its observability and security infrastructure. The company chose Elastic to streamline operational costs and gain greater visibility across its environment while safeguarding sensitive customer data and meeting regulatory compliance requirements. We also closed another eight-figure deal with a top 10 multinational financial services company that is expanding on Elastic to consolidate its observability, security, and internal and external search capabilities on our platform. They continue to grow use cases with us most recently expanding their use of monitoring and AIOps and advanced capabilities like tiered storage and machine learning. On the go-to-market front, last quarter, Elastic participated in 30 events and go-to-market programs with our cloud hyperscaler partners, including AWS reInvent, where we met more than 5,000 customers and prospects and held a joint session with our customer Dish Media. Our level of investment and engagement in this flagship event is a testament to the momentum of our partnership and the growing base of mutual customers that we serve. Finally, I'm excited to share that we have recently welcomed a new Chief Marketing Officer to Elastic, Matthew Donohue. Matt brings a strong cybersecurity marketing background and extensive experience developing and executing go-to-market plans to support company growth. His experience in increasing demand and driving sales will help us accelerate our journey as we build a generational company. The long-term opportunity for Elastic is clear, and we are positioning the business to emerge even stronger as we go through these challenging economic times. Now, on to our widening competitive moat. Our solutions continue to be bolstered by innovation on the Elastic platform, driven in part by our AI and machine learning capabilities. As industry analysts have reported and our own customer surveys also indicate, investments in ML are fundamental to IT leaders' ability to deliver on digital business transformation. ML continues to be a major driver for customers adopting our higher subscription tiers. A key part of our approach to machine learning is allowing our customers to integrate their own models in addition to leveraging the models that we offer. By natively integrating machine learning into the core of Elasticsearch, we have enabled our customers to adopt new ML-based features across each of our solution areas. Now I will share some details about additional innovation and customer wins are security, observability, and enterprise search solutions. Starting with security. This quarter, we renewed business with the leading multinational telecommunications company, which is using Elastic Security to bolster its cyber defenses with threat detection and response. A longtime Elastic customer, they expanded business with Elastic via the Google Cloud Marketplace with the goal of consolidating and standardizing their security operations across more than 10 countries. We also renewed a seven-figure multi-year deal with the top 250 MSSP using Elastic Cloud on AWS to expand their security use cases across SIM, XDR, and endpoint. They chose Elastic Security for our simple consumption-based pricing that enables them to expand their use of Elastic as their customer usage grows. We delivered several new capabilities in Q3, including interactive investigation guides, new deception-based ransomware protections, and improved protections against data exfiltration through entity analytics. Elastic Security also continues to be recognized by leading industry analyst firms. In our first appearance in the Forrester Wave for Security Analytics, Elastic was named a leader achieving the highest score for strategy. Elastic was also named a major player in the 2022 IDC MarketScape for SIM. Now, moving on to Elastic Observability. This quarter, we renewed and expanded a seven-figure deal with Deutsche Telekom, a leading integrated telecommunications company. As an Elastic Observability customer, they use Elastic for multi-cloud monitoring, as well as advanced capabilities like machine learning to forecast bandwidth calculations that assist them in planning their networks and in optimizing costs. The company also uses Elastic Security for SIM, endpoint, and EDR to secure its own internal networks. In Q3, we introduced innovations, including a new curated journey that accelerates root cause analysis by aiding in the identification of performance or availability issues caused by application dependencies. Elastic also appeared for the first time in the Forrester Wave for AIOps, being recognized as a strong performer and receiving the highest possible score in 13 evaluation criteria. Now, on to enterprise search. This quarter, we closed a new seven-figure deal in APJ with the major social e-commerce platform in India, which moved from AWS OpenSearch to Elastic Cloud via the Google Marketplace. With Elastic Enterprise Search, they were able to dramatically reduce search latency across an average of 2.8 million transactions per day while optimizing the shopping experience for their users. On the innovation front, we introduced new tools to implement and manage natural language processing across search indices, accelerating both time to value and higher quality search results. I'm also pleased to share that Elastic was recognized as a leader in the 2022 Gartner Magic Quadrant for insights engines, positioned farthest to the right for our completeness of vision. Moving on to our long-term model and our focus on profitable growth. When we first shared the $2 billion FY25 revenue target in June of last year, it reflected the market opportunity in front of us and the growth trajectory of our business at the time. Although we fully expect to be a multi-billion dollar company over time, given the current macro environment we are operating in, we do not expect to achieve the $2 billion revenue mark in FY25. Similarly, while we are seeing healthy customer commitments, given the software consumption patterns in the near term, we expect Elastic Cloud revenue exceeding 50% of total revenue will take longer than we initially anticipated. Having said this, I will reemphasize our conviction in the long-term opportunity in front of us especially in Elastic Cloud. That conviction is founded on the strength of our product innovations and continued customer confidence in Elastic as reflected in customer commitments and in all the examples I shared earlier. Now, on profitability. As we've demonstrated this quarter, we are committed to managing the business with discipline and remain highly confident in our ability to deliver the 10% FY24 non-GAAP operating margin target we established last quarter, with further expansion in fiscal 25. Our fundamentals remain strong. We remain committed to continuing our growth strategy while delivering increasing profitability. In closing, I want to thank our employees for their dedication and contribution to our performance. I also want to thank our customers, partners, and investors for their continued support and confidence. With that, I'll turn it over to Janesh to go through our results in more detail.