Elastic N.V. Q1 FY2025 Earnings Call

Good day and welcome to the Elastic First Quarter Fiscal 2025 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Anthony Luscri, VP of Investor Relations. Please go ahead.

Thank you. Good afternoon and thank you for joining us on today's conference call to discuss Elastic's first quarter fiscal 2025 financial results. On the call, we have Ash Kulkarni, Chief Executive Officer; and Janesh Moorjani, Chief Financial Officer and Chief Operating Officer. Following their prepared remarks, we will take questions. Our press release was issued today after the close of market and is posted on our website. Slides, which are supplemental to the call, can also be found on the Elastic Investor Relations website at ir.elastic.co. Our discussion will include forward-looking statements, which may include predictions, estimates, our expectations regarding the demand for our products and solutions, and our future revenue and other information. These forward-looking statements are based on factors currently known to us, speak only as of the date of this call and are subject to risks and uncertainties that could cause actual results to differ materially. We disclaim any obligation to update or revise these forward-looking statements unless required by law. Please refer to the risks and uncertainties included in the press release that we issued earlier today, included in the slides posted on the Investor Relations website, and those more fully described in our filings with the Securities and Exchange Commission. We will also discuss certain non-GAAP financial measures. Disclosures regarding non-GAAP measures, including reconciliations with the most comparable GAAP measures can be found in the press release and slides. The webcast replay of this call will be available on our company website under the Investor Relations link. Our second quarter fiscal 2025 quiet period begins with the close of business on Wednesday, October 17, 2024. Over the coming weeks, we will be participating in the Citi Global TMT Conference, Goldman Sachs Communacopia & Technology Conference and the Piper Sandler Growth Frontiers Conference. With that I'll turn it over to Ash.

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

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

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

Great. Thanks for the questions. Ash, I'll start with you. You mentioned this in your prepared remarks, but I wanted to delve deeper into what you view as the key actions being taken to enhance sales execution due to segmentation, which seems promising for the long term. How can we gauge the timeframe for when we might begin to see improvements in accelerating growth?

Thank you for the question. I've been thinking a lot about what we could have done differently and what we are doing now. There are three key actions we are currently taking. First, I have significantly increased our monitoring of deal progression through the sales funnel, working closely with our Chief Revenue Officer and his sales leadership team. Second, we are focusing more deeply on our enterprise accounts, which are our largest and have the biggest budgets. Third, while this is less of a specific action, our sales representatives are adapting to their new territories, building relationships, and we are already seeing some progress as deals move through the pipeline in these accounts. In addition to these three actions, we have also been working on our platform consolidation efforts. This has been successful for us, and during the Black Hat Conference, we launched the Elastic Express Migration program, which consolidates customer incentives and services to help them migrate quickly to the Elastic platform with minimal risk and effort. Additionally, due to our success in Generative AI, we have established a small technical specialist team to assist customers in building their Generative AI applications and accelerating their ramp-up, as the demand for their skills has been high. All of these initiatives give me confidence that in the next few quarters, we will return to a strong state of sales execution, which is my top priority and commitment.

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

Let me start by discussing the technology and then how we are scaling our efforts. We've introduced ESQL, our query language, which simplifies the process for customers to transition their existing logic, rules, and alerts from previous technologies to Elastic. Additionally, we launched the Elastic AI Assistant to aid in migrating these elements, such as rules, alerts, and dashboards. Recently, we released Automatic Import, a feature that allows for quick data stream transfers, enabling users to onboard data sources efficiently onto the Elastic platform. This capability utilizes large language models and AI to deduce the schema and create necessary mappings for fast onboarding. Overall, this technology is very beneficial. Furthermore, we have the program in place to address the challenge of double costs that many customers face during the transition. This program includes incentives to ease that burden. To scale our efforts, our sales team is actively engaged, and we've seen a strong focus and excitement around the pipeline. We initiated the Express Migration program at Black Hat, which has generated significant interest. In terms of partnerships, we aim to collaborate with hyperscaler partners and others to harness their capabilities and drive momentum into new opportunities.

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

Brent, the area where the impact was the greatest was in the Americas in all verticals except US public sector. US public sector for us is a separate team. And given the nature of those territories, we did not touch anything in that territory. But outside of that in the Americas, pretty much all the teams were affected. And the simple answer there is the way I look at these changes, the changes I still believe are the right changes 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. If I were to redo this, I would stagger those changes a little more and do them gradually. That's now what we are focusing on. We're making sure that we are inspecting all of those accounts, working with those reps as they gain familiarity with their accounts to ramp up quickly and build that progression of the pipeline. To me, it's just a temporary interruption, but we are well on our way. I expect that in a couple of quarters, we will be back to the level of sales execution that we've been accustomed to.

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

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

Pinjalim, this is Janesh. Maybe I'll take that. You're right, the impact was across both cloud and self-managed. It was not isolated to one format because it reflected the broader sales execution. In terms of the price increase that we did at the start of Q1 and whether that had any impact, I don't believe it did because it was a single-digit price increase mainly based on the technology enhancements we've delivered. So we didn't see a meaningful impact on customer commitments solely related to that issue. If anything, I think the shortfall in customer commitments was a broader sales execution issue. Even in terms of revenue, as I think about both Q1 revenue and the outlook for the year, the price change was not intended to be a meaningful driver of revenue for us this year, in part because it was a relatively small change or single-digit percentage increase. It will also start to come into renewal contracts at renewal time. Yeah, happy to touch on that as well. I think annual cloud consumption trends played out quite nicely for us as we expected in Q1. In both the enterprise and the commercial segments, customers continued to consume nicely against the commitments they've made to us. I think that's just a great indication that customers that adopt cloud continue to see a lot of value from our platform. The issue on cloud for us looking ahead is that because we have a lower degree of new commitments that we secured in Q1, that will impact our broader revenue outlook. The rate of consumption was healthy. As we've traditionally not broken out a monthly view of the business because there can be natural fluctuations in consumption patterns across customers, we tend not to rely too much on a single month of data.

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

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

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

Tyler, maybe I'll take a stab at that. So first off, in terms of where we saw the impact, it was not only in the large enterprise accounts, because as part of all the segmentation changes, we made changes across the entire Americas team except public sector. That impacted a number of commercial accounts and relationships, and there were changes there too. It was more broad-based. The impact was felt more on the enterprise segment because those tend to be larger accounts with larger deals and larger transactions. In terms of the mix of new workloads versus expansions and renewals, our gross retention rates stayed incredibly strong. Those were healthy. We felt pretty good about the renewals and how we closed that business. The shortfall in customer commitments was a broader sales execution issue. With that said, our annual cloud consumption trends played out quite nicely for us.

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

Yeah, Andy, I'll take that. So just as a general matter, we tend not to disaggregate the amounts of customer commitments and orders and so forth. But I'll just say it was significant, as you can see that it caused us to move the revenue amount here quite meaningfully. While these deals are progressing nicely through the sales funnel, I would not expect all of them to close in Q2. Many of these will take a while to close out. We are seeing encouraging signs and it will take a couple of quarters for us to get back to a stronger level of execution that we've seen in the past.

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

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

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

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