Elastic N.V. (ESTC) Earnings Call Transcript & Summary

Hi, everyone. Thanks for attending the Annual Bank of America Global Technology Conference and for your continued support during the [ II ] season. Thank you very, very much. For our next session, we are absolutely thrilled to be hosting a fireside chat with Janesh, CFO from Elastic. So Janesh, thanks again for taking the time and welcome to the conference. And for the audience out there, if you have any questions, please use the Q&A functionality on the webcast, and I'll be able to ask them on your behalf.

So let's get started. Janesh, I guess from a very high level on Elastic, can you just give us a brief background on yourself? What is the opportunity that Elastic is addressing it? And how is Elastic positioned to capitalize on this opportunity?

Yes. I'm happy to, Koji, and thanks for hosting us here at the conference. It's great to be here. And despite all of the effects around pandemic and these conferences going virtually, it's great to be able to interact with you and so many other folks through this event. So thank you for that. In terms of Elastic, at its core, Elastic is a search company. And the idea that you can read large volumes of data, index that data and then return your real-time search results on that finds application in many different use cases and many different solutions. So many different problems start to look like search problems. Every time you think about just using words like search, find, look in sentences, you'll find that many, many problems are search problems. And we take great pride in being able to solve those kinds of problems for customers. Most people traditionally think about search as text in a text box on a website somewhere, but search is so much more than that. When you think about visualizing data, when you think about looking at data in a histogram, when you think about filters or sliders, when you think in the enterprise environment around areas like observability, where essentially, a practitioner's job is to look through large volumes of data to make sure that applications and infrastructure and their user experience is well maintained. Or if you think about areas like security where threat hunters are sifting through large volumes of data, searching for patterns, searching for anomalies, those are all great examples of search. And so as we think about our opportunity set ahead of us, there's a massive opportunity across multiple different use cases. We focus on 3 main solution areas that we call Enterprise Search, Observability and Security. And I think we are very well positioned to capitalize on this and to capture the opportunity looking ahead, just given the underlying trends that we see with the explosion in data volumes, and we feel very good about how well we are positioned.

Got it. I wanted to ask you a question kind of a COVID state of the state. It's June 2021. Sure seems like the world is beginning to head in the right direction overall. Probably a long way to go before things really get back to normal or whatever the new normal is going to be, reflecting -- I guess, reflecting back over the last 16 months, how did the pandemic affect the business? What did you learn? And from your lens, from your seat, I guess, is the pandemic still affecting the business? Or is the right way to think about it, it's mostly behind the business?

Yes, it's a great question. And I think we offer a little bit of a unique perspective on that because as a company, we are very highly distributed, we had our roots in open source and so we've been adopted by a large number of customers and users around the world, and we get a fair amount of our business from outside the U.S., roughly 45% of our business came from outside of the U.S. And just given that history, if I think back to this time last year or maybe even a little bit before in sort of the April, May time frame of last year, as the world was headed into the pandemic, we saw 2 completely opposing trends, if you will. One was this discussion about nobody really knew what the effects of the pandemic would be. And there used to be talk about 30% and 40% GDP reduction and millions of job losses and complete uncertainty and customers not knowing how to react or change their businesses in the course of the pandemic. We have that on the one hand. And then on the other hand, we had customers continuing to pull and pull through and double down on their digital transformation initiatives. And when we look back at that point in time, it was a start of our fiscal year, our fiscal year ends in April. So when we provided our outlook to investors at this time last year, we were actually quite cautious about our outlook because it was -- there was lots of fear and uncertainty in the environment out there. And we actually put an outlook out for the full year, but we just took a very conservative view. And reflecting back, I would say it's been really encouraging to see customers spend through the pandemic. And I think that was probably the biggest learning for all of us that customers showed incredible resilience and they adapted their businesses relatively quickly and continue to double down in areas that they knew would set them up for a competitive advantage in the long run. And so in many of those areas, they're spending aligned very well with the areas where our solutions are aligned around Observability and Security and Enterprise Search, and we were the beneficiary of that general trend. And if I think about the way the pandemic is currently affecting the business, I'd say a couple of things. One is, it is really encouraging to see the world starting to gradually recover from COVID. That's the first and the most important thing, more shots in arms, more things opening up, people starting to get back normal. Those are all very encouraging signs. The U.S. seems to be a little bit further ahead than the rest of the world in that regard. And given that 45% of our business came from outside the U.S., the way we are thinking about the business is that we will continue to see a gradual improvement in the overall environment from a global standpoint over the year as this fiscal year continues to unfold for us. So I think that's the contrast for fiscal '21 and fiscal '22 for us.

Got it. Got it. Got it. I wanted to ask you digital transformation. Clearly, something we hear over and over and over again from across all industries. Clearly, the pandemic is a catalyst for digital transformation. Elastic works with some of the biggest companies in the world, but it also works with smaller business, too, across a very diverse set of industries. So I guess from your lens, what are you seeing out there with digital transformation trends? And overall, what does digital transformation mean for Elastic?

Yes. It's a great question because I think it's one of those terms that can mean a lot of different things to a lot of different people. From our perspective, it comes down to a few different things. One is that our customers are continuing to see that their investments in technology are key to their to unlocking value for them going forward. They have become part of how they enable competitive advantage in their own businesses. And how that translates into spending, there's obviously a number of different things that customers can do but specific to our businesses that are focus on a few aspects. One is, depending on the nature of the business, right, Enterprise Search is a great solution area and a use case as more businesses move online, more transactions shift online, there's more content to be searched. If you think about this in the context of e-commerce-related transactions, that's a great application of our solutions for Enterprise Search. Or if you just think about more content being generated and more content being recorded, and all of that content needs to eventually be searchable. So that has proven to be a fairly important tailwind from the standpoint of digital transformation for our business. The second is around observability, where if you think about the trends across people starting to work in much more of a distributed way, transactions starting to break down and get much more componentized. If you think about the trends that customers that are happening in technology, even things like container-based services, as an example, host start to break down and you got a lot more micro services. All of those micro services need to be observed. So as you think about the capabilities or the experiences that our customers are trying to enable for their end customers, they are relying on solutions and Observability a lot more. And again, that plays nicely to our advantage. And Security is the same way we increasingly see more and more cyber threats being reported. Customers are increasingly thoughtful and much more aware of their security postures. And from an Elastic perspective, our Security offerings are both in the area of SIEM as well as endpoints and really bringing SIEM and endpoints together to enable a much richer set of security outcomes for our customers, I think we continue to see great momentum on that front, too. And then you superimposed -- on top of that technology view, you superimpose a consumption view, which is more workloads shifting to the cloud. And increasingly, customers are leaning in more heavily to the cloud. I think different customers are just at different points in their journey. Some will move faster, some move slower, and some want to move faster, but end up moving slower, some vice versa. But our promise to customers is that we will be there for them wherever they are. So some customers are leaning in and moving more quickly to the cloud. And I think that's great for their business and great for our business as well.

Got it. Got it. And Janesh, I wanted to ask you a couple more big picture questions here before you kind of dig into the business. And you alluded to it a little bit in your comments of kind of the future of work and distributed workforces out there. So I guess when you're talking with your customers and prospects out there or even thinking about Elastic itself, what are you hearing out there? I mean how does think about -- how does Elastic think about the future of work? Work from home? Work from anywhere? Is it back of the office? I mean I'm kind of dying to get back in the office myself. Is it hybrid office? Remote pods? I mean how do you see the future of work from what your -- all the conversations that you're having?

Yes. It's a great question. And from our perspective, Elastic has been a distributor company from very early days. As I mentioned, we had our roots in open source. A lot of our teams are distributed globally around the world, including on the engineering side, clearly on the sales side. And certainly, in terms of all the G&A functions as we engage with and support those different parts of the businesses. And that's meant a few different things. And I think that came to life, particularly in the pandemic and Elastic's resilience and strength as a distributed company was clearly quite visible from that perspective. And to start with, I would say that it's important to appreciate that distributed does not mean remote. Distributed does not mean that you don't have offices. We have offices around the world and sure we shut them down during the course of the pandemic for all the right reasons, just like everyone else did. But like you and like so many others out there, we are keen to open those offices again. We are keen to have people work from wherever they are. And if I think about the future of work or even in our case, the way we've always thought about work as a distributed company, we think of work as something you do, not some place you are. Work is an activity. It's not a location and people can work from anywhere. And our job is to make sure that we create the best environment for them to work in a way that meets them and where they are. And for some people, that might mean offices, for some people that might mean complete remote work. And for many people, it's going to be hybrid arrangements. And so that's how I think -- what I think will happen eventually as the future of work. Look, there'll always be some jobs that have to be done in a certain physical location or what have you. And to be honest, even that thesis was tested quite extensively in the pandemic. But there will always be advantages to doing some work in a certain way or in a certain location. I think there are some businesses out there that are more apprenticeship businesses where that in-person interaction is important. In many instances, it's important to have that in-person interaction to build initial relationships, but then you can sustain those over time. So I think we'll see it evolve quite flexibly. And I think from an Elastic standpoint as well as from the standpoint of our customers and those that are thinking about this in a more forward-leaning way, the key really there is to enable flexibility for their workforces to work the way that, that individuals want to work.

Okay. Okay. Okay. So let's dig into the technology a little bit. I recently initiated coverage on the business, so I'm still learning what you guys do, what the technology differentiation is. And as part of the initiation process, and I spoke with a number of your customers and developers and SIs out there. And the feedback was pretty clear is that Elastic is really good at what it does. And what it does is it's hard to do. So I guess from a high level or maybe help me understand what is it about the technology that resonates so well with their end users?

Yes. I think a few different things. Like you said, what Elastic does is really special. It's not easy to do. And we do it really, really well. So when you think about that from a technology perspective, being able to, as I said at the start, read large volumes of data and index those and to do that in a distributed way, where you can balance the distribution of the data based on geography, based on clusters based on infrastructure size, and to still have the search results across all of those extend across a number of solution areas, all with a single unified interface, that -- those are some really complex problems that we've solved from the standpoint of technology, whether on the distributed side and distributed computing or just in terms of the capability to search. You still think about when Google as a web search engine would return search results. And there'd be a response that said the search was completed in 0.05 seconds. Search engineers pride themselves on the speed of search. When you think about typing into a search box and you get auto complete, that's a great example of the speed of search at work for you. The second piece, I think, that sets us apart is the ability to operate at scale. A search engine has no good if you can search of a very, very large volumes of data. And I think we've demonstrated that over the years with the technology with -- in a number of use cases. There are lots of customer examples where we're being used at just massive, massive scale. And the third piece around that is relevance. What we enable is really for people to have a live conversation with their data. And by the way, natural language processing is yet another application that's another form of search. So quite literally having a conversation with their data. But metaphorically, it's the ability to interact with your data as quickly as you want and you search for something, and it takes you in a different direction. And you go search for something else, it takes you in a different direction. You get some insights. You search for something else. And for that richness of that conversation with your data to be maintained, the search results have to be relevant. If you're looking for Apple computers and you're only getting search results back on the fruit, that's not going to be a very productive search experience for you. So it really comes down to speed, scale and relevance as the 3 things that really set us apart from the core technology perspective. And all of those solutions natively integrated into a single stack. So all of the data can be stored in one place with a single pricing model on top, that makes it special. It's hard to replicate.

Got it. Got it. I wanted to remind the audience out there, if you do have a question, please use the Q&A functionality on the webcast, and I'll definitely get your question asked to Janesh here. So I guess thinking about the quarterly results. Last week, business reported what we thought were really, really great fiscal fourth quarter results. The business finished off up over 40% for overall growth for the year, which is frankly, phenomenal given all the disruption that the world has seen over the past year. I mean, I guess, from our perspective, what was most interesting was that the revenue guide for next year and the $1 billion target, a $1 billion-plus revenue target for fiscal '23. So I guess could you maybe walk us through the process, the thought process there on why now, why put the stake in the ground now? And really, what was driving that underlying confidence to put that $1 billion-plus stake into the ground?

Yes. Happy to. So there's a couple of thoughts behind it. One is, as I mentioned, as we think about fiscal '22, we do expect that the macro environment will gradually improve over the course of the year. So that naturally sets us up for a better second half than the first half in terms of customer activity and billings. The second is, as we have been doing and as we continue to state we would do, is we are investing quite heavily in the business. You saw us do that here in Q4. We're accelerating the investments even further here in the first half of this year. And we do think that as we accelerate those investments, those investments will start to bear some amount of fruit at least in the second half of fiscal '22. People that we hire now will have at least some impact on the back half of the fiscal year. And so both of those things set us up quite nicely for a stronger second half than the first half when it comes to billings. And then just given the ratable revenue recognition model that we have, a lot of that sets us up nicely for fiscal '23 in terms of revenue in the business. And so given that we were leaning in and making heavy investments because we see the long-term opportunity, we thought it's also important for us to help people understand what we're investing towards. And if we're investing now to target that long-term opportunity to paint a picture of what that can look like in fiscal '23. So that was really the main driver behind it. And we've talked about this for some time now in terms of a long-term opportunity and how we need to invest against that opportunity. When I step back and think about it, the TAM that we outlined was a $78 billion TAM. And if you look at our guidance, that's basically a 0.1% penetration of that TAM. So we're looking at this massive opportunity set ahead of us, and we're investing aggressively towards that. So we wanted to at least put an objective stake in the ground so that people have a sense of clarity on what we're investing towards.

Okay. Okay. Okay. That makes sense. And just thinking about the levers for growth, maybe for the audience that might not be super close to this name. I guess could you maybe talk about what are the levers for growth, the key levers? Is it land and expand? What are the key land products, key expand products from here?

Yes, happy to. So we talked about some of the macro trends around just data volume explosions and so forth. So I won't belabor those. If I think about it more in the context of our business, we have a very powerful land-and-expand motion. And we sign up new customers -- quite a strong number of new customers every quarter. You've seen that in some of the results over the past several quarters, including Q4 here, which was particularly strong in terms of new customer additions. A lot of those new customer additions are on Elastic Cloud. And all of the things we've done in terms of adding investments to the go-to-market machinery, both on the marketing and the sales side, including with our partners in some of the larger cloud providers. I think all of that has been working quite nicely in terms of the land motion. And then a lot of those customers over time will continue to increase their spend with us. And the initial land can take 2 forms. people can sign up on the web for monthly cloud service, which is essentially a self-serve model. Or if it's a sales-led motion, and there's an initial land transaction, chances are they'll have adopted us initially for one particular use case or solution. It could be a departmental project. It could be something unique that they are trying to do with respect to either Observability or Security or Enterprise Search. And then as those underlying drivers kick in, where they see higher data volumes, they see the benefit that they're getting from the Elastic stack, they'll extend into additional areas. You'll start ingesting data from more sources. They will set up more projects across divisions, across departments for the same use case or in many instances, start to extend across those solution areas. If you're observing, why not also protect because it's the same underlying data set. So with security folded into the Elastic Stack, we just made every Observability practitioner a threat hunter as well. So I think people see a lot of benefit in that. So I think those are some of the motions that help us. And then as they continue to deploy more and more workload shift to the cloud, I think that just adds even more emphasis to that growth.

Got it. Got it, Janesh. Getting a couple of questions in here from investors and first one is schema on read launched a couple of months ago. Can you talk a little bit about that? And how mature is the schema on read product today?

Yes. So we implemented schema on read, the feature technically is called -- it's a run-time feature. But the schema on read there used to be a fair amount of [ fun ] out there around schema on read versus schema on write and is the one better, is the other better? And from our perspective, again, what we wanted to do is enable customers to have the best of both. From our perspective, when we initially an Elastic search had schema on write, and you could index the data upfront, it just made the search resolves that much faster. It goes back to that idea of having a conversation with your data. If the data was not indexed, search would be incredibly slow. And you only have to look at a few other folks that did it that way to understand the differences. And at the end of the day, we said, look, if folks want to use us for any kind of data and if they want us to, if they don't have the clarity on how they want to index the data upfront, that's fine. We can give them that capability, and that's what we did here with schema on read. So it just makes it very flexible for customers to choose whichever approach they want to take. And I think that sets us apart. It addresses some of the noise that existed earlier. I think customers see a lot of benefits in that feature as well. And I think we've seen some great customer responses and reactions to that.

Okay. Okay. And while we're on the topic of product, searchable snapshots frozen data tier. It sounds like this is something Elastic is really, really excited about. I guess curious to hear how did the idea come up for searchable snapshots and frozen data tier? Is this something that, that customers were asking for? Or is this just a natural progression of the platform, maybe a combination of both?

Yes. I think it's more of a natural progression of platform. And we talk to our users all the time. I think the -- we keep our ears to the ground. We really started on this journey of different temperatures of storage many, many years ago. When we started to move away from all data being stored in hot storage to some being stored in warm storage and then the cold tier and now the frozen tier. And the frozen data tier just allows customers to reduce their third-party infrastructure costs quite significantly. And then you combine that with searchable snapshots because you can now make those -- the data that's stored in those frozen data tiers are searchable. That allows customers to just unlock significant value from the investments that they made on the third-party infrastructure side and reduce that. And we actually end up being the net beneficiaries of that because it increases their transaction sizes with us. Searchable snapshots is a feature only in our Enterprise subscription tier. So if a customer wants to use that feature, they have to either sign up for that tier or upgrade to that tier. So I think it's just a natural progression. And it's one of those rare instances where there's so much value being delivered to a customer by way of helping them gain not just business value, but cost reductions on third parties that it actually ended up playing to the customer's advantage as well as our advantage when it came to the monetization.

Okay. Okay. Okay. Got a question here coming in from the buy side, asking about the competitive landscape here. And I guess just to premise that. I guess from a big picture perspective, how has the competitive landscape evolved over the past 24 months in Enterprise Search, Security, Observability. They're all very topical. It seems like those terms are getting thrown around a little bit, too. So just curiously, from your side, what are you seeing out there on the competitive front?

Yes. A couple of things I'd say. One is, and I just step back and think about how well we are positioned. We feel very good about our competitive positioning today. Our products are far superior to what we had 24 months ago. If you just think about the richness of the features that we've developed, all the capabilities that we've had around SIEM, around endpoint, around Observability. Many of these features didn't even exist back then. And then core -- just core features in the stack itself, low-level features that get -- provide benefit across a number of different solution areas. So we feel very good with respect to our product from a competitive standpoint. The other thing that I think from a marketplace perspective that started to happen is our positioning always was that you can get the benefit of having all of the data stored in a single stack in a unified data store, and you can get -- you can apply use cases around observability and security and enterprise search to that single data store and to that single data set. And that we thought is an advantage that sets us apart. Combine that with a unified pricing model, and it's really been impressive, I think, to see how that's played out in the marketplace. Observability as a term was not a very popular term a few years ago and it started to gain popularity relatively recently. And trends have moved very quickly in the marketplace towards Observability. And I think that plays to our advantage. It's great to see those silos across, logging an APM and monitoring breakdown because the way we think about it, Observability is just -- is a single solution and logging an APM and monitoring are essentially features in that solution. So when you hear us talk about solutions penetration in our customer base or anything of the sort, you'll always hear us just talk about Observability as one solution. We don't pretend that these things are different solutions around APM and monitoring and logging. So that's our view, and it's great to see the industry move increasingly towards that view. In terms of customer dynamics and what we see again. As we continue to move further up within the Enterprise, and I talked about the TAM penetration earlier, right? So it stands to reason that when the TAM is that big and the penetration rate is that low, you won't see competitors all the time. But as we move further up within the enterprise, we will see some of the incumbents more and I think that's just natural revolution. I think that's a good thing, not a bad thing because we feel very good about our success rates that we've seen there in the past and looking ahead.

Got it, Janesh. And just kind of digging in there more with this buy-side question is more specifically versus Splunk, logging and SIEM, I mean, I guess, where do you win and lose versus Splunk right now?

Yes. I think it's a great question. When I think about any individual competitor, if I think about Splunk, a lot of times, folks are -- they have -- they adopted Elastic initially because there was data that was dropping to the floor. And so they wanted to get the benefits of analyzing that data, understanding the threats that existed within that data, starting to use Elastic to get better outcomes. And I think we see that in a number of instances. I think there'll always be some instances where we will coexist side by side. I think there will be instances where we will win and displace any competitor. I've used Splunk as an example, but the same applies to any competitor. I think the more we paint the vision of the unified stack and the benefits that customers can get across all of these areas around Observability and Security, I think the more that plays to our advantage. And again, it's just great to see underlying market trends play in our favor in those areas.

Okay. Okay. Okay. And then I guess I just have to ask the question, too, on the Observability side, win or lose, how do you think about when you win or lose against some of the other -- the public players out in the Observability side of the world?

Yes. Again, I think there's a few things that come to mind. So in the context of a customer thinking about their long-term vision, first off, when we talk to them about these areas coming together, their eyes light up. I mean it's very, very consistent with their vision of the world. And I think the different customers are just going to be at different points in their journey. Some have an installed base they need to think about, some have existing contracts, some customers buy centrally, some customers buy in a decentralized way. There's just all kinds of permutations and combinations out there of these things. So we position the vision. And in many instances, customers might adopt us initially for a logging project to a Security project or an Enterprise Search project. And to us it doesn't matter how we get started. What matters is the vision that we got eventually are starting to drive the solutions across these different boundaries that exist.

Okay. Okay. Enough on the competitive front. I want to talk about, like I said -- it's another competitive question. Sorry about that. It's about Amazon. So you had your license change. And I understand the dynamics with Amazon. And in April, Amazon kind of came out and said, "Hey, we're announcing this fork of Elastic search in Kibana, and it's based on version 7.10." And I know that's already behind the current version that you guys have of 7.13. So I guess a couple of questions here. First question being, what are you hearing from your customers and partners about this?

To be honest, very little because the move that we made, it didn't affect any customers at all. Those are already existing Elastic customers using an Elastic license. The vast majority of our users were also unaffected because since 2018, when we made some changes in the licensing scheme, the vast majority of our downloads have been the proprietary Elastic license anyway. So existing users were really not affected in any significant way, nor were any customers really affected. We obviously saw a little bit of noise play out in social media. I think that always happens. By definition, there's selection buyers over there in social media. Amazon forked the code, we predicted that, that's what they would do. And I think it's still very early days. So we'll see how it plays out. But from our perspective, so far, things have played out exactly as expected. And you see that reflected in the strength of our business. You see that reflected in the numbers that we posted, and we see that in just continued conversations we have with customers and users.

Got it. Got it. And the second part of the question is, being a hard fork, the Amazon being a hard fork of the code, the products are effectively going to be significantly different going forward. I guess what are the some of the key differentiations today? And how does Elastic think about continuing to differentiate the product against Amazon's fork going forward?

Yes. So one of the important things to keep in mind is that we started introducing or expanding our proprietary but free feature set a long time ago, right, back, I think, 2.5, 3 years ago in the 2018 time frame. We had some features that put in basic, and we consciously decided to put many more features in there. And that basic subscription tier is proprietary features to us. And -- but they are still free for customers, and they are still open. So the code is open. So it's free and open, but it's proprietary. And a significant portion of our innovation over the last 2.5, 3 years has really gone into that free and open tier. If I think about so many capabilities, right, whether it's on the SIEM side, whether it's on the Observability side, many stack level features, many capabilities in Kibana. And then, of course, all of the paid features as well that we talked about some of them like searchable snapshots and run-time features and schema on read and so forth. So a significant portion of our innovation has really been in proprietary features. And so we always had the flexibility to change the licensing at a time and place of our choosing. And that's what we decided to do back in January with the announcement that we had made. So we feel actually very good about that. To your point, when we announced the change and Amazon announced the fork version 7.10 was in pure open source, and now it's already been 3 versions. We've got hundreds and hundreds of engineers that are continuing to build on top of that innovation engine and continuing to widen the competitive moat even further for us. And then you superimpose on that, the fact that their product is now going to be called something different because it's not Elasticsearch. It is, in fact, a completely different product. And so when it's going to be called something different, there's really no scope in the future for continued marketplace confusion about their product versus our product. And I think customers will see that. And to the extent that folks in the past may have had some level of confusion. I think it only serves to clarify that in the marketplace even further. So I think that all works to our advantage over the long run. But I do think it's a gradual shift that we will see.

Got it. Got it. Janesh, thank you for that. We are out of time. So thank you again so much for joining us today at our tech conference. Super. Appreciate it. We'll speak again soon. Thanks, Janesh.

Thanks again [indiscernible]

Thanks, everybody. Thanks, everyone, for tuning in. Yes. Thank you.