Good day and welcome to the Elastic Envy Second Quarter Cisco 2026 Earnings Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal 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, you may press star than 1 on your telephone keypad. To withdraw your question, please press star than 2. Please note, this event is being recorded. I would now like to turn the conference over to Eric Pringle, GVP of Finance. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss Elastic's second quarter fiscal 2026 financial results. On the call, we have Ashkel Carney, Chief Executive Officer, and Navamwely Hinda, Chief Financial 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 supplemented 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 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. Unless specifically noted otherwise, all results and comparisons are on a fiscal year-over-year basis. The webcast replay of this call will be available on our company website under the Investor Relations link. Our third quarter fiscal 2026 quiet period begins at the close of business on Friday, January 16, 2026. We will be participating in Barclays Global Technology Conference on December 10th and the Needham Growth Conference on January 14th. With that, I'll turn it over to Ash.

Thank you, Eric, and thank you, everyone, for joining us on today's call. Q2 was an outstanding quarter for Elastic, driven by robust growth across the company, with AI positively impacting all areas of our business. We beat the high end of our guidance across all metrics, delivering revenue growth of 16%, and a non-GAAP operating margin of 16.5%. Our team drove strong execution, achieving sales-led subscription revenue growth of 18%, with strength in both Elastic Cloud and our self-managed offerings. We also increased the number of customers spending over $100,000 with us to more than $1,600 at Quartrend. The importance of data, especially unstructured data, is growing at an unprecedented rate as enterprises continue to expand their use of AI. The Elastic platform, with its ability to sift through and find relevant insights in petabytes of structured and unstructured data in real time, is uniquely suited to address the need for context in this age of AI. This ability is driving the acceleration and adoption of the Elastic platform by organizations for their search, AI, observability, and security needs. In Q2, we secured significant customer commitments across all solution areas. We maintained strong momentum in search and AI, while also seeing an uptick in platform consolidation for security and observability, with an increasing number of customers migrating from legacy products to our platform. These factors led to an acceleration in the number of large deals we were able to secure this quarter. In Q2, we signed over 30 commitments valued over $1 million in annual commitment value, with five representing over $10 million in total contract value. Of these five deals, two were greater than $20 million, a new record this quarter. In Q1 2025, we strategically realigned our sales team to focus capacity on our highest value opportunities. This quarter marked the fifth consecutive quarter of disciplined sales execution, demonstrating our continued commitment to driving enhanced performance and consistency across the field. These increasingly larger commitments are exemplified by an eight-figure new logo deal where Elastic Security was chosen by one of the largest chemical manufacturers in the world. The company initiated a competitive search to replace its fragmented security tools and simplify its IT infrastructure, seeking an XDR platform that could deliver advanced threat protection and a 35% increase in operational efficiency. Elastic prevailed against multiple competitors. We demonstrated superior capabilities by detecting threats overlooked by all other solutions. The customer chose Elastic due to the proven effectiveness of our technology, our open ecosystem, and ability to scale across their global operations. With the customer now progressing towards an AI-driven SOC, We believe our AI features will enable them to realize even more ambitious efficiency targets. Building on our momentum and security, our leadership in NextGemSIM led to a $26 million commitment with CISA, the U.S. federal agency responsible for safeguarding critical civilian infrastructure. CISA selected Elastic Security on Elastic Cloud for a unified SIM-as-a-service offering that will help to secure U.S. federal civilian agencies. This program will standardize security data collection, enabling real-time threat detection and rapid incident response across agencies, while leveraging our standards-based, highly efficient platform to significantly reduce costs associated with data access and retention. We architected our next-gen SIEM solution knowing that security is fundamentally a data problem, one our Search AI platform is uniquely suited to solve. Capabilities like attack discovery, ESQL, and cross-cluster search help analysts investigate incidents and correlate events across environments without manually aggregating data or switching contexts, accelerating detection, response, and forensic analysis. Our ability to overcome complex data challenges by unlocking the value of unstructured data is directly linked to our continuing success in generative AI. In Q2, we saw strong demand for our platform as an increasing number of customers adopted Elastic for developing semantic search and agentic applications. Our deep expertise in managing unstructured data combined with our clear product differentiation and context engineering leadership positions Elastic as the natural choice for building Gen AI applications. This has led to widespread adoption and successful deal closures across numerous industries, addressing a wide variety of use cases. For example, a global financial institution operating in over 100 countries expanded its use of Elasticsearch in a seven-figure deal. This customer leverages the full Elastic platform in a self-managed environment for hundreds of use cases. Their search capabilities continue to grow as they centralized unstructured data to power insights for customer and employee-facing applications. Previously, they attempted to leverage a hyperscaler's co-pilot product, but it did not surface sufficient relevant results. Now they are using Elasticsearch as their context engineering platform, paired with an LLM for their internal AI applications. Elastic's ability to ensure accurate context and relevance has improved their results, and they are preparing to move the application into production. Our leadership in context engineering and relevance is translating directly into significant Gen AI customer adoption. In Q2, new customer commitments with Gen AI continue to grow. We signed four Gen AI deals that included new business of greater than a million dollars in annual contract value. We now have over 2,450 customers on Elastic Cloud using us for Gen AI use cases, with over 370 of these amongst our cohort of customers spending $100,000 or more with us annually, representing nearly a quarter of our greater than $100,000 ACV customer cohort leveraging Elastic for Gen AI use cases. In another Gen.AI win from Q2, a global supply chain software provider expanded its use of Elasticsearch in an eight-figure deal to leverage our AI and vector search features in an embedded fashion in their key products. The customer is now also expanding the use of our platform to support future agentic use cases. We are seeing customers expand their use of Elasticsearch to develop their own agentic workflows And to further empower enterprises in adoptive AI agents, we've recently introduced AgentBuilder. This new product builds on the Elastic Inference service and provides an out-of-the-box conversational experience, allowing users to interact directly with any data in Elasticsearch and extends our technology into a new frontier beyond the vector database. It embodies a truly relevant-centric approach rooted in context engineering by enabling users to explore their data and assemble the necessary tools for quickly building AI agents with robust workflow capabilities. AgentBuilder dramatically simplifies the entire operational lifecycle of agents, including their development, configuration, execution, customization, and observability, all directly within Elasticsearch. This powerful capability strengthens our moat of broader Gen AI differentiation, which is also helping us land deals in observability and security as customers grow with Elastic because of our AI features. An increase in AI-based security threats fueled a large expansion deal with one of the world's leading investment management companies. They are deploying our AI capabilities to proactively combat evolving attacks. This customer expanded its use of Elastic security to enhance runtime protection with integrated AI, a critical need for securing applications. Default LLM security controls alone were insufficient. The customer required a security solution capable of evolving with their unique requirements. Elastic's automation-first architecture provided them the ability to rapidly evolve to keep up with ever-changing security challenges. As bad actors grow in sophistication, leveraging Elastic's attack discovery and AI assistant allows their SOC to scale their capabilities and proactively address issues. We are seeing similar success in adoption of our platform capabilities across our observability solution. In one observability win from the quarter, a leading U.S. municipal technology and innovation agency signed a seven-figure expansion deal for Elastic Observability. The agency is tasked with providing infrastructure as a service to all municipality offices. They launched a new project to unify the city's data in a first-class data environment to modernize operations and decision-making. They chose Elastic Observability as a foundational technology due to our flexibility, open architecture, and ability to deliver cost savings at scale through features like searchable snapshots. The agency is now leveraging our AI assistant, which helps them remediate and triage issues, reducing their reliance on external consultant services. Building on foundational components for working with observability data, we introduced Streams this quarter. Streams is an agentic AI solution that simplifies working with logs to help SRE teams rapidly understand the why behind an issue for faster resolution. Streams can automatically organize logs, find meaning and problems in logs by applying AI and the power of Elasticsearch to this unstructured, messy log data. In Q2, we introduced a steady set of new AI capabilities, including a number of features that improve our performance as a vector database. We introduced a managed inference service natively through Elastic Cloud. Inference at scale is incredibly important for vector search, semantic search, and Gen AI workflows, and we provide our customers with an API-based inference service using NVIDIA GPUs with our vector database for low-latency, high-throughput inference. We also continue to improve our vector database performance with new functionality, including the release of DiskBBQ. DiskBBQ is a new disk-friendly vector similarity search algorithm that delivers more efficient vector search at scale than traditional industry standard search techniques used in many other vector databases. And finally, we announced our acquisition of GINA AI. GINA AI has developed leading frontier-class multilingual and multimodal embedding and re-ranker models, helping businesses and developers build powerful search applications. As enterprises build AI agents and develop software in new ways, defining context and grounding LLMs remains essential. This is why we have invested for years in developing our own embedding models, re-ranker models, data chunking strategies, and more. GINA AI extends and accelerates this strategy. These advancements in AI and vector search are not isolated. They are integral to our overarching strategy of delivering a powerful and flexible platform. This commitment to innovation extends across our diverse deployment options, ensuring our customers can leverage the full potential of Elastic regardless of their preferred architecture, Elastic Cloud or self-managed. We continue to innovate, making our platform more capable across both cloud and self-managed deployment profiles. As part of this, we made auto-ops available for the first time to our self-managed customers. Auto-ops simplifies cluster management through a cloud-powered service that processes telemetry for real-time issue detection and resolution, all while ensuring the underlying customer data remains within the self-managed deployment. It is these organic innovations and strategic acquisitions that gives us the confidence to be the leading data retrieval and context engineering platform for the AI era Just last week, IDC recognized Elastic as a leader in multiple Marketscape reports, including in the Worldwide Observability Platforms report and in the Worldwide General Purpose Knowledge Discovery for Search report. In the General Purpose Knowledge Discovery report, we had the strongest position of any vendor in the analysis. We are proud of this recognition, which affirms our unique ability to deliver a unified platform that solves the most complex data and AI challenges. In closing, our market opportunity is stronger than ever, driven by robust growth, clear Gen.AI leadership, and a unique platform built for this moment. Our foundational investments in search uniquely position Elastic to deliver AI to enterprises everywhere. I would like to thank our customers, our partners, and our shareholders for their continued trust and confidence in Elastic. And to our employees, thank you for your tireless spirit of innovation. And now, I'll turn it over to Navam to go through our financial results in more detail. Thank you, Ash. Good afternoon, everyone.

As you may recall, we raised our guidance for the quarter during Analyst Day on October 9th, and I am pleased to report that we exceeded both the top line and profitability of that improved guidance. We saw continued broad-based demand and notable strength in commitments across all geos, supported by healthy consumption trends. As Gen.AI adoption and platform consolidation continue to be top priorities for enterprises, we are seeing sustained momentum in demand for our platform reflected in the continued customer momentum and expansion in our sales pipeline during the quarter. Our total revenue in the second quarter was $423 million, representing growth of 16% as reported and 15% on a constant currency basis. Our sales-led subscription revenue in the second quarter was $349 million, growing 18% as reported and 17% on a constant currency basis. This strong performance reflects the strategic advantages of the Elasticsearch AI platform in addressing critical consolidation and generative AI use cases. Our current remaining performance obligation, or CRPO, which is a portion of RPO that we expect to recognize as revenue over the next 12 months, remains solid. At the end of Q2, CRPO is approximately $971 million, and grew 17% as reported and 15% in constant currency over Q2 of the prior year. Our top-line metrics were driven by strong consumption, deal momentum, and traction with greater than 100k ACV customers, all three drivers supported by Gen AI tailwinds. The primary driver of revenue was healthy consumption across solution areas. We saw steady consumption growth throughout the quarter, fueled by a strong demand environment, driven by solid organic consumption growth from existing customers as well as revenue from new customers. Second, deal momentum during the quarter was significant. As Ash referenced, we saw an uptick in consolidation and Gen AI use cases, which led to overall strength in large deals. We closed over 30 commitments greater than $1 million in annual contract value, with five of them representing greater than $10 million in total contract value and two of those greater than $20 million in total contract value. The strength of this can be seen through RPO, which grew 19% in the quarter, as reported, and 17% in constant currency. Our deal momentum occurred globally in both enterprise and public sector segments. Despite the U.S. government shutdown in October, the team closed a notable win with CISA, as Ash noted earlier. In the second quarter, deal momentum continued and supported our expansion of enterprise accounts and high-propensity commercial accounts. During the quarter, our greater-than-100K annual contract value customer account grew approximately 13%, representing approximately 180 net new customers over the past four quarters. Quarter-over-quarter, we added approximately 50 net new customers, and we continue to see strong expansion from our existing customer base. Gen AI is proving to be a powerful catalyst for customer expansion. 23% of our greater than 100K cohort now utilizes Elastic for Gen AI use cases, an increase from 17% just one year ago. We see significant headroom for customers to initiate their Gen AI journey and scale into a 100K annual contract value cohort. Even with our existing 100K plus Gen AI customers, adoption is in its early stages. Now, turning to second quarter margins and profitability, I will discuss all measures on a non-GAAP basis. Our commitment to balancing growth with disciplined spending translated to robust operating leverage and strong bottom line results. We continue to focus on cost and efficiency in our business. We delivered subscription gross margins of 82%, total gross margins of 78%, and an operating margin of 16.5%. Our disciplined approach to cost, combined with increasing revenue, underpins our strong profitability and free cash flow generation. Regarding cash flow, adjusted free cash flow is approximately $26 million in Q2, representing a margin of 6%. The second quarter is typically a seasonally low free cash flow margin quarter for us, and we manage and view adjusted free cash flow on a full-year basis. For fiscal 2026, we expect to sustain the level of adjusted free cash flow margin that we achieved in fiscal 2025. In October, during our Analyst Day, we announced a $500 million share repurchase program as part of our capital allocation framework. I am pleased to say that we are already underway on our program and began returning capital to shareholders during Q2. During the quarter, we returned approximately $114 million in cash to shareholders. This represents purchases of approximately 1.4 million shares at an average price per share of $84.45. As I mentioned at our Financial Analyst Day, we expect to use more than 50% of our $500 million authorized amount in fiscal 2026. Now for Outlook for the third quarter and the remainder of fiscal 2026. Starting this quarter, we will begin providing guidance for sales-led subscription revenue. As we detailed during our recent Analyst Day and in the past two quarters, sales-led subscription revenue is a key metric for measuring our success with larger strategic and enterprise accounts and high-propensity commercial accounts. Sales-led subscription revenue is the fundamental driver of our financial framework, and we incentivize our sales team to meet customers where they are, in cloud or in self-managed environments. The momentum we are building in this quarter is evident. Our sales pipeline is very healthy, and it has grown throughout the year. Given the strength of our business, we are raising our full fiscal year 2026 revenue guidance. For the third quarter of fiscal 2026, we expect total revenue in the range of $437 million to $439 million, representing 15% growth at the midpoint or 13% in constant currency growth at the midpoint. We expect sales-led subscription revenue in the range of $364 million to $366 million, representing 17% growth at the midpoint or 16% in constant currency growth at the midpoint. We expect non-GAAP operating margin to be approximately 17.5%. We expect non-GAAP diluted earnings per share in the range of $0.63 to $0.65, using between $108 million and $109 million diluted rated average ordinary shares outstanding. For fiscal 2026, we are raising our total revenue, which improves our expected non-GAAP diluted DPS. We expect total revenue in the range of $1.715 billion to $1.721 billion, representing approximately 16% growth at the midpoint or 15% constant currency growth at the midpoint. We expect sales-led subscription revenue in the range of $1.417 billion to $1.423 billion, representing 18% growth at the midpoint or 17% in constant currency growth at the midpoint. We expect non-GAAP operating margin for the full fiscal 26 to be approximately 16.25%. We expect non-GAAP diluted earnings per share in the range of $2.40 to $2.46, cents using between $108 million and $110 million diluted weighted average ordinary shares outstanding. The diluted weighted average shares outstanding reflect only share buybacks completed as of October 31, 2025. In summary, I am pleased with our second quarter results. We remain on track on our execution this fiscal year and on track to achieve the medium-term sales-led subscription revenue target growth rate we laid out during our financial analyst day. Elastic stands uniquely positioned as we bring relevance to unstructured data and allow enterprises to transform data into value. Our opportunity continues to grow. With that, I'll open it up for Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star than 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. The first question comes from Matt Hedberg with RBC Capital Markets. Please go ahead.

Great. Thanks for taking my question, guys. Ash, I want to start with you. You know, I assume you're seeing strong consumption trends from your AI native customer base, but I'm curious if you could talk about the performance of your non-AI native customers. Are they seeing an increase or an acceleration in consumption due to sort of an increased AI focus within that customer base?

Yeah, that's a great question. And yes, you know, we are seeing that it's not just the AI native cohort, but we are seeing strong consumption across the board, even in our traditional businesses, and not just in search, but also in observability and security. And, you of this is also that we are winning more and more commitments, like I talked about in my prepared remarks. This was a remarkable quarter in terms of the number of commitments that we were able to secure, large commitments where customers are consolidating onto our platform for security, for observability. And the five deals that we mentioned that were all greater than 10 million in total contract value are all clouds. So I would expect that as deals like those, as customers start to consume, we are going to start to see the benefit of that in our cloud revenue and our total revenue. And, you know, just to bring everybody's attention to the fact that when we think about our business, we think about both cloud and self-managed. And that's the reason why sales-led subscription revenue is such an important metric. And, you know, it came in at 18% this year. So very happy about it, continuing to drive the momentum.

Consumption is strong, commitments are strong, and we feel really good about the rest of the year. that that's really good to hear and then maybe for Novama just a follow-up you know all of your reported growth metrics were strong including both CRPO and RPO all kind of growing in the mid-teens or better I'm curious though you know billings isn't a key metric for you guys but you know it did lag some of those focus metrics wondering if you could talk a little bit about you know why that was the case thanks yeah thanks for the for the question Matt and I agree with you, Q2 to us was a great quarter.

We saw strength across the business, and what matters to us is commitments and consumption, and both commitments and consumption was strong. You noted correctly, CRPO grew 17% in Q2 compared to 16 last year, and also RPO grew 19%, and that was because of the strength of the multi-year commitments that we laid out. So overall, the commitment side of the business was very, very strong. Now, as it pertains to your specific question on the year year compare. Going into the quarter, we expected variability in the second quarter for a few reasons. And one of the main reasons is seasonality. And you have to keep in mind that last year was anomalous because of a weaker Q1 commitments that we saw. So the billings distribution, the revenue distribution in last year throughout the year was just atypical. So you can't over-index on the quarterly seasonality this year. And as a matter of fact, when you think about sort of the ACV, which doesn't have the cross-currents of billings, the ACV growth this year to date is stronger than what it was last year to date, right? And that's a great sign. And then the second point I want to make was you all know there was a government shutdown that impacted our third month of the quarter, impacted everybody, and that caused a few renewals, specifically self-managed renewals, to slip from Q2 to Q3. But net of all that, From a commitment perspective, the business is seeing really strong commitments, consumption is going good, and also the pipeline side is seeing strong growth as well. And that's what gave us confidence to raise the guidance to the back half of the year meaningfully. And keep in mind, you know, since Q1, we've raised FY26 by 34 million or 2% year over year, and that's mainly because of the commitment strength of the business.

Great to hear.

The next question comes from Koji Akira with Bank of America. Please go ahead.

Yeah, hey, guys. Thanks so much for taking the question. And so definitely appreciate the newly introduced guidance for sales-led subscription revenue. And so I wanted to ask kind of the compositions of that. I know underlying assumptions around monthly cloud, should we assume that's roughly flat with where it was in the fiscal second quarter? And that really leaves cloud and self-managed as the other inputs. And I do think cloud is probably the more watched metric of the two, and so I'll focus there. And so what should we assume is implied in the guide there? Is cloud growth higher, the same, or lower compared to the fiscal second quarter to get to that sales-led subguide? Thank you.

Sure. So this is the first time we're doing a sales-led subscription revenue guide. We are doing it because it's one of the most important metrics of the company. That's what we drive our salespeople to go and get commitments for, both cloud and self-managed. We also detailed what our medium-term targets are for sales-led subscription revenue. So because of that, we thought it was very important to start guiding to sales-led subscription revenue in addition to disclosing sales-led subscription revenue. So in terms of what the composition of that number is, it's what our sales team drives other than the monthly cloud self-serve business, which we, as you mentioned, expect it to be moving along the SMB segment. We expect it to be flat. So we're not – if it grows, that's great, but our goal is to drive what the sales team delivers from a commitment perspective, which is the self-managed commitments and the cloud commitments. And our expectations for how commitments and consumption flows is detailed in the guidance side. And as I said, we're very pleased with how Q2 went, and we're very pleased with being able to raise the full year by another percentage point from just a month ago.

Got it. Thank you. And maybe a follow-up, just focusing on that sales-led subscription revenue result of 18%, 17% in constant currency. Last quarter was 22%, and I know there was some cloud kind of tailwinds there, pricing tailwinds in there. So maybe excluding the pricing tailwinds, can you help us bridge the gap between the growth between the second quarter and the first quarter on sales-led sub-growth? And was there any Gen AI revenue growth contributions in the second quarter this year that you can call out?

Yeah, let me maybe first start by addressing this, you know, because we've talked about this at least in the last 90 days. And I think the most important thing to understand is looking at pricing in isolation is just an incorrect way to look at our overall model. When you're looking at a consumption business, there are lots of factors that lead to an increase in consumption. First is when customers bring new workloads onto the platform, when customers increase the data that's coming into the platform, all of those things increase the consumption. At the same time, we are constantly making our platform more efficient. In the past, we've released functionality like searchable snapshots. We've released functionality like LogsDB, like TSDB. All of these things make it possible for you to execute the same workload with fewer resources. When we come up with support for new instance types from the hyperscalers, that also makes our platform more efficient and sort of access something that brings down the consumption. So what we care about is when we look at the net of everything, including the pricing changes that we do from time to time, how is consumption tracking overall? And net of all of these things that push consumption up or push consumption down, the net consumption has been very strong. So we see our customers consuming on a really healthy way. We see them bringing new workloads onto our platform. We are capturing new commitments and new wins, like the ones that we detailed. Sysa is one of them. But all of those large commitments are going to turn into revenue over time. So fundamentally, trying to disaggregate pricing as one element is just wrong, and I would encourage you to not look at it that way, but look at the net.

To also add to that what I talked about earlier, which is you have to remember that not to over-index on a single quarter because the seasonality aspects of this quarter are very different from what it was last quarter, right? And the second point I want to make is that because of the renewal slips, you are seeing self-managed revenue change its shape from the second quarter to third quarter as well.

And by the way, one thing to say about those renewal slips, those government customers are continuing to use our software. They're very happy with our software. So we just expect those renewals to come in in Q3. You know, there wasn't anybody that was working during that shutdown in those agencies to be able to process those orders. So, you know, those are firm customers, you know, firm workloads for us, just a shift from Q2 to Q3. Thanks, guys.

The next question comes from Sanjit Singh with Morgan Stanley. Please go ahead.

Thank you for taking the question. I actually had a two-parter for you. If we can rewind back to the go-to-market changes at the beginning of last fiscal year or the beginning of the fiscal year, sort of mark-to-market where we are from a productivity standpoint, it sounds like productivity is going well. And if that's the case, is there a case given the momentum you're seeing with commitments to drive more capacity on the sales side? So maybe we tackle that first and then add a follow-up.

Yeah, absolutely. So you're exactly right that the changes that we made six quarters ago are clearly now showing, you know, bearing fruits, right? So this is the fifth quarter of strong sales execution that we've seen. The commitments are doing incredibly well. And what that means for us is, you know, both the way our sales teams are executing, the kinds of deals they're able to get across the line, and what that means for our future is very, very bright. So absolutely, like we've said in the past, this is an investment year for us. We are continuing to invest both in terms of our go-to-market capacity on the selling side, but also in AI where our engineering differentiation is helping us win these deals, not just on the search side, but also differentiate with things like streams and significant events and observability and with attack discovery and other capabilities and security. And so those are the areas that we will continue to invest in.

We expect to see the returns as we go along. and then my follow-up ash is sort of uh on rag you know as we have the industry conversation that we talked to some leading engineering departments at innovative companies there does seem to be a friction with rag there still seems to be the hallucination problem chunking data seems to be a complicated um task if you will and so when it comes to like monetizing your guys' AI search capabilities, is there a world where you have opportunities for growth outside of RAG, maybe some of the agent builder stuff that you discussed on your script? Just to give your point of view on how durable is the RAG opportunity, and then are there other ways to monetize the company's AI search capabilities outside of RAG?

Sanjit, it's really an and, not an or, because the way you should think about it is, fundamentally, it's all about connecting your private data with the large language model to make that large language model actually become relevant in the context of your business and your enterprise workflows. So that's really what it's all about. Now, the thing that you're pointing out is building these kinds of agentic applications takes some amount of work because getting that relevance just right. And by the way, relevance has always been our sweet spot. We specialize in messy, unstructured data. We specialize in relevance. This is what we've been doing the entire existence of the company. And so we are specialists at this, and we do this better than just about anybody else. But the complexity of this whole effort is what we are continually working to simplify, and that's what AgentBuilder does. AgentBuilder, under the covers, uses our vector database, uses our hybrid search capabilities, but also comes with embedding models that we have tuned to make sure that they can perform incredibly well for that grounding to connect the LLM to your data. That was what the acquisition of GINA AI was all about, to bring multilingual and multimodal capabilities to everything that we could do. So Agent Builder will absolutely be yet another way for us to monetize our core strength in context engineering, but it's going to be an and.

Understood. Thank you, Ash.

The next question comes from Ray Molinstra with Barclays.

Please go ahead. yes um you talked about the slippage in the quarter like the one question i got from a lot of people was like um historically you guys kind of beat in the quarter by a little bit more and obviously i appreciate we have a new cfo so there could be a new guidance philosophy but like but there also could be just a slippage situation um how how does how do you think about the quarter i i appreciate the bookings but like on kind of cloud speech on total revenue the beat level was kind of lower than what we've seen before. Were there any kind of puts and takes turn?

Yeah, Remo, thanks for the question. You may remember that we guided the quarter in the beginning at the end of Q1, and we also updated that during Financial Analyst Day, which was just a month ago. And at the time, we gave you a much closer to the pin number for the quarter and the year. And as I mentioned, the second quarter was a very strong quarter, so we We beat that number by $5.5 million in Q2, and we raised very, very healthily $16 million at FAD and another $34 million in total. A total of $34 million. A total of $34 million from Q1 to Q1 for the year. So we feel the business is going very well. The guidance obviously gives you a sense. The guidance closer to the quarter gives you a sense of where the quarter is ending. So that's the first point. The second one on the slips, you know, this was expected variability in the quarter. Like I mentioned, we don't over-rotate on a single quarter's performance. But the renewal side obviously is going to come in the year, and that's reflected by our strong year. And the booking shape is just going to be different this quarter than it was last quarter.

Okay, perfect. And then, Ash, one for you. And on the big win in SIN, do I have to think about that as, like, you know, or maybe broader, like, is this kind of like there is obviously a player that used to be strong in that space, that it's takeaways from that, or, like, what do you see in your sense of team momentum?

Yeah, actually, both of our – the two largest deals this quarter were both, you know, $20-plus million security wins. And, you know, what this highlights is just the level to which our security offering has evolved and matured and the AI capabilities that we offer are absolutely unmatched. And you're seeing an organization like CISA, the Cybersecurity and Infrastructure Security Agency of the United States. I mean, this agency is responsible really for shaping the direction of cybersecurity for all federal civilian agencies in the United States government. And them choosing Elastic to offer a SIM as a service on Elastic Cloud is an unbelievable endorsement. You know, it just shows the strength of the platform, the flexibility and capability, the AI capabilities. And as you can imagine, these kinds of agencies have been using other incumbents in the past. So this is a consolidation onto our platform. This is us taking share. This is us now really being in a place where, with all the experience that we've had with our security technology, now really demonstrating what we can do. And this is very exciting, the way I look at it going forward.

Okay, perfect. perfect congrats thank you the next question comes from rob owens with piper sandler please go ahead great uh good evening and thanks for uh for taking my question here um ash want to build on one of your initial comments in your script about how ai is possibly impacting all areas of the business and appreciate you know all of the color that you've given and the question's really around ezra's a percentage both of overall customers and of large deals and it's great to see that growing. I think it was 23% of your 100K deals, but why isn't that number greater? If everyone has some level of proof of concept right now going on in Gen AI, where's the unlock for Elastic relative to those types of opportunities? Thanks.

Yeah, that's a great question. A couple of things to keep in mind. First of all, the number that we've given is only on Elastic Cloud because that number is something for which the telemetry that we see is very, very clear and it's sort of indisputable. For customers that are using us on self-managed, we have many customers. You know, I gave one example in my prepared remarks of a financial services institution that is using us, and they are using us in a self-managed way. So for those, you know, those are over and above the numbers that we sort of call out. So the penetration is growing. It's meaningful. Like you called out, 23% in our 100K cohort. So we feel really good about it. As more and more companies start to deploy more and more of these kinds of applications, I would expect our penetration to grow. I would expect the breadth of revenue that we capture from each of these accounts to grow. As Navam had outlined in our financial day, you know, financial analyst day that happened about a month ago, So in the cohort of AI users, we see them growing faster than the rest of the cohort. So that, to us, is a very important metric. We measure it. We track it. We are constantly looking to make sure that we win the AI workloads in every account. You know, this is going to be something that we just keep working on. It's going to keep growing.

All right. Thanks for the color.

The next question comes from Brian Essex with J.P. Morgan. Please go ahead.

Good afternoon, and thank you for taking the question. I guess maybe ask for you, I'd like to dig into the security side of the business a little bit. Would love to understand what you're seeing competitively, whether the deal wins that you're seeing are against or at the expense of more observability-focused vendors. And are you starting to see maybe what I'll call some of the next-gen security platform vendors more frequently in the marketplace? And I have a quick follow-up.

So when it comes to security, we tend to see all the players that you would think of. We consider ourselves to be the leading next-gen security sim platform out there. So from that perspective, we tend to typically be the ones displacing incumbents. And the reason why we see that is, first and foremost, security is a data problem. I think everybody is starting to say that now. And our back-end data platform is the best in terms of the flexibility, the scalability that it offers. We were built first and foremost as a data platform, and that allows us to do the kinds of analytics that others struggle to do. The second thing is our AI functionality. That, again, comes back to our core differentiation, and we are able to apply that AI depth to things like attack discovery, which are capabilities that, again, are very, very differentiated, which allows somebody to reduce massively the amount of time that it takes to do the actual threat detection and then remediation of that problem. So that's where we are seeing a lot of success displacing incumbents. On the observability side, we tend to lead with log analytics. And when it comes to log analytics, that's where we land, and then we expand into metrics and traces. So, you know, as you can imagine, the number of players that are able to do sophisticated log analytics at scale is a very small number. And so we have a very, very differentiated advantage, especially with new AI-related features like streams, like significant events that we talked about in the Financial Analyst Day. And that's what is helping us, you know, win these deals faster. So of the five deals that were over $10 million, like I mentioned, two were security, the largest two, two were observability, and one of them was AI. So there is a really nice breadth of wins that we are seeing, and each of our business areas is seeing great success.

Got it. Maybe just to follow up on that point, you know, we've seen a couple of recent acquisitions by some of the larger platform vendors. We saw the acquisition of Quantosphere last night and then Onum a little while earlier from CrowdStrike. Any initial thoughts on those and whether or not you see those in the marketplace? Are they, you know, maybe responding to the capabilities that you have in that space in that regard?

Yeah, it's a great question. And, look, we've been talking about the fact that observability and security are two sides of the same coin. We've been saying it now for at least the last seven to eight years. and it's because fundamentally it's all about the data. The two things I'd say is, one, we have the best data platform, like I said, in terms of our ability to scale, in terms of our flexibility. We can bring in all kinds of telemetry, including the telemetry from these other players that you referred to, and we are able to do analysis on them. That's not something that others are able to do. So we have a tremendous way to get into accounts and then expand that others just don't share. The second thing is we've been at this for the last eight years, and we've built out our security capabilities, our observability capabilities. So we are way ahead of everybody in terms of our AI functionality, in terms of our ability to bring in all signal types, you know, and observability, whether it's logs, metrics, traces, in one single platform. So it's a great validation, first and foremost, that others are trying to emulate us. But it also means that, you know, our advantage in terms of us being in this for so long is just showing fruits in terms of the wins that we are seeing, in terms of the customer commitments. And I expect that to continue.

Got it. That's helpful, caller. Thank you so much.

The next question comes from Tyler Rajke with Citi. Please go ahead.

Yeah, thank you for taking the question. You talked about in prior quarters how you introduced some product optimizations into the platforms like the LogsDB product, which cut storage costs for customers that took advantage of that. I was just wondering if you could tie in that dynamic into sort of the cloud revenue trajectory, because obviously last quarter you saw some of the pricing dynamics impacted. And I imagine the optimization side impacted that as well. But I guess, you know, the question is, are most customers kind of through that optimization in terms of adopting the LogsDB product? And now you're starting to see those come on in terms of greater use cases and greater commitments. and perhaps that can sort of drive an acceleration in the cloud growth sequentially just as they've been able to kind of optimize and bring on new use cases?

Yeah, that's a great question. Look, the first thing I'd say is overall data growth is just expanding at an unbelievable pace, right? So the reason why we are constantly introducing features that make the platform more and more efficient is because without us doing that, it would be just near impossible for anybody to be able to really store and analyze all the data that they're generating. You know, data volumes in most organizations is doubling, tripling every year, and it just does not make sense for them to be able to manage all of that. So making the platform more efficient does two things. One, it allows customers to keep up and continue to use our platform in more ways. And second, it makes our platform more attractive for customers to bring other workloads from other observability vendors, from other security vendors onto our platform because we become a much more efficient way for them to do all the analysis that they might have been paying somebody a lot more for. And that's how we grow. So you need to look at everything in the overall context of things. And what really drives consumption growth, Tyler, is the commitments. So as commitments, as we get bigger and bigger commitments, that as it turns into consumption is what drives our revenue. And so what I feel most excited about is not just the fact that consumption has been strong this quarter, but also the fact that commitments have just been absolutely wonderful for us. So that is what gives us a lot of confidence, and you're seeing that reflected in the guide and the fact that, you know, we raised the guide again in such a meaningful way.

I'd add to that the largest – I just want to add to that to what Ash said. Both of our largest deals, the $20 million-plus deals that we talked about were cloud deals, so that's something we'll recognize over time.

Yeah, the $20 million security deals, those were all cloud.

Not the security deals, but we referenced $20 million-plus TCV deals. Both of those largest deals were cloud deals.

Okay. Okay, great. And just a quick follow-up for you, Navam. You talked about ACV growth being stronger in the first half. I assume net new ACV stronger as well. Is that ACV growth kind of tracking above what we see in terms of reported subscription or sales subscription growth too?

Yes, for the reason that cloud revenue trails these subscriptions, right? So you'd have commitments that then eventually turn into revenue over time. Sales-led subscription revenue is always going to trail the ACV aggregate amount that you have. So yes is the answer, and also the point that I made earlier, which is that the ACV growth year over year has been accelerating.

Okay, very helpful.

The next question comes from Miller Jump with Tourist Securities. Please go ahead.

Hey, great. Thank you for taking the question. So, Navant, you mentioned the cloud strength, but you all have also called out some pretty strong data points on the self-managed side as well. So I'm just curious, like, we've talked about strength across all three use cases here. Like, are those distributed the same when you look at the people consuming in cloud versus those consuming on self-managed, or do they skew differently?

There's going to be variability quarter over quarter, so some of them are going to be cloud and some of them are going to be self-managed. Like we said, we incentivize our sales team to go meet the customers where they are, be it on cloud or self-managed. So some quarters we're going to have some self-managed strength and some quarters we're going to have some cloud mix strength. There hasn't been any meaningful change in the mix trajectory. Both of those lines of business are expected to grow to reach our sales-led subscription revenue target that we laid out in the midterm.

Okay. And then just a model question I had was looking, you know, at the monthly subscription, I know that that's not part of the revenue you're guiding to, but it did tick down in the second quarter in each of the last two years. So is there a seasonal element to that, or is there anything else to unpack in this year's downtick?

Broadly speaking, that's going to be self-serve customers that are mostly smaller SMB customers. So we'd expect that line to be flat, and that's our expectation. Our revenue guide of sales-led subscription revenue is basically where we're driving the business to, and which is why we've separated out and given it to you as a guidance point starting this quarter.

Thank you.

The next question comes from Srini Kutari with Robert Baird. Please go ahead.

Yeah, thanks for taking my question. So you called out production, GNI workloads across DocuSign, NHS Seismic as proof points at the Analyst Day. Just curious, how are you seeing these large-scale embedded use cases evolving and just how enterprise customers are deploying workloads involving vector surge inference? Are these usage patterns proving to be more stickier, more voluminous than your traditional sort of log metrics, which I would think are often more compressible and hard to think from an NRR point of view? Yeah, and then how to follow up.

Yeah, let me maybe answer the, you know, what's the nature of these kinds of use cases. So first of all, you know, anybody that's using us for any of the AI use cases, it tends to be more compute-intensive, Shrenik, than if it were just, say, you know, textual search. That's just by nature of what these algorithms are like. And as we described, the cohort analysis that we laid out at the Financial Analyst Day kind of talked about the fact that those cohorts, the AI cohorts, are growing faster than the other cohorts. So that's just something that is built in. You know, if you haven't had a chance to look at that information, I'd encourage you to look at it. But we laid it out at Financial Airlines Day. In terms of those use cases, you know, what we're seeing is broadly across all industries, not just in AI-native companies that are also customers of ours, but broadly across all kinds of enterprises, financial services companies, telcos, government agencies, automotive companies, et cetera. We are seeing broad adoption. People are not just playing around. It's not just pilots, but it's production use cases that we are seeing. So we feel really good about the stickiness of our usage. And our overall AI functionality is so broad. It's not just about vector search. It's a lot more than that. And that's really what creates that stickiness, our ability to ensure accurate relevance.

Very helpful, Ash. And now a quick follow-up in how are you thinking about NRR dynamics broadly since you guys called out the sales type subscription? How is that trending from an NRR perspective? if we can share an update. And I know it's early days, but just curious if the renewals closed in the quarter, what could have been the NRR versus now?

Yeah, the net expansion rate played out roughly where we expected it to be. It's at 112%, which is stable. And that's buttressed by stable gross retention rates as well. And you may remember we described the underlying trends behind the NRR, which is cohort expansion of each of our individual cohorts, and we gave you some details during Financial Analyst Day, all those trends remain very strong. So driven by many other things, including the cohort expansion, we're seeing very good net expansion rates today.

Great. Thanks.

The next question comes from Itay Kidron with Oppenheimer.

Please go ahead. Thanks. Thanks. Ash, the large deal volume is impressive. Is there a way for you to break down the $30 million, $31 million deals into how many of them were renewals versus actually new customers? And also, in that 30, how do I think about potential deals that were pushed out from 1Q into 2Q or perhaps pulled in from 3Q into 2Q?

How do I think about that? let me let me answer the the second one first you know just in terms of uh deals uh moving between quarters like there's always some uh deals that slip a quarter some that uh you know get pulled in naturally this is now i'm talking uh outside of any of the government shutdown dynamics but some of that movement happens naturally anyways uh that's typically just a few deals typically that that happens with. This quarter Q2 was not different from prior quarters. It played out normally just as we would have expected. So there was nothing special there. In terms of the large deals, like, you know, I don't have the breakdown for the full 30 plus deals. What I will tell you is that when we look at the five deals that are greater than 10 million in total contract value, two of them were security deals, two of them were observability deals, and one of them was an AI deal. And one of those, one of the largest deals that we signed was actually a new logo for us. So we do see a good mix of expansion on existing logos where we are cross-selling a new solution or something along those lines. And then there are ones where there are completely new logos. So I talked about in my prepared remarks, one of the world's largest chemical manufacturers. That was a completely new logo for us, and it was a deal over $20 million.

Very good. And maybe as a follow-up, Navam, on your sales-led guidance, I know you look at sales led as a group whether it be self-managed or cloud as both of them as important drivers for you I think the challenge that investors have is that when you don't give more more specific breakdowns on your expectations from cloud to self-manage it's hard to gauge where you internally you're outperform versus underperform and and investors no matter what They're going to be very focused on cloud. So is there any color that you can give us, first of all, on 2Q that you just reported? Did you outperform on cloud or self-manage or underperform in any of them relative to your internal targets? That's question number one. And question number two, can you give us any some sort of a little bit more granular perspective on how to think about the breakdown of your sales-led guide for the third quarter?

Sure thing. Hey, so Ittai, there is no internal breakdown of cloud versus self-managed for our sales team. We give them a quota, and they go and hit that quota regardless of whether it's cloud or self-managed. So we're giving you a metric in exactly the way we think about the metric, right? We don't think about a cloud number. We don't think about a self-managed number. We don't think about migrations from self-managed to cloud. One is not an old platform, and the other is a new platform. This is all one sales motion that we sell our customers to, and there are plenty of AI workloads, modern AI workloads, that are self-managed. So, frankly, we meet our customers where they are, and we are fine with either. So this is basically us informing the street on how we internally think about our metrics. So I think that's important to talk about. And, you know, the sales-led guidance that I gave you in the third quarter was primarily related to the strength we're seeing in the two things that I talked about, the commitments momentum, and we talked about the large deal momentum that we're seeing, which is also a factor in the commitments we're seeing, and the consumption momentum. Both those things are the factors that lead to a strong Q3 number and also, frankly, a very strong full-year number that we increased twice in a row now since the end of Q1.

I appreciate it.

The last question comes from Jacob Roberts with William Blair. Please go ahead.

Yeah, thanks for taking the question. You referenced the CISA deal during the quarter, but can you talk about how the rest of the federal business came together? And then you mentioned there was some impact to term license in the quarter from the shutdown. Would you expect that to catch back up pretty quickly during the third quarter? in any way to kind of size that impact that it was the Q2?

So let me maybe start with that. So, you know, the best way to think about our overall performance in the U.S. public sector was great. Like, absolutely, we were very happy with the performance in the team. Obviously, we had one less month in the quarter when the teams were able to close meaningful business, but they were able to work around it. Demand remains very, very strong, and the execution of the team was excellent. And the CISA deal, you know, came in in the month of September before the shutdown happened. So all of that worked out very, very nicely. In terms of the renewals that slipped from Q2 to Q3, the best way to think about it is those were renewals where the customers are still using our product. So, you know, we did not take the approach of, you know, shutting them down. We just let them continue using it because we know that when we knew that when the government reopens, that they will process those orders. So that's the right way to think about it. So those renewals will come through in Q3. And so it's not business that's at risk. It's just something that slipped because the government was shut down.

Very helpful. Thanks for taking the question.

This concludes our question and answer session. I would like to turn the conference back over to Ash Kulkarni for any closing remarks. Please go ahead.

Thank you all for joining us today. So we here at Elastic are very proud of our strong results and are very excited about the opportunity ahead. Thank you.

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