Elastic N V (ESTC) Q2 2021 Earnings Call Transcript

Elastic N V (ESTC 1.60%)
Q2 2021 Earnings Call
Dec 02, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Elastic's second-quarter fiscal 2021 earnings conference call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Anthony Luscri, vice president, investor relations. Please go ahead.

Anthony Luscri -- Vice President-Investor Relations

Thank you. Good afternoon, and thank you for joining us on today's conference call to discuss Elastic's second quarter of fiscal 2021 financial results. On the call, we have Shay Banon, founder and chief executive officer; and Janesh Moorjani, 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 accompany this webcast can be viewed in conjunction with live remarks and can also be downloaded at the conclusion of the webcast on the Elastic investor relations website, ir.elastic.co. Our discussion will include forward-looking statements, which may include predictions, estimates, or expectations regarding the impact of the COVID-19 pandemic 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 accompanying this webcast and those more fully described in our filings with the Securities and Exchange Commission. We will also discuss certain non-GAAP financial measures. Disclosures regarding these non-GAAP measures, including reconciliations with the most comparable GAAP measures, can be found in the press release and slides.

The webcast replay of this call will be available for the next 60 days on our company website under the Investor Relations link. Our third-quarter fiscal 2021 quiet period begins at the close of business on Friday, January 15, 2021. We'd also like to inform you that we will be virtually participating in the Barclays Global TMT Conference on December 9 and the Goldman Sachs Technology and Internet Conference on January 12. With that, I'll turn it over to Shay.

Shay Banon -- Chairman & Chief Executive Officer

Thank you, Anthony. I'm glad to be here with everyone today and share the results of our second fiscal quarter. The end of 2020 is upon us and what year it has been. As we closed out Q2, I reflected on the importance of empowering our community of customers, partners, and users with the same resilience we strive for as a company.

We are building the business for the long run. A business that is there for our customers today and tomorrow, and I feel fortunate to say that I believe we are well on our way. We had a great second quarter as total revenue grew 43% year over year. We ended the quarter with more than 12,900 subscription customers, including over 650 with ACV of more than $100,000.

I'm proud of how well the team executed in an ongoing mixed demand environment, delivering a strong quarter for us. This can't be done alone, so thank you to our entire community for joining us on this journey. In the quarter, it was fantastic to see so many of our users come together during our first virtual conference, ElasticON Global. More than 25,000 registrants from more than 80 countries signed up to participate.

We had more than 300 sessions that showcased how our solutions help customers drive outcomes with data, insights, and action. We were pleased to have our strategic partners, Google and Microsoft, participate as sponsors and presenters at the event. I was especially excited to have Google Cloud's CEO, Thomas Kurian, speak about our continued partnership during the opening keynotes. It's wonderful to have that level of executive engagement.

I was also happy to see so many of our customers speak and share their stories at ElasticON Global, including Cisco, Audi, Rocket Homes, and Wells Fargo, all of whom renewed business with us in Q2 as well. Achieving this level of engagement on a global scale doesn't just happen overnight. It all starts with the power of our developer community. We earn their mind share every day with openness and transparency as they adopt, shape, and champion our technology.

Our three solutions, Enterprise Search, Observability, and Security, actually built into a single stack make it possible for us to innovate once and apply everywhere. In turn, it's easier for customers to adopt one solution and expand to another. Combine that with the customers' power to choose where they run, cloud, on-premises, or in hybrid environments and the simplicity that comes with a unified pricing model, they're able to grow with flexibility, not friction. And it's all underpinned by the power of Search, the fastest way to go from data to insights to action.

At our financial analyst meeting, I talked about a few innovations where we've built one in the Elastic Stack and applied everywhere. There is Elastic Agent, our unified agent, which is currently in beta. It allows for data collection across Security and Observability use cases in a single click. Kibana Lens, which became generally available in Q2, delivers powerful, intuitive drag and drop visualizations anyone can create with any kind of data.

And then there is searchable snapshots, a paid enterprise-level feature for storing more data on local storage options like S3 with the appropriate performance. It's now available in beta in our 7.10 release. I am super excited about the value this capability will unlock for our customers. Our journey with this new capability is just beginning.

In Q2, we saw a strong broad-based demand across our business and executed well across our diverse portfolio of customers, including the U.S. federal sector and global public sector. The team delivered great results across all of our solutions. I'd like to share a few highlights with you.

I'll start with our Enterprise Search solution, which powers search across websites, applications, and workplaces. It's easy to use, easy to scale, and easy to connect. It helps increase productivity and improve customer engagement. We're creating a consumer experience built for the enterprise.

With this solution, it's easier to find things than to lose them, including your slacks. In our 7.10 release for Elastic Workplace Search, we delivered more out-of-the-box connectors for more content sources. In a few clicks, customers can search across Slack, Google Drive, Microsoft 365 ServiceNow, and more. This release also delivered enhanced controls for admins to personalize who can access what with our paid proprietary security capabilities.

Security capabilities matter to our customers. For example, a prominent U.S. government entity closed new multiyear business with us in Q2, and they needed granular security controls to surface the right content to the right people for both their public and internal facing applications. Another example from Q2 where an enterprise consumer-like experience is being built comes from a leading U.S.

aerospace company. They renewed business with us because Elastic powers the search for their aircraft maintenance program. This is a vital function that helps the team quickly find parts, repair schematics, and anything else they need to keep their aircraft flying safely. To add to all the goodness, our recently released searchable snapshot capabilities open up new potential for our customers by making application content and historical workplace records searchable.

You want to search across years of email without breaking the bank, we're making this possible by unlocking search across cost-effective object stores like S3. Let's turn to our Observability solution, which unifies long, metric, and APM data analysis into one place. It's easy to use, eliminates data silos, and lowers mean time to resolution. This is why customers like Singapore-based, multinational ride-hailing, and food delivery company, Grab, renewed, and expanded business with us in Q2.

They use Elastic for log analytics to monitor pickup and drop-off logistics, analyze the cost associated with waiting time and search latency across their taxi, ride-sharing, and food and grocery delivery services. Another example from Q2 comes from a global payment company, who renewed multiyear business with us. Elastic helps the company power multiple use cases from log analytics to APM to real-time business monitoring across high volumes of global transactions with a single technology stack and unified pricing. And we continue to innovate in this space, adding even more value to our customers.

In our 7.10 release, we invested in helping organizations step into their end-users' shoes and monitor digital experiences with our user experience app in Kibana. We've also made it easy to measure against core web vitals that help developers and website owners interpret digital experience signals. Additionally, we released one-click workflows that enable prebuilt machine learning jobs to detect common infrastructure issues like CPU spikes in Kubernetes Pods. And our new surgical snapshots capabilities helped keep Observability data from logs to metrics to traces, online and searchable for longer.

In fact, I recently met with several senior leaders at a large U.S. financial services company who renewed multi-year business with us for log analytics. They were very impressed by the journey we're taking with searchable snapshots. It can immediately add value to their log analytics workloads by allowing them to keep all their logs online for longer and at a lower cost.

They also see tremendous opportunity with other use cases like APM. Moving to our Security solution. We made a number of investments in this space with our 7.10 release. Security practitioners are equipped better than ever to stop security hacks at scale.

New correlation rules help automate detection and prioritization of complex threats while reducing alert fatigue. We invested in helping eliminate blind spots by adding more security for cloud and remote users with prebuild detections for Azure, Google Cloud, and Zoom. And with our searchable snapshots, threat hunters and analysts have years of high-volume security data stored on object stores like S3 at their disposal for long-term historical search and analysis. We continue to see customers rapidly adopt Elastic for security in Q2.

We saw this with an expansion at a global online travel agency for lodging and reservations. Even in a challenging environment, they saw the value in investing in a unified security approach that helps them to manage total cost of ownership and focus on business outcomes while allowing for internal compliance and auditing mechanisms. And the theme of solving multiple use cases is alive and well. After all, while you observe, why not protect? Bell Canada renewed multi-year business with us in Q2 for operations and network security.

Additionally, a large property, casualty, and auto insurer in the U.S. closed new multiyear business with us in Q2 for security. This use case complements their existing Enterprise Search and Observability workloads with Elastic. The ability to address multiple business needs with a single technology has been a driver in helping them optimize cost and reduce complexity.

Now, to our cloud business. We make it easy to deploy and scale our solutions with Elastic Cloud, which is available on AWS, Google Cloud, and Microsoft Azure. The ease of use and simplified management that comes with adopting Elastic Cloud resonates with our customers. For example, Rocket Homes, whose parent company is Rocket Companies, renewed and expanded their business with us in Q2.

They run on Elastic Cloud in order to simplify cluster management and get additional value from our ecosystem of proprietary features. They use Elastic to power application search across massive amounts of property data. With COVID and the current housing market, speed is literally the name of the game. They have to surface relevant results to their customers with remarkable speed in order to compete.

We continued to invest in our cloud offering in Q2. We expanded into new regions, including AWS Mumbai and two Asia regions for Iowa and New South Wales. We also announced billing integrations with Azure Marketplace, making it simpler for customers to buy and scale for their use case and consolidate their appeal. In looking at our company at large, we remain committed to creating inclusive, equitable, and diverse environment for business success.

In Q2, we announced a program for supporting veterans in technology, held a panel at ElasticON Global on diversity and inclusion, and received third-party recognition as a great place to work for women in technology. We continue to build a diverse and distributed company. Diversity and being distributed applies to us on many levels, from the strength of our customer portfolio to the freedom we give our customers to run Elastic where and how they want. Diversity also applies to uniting disparate data sources into a single stack to solve multiple use cases and enable our unified pricing model.

We'll continue to be where our users are and we'll continue to help them solve the challenges they face. We have a large market opportunity before us. We continue to see our solutions align with customers' spending priorities. This is validated across industries, geographic regions, and businesses of all sizes.

As we discussed during our analyst meeting, if we look at our customers over $100,000 ACV, over 50% just use one solution. But when you get to $1 million ACV, over 75% use two or more solutions. As a reminder, solutions in this context are Enterprise Search, Observability, and Security. For instance, if a customer uses log analytics and APM, that counts as one solution, Observability, not two.

This shows we have strong vectors of growth to capture the significant opportunity before us. Taken together, all this is key to our resilience now and in the long term. I am proud of the team for their strong execution in the quarter. I'll hand it over to Janesh.

Janesh Moorjani -- Chief Financial Officer

Thanks, Shay, and thanks again to everyone who joined us on our inaugural financial analyst meeting some weeks ago and for joining us today. Q2 was an excellent quarter for Elastic. We, once again, delivered strong performance on all our key growth and profitability metrics. During the second quarter, the demand environment remained generally similar to the first quarter.

As expected, we saw some headwinds from COVID-19 related to overall spending and slightly longer sales cycles as compared to pre-pandemic levels, offset by tailwinds in cloud and adoption of our solutions. Our execution against this backdrop remained consistently strong. Let's jump into the numbers. Total revenue for the second quarter was $144.9 million, growing 43% year over year.

45% of our revenue came from outside the United States. We believe our geographic distribution continues to be a long-term strength of our business model. Subscription revenue totaled $134.2 million, comprising 93% of total revenue. The strength in subscription revenue growth at 46% year over year despite the pandemic demonstrates the importance that customers place on our Enterprise Search, Observability, and Security solutions.

Within subscriptions, revenue from Elastic Cloud was again strong at $37.4 million, growing 81% year over year. We saw strength in both our annual SaaS business, as well as our monthly SaaS business. Elastic Cloud continues to be a key strategic area for us. We have rich feature advantages over other cloud offerings and continue to invest in expanding our reach and our partnerships.

We remain confident in continued strong growth in Elastic Cloud looking ahead. Professional services revenue was $10.7 million, comprising 7% of total revenue. As I've said before, services revenue can fluctuate across quarters depending on the timing of projects and delivery. Moving on to calculated billings.

Calculated billings in Q2 grew 42% year over year to $177.7 million. In terms of geographic growth, EMEA grew the fastest, followed by the Americas and then APJ. Within the Americas, we also saw strong performance in the U.S. federal business during the quarter.

We are proud of the presence we've built in the federal space and our sales execution in the segment. At the end of Q2, total deferred revenue was $309.2 million, up 54% year over year. Remaining performance obligations totaled approximately $644 million, up 57% year over year. Although we do not actively manage the business to a target contract length, contract lengths were slightly longer compared to a year ago and were a little over 1.5 years on average.

As a reminder, our monthly SaaS business has no deferred revenue or remaining performance obligations. Turning to customer metrics. As of the end of Q2, we had over 12,900 total subscription customers and over 650 customers with annual contract values above $100,000. Our net expansion rate ticked down a couple of points compared to Q1 but remained modestly above 130%.

Our continuing strong customer metrics demonstrate the strength of our business model as customers initially adopt Elastic and then grow their spending with us as they extend Elastic to multiple projects and multiple solutions over time and as their overall data footprint grows. Now, turning to profitability, which is non-GAAP. Gross profit in the first quarter was $111.5 million, representing a gross margin of 76.9%. We continue to track well relative to our expectations.

In the near term, Elastic Cloud will remain a modest headwind to gross margin overall as we continue to invest to drive growth. Looking at operating expenses in Q2, we increased our investments in the business as we expected and as we laid out in our prior call. Our operating loss in the quarter was $1.7 million with an operating margin of negative 1.2%, which was better than expected, primarily due to the strong revenue performance in the quarter. This reflects the operating leverage inherent in our business model.

Net loss per share in Q2 was $0.03 using 86.4 million weighted average shares outstanding. Turning to free cash flow. Free cash flow was negative $18.6 million in Q2. As a reminder, we look at free cash flow and free cash flow margin primarily on an annual basis since there are both seasonal and timing effects in any quarter, making quarterly cash flow inherently lumpy.

Through the first half of fiscal '21, free cash flow was positive $3 million, reflecting our progress toward being free cash flow positive. We are pleased with our progress so far this year and continue to expect free cash flow margin of approximately negative 2% to negative 4% in fiscal '21 and positive free cash flow margin in fiscal '22. Before I move to guidance, I'll remind you of the overall framework that we laid out for the year. As we shared at the start of this fiscal year, we assumed in our model that COVID-19 would likely create headwinds to calculated billings for a couple of quarters and that we would then see gradual improvement beyond that.

The first half of fiscal '21 has played out as we expected in terms of those demand patterns. However, given the global situation with the pandemic, our current assumption is that the mixed demand environment that we experienced in the first half will continue for the rest of the fiscal year. Previously, we were expecting the environment to gradually improve during the second half. At the same time, our strong execution in the first half of this fiscal year gives us the confidence to raise our revenue and profitability outlook for the full year.

And we continue to increase the level of investment in the business, commensurate with the growth opportunity we see in the long term. We also expect to see continued significant savings from travel and events as we have in the first half of this fiscal year. I'll remind you that we expect our spending in these areas to return to previous levels in fiscal '22. With that, for Q3, we expect revenue in the range of $145 million to $147 million, representing a growth rate of 29% year over year at the midpoint.

We expect non-GAAP operating margin in the range of negative 8.5% to negative 7.5% and non-GAAP net loss per share in the range of $0.16 to $0.14, using between 88.5 million and 89.5 million ordinary shares outstanding. And for fiscal '21, we expect revenue in the range of $568 million to $572 million, representing a growth rate of 33% year over year at the midpoint. We expect non-GAAP operating margin in the range of negative 7% to negative 6% and non-GAAP net loss per share in the range of $0.40 to $0.32, using between 87 million and 89 million ordinary shares outstanding. In summary, we had a strong second quarter and executed well in the current environment.

Although we expect continued headwinds from COVID-19 and broader customer spending trends, we believe that the tailwinds of cloud and our solutions adoption position us well for the rest of this fiscal year and beyond. We've built a strong foundation from which to capture the tremendous market opportunity ahead of us. With that, let's take questions. Operator?

Questions & Answers:

Operator

I will now begin the question-and-answer session. [Operator instructions] Our first question today comes from Brent Thill with Jefferies.

Brent Thill -- Jefferies -- Analyst

Thanks. Good afternoon. I'm curious if you could just characterize the demand environment and what you saw later in the quarter as you went through October? And curious if anything dynamically has changed for you in terms of how the customers are feeling or expert signatures to sign off? Are you seeing kind of more of the same behavior you've seen earlier in the year? Thank you.

Janesh Moorjani -- Chief Financial Officer

Hey, Brent, this is Janesh, and maybe I'll start with that. So first off, as I just reflect back on Q2, we saw really strong execution across segments and geographies. So we were really pleased with that approach. In terms of the demand environment, I'd say it was steady.

It was very similar to Q1. And generally, it remained mixed as we expected with headwinds and tailwinds similar to what we've talked about before in the form of slightly longer sales cycles, but customer spending generally shifting toward areas where our solutions are very well positioned. And so we've seen continued momentum in the business. Our pipeline and our top of funnel activities, all of that continued at a pretty good pace throughout the course of the quarter.

And we also expect that looking ahead, customers will continue to be similarly careful as they've been in the first half of the year, they'll take a similar approach we expect in the back half. So I'd say so far, the year has played out largely as we expected. And we do expect that, as I've mentioned in the prepared remarks, that the macro will stay similar in the back half to what we've seen so far. In terms of linearity and how the quarter played out, it played out pretty well.

Q2 for us, it followed normal patterns. August is usually a little bit slower and September is a little bit faster than that because of the federal year-end. And as with any other software company, we have a typically stronger third month. So we saw it play out again normally and as we expected.

But overall, it was a really strong quarter and we're looking ahead to the back half and feeling pretty good about it.

Brent Thill -- Jefferies -- Analyst

And just a quick follow-up on federal. Maybe just give us a sense, did that exceed or kind of meet your expectation? Any color on the overall execution there would be helpful. Thank you.

Janesh Moorjani -- Chief Financial Officer

Yeah. It was a really strong quarter in federal as well. And congrats to our team for delivering yet again. The Fed business, as we know, can be a bit lumpy, and our performance is not always like the federal fiscal year.

But despite that, I think the team did a remarkable job. In fact, we also pulled in a few million dollars of business that was expected in Q3. And so the team did a really good job on that front. Overall, we are proud of the way the team has delivered.

We are continuing to invest in federal and are really excited about the opportunity in not just fed but public sector globally for us.

Operator

Our next question comes from Raimo Lenschow with Barclays.

Pree Gadey -- Barclays -- Analyst

This is Pree Gadey for Raimo Lenschow. I wanted to ask you about your net expansion rates. It looks like they've been pretty strong, but your peers are seeing some of those rates fall off. So I'm kind of wondering how much of the strength that you're seeing is coming from some of the e-commerce tailwinds in Observability and Security?

Janesh Moorjani -- Chief Financial Officer

Hey, Pree, this is Janesh. You cut off in the earlier part. You mentioned some rates. Can you just repeat the earlier part of the question?

Pree Gadey -- Barclays -- Analyst

Sorry. Your net expansion rates.

Janesh Moorjani -- Chief Financial Officer

Got it. Yeah. So I'm happy to talk about that. We've had a pretty strong track record of driving expansion within the customer base.

And we saw that again in Q2, both with the growth in the customer count over $100,000 ACV, as well as our net expansion rate being over 130% once again. The net expansion rate did dip a couple of points in Q2, just reflecting the broader demand trends that we referenced, both headwinds and tailwinds. But looking ahead, in terms of customer dynamics across verticals, we expect that the second half will be similar to what we've seen in the first half. The verticals that are more adversely impacted by COVID like hospitality and transportation continue to be soft.

And verticals that have been beneficiaries, spending in areas like e-commerce continues to be strong. But overall, as I think about the customer dynamics and the impact of the pandemic, that can impact new business, renewals, and expansion. It just mirrors customers spending more broadly. So I'm not discretely thinking about a specific percentage or a number in any of those areas.

But just as we think about the business in the aggregate, we just feel really good about the relevance of our solutions and how well they are aligning with customer priorities at this time. So we feel pretty good about the longer-term opportunity we have.

Pree Gadey -- Barclays -- Analyst

Thank you. And I was hoping you could give us an update on the competitive dynamics around the observability area. How much of you having that security piece is helping you win deals?

Shay Banon -- Chairman & Chief Executive Officer

Yeah. I'm happy to take it. It's Shay here. So first of all, when it comes to our observability use cases, we feel very good about it.

We feel we're leading the tack, if you will, when it comes to the applicability of the broad-based observability market, which is the consolidation of multiple markets historically from IT operation logs to APM to infrastructure monitoring. We have been investing in it for years. We have invested heavily on the technology stack, single technology stack. We're treating them as features and not as product, with a unified pricing model.

And it really resonates with our customer base because they really feed the need. The outcome is the same. The ability to observe the infrastructure and then act on it whether when something goes wrong, sadly, sometimes, or be in front of some of the challenges that they might have. So that's one aspect.

As you mentioned also, though, we do see the overlap between observability and security. If you look at operational logging, where we started as a company and where we're the strongest now, every log event is also a security event. So that's why we're investing heavily in the security market. And we're actually seeing end-users being really excited about the ability to treat observability data as security data.

And the fact that they can do it is thanks to our investments in a single technology stack, the fact that everything is stored in the same place that you can weave in through these data sets, whether you talk about them as observability or security using a single search query, that's extremely powerful. And that's what we're delivering to our customer base and it's reflected by the adoption of our software.

Pree Gadey -- Barclays -- Analyst

Thank you and congrats on great results.

Janesh Moorjani -- Chief Financial Officer

Thank you.

Shay Banon -- Chairman & Chief Executive Officer

Thank you.

Operator

Our next question comes from Mark Murphy with J.P. Morgan.

Pinjalim Bora -- J.P. Morgan -- Analyst

Hey. This is Pinjalim on behalf of Mark. Congrats on the results. Shay, I just want to ask you about schema on read.

We have always heard that schema on read is something that Splunk and Sumo has and Elastic does not have and that kind of results in a better ease of use for those platforms versus Elastic. But now, you have schema on read. So how should investors think about that? I mean, do you think it elevates the ease of use of the platform versus competition and it makes it much more consumable to a non-developer audience? Or does it actually increase the latency for search?

Shay Banon -- Chairman & Chief Executive Officer

Yeah, of course, happy to touch on it. So we announced our investment in schema on read. We called them runtime fields in our ElasticON Global conference. I just mentioned that we haven't released it yet.

It's slated to be released and then mature over the next few quarters. We're very excited, first of all, about this feature because we are implementing it in a way that is completely seamless to the user and they can go and use these fields to query on, if you will, whether they are indexed in schema on write or whether they're being done on read. And then with a single click, be able to transform it from schema on read to schema on write. When it comes to our investments in it, we start always from fast.

It's easier to start fast and go slower. It's really hard to start slow and go fast. So we always start with fast. We start with fast when it comes to schema on write.

And I would say that we've been innovating quite a bit when it comes to our investments there. We index everything by default. It's magical, like no other system does that. And it's reflected in how fast we are.

But we give our users the flexibility. And with schema on read, we will give them even more flexibility to make that choice between indexing everything by default versus being slower by doing it at real-time. And that can help some usability aspects and ease of use, of course. But we still deeply believe that schema, on write and the capabilities that it provides, provides the best user experience when it comes to speed, ease of use, dashboards being loaded in a snap, threat hunters being able to find attacks in milliseconds, and out of complete boxes responding as you type and not having to wait for it.

That's one of our powerful aspects. I will add a bit on a technical level that I think it's an interesting aspect. We also announced searchable snapshots. That's the ability to store the same data, the same structures that we have in Elastic Search, not on SSDs, and obviously provides these natural responses but on cost-effective measures like S3 and object stores.

And the fact that we have schema on write and as you upload it to this more cost-effective optic stores, even though that's going to be slower due to the fact that it's not SSDs, it's still going to be considerably faster compared to any other system that is doing something similar on something like S3. So schema on write reflects itself and the benefits of it reflect itself not only on how fast, it is for hot data or for snappy dashboards but also how cost-effective it is when it comes to long-term storage.

Pinjalim Bora -- J.P. Morgan -- Analyst

Understood. Thanks for that explanation. And, Janesh, one quick question for you. When I'm looking at the guidance, obviously, you came in well above your guidance this quarter.

You came in well above last quarter. But the guidance in the back half seems like calls for a big slowdown, but it seems like you're saying that the environment that you saw in the first half would be similar in the second half. So I'm trying to kind of put both of that together. Maybe the question is, I mean, what surprised you positively in the first half and in the October quarter, but what your guidance was, but what were you expecting? And then what gives you caution in the second half for that slowdown to happen?

Janesh Moorjani -- Chief Financial Officer

Yes. It's a great question. Overall, as I step back and think about the first half, we executed really strongly. And that was, I think, one of the main drivers for the overperformance that we delivered here in the second quarter as well.

We also saw strength in SaaS overall and that included the monthly SaaS business. We saw a little bit of stronger quarter-over-quarter growth in the services revenue as well. But as I step back and look at the back half of the year, despite the success you had here in Q2 across all dimensions, and we're really proud of that, what we see out there is that the demand environment continues to be unchanged. You will recall that at the start of the year when we first laid out our guidance, we had said that we were modeling the second half of the year to improve.

And at this point, we are just expecting that it will stay status quo in terms of the macro backdrop. So we've seen customers continue to spend with us. We are very comfortable with the way our solutions are relying with their priorities, but it does take them a little bit longer to get there and they're a little bit more thoughtful about that. And sales cycles, as we expected, were a little bit longer, similar to where they were in the prior quarter.

So all of those factors weighed into the thoughts around the Q2 guidance -- excuse me, the back-half guidance. But as I said, we've raised the full year by quite a bit, certainly more than the Q2 beat. So effectively, we've actually raised the back half of the year relative to the prior expectations that we had. And that just reflects the performance that we had in the first half.

So overall, we think that the guidance for the back half suitably balances the near-term opportunities, as well as the near-term risks. And we are confident in the outlook of the year and quite excited about the long-term opportunity set that we have.

Pinjalim Bora -- J.P. Morgan -- Analyst

Great. Thank you so much.

Operator

Our next question comes from Matt Hedberg with RBC Capital Markets.

Dan Bergstrom -- RBC Capital Markets -- Analyst

Hey, it's Dan Bergstrom for Matt Hedberg. Thanks for taking our questions. So new customer additions ticked up -- or ticked back up nicely this quarter versus the first quarter. I know top of the funnel had remained strong.

You called that out, the number proved that out. Is this just seasonal strength here in the second quarter? Or are there more specifics around the higher number of new customers versus last quarter?

Janesh Moorjani -- Chief Financial Officer

Yeah. We're actually quite pleased with the new customer additions that we had in the quarter, especially in light of COVID-19. It was consistent with prior quarters. We've continued to add many customers on both Elastic Cloud, as well as in our self-managed business.

In terms of trends that we saw in the quarter, I'd say, again, it was a pretty clean quarter, straight down the middle of the fairway in terms of new customer adds. We are quite pleased with that. A lot of our new customer adds were on the monthly SaaS business, where also we saw pretty consistent trends. So nothing specific to call out in terms of seasonality.

I think we just continue to execute the playbooks that we have, and the sales team continue to do a pretty remarkable job bringing business home.

Dan Bergstrom -- RBC Capital Markets -- Analyst

Great. Thanks. And then maybe could you talk a little bit more about the opportunity in the installed base. What's driving new product adoption for customers? And then what would help or is driving adoption of multiple product categories for those 100,000-type ACV customers? How does that work more toward the levels of the $1 million-plus ACV customers?

Shay Banon -- Chairman & Chief Executive Officer

Hey, this is Shay here. Happy to take it. So first of all, our go-to-market relies heavily on what we call bottom-up adoption model. We communicate, engage, and work with the creator class, the developers, the threat hunters, the security practitioners, the people that go and hands on keyboard go and implement a search box on a website, make sure that the infrastructure stays up because they're SREs or DevOps, make sure that they go and do threat hunting, right, to implement the right level of company level security that is netted to do that.

And as that adoption happens, and it's important to note that that adoption happens, thanks to value, right? It's like they go, they use the software, there's many products around it. But they choose us, thanks to the value that it brings to them. And those are the people that actually hands on keyboard doing the work. We start to grow.

And either they deploy some cloud or download and run our free and open distribution, and then they start to adopt us through it. As we grow, we grow in multiple factors. The first one is projects become mature, we start to be used more and more within the projects, more data gets aggregated to it. And then thanks to that more resources are being used on our cloud, for example, and then we grow with the customer.

We also sometimes grow because the same use case, for example, logging, is being used not only for one application but for multiple applications. So that's another vector of growth that we love. We get -- we see growth because someone that we started to use us for logging now decides to use this for APM, but has matured significantly over the past two years, and we're very happy with where it stands. And we start to see the adoption of it spike up as well.

And that's exciting because we can provide the user more value for what they spend with us and our value is associated with the growth that they have. All of that, by the way, is enabled by the single technology stack and single-click experience that they have, like moving from logs to APM is a single click and that's exciting for us. And then from there, they can move from one solution like Observability to more solutions across the company, and that can be either Security or Enterprise Search, for example, or vice versa. So all of these are vectors of growth and those drive the growth for us.

Typically, for $100,000 ACV customers, they tend to mostly use a single solution, but I'll remind you that even within a single solution, it might be that they're using logging and APM and other consider them to be different ones. But then as we gate to $1 million base customers, we start to see them adopting us for more than one solution across the company. And that's exciting for me because it's still the same tool, same environment, same API, same UI, same user experience, and same pricing model. And they're very excited about the ability for us to deliver for them more for the same investments that they made before.

Dan Bergstrom -- RBC Capital Markets -- Analyst

Great. Thanks so much.

Operator

Our next question comes from Tyler Radke with Citi.

Unknown speaker

Hi. Good afternoon. This is [Inaudible] dialing in for Tyler today. I have a quick question on like competitively, it looks like Splunk meets their numbers to then start it down and like some of the growth decelerated rapidly.

Meanwhile, for you guys, this growth has been holding steady and is not like going up. Like have you guys seen anything shifted or competitively versus Splunk for the quarter?

Shay Banon -- Chairman & Chief Executive Officer

Yeah. So generally, for us, the competitive dynamic with Splunk remained the same. We're very happy with where we stand in the two fronts that we tend to see Splunk, whether it's in the logging market or the IT operation logs that has evolved to an Observability solution. And in the security market where our SIEM efforts, S-I-E-M, efforts have matured.

We GA-ed the product and we believe that in the next few quarters, we actually have the full feature set to do wholesale replacements for incumbents, but we're being adopted as you've noticed in our earnings call with it already. So in that aspect, we're very bullish about the capabilities that we have. I think we're ahead of the pack when it comes to really treating a single unified product with a single unified pricing versus a combination of multiple products and multiple user experiences. We heard that reflected with our customer base.

They're super excited about the innovation that we continue to deliver, not only within Observability and Security, but also being able to invest in endpoint security, for example, in the security market and start to pull that into the stack with our Endgame acquisition. And also with our continuous innovation to be able to give them the right levels and levers of choice, whether it's with schema on read that was mentioned before or the ability to store more data at cheaper cost on object stores like S3. So all these innovations are just amazing, and the team is delivering on products that ends up delivering value, and that's reflected in our adoption and the customer reactions to it.

Unknown speaker

Thank you. I also want to touch on the margins question. It looks like you guys are going down way faster than before. I just wanted to see how should we be thinking on the cadence of the margins going back for next year, if we're going to see a staring go back up? Or how are you guys thinking for next? Thanks.

Janesh Moorjani -- Chief Financial Officer

Yes, [Inaudible]. So, you know, I'll talk a little bit about our investment philosophy for this year. In terms of thinking about it for next year, we will talk a bit more about that when we're ready to talk about fiscal '22. But at the start of this year, we deliberately had slowed the pace of investments as we were in the early months of the pandemic.

We talked about that back in Q1. And then we decided to continue to increase the pace of the investments, which is what we said we would do, and that's exactly what we've done here in the second quarter. And then looking out over the back half, we will continue to invest quite heavily in the business, adding people across all functions as we continue to invest for scale and to drive growth even more into the future as we prosecute the longer-term market opportunity. Broadly speaking, when I think about it, the signs from our customers is that their spending priorities are aligning well to our solutions.

So it makes sense for us to continue to increase the pace of investment in the business in that direction. I will point out that the strength that we saw here in Q2 on the operating margin was really a function of the revenue beat, and we continue to invest, as we had said we would. So despite the headwinds that we face from the pandemic, we think it's important for us to invest through this pandemic so that on the other side of this, we'll be even better positioned to capture the longer-term opportunities. So we'll continue to execute here in the near term and then talk a little bit more about FY '22 a bit later.

Unknown speaker

Thanks. Congrats on the results.

Operator

[Operator instructions] Our next question comes from George Iwanyc with Oppenheimer.

George Iwanyc -- Oppenheimer and Company -- Analyst

Thank you for taking my question. Janesh, just following up on your comment about continuing to invest. Maybe can you give us a broad feel about your hiring plans? And where you feel like you'll do most of additions to just kind of balance between R&D and sales?

Janesh Moorjani -- Chief Financial Officer

Yes. So I think stepping back, as I look at the strength we've seen in the first half, we're investing across all functions. That includes investing in sales to drive coverage and near-term growth. That includes investments in R&D to drive the right product and long-term growth, as well as investing in the G&A functions for scalability, and marketing is a big part of our go-to-market investments as well.

And so as I step back and think about the overall approach we've taken around investments, we've proven that we can be nimble in hiring and dial the level of investment in the business. We are continuing to do that looking ahead. As we think about the back half, you will see us investing both on the R&D and the go-to-market functions, as well as investing appropriately in G&A to secure scale for the future. So it's really across the board.

If I think about it in terms of geographies as well, it's really distributed, reflecting the opportunity that we see. From our perspective, the demand environment is COVID-19 is a universal global phenomenon, and the longer-term demand that we see as well, the market opportunity we see as well is global. So we will continue to invest globally to prosecute that.

George Iwanyc -- Oppenheimer and Company -- Analyst

Thank you. And, Shay, can you maybe share some perspective on how do you feel about the evolving capabilities from AWS and the other cloud service providers and kind of the balance of competitive dynamics versus the health of the partnerships?

Shay Banon -- Chairman & Chief Executive Officer

Yeah, of course. So I mean, I'll start with saying that our strategy, when it comes to cloud, is to run on all three cloud providers, AWS, Google Cloud, and Azure. We integrate natively with all three of them. And we have very strong partnership with Google Cloud and Microsoft Azure and even double down on these integrations with them.

So very happy with the integration that we have with all of them and obviously with the capabilities of our products. As you can imagine, our areas are at the forefront of the needs of companies, whether it's the ability to put a search box on a website or on a workplace, the ability to take a search box and put it on the infrastructure to observe it or the ability to take a search box and put it on your company to protect it. And we feel like we're ahead of the pack on all three when it comes to the maturity and the future readiness of our products, and that's reflected, I think, by the usage of it. And the fact I think that we provided across all cloud providers, as well as on-prem and the ability to run hybrid across it with a single search request to be able to search across all of them, if you want to, as a customer, that resonates really well with our customer base, and we're very happy about it.

Operator

This concludes our question-and-answer session, and I'd like to turn the call back over to Shay Banon for any closing remarks.

Shay Banon -- Chairman & Chief Executive Officer

Thank you all for joining us today. Q2 was an excellent quarter for Elastic. We continue to see customer spending priorities align with our solutions and a large market opportunity ahead of us. We look forward to catching up with you in the near future.

Stay healthy. Stay safe. Appreciate you joining us. Ciao.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Anthony Luscri -- Vice President-Investor Relations

Shay Banon -- Chairman & Chief Executive Officer

Janesh Moorjani -- Chief Financial Officer

Brent Thill -- Jefferies -- Analyst

Pree Gadey -- Barclays -- Analyst

Pinjalim Bora -- J.P. Morgan -- Analyst

Dan Bergstrom -- RBC Capital Markets -- Analyst

Unknown speaker

George Iwanyc -- Oppenheimer and Company -- Analyst

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