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CrowdStrike (CRWD) Q3 2025 Earnings Call Transcript | The Motley Fool

Hello, and welcome to CrowdStrike's fiscal third quarter 2025 financial results conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, we will conduct a question-and-answer session. Please be advised that today's conference call is being recorded. I would now like to hand the call over to Maria Riley, vice president of investor relations. Maria, please go ahead. Maria Riley -- Vice President, Investor Relations Good afternoon, and thank you for your participation today. With me on the call are George Kurtz, chief executive officer and founder of CrowdStrike; and Burt Podbere, chief financial officer. Before we get started, I would like to note that certain statements made during this conference call that are not historical facts, including those regarding our future plans, objectives, growth including projections, and expected performance including our outlook for the fourth quarter and fiscal year 2025 and any assumptions for the fiscal periods beyond that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this call. While we believe any forward-looking statements we make are reasonable, actual results could differ materially because the statements are based on current expectations and are subject to risks and uncertainties. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise. Further information on these and other factors that could affect the company's financial results is included in the filings we make with the SEC from time to time, including the section titled Risk Factors in the company's quarterly and annual reports. Additionally, unless otherwise stated, excluding revenue, all financial measures disclosed on this call will be non-GAAP. A discussion of why we use non-GAAP financial measures and a reconciliation schedule showing GAAP versus non-GAAP results is currently available in our earnings press release, which may be found on our Investor Relations website at ir.crowdstrike.com or on our Form 8-K filed with the SEC today. With that, I will now turn the call over to George. George Kurtz -- Co-Founder, President, and Chief Financial Officer Thank you, Maria, and thank you all for joining our third quarter FY '25 earnings call. I'd like to start today's comments by sharing three key themes that excite me about this quarter and our bright future. First, trust, the trust that customers, partners, and the market have in CrowdStrike. We grew ending ARR more than 27% year over year and maintained stable gross retention rates. Second, widespread platform adoption. Our Falcon Flex subscription model is supercharging Falcon platform adoption. With CrowdStrike, cybersecurity consolidation is rapid, and ROI is measurable. Falcon Flex is increasing both our share of wallet and enterprise real estate, furthering CrowdStrike as cybersecurity's AI native platform of record. And third, trailblazing innovation. From cloud to device, data to GenAI, application to identity, and compliance to resilience, our innovation disrupts legacy markets and creates new categories. CrowdStrike is leading the future of AI-powered cybersecurity. The themes of trust, platform adoption, and innovation guide CrowdStrike's customer obsession and continued strong execution. Following the summer's incident, as a company, we were tested. We responded with speed, care, and resolve, and we focused on becoming even better, continuing to deliver industry-leading cyber protection on the Falcon platform's proven, resilient, and scaled AI native architecture. I'm encouraged by CrowdStrike's Q3 results, our first full quarter post incident. First, ending ARR surpassed $4 billion, making CrowdStrike the fastest pure-play cybersecurity software company to achieve this reported milestone, tracking to our $10 billion ARR vision. Second, Q3 revenue surpassed $1 billion. Subscription revenue grew 31% year over year, and total revenue surpassed $1 billion for the first time in company history. Third, free cash flow of $231 million or 23% of revenue, achieving a Rule of 51 on a free cash flow basis. Fourth, we closed more than 150 Falcon Flex transactions with these customers representing more than $600 million in total deal value. And fifth, more recently, we announced and closed the acquisition of Adaptive Shield, adding SaaS posture management to our portfolio, further differentiating and connecting the Falcon platform's Cloud Security Suite and Identity Protection offerings. In addition to these achievements, I'd like to provide some perspective on what we saw in Q3. First, Falcon customers are staying with CrowdStrike as their trusted cybersecurity platform of choice. Q3 gross retention was over 97%, down less than half a percentage point. Strength in retention was driven by the value that customers receive from the Falcon platform. Second, Falcon customers are growing with us. Q3 dollar-based net retention was 115%, temporarily impacted by the incident and reflective of customers strengthening their commitment to CrowdStrike. Customers are leveraging our customer commitment package and Flex subscription model to both increase their long-term investment in CrowdStrike and increase their adoption of the Falcon platform. And third, we're seeing exceptional strength in key verticals and market segments. Health care saw a record quarter as providers are investing in cybersecurity's criticality based on heightened and targeted attacks. Our corporate sales team covering organizations below 2,500 employees had their largest quarter ever, benefiting from Falcon Flex as well as successful competitive takeouts. These successes are in the context of CrowdStrike's sustained Fortune 500 market leadership. Our track record of AI innovation and market-leading protection delivered on our highly resilient and cybersecurity's most performing architecture continues to resonate at scale. Our competitive win rates remain consistent to trending upwards and our total deal size for new business trended up over the last year, which we attribute to the continuous evolution of our platform solutions across cloud security, next-gen SIEM, identity protection, data security, and AI. Our revolutionary Falcon Flex subscription model and CrowdStrike's amplified brand recognition and favorable market sentiment from our transparent and deliberate response to the summer's incident. Through it all, we remain laser-focused on innovation, which is what drives our platform differentiation, customer stickiness, and superior protection outcomes. This fall, we hosted the largest event in CrowdStrike's history, Fal.Con, our global flagship ecosystem event in Las Vegas, where 6,000 attendees joined us from more than 60 countries and 100 exhibiting ecosystem partners showcased their Falcon-integrated solutions. More recently, we hosted our inaugural Fal.Con Europe in Amsterdam, where we welcomed more than 1,700 attendees from more than 50 countries and showcased nearly 40 exhibiting ecosystem partners. These events demonstrate our continued global momentum, innovation, and the strength of the crowd, cybersecurity's ecosystem building with, through, and around CrowdStrike. Both events generated significant pipeline. Aside from the platform innovations we announced, attendees were captivated by our novel subscription model, Falcon Flex. We announced the Falcon Flex model a year ago at Fal.Con 2023, and we shared at our Fal.Con 2024 Analyst Day that accounts that had adopted Falcon Flex represented more than $700 million in total deal value. We saw remarkable and accelerating Falcon Flex adoption in Q3, bolstered by our customer commitment packages with over 150 Falcon Flex deals in the quarter. Unpacking this momentum, we did two Falcon Flex deals every business day of the quarter on average. Accounts that have adopted the Falcon Flex model now represent more than $1.3 billion of total deal value, with the average Falcon Flex subscription being multiples larger than our typical contract value. Flex customers enjoy preferred pricing for both their contracted modules as well as other current and future modules in our portfolio. And it all comes with the flexibility of access to the products they want when they're needed. Through Flex, platform consolidation is rapid, and ROI is real. Falcon Flex also became the key delivery mechanism for our customer commitment package. We've already worked through a significant number of CCPs, with the remainder to be concluded in the upcoming quarters. We see Falcon Flex deal volume accelerating. Flex has ushered in a new tempo of module adoption. We've seen customers accelerate their platform demand plans across our existing as well as new products. For example, upon announcing Adaptive Shield, we had a slew of Flex customers eagerly asking if they could use their Flex dollars for Adaptive Shield SSPM adoption. Flex enables us to rapidly commercialize innovation, whether organic or acquired, across our global sales team and partner network. Flex is already proving to be a rapid platform adoption accelerator across the customer base, giving us confidence in net new ARR acceleration in the back half of next year. Flex also broadens the customer audience for CrowdStrike as a whole. We've talked about cybersecurity moving from the back room to the boardroom. With Flex, we've expanded our customer stakeholder audience to include the CFO. The Flex subscription model aligns cybersecurity investment and more specifically, platform consolidation with measurable dollars and cents. And with CrowdStrike Financial Services, we bring even more tangible financial value to CFOs, deepening our relationship and relevance to this increasingly important CXO persona. As we steadily engaged with more CFOs over the past year, the feedback has been resoundingly consistent. With Falcon Flex, CFOs can see the economic benefits of platform consolidation. The Flex model solves today's customer needs while seeding future growth. Flex customers demonstrate the following Falcon platform characteristics: more Falcon platform adoption. Flex customers, on average, have adopted more than nine modules, and we expect to see these numbers continue to rise. Faster Falcon platform adoption. All of our Flex licensing has happened in the past 12 months. In looking at this customer cohort, the amount of adoption we've seen at speed and scale is encouraging. With Flex, we have seen some customers more than double or even more than triple their module adoption. Increased investment in CrowdStrike. Flex has allowed us to increase our share of wallet, consolidating multiple point product vendors. Looking at Q3, the average CrowdStrike customer spent hundreds of thousands, while the average Flex customer spent multimillions. At the same time, Flex seamlessly takes cost out of cybersecurity programs, eliminating organizational and product inefficiencies from the long list of legacy disjointed point product cybersecurity tools. Alongside Falcon Flex's success and larger transactions overall was the announcement of CrowdStrike Financial Services, CFS, our financing arm that aligns customer cybersecurity and cash flow objectives. CFS gives customers financial flexibility while driving larger deals, faster deal cycles, and longer subscription duration. In our first quarter of CFS, we closed more than $49 million in deal value, including two eight-figure deals. Here are a few Flex noteworthy wins: an eight-figure expansion deal with a Fortune 500 travel leader who sought CCP pricing to do more with CrowdStrike, growing their spend with us by over $15 million. Despite impact from the summer's incident, our response and partner-assisted recovery solidified trust and inspired increased Falcon investment from the board to executives to the cybersecurity team. Through Flex, this customer expanded their Falcon demand plan to include Falcon Cloud Security, File integrity monitoring, firewall management, and data protection going from eight modules to 14 modules in a single Flex transaction. An eight-figure new logo land with a Global 2000 technology manufacturer, where Falcon displaced legacy AV, a legacy SIEM, and a legacy vulnerability management product. Through Flex, the customer was able to go all in on the Falcon platform for EDR, Next-Gen SIEM, Falcon Complete MDR, Identity Protection, threat intelligence, and Exposure Management, consolidating four vendors in this initial Flex purchase. Consolidation goals achieved, protection outcomes delivered, and platform adoption success. Closing off on Falcon Flex, customers are spending more, entering into longer subscription terms, and taking the opportunity to achieve their consolidation objectives faster. We expect to see faster and larger ARR uplift over time through the Falcon Flex model. Aligning the industry's leading cybersecurity platform with our revolutionary subscription model is a lightning-in-a-bottle combination for current and future growth. Next, I'd like to share our innovation progress where we're trailblazing new cybersecurity outcomes across Cloud Security, Identity Protection, and Next-Gen SIEM in addition to our data, AI, and IT investments. We're incredibly excited by the innovation taking place within both our cloud and identity businesses. We recently announced the acquisition of Adaptive Shield, a leading vendor in the fast-growing SaaS security posture management, or SSPM, market. Adaptive Shield builds on our AI leadership, giving us unmatched coverage of the rapidly growing SaaS threat plane, with more than 150 native integrations across everything from CRM tools to cloud backup to workforce productivity. More importantly, Adaptive Shield slots in perfectly as a complement to both our cloud and identity security businesses with multiple integrations already completed, another example of CrowdStrike charting the course ahead of the market. Within Cloud Security, the combination of Adaptive Shield with our core Falcon Cloud Security functionality gives us the broadest cloud security ecosystem coverage. This move builds on both our organic developments as well as the recent acquisition of Bionic and Flow. With Adaptive Shield, CrowdStrike is the only platform delivering an end-to-end cloud security suite with runtime at the center of everything from code, data, and now SaaS to runtime. And with Adaptive Shield, we further enhanced our ability to secure the enterprise's prolific adoption of AI. CrowdStrike pioneered the use of AI for security through our on-sensor model and Threat Graph and pioneered the use of GenAI for improving SOC analyst workflows through Charlotte AI. We've also recently introduced bespoke services for AI security, pen testing AI models to reduce exposure, weaknesses, and data leakage risk. At CrowdStrike, we deliver both AI for security and security for AI. While our recently launched AI-SPM offering enables organizations to secure the adoption of AI within their cloud infrastructure, Adaptive Shield works by protecting the enterprise from GenAI risk. As more employees look to leverage GenAI tools for their everyday workflows, data leakage, data theft, and adversary espionage are on the rise. The combination of AI-SPM and Adaptive Shield gives our customers more holistic AI protection from code to runtime and now to the end user. AI-powered cloud security wins in the quarter include a unicorn AI leader that took their Falcon deployment to the next level in an eight-figure Falcon Cloud Security expansion deal. Growing their Cloud Security footprint rapidly over the last few years, the combination of workload protection as well as our CSPM, CIEM, and more recently, our posture management for AI, data, and applications solidified our position as this company's cloud security consolidator of choice. Once again, this customer set a new largest transaction record for our corporate sales team. A Fortune 50 retailer expanded in an eight-figure deployment of Falcon Cloud Security. Seeing the difference that runtime protection makes, we seamlessly expanded from being the company's EDR vendor of choice to its cybersecurity platform of record for the cloud and AI era. Falcon Cloud Security goes well beyond narrow CSPM use cases and associated alert fatigue. Falcon Complete's CDR made securing their expansive multi-cloud and hybrid cloud estate, the easy and frictionless choice. Within Identity Protection, Adaptive Shield builds on our continued organic innovation. Since launching our Identity Protection module, CrowdStrike has always had best-in-class coverage of Active Directory environments. However, with Adaptive Shield, CrowdStrike is now capable of securing identity where potentially malicious user behavior takes place. Whether on-device, in the cloud, or in a SaaS application, CrowdStrike offers holistic protection across critical identity touch points. And we're just getting started. We recently announced support of Microsoft Entra ID, formerly Azure Active Directory, making CrowdStrike capable of securing the rapidly emerging identity threat vector for all Microsoft customers from highly regulated enterprises to born-in-the-cloud AI disruptors. Here's a representative identity win from the quarter. A Fortune 500 new logo in the travel and hospitality space saw the difference that our robust identity protection technology makes in stopping prolific e-crime actors. Replacing a patchwork of legacy technologies, we were able to showcase the differentiation of Falcon Identity Protection to land a sizable platform win across identity, EDR, Next-Gen SIEM, and threat intelligence. Falcon Next-Gen SIEM has been a game changer, and we're experiencing a hyper-growth inflection point. While we provide more granular detail during our Q2 and Q4 earnings calls, Next-Gen SIEM performed exceptionally well this quarter with net new ARR growth accelerating to over 150% year over year at multi-hundred-million-dollar scale. With 30 million Fusion SOAR workflows per week and over 2,000 Next-Gen SIEM customers, Falcon Next-Gen SIEM is quickly becoming our customers' data foundation. We've introduced several new groundbreaking features AI-generated parsers take the guesswork and learning curve out of integrating third-party data sources into Next-Gen SIEM. AI Investigator accelerates query speed and flattens analyst learning curves through a GenAI-powered query builder. And AI alert triage automates end-to-end workflows at the speed of AI. Yet the core differentiation for Next-Gen SIEM remains unchanged, unmatched speed and scalability, and an unmatched cost with Falcon Data natively resident from the start. This is why more and more customers are ditching their legacy SIEM vendors for CrowdStrike. Next-Gen SIEM customer wins in the quarter include an eight-figure major national healthcare provider that replaced a competing SIEM, expanding their Falcon usage with Next-Gen SIEM. Using CrowdStrike Financial Services, we were able to close a sizable seven-year deal. Working across the customer C-suite, specifically with the CFO, we aligned cybersecurity innovation with cost reduction, platform consolidation with protection outcomes, and payment terms with ROI, delivering eight figures of customer business value benefits within three years of purchase. CrowdStrike is now firmly rooted as the organization's cybersecurity data platform of choice. A near eight-figure expansion deal with a Fortune 500 manufacturing giant, where we replaced a hyperscaler SIEM in a competitive deal against several SIEM vendors. Multiple consoles and a lack of security workflows created inefficiencies for this customer. The transaction was also an opportune time to grow with CrowdStrike, purchasing Charlotte AI and threat intelligence as SIEM enhancements as well as other modules such as Data Protection. Having a single console in a single platform continues to differentiate Falcon customer experiences. All the while, our innovation investments continue to grow and show promise. Let me first talk about CrowdStrike's AI innovation and the progress we're making with Charlotte, our AI agent. Much like peer companies ServiceNow and Salesforce, we're using advanced AI models to deliver proactive and autonomous outcomes. Charlotte AI is capable of taking actions based upon observed data to achieve specific security goals. Going well beyond the capabilities of a chatbot, Charlotte addresses a critical skills gap in human capital need by automating detection triage, traditionally a labor-intensive process for all security personnel. Charlotte AI detection triage announced that Falcon eliminates a significant amount of routine EDR investigation tasks. Charlotte continues to evolve through customer use, leveraging the Falcon platform's unique data advantage. CrowdStrike's highly curated threat data and high-fidelity security events. We had a record triple-digit growth quarter for Charlotte AI, fueled by customer demand for increased time savings and workflow automation. Data security, with our largest data security quarter to date, driven by customer desire to replace legacy DLP without additional overhead. Falcon for IT. We're seeing continued demand from large enterprises seeking to unify security and IT management while eliminating vendors to further their consolidation objectives. The Falcon platform continues to resonate at scale with partners of all types. In Q3, nearly 70% of our new subscription business was partner-sourced, illustrating the commitment and stickiness of our winning partner ecosystem. Our GSI partners are building Next-Gen SIEM practices across the world. Our hyperscaler partners are seeing CrowdStrike records, with AWS Marketplace transaction values up more than 100% year over year, as organizations pursue their Falcon Flex licensing on their hyperscaler platforms of choice. Our technology partners continue to win with us. We announced a strategic partnership with Fortinet, the global firewall market share leader by shipments. We're already seeing Fortinet take us into their accounts, and we're doing the same. Helping us reach the long tail of SMBs, our MSSP business continues to expand at a rapid triple-digit pace through The Pax8 Marketplace, NinjaOne, and leading MSPs who contract with CrowdStrike. And lastly, in Q3, SHI became our fourth billion-dollar partner, bringing the Falcon platform to their customers. This is highlighted by their success bringing Next-Gen SIEM, Cloud Security, Identity Protection, and Falcon Complete MDR to market. We ended Q3 with deal registrations up year over year, a marked turnaround from incident levels. Our business results speak to the conviction partners have in the Falcon platform and the multi-TAM transformation opportunity that only CrowdStrike offers. Our continued market and technology leadership isn't only recognized by customers and partners. It is also lauded by industry analysts. Several recent noteworthy accolades include, one, the Gartner Magic Quadrant for Endpoint Protection. Even after the summer, CrowdStrike was placed highest for ability to execute and furthest for vision in the whole Magic Quadrant, ahead of all competitors in every dimension. Two, in Gartner's critical capabilities, CrowdStrike earned the highest scores ahead of all vendors evaluated in both core endpoint protection and managed security services for the second year in a row. Three, Falcon Cloud Security was recognized as a Frost Radar Leader in Cloud Workload Protection Platforms for the second consecutive year, ahead of CSPM start-ups and industry peers. Four, attack surface management was positioned as a leader in the Q3 2024 Forrester Wave, showcasing our emergence in a new market category with significant TAM opportunity. And five, Falcon Next-Gen SIEM was named a major player in the latest SIEM IDC MarketScape, underscoring our success displacing the legacy SIEMs. In closing, customers and partners remain firmly committed to CrowdStrike as their cybersecurity platform of record. Our Flex licensing model delivers accelerated platform adoption, and Falcon innovation isn't stopping. These themes set up a Q4 of continued progress in an upcoming year of back-half net new ARR acceleration growth. Our future is bright. A vivid example that struck me this past quarter is the scale and consistency at which we're doing substantial transactions. We set a new record of million-dollar-plus transactions, closing more than 260 this quarter, equating to an average of four more million-dollar-plus deals every business day. Results like these demonstrate the customer conviction, partner commitment, and market sentiment for CrowdStrike as cybersecurity's innovation leader and security platform of record. Before turning the call over to Burt, I would like to thank all CrowdStrikers for their dedication to our mission of stopping breaches, our partners for helping us win and continuing to build large businesses with us, and of course, our customers for their commitment and unwavering trust in CrowdStrike. I'll now turn the call over to our CFO, Burt Podbere. Burt W. Podbere -- Chief Financial Officer Thank you, George, and good afternoon, everyone. As a quick reminder, unless otherwise noted, all numbers except revenue mentioned during my remarks today are non-GAAP. We delivered third-quarter results above our stated expectations across all guided metrics. Our third quarter results reflect our focused execution and relentless customer-first mindset, which drove a strong finish and quarter-over-quarter increase in pipeline despite continued headwinds and a pause in pipeline generation at the start of the quarter following July 19. In Q3, ending ARR surpassed the $4 billion milestone, growing 27% year over year to reach $4.02 billion, of which $153 million was net new added in the quarter. As expected, the July 19 incident resulted in near-term headwinds to net new ARR as we experienced extended sales cycles with both existing and prospective customers and one-time incentives offered through our customer commitment packages, which resulted in increased contraction and muted upsell rates. Sales cycles increased by approximately 15% year over year within enterprise accounts. As of last Friday, we closed more than half of the push deals that had remained open at the time of our Q2 call. While we normally recognize ARR contraction in the quarter a transaction is subject to renew, in Q3 FY 2025, we excluded approximately $26 million from ARR after a distributor in the federal space provided notice of its intention to exercise transferability rights with respect to a transaction, and we concluded that the transaction would not recur. In compliance with U.S. GAAP revenue recognition rules, this transaction remains in revenue. In total, our Q3 dollar-based gross retention rate of over 97% held resilient with less than half a percentage point decrease from Q2's strong performance. And given the July 19 incident, we are also pleased with our Q3 dollar-based net retention rate of 115% as customers embraced our customer commitment packages and more of the Falcon platform. We estimate that customer commitment packages impacted net new ARR by approximately $25 million in Q3 within our expectations. The majority of deal value that closed in the quarter with customer commitment packages included additional product or Flex dollars rather than extended time and professional services. That, coupled with the timing and linearity of in-quarter Q3 revenue, limited the impact to Q3 revenue and contributed to the strong revenue beat in the quarter. Our customer commitment packages are helping fuel an increase in platform and module adoption. Subscription customers with five, six, and seven or more modules grew to 66%, 47%, and 31% of subscription customers, respectively. Notably, we reached a new milestone for module adoption in the quarter as customers with eight or more modules grew to 20% of subscription customers. This momentum in increased module adoption, and our Falcon Flex program gives us confidence in our customer commitment strategy and ability to reaccelerate net new ARR growth starting in the back half of fiscal year 2026. Moving to the P&L. Total revenue grew 29% over Q3 of last year to reach $1.01 billion, ahead of our expectations and our first quarter exceeding the $1 billion milestone. Subscription revenue grew 31% over Q3 of last year to reach $962.7 million, and professional services revenue was $47.4 million. Total gross margin of 78% was flat year over year, and subscription gross margin remained strong at 80% of revenue. Total non-GAAP operating expenses in the third quarter were $591.7 million compared to $436.1 million in the prior year. As outlined in our last earnings call, we continued to invest in our FY 2025 plan and bolstered our R&D, quality assurance, and customer support programs. In the third quarter, non-GAAP operating income grew 11% year over year to $194.9 million and operating margin was 19%. GAAP net loss attributable to CrowdStrike was $16.8 million, primarily due to $33.9 million in expenses related to the July 19 incident. Non-GAAP net income attributable to CrowdStrike grew 18% to $234.3 million or $0.93 on a diluted per-share basis. Cash and cash equivalents grew to $4.26 billion. Free cash flow was $230.6 million or 23% of revenue and was impacted by the July 19 incident as well as planned investments in data center and workload optimization, R&D, and sales and marketing. Additionally, the $49 million in deals financed through CrowdStrike Financial Services had a de minimis impact to Q3 free cash flow as expected. Turning to our outlook. We are encouraged by our continued high dollar-based gross retention rate, success of our customer commitment packages with customers opting for more product or Flex dollars, the continued strong adoption of the Falcon platform and growing module adoption rates, and quarter-over-quarter growth in pipeline. All of these positive indicators give us confidence in our ability to reaccelerate net new ARR growth starting in the back half of FY 2026. However, in the near term, visibility remains limited given the headwinds related to the July 19 incident that we outlined last quarter, including the delay of the vast majority of outbound pipeline generation activities for a few weeks following the July 19 incident, extended sales cycles for both new and existing customers and continued deployment of customer commitment packages resulting in muted upsell rates and potentially higher-than-typical levels of contraction. While in Q3 customers strongly embraced the additional modules and Flex options associated with our customer commitment packages rather than additional time, it is still too early to determine if that trend will remain the same in Q4. Recognizing our continued reduced visibility, we are maintaining our estimated impact of approximately $30 million to both net new ARR and subscription revenue in Q4 from our customer commitment packages. As we discussed last quarter, the aforementioned headwinds are additive to the expected quantified impact. While we do not typically comment on analyst estimates, we wanted to note that the vast majority of analysts are modeling Q3 to Q4 net new ARR seasonality well above historical levels. We request that you keep historical sequential seasonality in mind when updating your models. Additionally, as we discussed last quarter, the modeling of ARR and subscription revenue should be decoupled in the short term, given the customer commitment packages. Our Fal.Con 2024 investor presentation has additional details on this dynamic. Moving beyond the top line, we expect to incur additional GAAP tax expense in Q4 of approximately $58 million due to previous acquisitions. Additionally, we closed our acquisition of Adaptive Shield last week, which is expected to have a $0.01 to $0.02 impact to non-GAAP EPS as reflected in our Q4 guidance. Moving to cash. We expect Q4 free cash flow to reflect a significantly more pronounced July 19 impact in comparison to Q3. This is due to collections impacted by increased flexible payment terms under customer commitment packages for deals closed in Q3, the incremental sales compensation expenses, and the timing and size of G&A costs, all relating to July 19. As a result, we do not expect to see sequential free cash flow margin leverage in Q4. We continue to expect CrowdStrike Financial Services to have a de minimis impact to free cash flow in Q4. We remain committed to achieving $10 billion in ending ARR by the end of fiscal year 2031 and achieving our target non-GAAP operating model on an annual basis by fiscal year 2029, which includes a free cash flow margin target between 34% and 38%. Moving to our guidance. For the fourth quarter of FY 2025, we expect total revenue to be in the range of $1,028.7 million to $1,035.4 million, reflecting a year-over-year growth rate of 22%. We expect non-GAAP income from operations to be in the range of $184.0 million to $189.0 million and non-GAAP net income attributable to CrowdStrike to be in the range of $210.9 million to $215.8 million. We expect diluted non-GAAP net income per share attributable to CrowdStrike to be approximately $0.84 to $0.86, utilizing a weighted average share count of approximately 252 million shares on a diluted basis. For the full fiscal year 2025, we currently expect total revenue to be in the range of $3,923.8 million to $3,930.5 million, reflecting a growth rate of 28% to 29% over the prior fiscal year. Non-GAAP income from operations is expected to be between $804.4 million and $809.4 million. We expect fiscal 2025 non-GAAP net income attributable to CrowdStrike to be between $937.5 million and $942.6 million. Utilizing approximately 251 million weighted average shares on a diluted basis, we expect non-GAAP net income per share attributable to CrowdStrike to be in the range of $3.74 to $3.76. George and I will now take your questions. Operator Thank you. [Operator instructions] In the interest of time, participants will be limited to one question. Our first question comes from Saket Kalia. Please unmute your line and ask your question. Maria Riley -- Vice President, Investor Relations Hello? Saket, are you there? Operator, is he there? If not, please go to the next question. Operator OK, great. Not a problem. We will move forward with the next question. Sorry about that. Absolutely. So, George, maybe for you, lots of helpful detail. I wanted to start sort out, just zooming out a little bit. You spend a lot of time with customers. I guess the question is what are they telling you about some of the puts and takes to security spending next year? I mean, you've got plenty of tailwinds like lower interest rates and potentially a better macro but also different policies out of the federal government. So, how do you think about those factors as you maybe gauge the health of security spending next year? George Kurtz -- Co-Founder, President, and Chief Financial Officer Sure. Thanks, Saket. I think if you're -- and everyone probably is following some of the news. You'd see the security environment is only getting worse. E-crime groups have been prolific, and we continue to see ransomware and extortion where -- be very, very successful for big dollars. So, from a security environment perspective, customers want the best products. They want the best platform. They want something that's going to stop the breach and be most effective. That hasn't changed. Two, they want to consolidate. This hasn't changed either. This complexity normally breeds inconsistencies and seams in protection gaps within multiple technologies, so a broad platform approach is something that aids in stopping the breach. And they want to drive down their overall operational cost, and that hasn't changed, and I don't think that is going to change based upon my interactions with companies in the coming year. So, we'll see how it all unfolds, but we're certainly encouraged by the forward-looking environment based upon just what we see. And companies, whether it's the threat environment or regulatory pressures, they're going to have to spend money on the best technologies. And we're certainly going to be there to be able to capitalize on it. Our next question comes from Hamza Fodderwala with Morgan Stanley. Please unmute your line and ask your question. All right. Great. Good evening. Thank you so much for taking my question. Burt, maybe for you just to comment on the ARR or net new ARR seasonality that you spoke about for Q4. If I look at the last few years, last Q4, we had a pretty strong budget flush, pretty strong Q4 overall. The year before that, I think it was a bit more muted. When you speak on Q4 net new ARR seasonality this year, is that assuming that budget flush that we saw a year ago or something similar to what we saw maybe two years ago? Thank you. Burt W. Podbere -- Chief Financial Officer Hamza, thanks for your question. So, when we think about Q4, I talked about some of the things that impact us and certainly, one of them is the limited visibility that we have. It's just too early to tell. We have a lot of things that are going to be in play for Q4, the continued CCP packages that we have. And with that, it just limits our visibility in terms of how we think about Q4. Generally, it is, of course, our biggest quarter, and we have the most that's subject to renew, but we still need to sell through it. Operator Our next question comes from Brian Essex with JPMorgan. Please unmute your line and ask your question. Brian Essex -- Analyst Hi. Good afternoon, and thank you for taking the question. George, great to see the durability of the growth retention rates, particularly in light of the event in July 19. Is there anything that you can call out in terms of trends that you're seeing as you're speaking with customers, both on the churn side? Like what tend to be some of the themes of customers that are churning off? And then also on the better adoption side, what are some of the more durable factors that are leading to better adoption rates on the platform? Thank you. George Kurtz -- Co-Founder, President, and Chief Financial Officer Well, thank you, and good question. As you probably know, I spend a lot of my time with the larger customers and really haven't had a lot of conversations around churn. And the conversations that I have had have been recognition that we do have the best technology in the market and a recognition of how we handled the July 19 outage. And I think that's an area where we turned crisis into a customer trust-building opportunity. And of course, we're trying to make it right for customers. So, from my perspective, I certainly haven't seen a lot in the larger to midsized deals. In fact, our corporate business, as I called out, had the best quarter ever. So, from a churn perspective, you could see some churn in the very small MSP space. It's an area where it really doesn't matter, the vendor. It's easy to kind of move in and out. But I'm encouraged by the conversations that I'm having with our largest customers and a reflection on the fact that they realize that we have the best tech in the industry and the ability to stop breaches and drive down their overall operational cost from a platform perspective. Operator Our next question comes from Patrick Colville with Scotiabank. Please unmute your line and ask your question. Patrick Colville -- Analyst Hey, Tim, thank you so much for taking my question. I guess I want to ask George. I mean, 2024 was the year of copilots, including Charlotte AI. In your prepared remarks, George, you talked about kind of detection triage. I guess the topic du jour among the investment community is agentic AI. You didn't mention that in your prepared remarks. So, I guess how is CrowdStrike thinking about internal usage of agentic AI or possibly the ability for agentic AI to help CrowdStrike's customers? Thank you. George Kurtz -- Co-Founder, President, and Chief Financial Officer Thanks, Patrick. And I covered that a bit in the prepared remarks in the fact that Charlotte AI was built to be something more than a copilot. We probably built it before it even had a term, which is now fashionable agentic AI. And the whole idea with Charlotte AI was not only to take the collective wisdom of CrowdStrike over the last decade, all of our threat indicators, all of the sort of workflows that we've created around triaging events and answer those questions but go beyond that to actually do work on behalf of customers. So, today, and it's the way we built it, it actually will do work on behalf of customers. And that's the entire piece of SOC transformation. And just to give you an example, we talked about alert triage and some of those things in the prepared remarks, but we had a customer that would take four days to create what's called a sit rep, a situational report, and that manually, they would create these reports. It now takes them one hour. So, that's the level of efficiency that we're seeing with Charlotte. And you couldn't do that if it was just a chatbot. It's the agentic nature of Charlotte AI, and that's what we're delivering to customers. Internally, we're certainly leveraging a lot of what our great partners put together, whether that's Salesforce or ServiceNow or what have you. There's many technologies that we leverage, including many of the GenAI technologies to help us create greater efficiencies. Operator Our next question comes from Tal Liani with Bank of America. Please unmute your line and ask your question. Tal Liani -- Analyst Hello. Thank you. So, Burt, I know you're cautious but your net new ARR was not bad at 150 given that we had 250 before the outage. It's -- some people expected it even to be negative. And I hear you now on 4Q cautious again. And the question is what are the -- how are the factors changing in 4Q? Meaning you said that you have a big renewal quarter. Outside of the renewal -- or can you speak about, for example, what was your experience with renewals this past quarter? I would have thought that 4Q would be better than 3Q just because we don't have an outage in the middle, so it eliminates these 10 days or 14 days that people were kind of unclear about what's happening. So, I want to understand how 4Q changes and why wouldn't 4Q be actually better than 3Q. Thanks, Tal. So, although true that we are a little further from the sun. We're still kind of fighting through the incident. But I'll give you some additional color in terms of the things that I went through when I thought about Q4. And I talked a little bit about limited visibility with Hamza. So, one is when we think about what happened shortly after the incident, the lay of the vast majority of our outbound pipeline-generating activities, for the first few weeks following the incident, that certainly has an impact for Q4. So, that's one. I think we're still going to see extended sales cycles for both new and existing customers. I think customers have additional scrutiny, additional layers of approvals, all that sort of thing. And I think we're going to continue to deploy customer commitment packages. This is going to result in muted upsell rates and potentially higher-than-typical levels of contraction. You factor all those things together, and I still want to be mindful of those things taking place and the activities that the sales team has to do to sell through all of that. Well, I'll add a couple of other things. While in Q3 customers strongly embraced the additional modules and Flex options associated with CCPs, rather than additional time, it is still too early to determine if that trend will remain the same for Q4. I want to give caution in terms of what customers are going to choose with respect to CCP. We don't know yet. We had one quarter, and so that really impacts our ability to really understand what's going to happen in the dynamics in Q4. And then finally, I do want to talk about the fact that we are maintaining our estimated impact of approximately $30 million to both net new ARR and subscription revenue in Q4 from our customer commitment packages. And remember, the two of those, you have to decouple both of them. And we talked about that last quarter, and we talked about it in our Fal.Con 2024 investor presentation, and it has the details on that dynamic. Operator Our next question comes from Joel Fishbein with Truist. Please unmute your line and ask your question. Joel Fishbein -- Analyst Thanks for taking the question. I guess one for Burt. Burt, on the Falcon Flex, obviously, it sounded like it was ahead of your guys' expectations in terms of adoption. The one thing that I didn't get, which I would love, from you is the average deal term or duration of those deals. That would be really helpful. Really appreciate it. Burt W. Podbere -- Chief Financial Officer Hey, Joel, thanks for the question. We didn't give a specific number, but we did see deals being slightly longer, and so that excited us for sure. Operator Our next question comes from Gabriela Borges with Goldman Sachs. Please unmute your line and ask your question. Gabriela Borges -- Analyst Hi. Good afternoon. Thanks for taking the question. Burt, I wanted to connect the dots here on what you're saying about Falcon Flex and the potential for reacceleration next year. Is there anything you're seeing in the Falcon Flex cohorts post July 19 versus those before July 19 in terms of average ARR increases, average deal sizes, etc., that would lead you to think that the conversion rates or the upsell rates on today's Falcon Flex deals could look different a year from now versus the baseline that you already have? Burt W. Podbere -- Chief Financial Officer Hi, Gabriela. So, I talked a little bit about the fact that we've seen deals being slightly larger, which is great. Still too early to tell what's going to happen as these renewals come due. But certainly, it goes back to how we already thought about this and how we talked about it last quarter with respect to seeding the future and having the ability to do upsell on the renewal and getting customers to enjoy us more and wanting to use more. We had over 150 Falcon Flex deals and that's a great number. And then I think that we had accounts -- at the end of the day, the accounts that have adopted the Falcon Flex model now represent more than $1.3 billion of total deal value, and in there with an average Falcon Flex subscription being multiples larger than our typical contract value. So, those are important takeaways. Flex customers, on average, have adopted more than nine modules. So, if you factor all those things together, we get encouraged, again, by reacceleration in the back half of next year. Operator Our next question comes from Matt Hedberg with RBC. Please unmute your line and ask your question. OK. Great. George, a question for you. You talked about Next-Gen SIEM in the prepared remarks. It's really good to hear the growth that you're seeing there. I guess I'm wondering, what are you seeing really from a competitive perspective? I think we all are thinking that there's a good opportunity there, but just wondering about that. And then what are pushing some customers to change, I guess, is ultimately the question. George Kurtz -- Co-Founder, President, and Chief Financial Officer Yeah. I think when you look at the Next-Gen SIEM market and one of the things that we really, again, helped, I would say, create and pioneer, it's greater efficiencies, speed, and scalability, which is just not available in legacy products. The fact that we can basically give immediate outcomes because it's all built into our system, right, this is concept of first-party data, which comes from CrowdStrike, a third-party data, well, we've created an incredible ecosystem and opened up the platform now where these workflows can be done within the Falcon platform and then aided by Charlotte AI. So, customers are putting more and more data into the technologies. And they're seeing the performance and the speed and maybe, more importantly, the cost differences between some of the legacy providers that are out there. And we go into a POV, and we go through all of the stats, and people kind of scratch their heads sometime to go, "OK, prove it." And then when we get through it, they're like, "We've never seen anything this fast or performant or get the outcome that we're looking for." So, we're really excited about it. We keep broadening the ecosystem there. And I think it represents a tremendous opportunity for us in the short, medium, and long term. It's a huge business, Next-Gen SIEM, and we're going to be front and center in it. Operator Our next question comes from Andy Nowinski with Wells Fargo. Please unmute your line and ask your question. Andrew Nowinski -- Analyst OK. Good evening. Thanks for taking the question. First off, congrats on getting through what was likely your most challenging quarter you probably had in company history. So, I wanted to ask a question again on Falcon Flex. I know you booked $1.3 billion in deals, and you talked about how it's supercharging the adoption of your platform. But if I'm thinking about it correctly, I would think it's also supercharging your customer retention rates because as customers deploy more modules, like you said, it seems like it makes it increasingly difficult to leave the platform. So, I guess, first, am I thinking about that correctly in terms of customer retention? And are you factoring in any improvement to ARR due to Falcon Flex going forward? George Kurtz -- Co-Founder, President, and Chief Financial Officer Well, I'll take the first part, and Burt, you can feel free to chime in. It absolutely makes the platform stickier. The more modules -- we know this is a fact. The more modules customers use, the stickier the platform becomes. And you're talking nine, 10. We've talked about, I think, one of 14. That's incredibly sticky because a lot of processes are built around that. So, from our perspective, it is a great opportunity for customers and for us, makes it stickier. They get a better value. And again, what we're seeing is, in general, we're seeing customers adopt more faster, right, which if they adopt more and faster, that gives us the opportunity to go back in and top up those Falcon Flex pools. So, we are excited about the licensing mechanism. Customers are. We talked about Adaptive Shield. The day we announced that, we were at Fal.Con Europe and a customer said, "OK, if I'm a Falcon Flex customer, can I use it Day 1 when it closes?" And we're like, yes, since we closed the deal and we get it SKU-ed up, you'll be able to use it, which again removes a lot of friction and aids in the adoption. So, anything to add, Burt? Burt W. Podbere -- Chief Financial Officer Yeah. I think all the things that George said gives us more confidence in our ability to reaccelerate in the back half of next year. Operator Our next question comes from Gregg Moskowitz from Mizuho. Please unmute your line and ask your question. Gregg Moskowitz -- Analyst OK. Great. Thank you very much. Your RPO growth accelerated quite strongly this quarter and your RPO bookings growth, which at least by our estimates, is greater than 60%. That appears to be the highest we've seen since fiscal 2022. Now, clearly, the customer commitment packages, and Flex had a significant impact here. And so, I guess with that in mind, it would just be helpful, Burt, to get your perspective on, A, how the cRPO performance was; and B, how we should generally be thinking about what these strong bookings might mean for revenue recognition and ARR when we look down the road. Thanks. Burt W. Podbere -- Chief Financial Officer Thanks, Gregg. So, I think, ultimately, when we think about RPO and we think about the increase, it does talk to just longer deals, longer duration. I think all the things that we've talked about, whether it's CCP, whether it's CrowdStrike Financial Services, they all add in terms of helping customers do more with us for longer periods of time, and that's reflected in our RPO number. Operator Our next call comes from John DiFucci with Guggenheim. Please unmute your line and ask your question. John Difucci -- Analyst Thanks for taking my question. Burt, listen, you've always been really clear, which has, I think, been great for investors and great for the stock, too. And ARR is always -- and revenue have always been great -- had a great connection over time. Can you -- and I know there's some small print, and I -- but I don't -- can you explain to us what's making this coupling diverge? And I don't know, hopefully, it's not a long explanation. It's probably why you haven't said it. But can you do that? Can you give us like even if it's temporary here? Because I don't want to see -- my model works great for you and you're the first ones to do this. And it's really clear and you put it right out there for everybody to see. But why is that going to diverge? Why could it diverge in the short term? Burt W. Podbere -- Chief Financial Officer So, thanks, John. So, number one, for all your comments, appreciate all your comments that you made. So, first, big picture, it's temporary. The divergence is temporary. And I think it just talks to when you have a CCP and out of the gate, there is, for example, extended time that's offered, there's going to be a more immediate hit on ARR than revenue. It's going to lag. And so, that's how we think about it and that's how I've tried to be clear on explaining it. Hopefully, that helps, John. Operator Thank you. This concludes today's question-and-answer session. I would now like to turn the call back over to George Kurtz for closing remarks. George Kurtz -- Co-Founder, President, and Chief Financial Officer OK. Thank you, operator. So, thank you all for your time today. We appreciate your continued support and look forward to seeing you at our upcoming investor events.

Intuit (INTU) Q1 2025 Earnings Call Transcript | The Motley Fool

Good afternoon. My name is David, and I will be your conference operator. At this time, I'd like to welcome everyone to Intuit's first quarter fiscal year 2025 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator instructions] With that, I'll now turn the call over to Kim Watkins, Intuit's vice president of investor relations. Ms. Watkins? Kim A. Watkins -- Vice President, Investor Relations Thanks, David. Good afternoon, and welcome to Intuit's first quarter fiscal 2025 conference call. I'm here with Intuit's CEO, Sasan Goodarzi; and our CFO, Sandeep Aujla. Before we start, I'd like to remind everyone that our remarks will include forward-looking statements. There are a number of factors that could cause Intuit's results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2024, and our other SEC filings. All of those documents are available on the investor relations page of Intuit's website at intuit.com. We assume no obligation to update any forward-looking statement. Some of the numbers in these remarks are presented on a non-GAAP basis. We've reconciled the comparable GAAP and non-GAAP numbers in today's press release. Unless otherwise noted, all growth rates refer to the current period versus the comparable prior-year period, and the business metrics and associated growth rates refer to worldwide business metrics. A copy of our prepared remarks and supplemental financial information will be available on our website after this call ends. Great. Thank you, Kim, and thanks to all of you for joining us today. It was wonderful to see many of you at investor day. We hope you are inspired by our momentum and innovation that demonstrates the power of our AI-driven expert platform strategy, which is delivering tangible benefits for our customers and fueling into its growth. With that as context, let's talk about the first quarter. We have strong start to the year, growing revenue 10% driven by our global business solutions group online ecosystem revenue growth of 20% and Credit Karma revenue growth of 29%. We're confident in delivering double-digit revenue growth and margin expansion this year, and we're reiterating our full year guidance. The future is here and it's AI driven. And it will fundamentally transform every part of our work and personal life. We've transformed the company from a tax and accounting platform to an AI-driven expert platform. We're leading this transformation by creating done-for-you experiences where the customer is always in control. Enabled by AI, with access to AI powered human experts, our platform fuels the financial success of consumers and businesses. We have a significant competitive advantage with our scale of data, data services, AI capabilities, ecosystem of applications, and our large network of AI-powered virtual experts. We're disrupting the categories we operate in to drive better money outcomes for consumers and businesses. The progress we've delivered and the proof points we're observing continue to bolster our confidence in our strategy. I will now share how our Big Bets are solving customer problems and powering our success as a platform. Starting with our consumer platform, Big Bet 3 is focused on helping customers make smart money decisions, take steps to improve their financial health year round, achieve their best tax outcome, and accelerate the receipt of their refund. We're focusing on winning as an AI-driven expert platform by leading with ease of use, speed to completion, and best price for our customers. Our strategy is to first win in the do-it-yourself tax category by improving value for low-income filers, accelerating growth with more complex filers, and offering fast refund access. Second, we're disrupting the assisted tax category. We're showing how the new way of taxes done for you is superior in experience, speed, and price. We've expanded marketing to drive awareness ahead of tax season and are working on methods to surface our experts in local search and match customers with the best expert for them. Third, we're driving year-round engagement with our consumer platform, accelerating money benefits, including refund access and growing Credit Karma across our verticals, such as prime and insurance, all of which accelerates monetization. Moving on to our business platform, our vision is to help customers run and grow their businesses end to end. We made significant progress during the quarter across two of our Big Bets. Our first big bet is to revolutionize speed to benefit, delivering done-for-you experiences with Intuit Assist, our gen AI-powered financial assistant. After successfully piloting Intuit Assist with over 2 million customers, it is now generally available to all U.S. QuickBooks Online customers. To help businesses manage cash flow, Intuit Assist uses AI agents to automatically turn emails, electronic documents, and hand-written notes into estimates, invoices, and bills. It spots potential cash flow shortages in real-time and suggests solutions like applying for a line of credit. It also generates invoice reminders to help customers get paid 45% faster, an average of five days sooner, and automates accounting by matching transactions to bills and invoices for review. This is the power of our AI-driven expert platform, delivering five tangible benefits to our customers, which we expect to drive increased adoption of our platform. And we are just getting started. Shifting to Big Bet 5, disrupt the mid-market, which represents an $89 billion TAM. We already have 800,000 mid-market customers in our franchise who can grow into our QBO Advanced and Intuit Enterprise Suite offerings. In fiscal 2024, QBO Advanced customers grew 28%, online ecosystem revenue grew 36%, and ecosystem ARPC was 5x that of the rest of the QBO base. We introduced Intuit Enterprise Suite, or IES, to expand further upmarket from where we are today with a configurable suite of integrated financial products for mid-market businesses. With IES, we're focusing on addressing the needs of complex businesses, enabling multi-entity management, leveraging AI agents to boost productivity through powerful automation, and delivering actionable insights. While it's early days, I'll share two customer examples that highlight the opportunity ahead and give us confidence in our strategy. We signed an eight-entity RV park operator with approximately $10 million in annual revenue who was evaluating competitive solutions to streamline its workflow and consolidate reporting across entities. With the seamless upgrade to the IES platform, the company went from outsourcing its multi-entity reporting to a fractional CFO, which took several days, to being able to do this on its own in just five minutes. With this data immediately accessible and at its fingertips, the company can make the decisions it needs to run and grow its business. Their CTO referred to IES as a game changer for their business, and values the relationship-based AI-powered support. We also recently signed an economic development organization with more than $60 million in annual revenue across 18 corporate entities. As part of its IES contract, this customer also adopted bill pay, payments, and payroll. For customers like this, having all of these services in a single platform solves many challenges by seamlessly integrating data that previously came from multiple apps and point solutions, helping them streamline operations and save time. Last month, we hosted our first-ever Intuit Connect conference with more than 2,000 attendees, including mid-market businesses and the large accounting firms that serve them. We showcased our vision for an end-to-end business platform that fuels revenue and profitability growth for our business customers and the success of accountants. We spotlighted IES, and the initial reaction we received at the event was overwhelmingly positive. Customers that have already been using the offering are strong advocates, sharing that IES is helping them see how their business is performing, saving them time and helping them make the decisions they need to improve growth and cash flow. In addition, current customers are finding it easier and less costly to upgrade to IES than switch to an entirely new platform. We are excited more than ever to serve the $89 billion mid-market TAM to fuel the success of large businesses and accountants. Wrapping up, we are honored to be ranked No. 3 on Forbes' America's Best Companies list which came out this month. Forbes evaluated the nation's largest public companies and considered factors such as financial performance, trust, and customer and employee satisfaction. With the progress and momentum we are delivering, we continue to believe we are well-positioned to win as an end-to-end platform with done-for-you experiences that fuel the success of our consumers, small, and mid-market businesses. Thanks, Sasan. We delivered a strong first quarter of fiscal 2025 across the company. Our first quarter results include: revenue of $3.3 billion, up 10%; GAAP operating income of $271 million, versus $307 million last year; non-GAAP operating income of $953 million versus $960 million last year; GAAP diluted earnings per share of $0.70 versus $0.85 a year ago; and non-GAAP diluted earnings per share of $2.50 versus $2.47 last year. Our GAAP results reflect a restructuring charge of $9 million recognized in the quarter related to the organizational changes we announced in July and a $42 million net loss on a private company investment. Now, turning to the business segments starting with the global business solutions group. Our business platform helps customers run and grow their business end to end. Global business solutions group revenue grew 9% during Q1, driven by online ecosystem revenue growth of 20%, a two-point acceleration from the year-over-year growth we saw in Q4. This was partially offset by a 17% decline in desktop ecosystem revenue, reflecting the desktop offering changes we made in early fiscal 2024 and highlighted last quarter. The momentum in our online ecosystem is demonstrating the power of our small and mid-market business platform and the mission-critical nature of our offerings as customers look to grow their business and improve cash flow in any economic environment. QuickBooks Online accounting revenue grew 21% in Q1, driven by customer growth, higher effective prices, and mix shift. We continue to prioritize disrupting the mid-market through continued focus on both go-to-market motions and product innovations, which we expect to continue driving ARPC growth. Online services revenue grew 19% in Q1, driven by money offerings, which include payments, capital, and bill pay, payroll, and Mailchimp. Within money, revenue growth in the quarter reflects payments revenue growth, which was driven by customer growth, higher effective prices, and an increase in total payment volume per customer, and QuickBooks Capital revenue growth. Total online payment volume growth in Q1 was 17%. Within payroll, revenue growth in the quarter reflects customer growth, higher effective prices, and a mix shift toward higher end offerings. Within Mailchimp, revenue growth in the quarter was driven by higher effective prices and paid customer growth. We're seeing good progress serving mid-market customers in Mailchimp but are seeing higher churn from smaller customers. We are addressing this by making product enhancements and driving feature discoverability and adoption to improve first-time use and customer retention. While we feel good about the product work we're prioritizing, we are expecting it to take a few quarters to deliver improved outcomes at scale. In addition, beginning next quarter, we are lapping the price changes we made in Q2 of last year. We remain confident in, and are executing on, our vision of an end-to-end business platform that integrates the power of Mailchimp and QuickBooks services, enabling our customers to both run and grow their business, all in one place. Third, we're executing our international strategy, which includes leading with our connected business platform in our established markets and leading with Mailchimp in all other markets as we continue to execute on a localized product and line-up. On a constant currency basis, total international online ecosystem revenue grew 10 percent in Q1. As we shared at investor day, we win as a platform company. Our online ecosystem revenue growth reflects the progress we are making with our strategy of serving both small businesses and mid-market businesses with more complex needs. This represents an addressable market of over $180 billion, roughly half of which is mid-market. In Q1, online ecosystem revenue grew 20%, including approximately 42% growth in online ecosystem revenue for QBO Advanced and Intuit Enterprise Suite. This reflects our progress serving customers with our mid-market offerings. Online ecosystem revenue for small business and the rest of the base grew a strong 17%. We are excited about our progress in serving mid-market customers while continuing to focus on small businesses. Looking ahead, we continue to expect online ecosystem revenue in total to grow approximately 20% in fiscal 2025. Turning to desktop. During Q1, desktop ecosystem revenue declined 17%, including QuickBooks Desktop Enterprise revenue which declined in the low teens. As we described last quarter, Q1 desktop ecosystem revenue reflects changes the company made to its QuickBooks desktop offerings in early fiscal 2024 to complete the transition to a recurring subscription model, including more frequent product updates. We continue to expect desktop ecosystem revenue to return to growth in Q2. And overall, we expect desktop ecosystem revenue to grow in the low single digits in fiscal 2025. Turning to our consumer platform. Our consumer platform is helping customers make smart money decisions, take steps to improve their financial health year round, achieve their best tax outcome, and accelerate receipt of their tax refund. Starting with Credit Karma. Building on the momentum we saw each quarter in fiscal 2024, Credit Karma revenue growth accelerated to 29% during Q1, reflecting strength in personal loans, auto insurance, and credit cards. On a product basis, personal loans accounted for 11 points of growth, auto insurance accounted for 9 points, and credit cards accounted for 8 points. Insurance growth reflects the continuing strength we've seen in partners' spend that started in Q3 of fiscal 2024. We are excited about the opportunity ahead for Credit Karma as we execute our strategy to drive engagement, accelerate money benefits across our consumer platform, and grow in prime and insurance. Our vision is to create one consumer platform, with seamless integration of TurboTax and Credit Karma products, that delivers year-round benefits for customers and drives monetization for Intuit. We are excited by our significant progress this year. Moving to consumer and Pro Tax groups. Consumer group revenue declined 6%, as we lapped the period a year ago that included the extended tax filing deadline for most California filers. Our focus this season is on ease and speed at the best price. Our strategy is to win in DIY tax, disrupt the assisted tax category, and create one consumer financial platform by delivering year-round benefits leading to engagement and monetization. We launched new experiences during the extension season this year, and the results we saw further bolster our confidence in our strategy as we look ahead. Turning to the Pro Tax group, revenue was $39 million in Q1, down 7%, as we lapped the period a year ago that included the extended tax filing deadline for most California filers. In summary, I'm pleased with our early momentum this fiscal year and our opportunities ahead. Shifting to our balance sheet and capital allocation. Our financial principles guide our decisions, they remain our long-term commitment and are unchanged. We finished the quarter with approximately $3.4 billion in cash and investments and $6.1 billion in debt on our balance sheet. We repurchased $570 million of stock during the first quarter. Depending on market conditions and other factors, our aim is to be in the market each quarter to offset dilution from share-based compensation over a three-year period. The board approved a quarterly dividend of $1.04 per share, payable on January 17, 2025. This represents a 16% increase per share versus last year. Moving on to guidance. We are reaffirming our fiscal 2025 guidance. This includes: total company revenue growth of 12% to 13%, GAAP operating income growth of 28% to 30%, non-GAAP operating income growth of 13% to 14%, GAAP diluted earnings-per-share growth of 18% to 20%, and non-GAAP diluted earnings-per-share growth of 13% to 14%. GAAP guidance reflects an expected $14 million restructuring charge related to the reorganization we announced in July. Our guidance for the second quarter of fiscal 2025 includes total company revenue growth of 13% to 14%. This includes our expectation for a single-digit decline in consumer group revenue due to some promotional changes in retail channels largely related to our desktop offering. This only impacts revenue timing and does not impact overall unit or revenue expectations for fiscal year 2025. GAAP earnings per share of $0.84 to $0.90, and non-GAAP earnings per share of $2.55 to $2.61. You can find our full fiscal 2025 and Q2 guidance details in our press release and on our fact sheet. Excellent. Thank you, Sandeep. We remain confident in our long-term growth strategy, including double-digit revenue growth and operating income growing faster than revenue. We have a durable advantage with our depth of data and AI capabilities, and the strategy to win given the proof points we're observing. With less than 5% penetration of our $300 billion in TAM, we have a massive runway ahead of us. Let's now open it up to your questions. Operator [Operator instructions] We'll take our first question from Brad Zelnick with Deutsche Bank. Please go ahead. Your line is open. Brad Zelnick -- Analyst Great. Thank you so much for taking the question, and congrats on a strong start to the year. As we look through the mix, you know, starting the year with about 20% online ecosystem growth, I think, was just barely in line with what some were modeling. How should we think, Sandeep, about the progression in drivers that will get us to your full year GBS guidance? And what might be the greatest sources of upside? Sandeep Aujla -- Executive Vice President, Chief Financial Officer Brad, thanks for your question. You know, we are off to a great start in the global business solutions group. You mentioned the 20% on ecosystem revenue growth, which is a two-point acceleration from Q4. And as we look ahead and, you know, it's the same things that drove the acceleration. It is a continued strong customer engagement of the platform. We saw good attrition -- sorry, good retention -- sorry, low attrition after our price changes. We are seeing good mix shift. I shared that the mid-market grew approximately 42%, and that is driving the improvements and should continue for the remainder of the year. And we're seeing good adoption of our services. So, all of those things are what we feel confident in, and it reinforces our confidence in the guidance that we reaffirmed today. Brad Zelnick -- Analyst Thank you, it's very helpful. Maybe just a quick follow up. If I look at TurboTax marketing expense in the quarter, I think it was up $46 million year on year and a strategy that has you out in front of filers even earlier this year and ahead of the season, which, by the way, we see the ads, and I think they're great. How should we think about the overall strategy and expected marketing spend over the full season? Thank you. Sandeep Aujla -- Executive Vice President, Chief Financial Officer Brad, as we shared previously, our strategy with the consumer group is to disrupt the assisted tax category. And one of the things that we know for as we have continued to evaluate the market is many customers make the decision on who they're going to use the following year to do their filing well before January, which is when, traditionally, the consumer group marketing campaigns will start. With that, and as we shared previously, we started our marketing campaigns earlier. And that actually drove really strong consideration by what we call prior assisted, those who got their taxes done through the system method this year. We saw a strong lift in traffic and consideration and, even more so, in our targeted segments that we are going after for the assisted category. So, that reinforced the guidance, our belief that that was a good spend, good ROI and bolsters the conference for the full year. You should expect us to continue to optimize the spend throughout the entire tax season. And I would expect consumer group marketing budget to be up slightly but not more so than that. We'll take our next question from Keith Weiss with Morgan Stanley. Please go ahead. Your line is open. Keith Weiss -- Analyst Thank you, guys, for taking the question, and congratulations on a good start to the year. Sorry to harp on a part of the equation that's not going as well, but on Mailchimp, the churn at the lower end of the base that you mentioned on the call, I don't recall hearing that previously from you guys. So, is that a new phenomenon that you're seeing in the marketplace? And on the flip side of the equation, can you talk to us a little bit about where we are with the integrated sort of like the bundled solution? It seems to make -- there's a lot of industrial logic behind being able to offer your customers both sort of like the backend and the front office solution together. Where are we in sort of teasing out those synergies and getting that bundle in the market and driving good results in the market? Sasan K. Goodarzi -- Chief Executive Officer and Director Hey, Keith, thanks for your question. Let me take it. You know, first and foremost, when you look at the Intuit Enterprise Suite, Mailchimp is actually part of that suite and available to our customers today. However, in context of a deeply integrated experience across all of our services, I would say think about the expectation of, you know, several quarters from now. We should be in the marketplace with our really end-to-end experience that where there's deeper and much depth in the integration of the product and, more importantly, all the data and AI capabilities that allows us to create done for your experiences. So, think about it as several quarters. We are in sort of final stages of building it out and having customers tested. So, that's one element of your question. The second element of your question is the reason we called out churn on the low end is because we've had an incredibly accelerated set of innovation on the platform, particularly for mid-market customers, from just powerful analytics and segmentation, audience import, SMS capabilities in even more countries. And as we've done that for mid-market customers, which has actually been driving customer growth in the mid-market, it made discovery and usability tougher than it should be for the very, very small customers. And so, we have a team that's really focused on first-time use and first-time benefit so that these smaller customers can get the benefit of some of these larger innovations that I just talked about that our mid-market customers are enjoying. And we just wanted to be clear and call it out. Keith Weiss -- Analyst Got it. And just to be clear, it's more so from sort of -- it is more of an idiosyncratic issue with that innovation and not a broader market commentary or macro weakness that sometimes you see in smaller customers and more marketing-focused solutions. It's not about the macro. Sasan K. Goodarzi -- Chief Executive Officer and Director It is not. It is not at all about the macro. It's driven entirely by all of our innovation that is benefiting the larger customers. But frankly, I think we have an opportunity to make the first time use for smaller customers much better, which is exactly what we're working on. We'll take our next question from Siti Panigrahi with Mizuho. Please go ahead. Your line is open. Siti Panigrahi -- Analyst Thanks for taking my question, and congratulations on a good start to the year. I want to dig into the online ecosystem and mainly QBO online accounting. Good to see that two-point acceleration. But -- so you guys started this mid-market go to market sales team hiring. So, wondering where are you in terms of hiring and ramp. And have you started seeing like the contribution this quarter from that that drove that acceleration? And if so, how should we think about the contribution for subsequent quarter? Is it something we should see now? Or will take a year for that -- you know, for that team to wrap and start contributing revenue? Sasan K. Goodarzi -- Chief Executive Officer and Director Yeah, Siti, thank you for your question. Let me kick this off. You know, first of all, if you reflect back on what Sandeep talked about earlier, when you look at our overall 20% online ecosystem revenue growth, you know, 42% of that -- not 42% of it, but we had 42% growth when you look at our QBO Advanced and Intuit Enterprise platform and all the services that comes with it. And we wanted to explicitly call that out because as we continue to build out our go-to-market capabilities in the mid-market, it will benefit QBO Advanced and services, and it will benefit, of course, with the Enterprise Suite. And so, we are actually seeing the benefit now, and it's material. We've also added over 200 account managers, business development folks that are very geared toward outside selling. And that is contributing to where we are today, but frankly, the biggest contribution of all those investments that we've made are to come. And so, we view that in the quarters to come. And, therefore, you know, if I were to put a punchline on this, the acceleration that you saw from last quarter to this quarter of 18% to 20% growth with our online ecosystem revenue growth, you know, it came from more services, it came from mid-market, which is both QBO Advanced and Intuit Enterprise Suite. It came from better retention, higher ARPC, better mix. So, we're sort of clicking on all the key cylinders that strategically we've communicated to you all. And we expect that to continue. Siti Panigrahi -- Analyst Thanks for the color. And quick follow-up to your Q2 guidance for consumer. I understand only -- January quarter is a big chunk of that comes from desktop TurboTax. I understand that. But what was this promotion about? I understand that you guys wanted to push a consumer to online, but what's driving the extra promotion? Sasan K. Goodarzi -- Chief Executive Officer and Director Yeah, you know, it's, first of all, a couple of factors. The primary factor is, you know, typically, we would do promotions from December time frame to middle of January. And really, what we've aligned more so this year with our retail partners because this is TurboTax Desktop is really the buying patterns and the buying behaviors of those consumers that buy our desktop product. What we've done is we've really lined up the promotional time frame that now starts much later in January and goes beyond January. And that positions us better to deliver for consumers, deliver for their buying behaviors, again, on TurboTask Desktop. And because of that move, that really shifted revenue into Q3. Our full year is as is, and it just shifted between quarters. And we also, of course, estimate then also the timing of the IRS opening and those factors play into it, but the biggest one is what I just described. And so, we feel very bullish and confident about the year and, particularly, because of what Sandeep articulated. We launched a lot of our lineup changes, our experiences, and our campaign, which we've never tested in the time of the year that we did this year. And frankly, we're more bullish and confident about this coming season than we have been for a while just because a lot of the results that we saw based on everything that we launched. We'll take our next question from Scott Schneeberger with Oppenheimer. Please go ahead. Your line is open. Scott Schneeberger -- Analyst Thanks very much. One question for each of you, and I think they're kind of tied together. Sasan, the early marketing strategy, you know, saw it earlier than ever before, but Brad brought it up, and we talked about it a little bit since. It was good, but I think that you had to -- or you had changed that up a little bit due to NATP. And just curious if you could give us a state of the union on how you are going to market, what that campaign is. And you said that you're seeing early success. If you could just elaborate a little bit more on that. And then, Sandeep, for you, the EPS guide for the upcoming quarter, we're seeing revenue growth in the next quarter, but that is guided down year over year. So, if you could just clarify it a little bit more. I think you've given us the big components, but if you could talk us through that a little bit. I'll turn it over. Thank you both. Sasan K. Goodarzi -- Chief Executive Officer and Director Yeah, sure, Scott. Thank you for the question. Let me take the tax element, and then I'll turn it over to Sandeep. You know, first of all, from all the learnings and insights that that we've had to really disrupt the assisted tax segment, one element was just really a lot more clarity and precision in terms of timing of decisions by the customers that have somebody else do their taxes for them. And that's what really drove the early marketing campaign. And there was a couple of things we were looking for. One, now that we're in market, does it raise heads? Two, will people engage? And three, how much does price matter when you engage sort of pre-season? And I would tell you that the results were overwhelmingly positive. It raised heads. There was engagement better than what we thought. And price was a significant factor in a very positive way. And that informs the campaign that we are putting together for season. And really, the campaign we're putting together for season is really about demonstrating what a new way of taxes looks like and what it means. And it will focus on experience, speed, and best price. And to specifically answer your question around what we've learned, one of the biggest things that we learned in the campaign that we just ran was really the focus is about the new way. And the focus is about a better experience, and it's about a better price. What we learned is that we have an opportunity to continue to do that but ensure that it doesn't come across that the experts of the old way is a bad experience. Because at the end of the day, experts are critical to our experience. The accountants that partner with us. There are a lot of them are on our platform. The 12,000 experts that we have on our platform are the very accountants that we partner with. And the thing that we learned is to ensure that we really focus on the experience, the speed of it, and the price of it, and then not at all depict that the expert in the old way doesn't deliver a great experience or is not a good expert. So, that's the learning that we've had. That's how what we are incorporating as we look at the campaign that we're developing. I will just end with the punchline that it worked really well, and we're super excited about it. Before I turn it over to Sandeep, I wanted to just use this opportunity since you asked about tax to just address something that I know is on the minds of a few folks and, opportunistically, if I could address it. And that was some of the news this week around the new administration and whether or not they would create new tax software or free tax software. And I just wanted to touch on that while I have the floor. First and foremost, I am personally engaged with the new leaders and the new administration coming in. And what I would share with you is a couple of key priorities that I think all of you have seen in the news, but I've personally also learned that really matters to the new leaders and new administration coming in. One is being very aggressive on budget cuts and workforce reduction. This really streamlined the operations of the government. Two is to really look at the regulatory environment and to reduce the regulatory environment that ultimately will benefit consumers and businesses. Third, reduce fraud, whether it's from identity theft and/or loans. And then, last but not least is if there's an opportunity to actually simplify the tax code. I'm actually excited about those priorities because those are all priorities that we can help as a company. I would tell you that the last thing that sort of is on the mind of the new leaders coming in is adding to the bureaucracy and adding to the investment levels of something that already exists in private industry. So, when it comes to free tax software, as you all know, our stance is it already exists. Private industry has free software available to all Americans. Our perspective and my learning in terms of what's most important, the last thing that the new folks want to do is to add to that bureaucracy and to add investments in an area where the offerings already exist and private industry already serves it. With all that said, free is available to all consumers. And if tomorrow, five new free tax offerings become available in the market, it does not have an impact to the structure of the market because free is a commodity for the do-it-yourself category. So, I wanted to just opportunistically touch on that while I have the floor. Sandeep, I'll turn it over to you on EPS. Sandeep Aujla -- Executive Vice President, Chief Financial Officer Sure. Hey, Scott, on the EPS, one thing to keep in mind is that we always optimize our spend for the full year, and we continue to feel really solid about our guidance for the year. And as I look internally, how we are leveraging AI in how we work as a company, I see tremendous opportunities for us to continue to expand our margin. But now, let me address your question on Q2 specifically. This is a continuation and all-in strategy on the things that we talked about as it relates to Q1. In consumer group, we are continuing our marketing opportunities. Historically, they would have started in the January timeframe. And now, they're continuing through November and December, which wasn't there the past year. Credit Karma is in a very different position this year. Last year, Q1, we were negative 5%. This year, we're 29%. We're seeing partners lean in. So, we are also leaning into our go-to-market and our marketing campaigns there and seeing exceptionally strong ROI than payback periods there. And lastly, in the global business solutions group, we touched on the approximately 200 people that we have in the mid-market. So, that's now in a run rate from Q1 heading into Q2. You know, of course, we'll scale that only as we see ROI and payback periods that are palatable to us. But the other thing on the global business solutions group to keep in mind is, last year, the campaigns took us a little longer to come into market. This year, our campaigns were ready earlier, and the team decided to go to market earlier because there were opportunities for us to get even better ROI by optimizing that spend through all four quarters as opposed to last year when we leaned in more toward the January busy season. So, those are -- again, your key takeaway should be all of this is in line with our strategy, and we continue to have lots of confidence in our full year path to margin expansion as a company. Scott Schneeberger -- Analyst Great. Thank you both for all the color and Sasan for that extra color and very well put. We'll take our next question from Raimo Lenschow with Barclays. Please go ahead. Your line is open. Raimo Lenschow -- Analyst Thank you. Thanks for the clarity from me as well, Sasan. My question is on the payment. If you look at the payment volumes, if I heard you correctly, it was 17%, decelerated a little bit. Can you talk a little bit about the puts and takes there? Because, you know, obviously, you know, you revamped the payment platform, and so, you know, that should be an area of healthy growth going forward as well. Like, how do I have to think about that number in that context? Thank you. Sasan K. Goodarzi -- Chief Executive Officer and Director Yeah, thank you for the question. A couple of things I would say. One, our momentum around our innovation around money and payments being one element of it continues to be an area where we're very bullish, particularly, as we penetrate with services, not only with small businesses but also in mid-market. There was a couple of factors that played into the 17% for the first quarter. One is the storms in the East Coast actually impacted a lot of service-based small businesses. We saw the impact, and we actually saw it start to come back. So, that's one element. And also, another element is just number of days that fell into this quarter versus the same quarter last year. So, those factors played into it, and we expect it to, in essence, accelerate as we look ahead. Raimo Lenschow -- Analyst OK, perfect. And then the other question I had was, as you kind of said earlier, Sasan, you're kind of now like, you know, more an AI platform. If you think about tax season or -- and the QBO business as well, how do you think about like the next iteration for how you weave that into the product to kind of, you know, keep the customer longer in the funnel, etc.? Is there any big changes we can expect for the tax season? I'm not asking you to kind of spill that out, but is there like -- how do you think about that evolution of weaving it into the product? Thank you. Sasan K. Goodarzi -- Chief Executive Officer and Director Yeah, great question. You know, first of all, just briefly start with the context of our entire strategy as a company is to create done-for-you experiences. Marketing is done for you, quote-to-cash is done for you, your books are done for you, your accounting is done for you, your taxes are done for you, and connecting you to financial products that are right for you as a consumer are done for you. The customer always in control and always with the path to an AI-powered human expert. That's the fundamental essence of our strategy to serve consumers, small businesses, and mid-market customers. And the whole premise of our investments around data and AI has been toward that. You asked about tax, but let me just start 30 seconds with our excitement around Intuit Assist. In essence, done-for-you experiences being available to all of our business customers now. It has been an incredible amount of work. And the reaction from our small business has been overwhelmingly positive. You know, today, now, all of our small businesses can take an email, they can take a picture of a handwritten note, they can take any file, and we will create on their behalf an estimate, an invoice, a bill. We will do the accounting for them in the background and match and categorize everything for them. We will ultimately help them if they're a construction company on the road, tap to pay for the handwritten note that they just took a picture of and get paid right there on the job site, be able to help them with where they're going to have cash flow shortfalls and make it immediately a line of credit available for them. That's now all Intuit Assist, the gen AI-powered assistant that will do the work for our customers, generally available for all of our customers. That's a huge deal. You can imagine, as we look ahead, our goal is to create a done-for-you experience across the entire platform, across Mailchimp and QuickBooks and all of the services. To answer your question around tax, I think what I would say is you will see, this year, based on all of the investments that we've made over the last several years, leveraging data and AI to dramatically streamline experiences by how we leverage the data and how we streamline getting rights at a refund. It'll make it far more superior and easy. Our focus is best experience, the fastest, and at the best price for those that want to do it themselves, but also for those that want our experts to do it for them. So, our experts are going to be far more effective and efficient. They're going to be able to get your taxes done in less than an hour at the best price, all of which is the result of all of the data and AI investments and revamped experiences that we will have in season this year. We'll take our next question from Taylor McGinnis with UBS. Please go ahead. Your line is open. Taylor McGinnis -- Analyst Yeah, hi. Thanks so much for taking my question. So, if I look at the implied operating margin guide for the second half, it looks higher than what you guys have done in past years. So, when we just think about the seasonality of this year compared to some past years, is the messaging is that, you know, you're seeing more front unloading of expenses compared to last and that should drive stronger growth in the second half? Maybe you can just talk about some of the drivers in the second-half expansion, you know, despite some of the continued scaling on the go-to-market investments in other areas. Sure. Hey, Taylor. So, the investments that we started early on, both on the consumer side, as I shared, that drove a lot of head lifters with the prior year assisted that, you know, came to our side. So, that is something that will pay dividends as you get into the tax season. The sales force that we are building in mid market, you can imagine building -- hiring those 200 people. There's a training component to it. There's an efficiency component to it. But that sales force gets more and more effective week by week by week. So, that helps drive more dividends as you get into the into the back half. And then, on the global business solutions group, the team looked at the spend and is optimizing the spend to drive consideration, drive people and customers into the platform that then will add on services. And as you know, from having followed the company for a long time, services take a while to ramp up as they onboard their employees, as they bring their payment volumes onto our rails. So, it is all consistent with our strategy, which is optimize the spend to maximize ROI for the full year. And that's what's giving us the confidence that the trajectory continues to strengthen into the back half. We'll take our next question from Michael Turrin with Wells Fargo Securities. Please go ahead. Your line is open. Michael Turrin -- Analyst Hey, great. Thanks very much. Appreciate you taking the questions. Sasan, I'm going to give you a chance to go back to Assist. We've seen the QuickBook announcements as well. Was hoping you could just level set for us how you're thinking about capturing the value of those, whether it's through monetization or just other costs or economic benefits you're observing as you start to get those tools in the hands of more of your customers. Sasan K. Goodarzi -- Chief Executive Officer and Director And, Michael, are you referring to the Intuit Assist that we just announced this week? Is that what you're referring to? Got it. Yep, absolutely. So, I would say, you know, the biggest thing that we learned having this in the hands of, you know, 2 million customers before we made it generally available, and also experiences that we had in beta and alpha for new prospects, there's really, I would say, two big outcomes: improved conversion, improved retention, and really, a third outcome, which is improved adoption of services. Those are -- and those, if you think about back to what Sandeep and I shared, I think, it was 18 months ago at investor day, our perspective around creating done-for-you experiences with Intuit Assist, we believe will lead to new customer growth. It will lead to higher adoption of services. And we believe, over time, there could be offering stand-alone SKUs that are completely -- they do all the work for you, and they could be separate-priced SKUs. What we've proven so far to ourselves is this creates new customer growth. It could create better retention but also creates better adoption of services. So, like if you think about what we just launched this week, which is you can take an email, a photo of a handwritten note or a file, and create an estimate, an invoice, and create a bill, that all drives bill pay and payments growth, as an illustrative example. So, those are the things that we've learned as we've been sort of in beta and alpha. And now that we're in GA, and particularly what we expect this coming season in TurboTax, new customer growth adoption of our services is what we see as the outcome and why we're so excited as we look ahead. Michael Turrin -- Analyst Great. If I can just ask on the Credit Karma bounce back, based on what you're seeing, is there any way to help just split how much of that is macro versus something product-specific you've maybe incorporated into the experience there? And maybe just help level set what you're seeing today versus what you're guiding for rest of the year, given the fiscal year guide now sits below the run rate you just put up this quarter. Thank you. Sandeep Aujla -- Executive Vice President, Chief Financial Officer Yeah, absolutely. Michael, I would -- you know, it's a blend of both. If I had to attribute it, I'll say it's 50-50 now. On the personal loan side, having a more stable rate environment absolutely helps. And we saw partners lean into testing and lean into lending on the platform. But it's also -- credit goes to the team, the product team and the go-to-market team at Credit Karma as a -- invested into Intuit Assist as they invested into driving the right experiences and driving engagement across the platform and as they added more segments, such as the insurance segment, which has been quite strong starting Q3 last year. So, I would say it's a blend, and I would probably blend that about a 50-50 mix. We'll take our next question from Alex Zukin with Wolfe Research. Please go ahead. Your line is open. Alex Zukin -- Analyst Hey, guys. Thanks for taking the question, and congrats on the results. Sasan, I wanted to get your take on just the notion and the topic of what you're seeing in your business right now from a SMB demand environment perspective. Kind of are you starting to see the beginnings of a recovery? How and when do you expect that to show up? And on the very fast-developing agentic opportunity for kind of AI utilization, monetization in your customer base, when do you believe or strongly think we should start seeing impacts from a monetization standpoint, both with Assist around either, does it change the magnitude, does it change the strategy over the next few quarters? Sasan K. Goodarzi -- Chief Executive Officer and Director Yeah, great. Thank you, Alex, for the for the question. I'll take the first one. I would say a couple of things. One, it's a stable environment. Our belief, which is not baked into our guidance, is that we will see an improved environment as we look ahead in 2025, particularly just with some of the things that I mentioned earlier around just interest rates, jobs, you know, the regulatory environment. You know, these things have a real burden on businesses. And we believe that, you know, a better future is to come, none of which we're making and assuming, but important to say. So, stable, we believe the future will be better. And I would just end by saying, really the growth that we are experiencing. If you look at our overall guidance for the year and our business franchise of 16% to 17%, and then the 20% online revenue growth that we delivered in Q1 and that we would expect the rest of the year, that's all because of the power of our platform and the innovation on our platform that is actually saving customers money because they're digitizing their entire business and are able to run and grow their business in one place rather than multiple apps where they don't -- they spend a bunch of money, they don't really understand how their business is performing. And we're digitizing that with our platform. And so, our growth that you are -- that we're reporting, that you're experiencing is all because of our innovation. And we believe that as things -- demand starts improving, we think that will be impactful positively to our results. The second element of your question, you listen, our core thesis that we have proven over the years, and particularly internally as we just launched Intuit Assistant, made it generally available to all, is that the more we can do the work for customers, the more we will drive new customers into the franchise, the more we will drive penetration of services. And if you look at Intuit Enterprise Suite, you know, the biggest thing that we're learning from customers is they love the experience. Our AI agents are doing the work for them, helping them understand the performance of their business, helping them provide insights into things that may happen and actions that they do, they should take. Those are all our AI agents. And we believe our AI agents can ultimately do, you know, the -- enable them to do the work of a CFO, of a CMO, of a sales officer of these midsize businesses. And to get to the essence of your, your question, we haven't baked any of that into our year. We believe that these are going to be contributors of growth into the future and, of course, our desire is accelerating growth. Alex Zukin -- Analyst Very helpful. And then, maybe just a follow-up for Sandeep. So, is it as simple to say basically that the maybe slightly smaller earnings beat that we typically see when you have revenue outperformance to the magnitude that you've shown and the guide for Q2 on earnings being a bit lighter than consensus, is that just effectively mostly associated with timing of incremental spend for your some of your newer initiatives and some of the hiring from a go-to-market perspective? Is that -- is it more just shifting timing to the first half, to Taylor's point? Sandeep Aujla -- Executive Vice President, Chief Financial Officer Alex, that's exactly right. We always have, sometimes, things -- if you remember last year, Q1, we had some items move out of the quarter. This year, we had some items move in. We saw opportunities in areas such as Credit Karma to, you know, lean into investments earlier than we would have just given the behavior we were seeing from the partners. So, all to say we -- again, we optimize spend for the year. And when we saw revenue uplift, that gave us a little bit more flexibility to lean into Q1. We'll take our next question from Brad Reback with Stifel. Please go ahead. Your line is open. Brad Reback -- Analyst Great. Thanks very much. Sandeep, in the quarter, money represented well over half of the growth in online services. Should we expect that to continue here for the rest of the year? Or will the mix shift? Sandeep Aujla -- Executive Vice President, Chief Financial Officer You know, Brad, we don't, of course, guide by each sub segment, but we feel very bullish and confident in our money strategy, which includes, of course, payments, bill pay, and capital. The momentum, as you pointed out, has been strong in Q1, and I would expect that to continue throughout the year. And what I would point you back to is our confidence, our utmost confidence in the 20% online ecosystem growth for the year as we continue to scale the business, and the money portfolio is going to be a key contributor -- is a key contributor to that confidence. Brad Reback -- Analyst Got it. And just one follow-up. Given Sasan's comments on Mailchimp and your comment right there and the overall confidence in the 20%, it would feel like the recovery in Mailchimp is more a driver for next year than needed for this year. Sandeep Aujla -- Executive Vice President, Chief Financial Officer I would think about the Mailchimp as a several-quarter journey. We really want the team to nail the first-time use experience. We have internal KPS all around customer behavior and all related to FT -- first-time use, FTU what we call internally. So, yes, that's something that, you know, we're being patient with because we wanted a team to focus on the customer experience. So, that's not something that we're banking on for the confidence I shared in the 20%. We'll take our next question from Brent Thill with Jefferies. Please go ahead. Your line is open. Brent Thill -- Analyst Thanks. Sasan, just on the mid-market, you mentioned a couple of -- one of the deals in the early remarks. I'm just curious if you can give us more of an update in terms of where you're at, kind of mile markers. And I think there's some fear among investors that this is a much lower margin business that's going to require a heavier lift in a different kind of market. So, if you could just comment on how you feel long-term dynamics of that plays out? Sasan K. Goodarzi -- Chief Executive Officer and Director Yeah, Brent, thank you for your question. In fact, I would say it's the reverse. It is very high margin, very lucrative, high ARPC. And it's very similar to, I think, the concerns investors had four or five years ago when we talked about disrupting the assisted category and how we would do that, given we're talking about experts. And I would tell you that the answer that we gave then and the answer I'll give you now, there are a lot of parallels. The essence of our scale is because of all of our data investments, all of our AI investments, and all of our platform services. When you look at QBO Advanced and Intuit Enterprise Suite, it's actually fueled by a lot of the platform services that we have built over the last several years. And, therefore, when you look at the only thing that we are sort of adding is a couple of hundred folks that are in sales to really capture the opportunity. But the effectiveness and the efficiency that we have on the other side because of data and AI is significant. And so, this is actually quite lucrative. It's very high ARPC. It's not only new customers but existing customers upgrading. The service opportunity is massive. So, when you look at the fact that it's a platform driven by all the services that we already have, coupled with higher ARPC, it's actually far more lucrative than just when you look at our QBO base. So, we actually expected to play a dual role, number one, to continue to accelerate our growth. As you heard Sandeep talk about earlier, the overall online revenue growth was 20%. And Advanced and Enterprise Suite are growing 42% along with the services. That actually has even a second benefit, which is higher contribution over time to margin. So, it's actually the reverse of the concern that you articulated, very similar to when we shared in a couple of investor days ago that the variable margin of our TurboTax 5 was actually higher than just the TurboTax on its own. We believe the same will play out here. We'll take our next question from Mark Murphy with JPMorgan. Please go ahead. Mark Murphy -- Analyst Thank you very much. On the QuickBooks Enterprise Suite, it's clearly showing robustness. Sasan, how's the early response you're seeing if you can speak to the $20,000 ARPC mentioned earlier? Because you had mentioned a couple of, I think, surprisingly large customer wins on the call today. And I'm just wondering if you can comment on the response to some of the advanced functionality that relates to multiple locations and entities and consolidated segment reporting. Sasan K. Goodarzi -- Chief Executive Officer and Director Yeah, Mark, the way I would answer your question is I frequently will engage our large accountants and accounting firms and these large businesses. And I have the pleasure and the opportunity to engage a lot of them in a couple of days period very recently at Intuit Connect. And listen, I don't want to downplay what I'm about to say, but money is actually not the object here. These businesses, you know, when I spoke to the CFOs of these businesses or the owners of these businesses, the words that they use is "You've changed my life as a business." This is a game changer for really two, I would say, significant reasons. You know, one, they can actually see how their business is performing. So, put to the side that they go from days of trying to consolidate and understand how their business performing to now minutes, but knowing how their business is performing every day. Having insights and recommendations from us to inform their decision is actually quite significant. The other is when you go from using multiple apps and point solutions, everything is in one place. The amount of digitization that happens across all of your money movement, whether it's bill pay, whether it's payments, whether it's payroll, and having all of that inform your dashboard every day is a complete game changer. So, the biggest thing that we hear from them is actually about more things they would like to see. And from new customers that are in sectors that we don't yet serve, how can we serve them far more quickly because they're dying to get on into an Enterprise Suite? So, that's the way I would sort of describe the reaction. The other thing that we're working on, and I'll just end with this, is making sure that we also provide capabilities to feel the success of accountants and our sort of monetization model for accountants that not only is good for them but good for us to really, together, be able to serve the market together. And that is all the time we have for questions today. I'll turn the program back to our speakers for any additional or closing remarks. Sasan K. Goodarzi -- Chief Executive Officer and Director All right, well, awesome. Thank you. Listen, everybody, thank you for your time. Thank you for all your questions. This does conclude today's program. Thank you for your participation [Operator signoff]

Elastic (ESTC) Q2 2025 Earnings Call Transcript

Good day, and welcome to the Elastic second quarter fiscal 2025 earnings results conference call. All participants will be in listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [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 fiscal 2025 financial results. On the call, we have Ash Kulkarni, chief executive officer; Janesh Moorjani, chief financial officer and chief operating officer; and Eric Prengel, our incoming interim CFO. Following their prepared remarks, we will take questions. Our press release was issued today after the close of the market and is posted on our website. Slides, which are supplemental to this 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, or expectations regarding the demand for our products and solutions and our future revenue and other information. These forward-looking statements are based on factors currently known to us, speak only as of the date of this call, and are subject to risks and uncertainties that could cause actual results to differ materially. We disclaim any obligation to update or revise these forward-looking statements unless required by law. Please refer to the risks and uncertainties included in the press release that we issued earlier today, included in the slides posted on the investor relations website, and those more fully described in our filings with the Securities and Exchange Commission. We will also discuss certain non-GAAP financial measures. Disclosures regarding non-GAAP measures, including reconciliations with the most comparable GAAP measures can be found in the press release and slides. The webcast replay of this call will be available on our company website under the Investor Relations link. Our third quarter fiscal 2025 quiet period begins at the close of business on Friday, January 17th, 2025. We will be participating in Scotiabank's Global Technology Conference on December 10th, and the Needham Growth Conference on January 16th. With that, I'll turn it over to Ash. Ash Kulkarni -- Chief Executive Officer Thank you, Anthony, and thank you, everyone, for joining us on today's call. Elastic delivered a strong second quarter supported by solid sales execution and customer commitments. In Q2, we meaningfully exceeded guidance across all revenue and profitability metrics. Revenue grew by 18% year over year. Cloud revenue grew by 25% year over year, and we delivered a non-GAAP operating margin of 18%. We also increased the number of customers spending over 100K with us to 1,420. At the start of this fiscal year, we made sales segmentation changes to increase the focus on our key enterprise and high-potential mid-market customers. After some unexpected disruption in sales performance in Q1, we are now starting to see the benefits of the changes we made take hold. Our performance in Q2 reaffirms our confidence in our strategy and shows that we are well on our way to returning to the strong pace of sales execution that we have demonstrated in the past. In Q2, we saw strong customer commitments with key wins across all of our solution areas, especially in search powered by generative AI. We also saw continued consolidation onto the Elastic platform for security and observability, with many customers displacing incumbent legacy products and migrating onto our search AI platform. Turning to generative AI. Our momentum in this area continues to build. In Q2, we saw strong demand for our vector database as customers increasingly adopted Elastic for building semantic search and retrieval augmented generation or RAG applications. Our clear product differentiation and our relentless pace of innovation are helping us become a natural choice for customers building GenAI applications. We are seeing adoption and winning deals across many different industries and for use cases that seek to automate a wide variety of business processes. In Q2, we saw continued acceleration in our search business, with significant tailwinds from GenAI. In Q2, new customer commitments with GenAI almost doubled in dollar volume as compared to what we saw in Q1, with three of the deals we signed being greater than $1 million in annual contract value. We now have over 1,550 customers on Elastic Cloud using us for GenAI use cases with over 240 of these among our cohort of customers spending $100,000 or more with us annually. For example, this quarter, a U.S.-based global leader in the automotive industry expanded its relationship with Elastic in a multiyear seven-figure deal by selecting our Elasticsearch AI platform. The company has standardized Elastic's vector database as the backbone for their retrieval augmented generation and chatbot applications. Elastic's vector database powers over 30 chatbot clusters used for both internal employee support and customer-facing interactions to enhance efficiency by providing real-time relevant answers and driving improved productivity for the organization's workforce. Beyond chatbots, the company is leveraging Elastic's hybrid search capabilities, combining keyword and semantic search for broader applications. We also signed an expansion deal with a leading sporting goods retailer in North America to support their omnichannel experience. Using the Elasticsearch AI platform, the retailer will improve search relevance by adopting semantic search and using advanced AI relevance capabilities like learning to rank to improve margins and profitability in-store and online. The company chose Elastic for our deep expertise in retail search transformation and our integrated machine learning and search AI capabilities, all within a single platform, T3. In addition to GenAI, the other secular tailwind that we have been benefiting from is customer consolidation onto our platform for multiple use cases. Our ability to help customers reduce complexity and drive efficiency at a lower total cost of ownership by consolidating onto the Elastic platform for multiple use cases is helping us secure strong customer commitments and become an increasingly strategic part of their IT infrastructure. And we continue to invest in capabilities and incentives that make it possible for customers to migrate easily from incumbent solutions to Elastic. Last quarter, I talked about the Elastic Express Migration program and our search AI-powered automatic import functionality. And I'm pleased to say that we are seeing significant momentum from customers who are leveraging these to migrate off of legacy offerings onto our platform. These incentives and offerings were critical in helping us win over 40 competitive deals in Q2, where we either displaced incumbent solutions or onboarded new workloads through platform consolidation. This quarter, an online marketplace for short- and long-term homestays selected Elastic Security to replace its existing SIEM solution, marking a strategic shift toward a more scalable and AI-driven security approach. This seven-figure expansion deal involves replacing a complex and inefficient solution, unable to keep up as the company's threat landscape and data footprint grows. The Elasticsearch AI platform, including ESQL and our AI Assistant, will help the company streamline its security operations and ensure faster, more accurate threat detection. Cost efficiency at scale, seamless integration, and advanced AI features were significant factors in their choice of Elastic, positioning us as a key partner in their next-generation security infrastructure. In another seven-figure deal, we signed a new agreement with an insurance provider, displacing two competitive solutions for their cybersecurity operations. The company chose Elastic Security, leveraging our AI Assistant and attack discovery to strengthen their threat detection, incident response, and vulnerability management as part of their broader digital transformation efforts. Now turning to product innovations in Q2. We introduced a steady addition of new AI capabilities, including a number of features that significantly improve our performance as a vector database. We continue to innovate to maintain our position as the most downloaded vector database on the market. Elasticsearch now supports bit vectors, SIMD acceleration, and INT4 quantization to improve performance. And now Elastic is the first vector database to offer better binary quantization, now in tech preview. BBQ, as we refer to it, offers a 32x lower memory footprint compared to storing and searching full precision vectors. It also surpasses traditional methods like product quantization, delivering faster vector search at lower costs without compromising accuracy. Initial benchmarks are showing 30x less quantization time. This is a game changer for navigating the usual vector search trade-offs between cost and accuracy and is only available from Elastic. We also announced the general availability of AutoOps, the outcome of our acquisition of Opster, which significantly simplifies Elasticsearch cluster management with performance recommendations, resource utilization, and cost insights, as well as real-time issue detection and resolution paths. By analyzing hundreds of Elasticsearch metrics, configuration, and usage patterns, AutoOps recommends operational and monitoring insights that deliver real savings in administration time and hardware costs. In security, AI continues to transform the SIEM landscape with the SIEM fast evolving to an AI-driven security analytics solution for the modern SOC. We expect this new generation of solutions to not only subsume traditional SIEM functionality but also consolidate extended protections for various parts of the IT infrastructure, which today require separate tools. Cloud detection and response, or CDR, is one such area of extended protection that we recently integrated into our AI-driven security analytics solution, providing threat detection and response and contextual investigation to protect cloud environments, all within a unified set of workflows already familiar to our SIEM users. As part of this capability, our users can benefit from detection rules that combine cloud telemetry with other relevant logs collected by the SIEM and from context gained from correlating other events and entities to perform streamlined yet informed investigations. Since this capability is fully integrated into our SIEM, CDR users can now benefit from all of Elastic's unique differentiators in the areas of query speed, data management, and relevance-focused AI. In the area of observability, Elastic is now 100% OpenTelemetry or OTel-native. As you know, OTel enables observability users to move from proprietary data ingest mechanisms to an open standard format. As of Q2, all OTel-compliant data is now stored in Elastic without data translation, which removes the need for SRE teams to worry about data formats. Our entire Observability suite now works out of the box for OTel-compliant ingested data. In addition, we introduced our OTel-based Kubernetes integration and dashboards, providing users with instant visibility into clusters and application metrics, logs and traces, all without the need for any manual configuration. Elsewhere, we expanded our LLM observability capabilities to include Amazon Bedrock. This adds to our previously announced support for Azure OpenAI. With this, we provide comprehensive visibility into the performance and usage of foundational models from Bedrock, as well as dashboards and detailed insights into model performance, usage patterns and costs. On the go-to-market front, we kicked off our ElasticON events in Q2 and, to date, have held events in San Francisco, Bangalore, Munich, and New York. Our ElasticON events have drawn thousands of attendees, and we are looking forward to hosting six more events across the globe during fiscal Q3 and Q4. ElasticONs give us the unparalleled opportunity to meet with thousands of customers, partners, prospects, and developers to share ideas and showcase Elastic innovations. Partners play a critical role in our success. This quarter, we launched the new Elastic AI ecosystem as part of our vision to transform, simplify, and accelerate how enterprise developers build and deploy generative AI applications, working with leading technology providers, including Alibaba Cloud, Amazon Web Services, Anthropic, Cohere, Confluent, DataRobot, Dataiku, Galileo, Google, Hugging Face, LangChain, LlamaIndex, Microsoft, Mistral, NVIDIA, OpenAI, ProtectAI, Red Hat, Unstructured and Vectorize. We have built a comprehensive set of integrations with our Elasticsearch vector database to help developers speed up the time to develop GenAI applications. Now switching to some organizational news. Today, we are announcing that Janesh Moorjani will be leaving Elastic to pursue a new opportunity, and his last day with Elastic will be December 13th. Janesh has been a key part of our leadership team over the past seven years, first as CFO and more recently as CFO and COO. And his tenure here has included a number of major milestones for the company, including leading our IPO back in 2018 and more recently, helping guide the business across the $1 billion mark. Personally, to me, Janesh has been a trusted colleague and a friend over the years, and I want to thank him personally for all that he has done during his time here. I'm looking forward to seeing all that he can accomplish in the years ahead. With this change, I'm happy to have Eric Prengel, Elastic's group vice president of finance, taking on the role of interim chief financial officer effective December 14th while the company conducts a search for a permanent replacement. Eric has been with Elastic for the past two years and has already made significant contributions to Elastic with broad responsibility for various FP&A and business partnership functions. Prior to joining Elastic, Eric spent nearly 10 years at JPMorgan in various investment banking leadership roles. And he was involved with Elastic even then, having worked on our IPO. I have worked closely with Eric during his time here and I'm confident in his disciplined leadership and ability to excel in this role. As such, and not surprisingly, Eric will also be considered as a candidate in our search process. In closing, I'm pleased with our strong performance this quarter. I want to thank our team for their focused execution. And I also want to thank our customers, partners, and investors for their continued support and confidence. We are seeing positive signs that we are well on our way to returning to historical levels in terms of our pace of execution, and our Q2 performance is a strong indication of this progress. The innovations we are building into our search AI platform, the momentum we are gaining around generative AI and the traction we are seeing with customers consolidating onto our platform gives us great confidence in our future and in our ability to build a multibillion-dollar business over time. With that, I'll turn it over to Janesh to go through our financial results in more detail. Janesh Jamnadas Moorjani -- Chief Financial Officer and Chief Operating Officer Thank you, Ash, for those kind words. It's been a privilege to have been part of Elastic's growth journey for the past seven years. I am proud of our successful track record, and I firmly believe that the future for Elastic has never been brighter. It's been an incredible partnership with you personally, and I am deeply grateful for your trust and friendship. While I'm sad to leave behind such a talented team, many of whom are now good friends, I am excited about my next opportunity. I'm confident that the business will be in great hands with Eric. He has been my right hand for almost two years and has proven himself to be an exceptional and disciplined leader. I'll let him say a few words before I get into our results. Eric Prengel -- Group Vice President, Finance Thanks, Ash and Janesh. I really appreciate it. In the almost two years I've been at Elastic, it has been a pleasure to partner with both of you. From my time working on the IPO, I was impressed with the differentiated technology and strong culture that Elastic has. Since joining, it has become even clearer to me that we have an opportunity to be a truly generational company. Janesh, you have shaped so much of Elastic, and I very much appreciate that I got the opportunity to work closely with you. I wish you the absolute best in your next role, and I'm excited to be stepping into this role with all that is in front of Elastic. Janesh Jamnadas Moorjani -- Chief Financial Officer and Chief Operating Officer Thanks, Eric. I'm sure you'll knock it out of the park. Let's get into our Q2 results. With a challenging first quarter behind us, we were pleased that we improved our sales execution in the second quarter with strong customer commitments, as Ash described, and also outperformed against the high end of both our revenue and profitability guidance. Total revenue in the second quarter was $365 million, up 18% year over year as reported and up 17% year over year in constant currency. Subscription revenue in the second quarter totaled $341 million, up 18% year over year as reported and in constant currency. Within subscriptions, revenue from Elastic Cloud was $169 million, growing 25% year over year as reported and in constant currency. Elastic Cloud represented 46% of total revenue in the quarter. Aggregate consumption trends in the second quarter remained healthy with enterprise and commercial customers generally continuing to consume as anticipated against their commitments and with stronger-than-expected consumption among some of our larger customers. Revenue from our Elastic Cloud month-to-month motion, which is driven mainly by self-service SMB customers, was consistent with our expectations and remained flattish in dollar terms, coming in at 13% of total revenue. Consumption revenue can fluctuate across quarters and we've seen such fluctuations in the past so we will continue to monitor this closely. Professional services revenue was $25 million, growing 7% year over year as reported and in constant currency. As a reminder, professional services revenue may fluctuate across quarters based on the timing of service delivery. To add more context around deal flow during the quarter, we had solid sales execution with improving performance compared to the prior quarter. We are pleased with the progress we have made so far and intend to continue our focus and diligence around sales execution. We saw healthy growth across our solutions where search grew the fastest year over year, given the strong traction we've seen in GenAI that Ash described. The quarter's strength was also balanced across geographies where the Americas grew the fastest, followed by EMEA and APJ. Customers continue to make strong multiyear commitments to us, reflecting their preference for Elastic as they consider platform consolidation and reflecting our increasing relevance to their business. We did not see any significant changes in the competitive environment during the quarter. Turning to customer metrics. We ended the second quarter with over 1,420 customers with annual contract values more than $100,000. We continue to be focused on customers with a higher propensity for growth and target such customers in the enterprise and commercial segments. These larger customers provide a strong foundation for our land and expand motion as we continue to scale. Looking at customer additions more broadly, we ended the quarter with over 4,480 customers above $10,000 in ACV and approximately 21,300 total subscription customers. Our net expansion rate was approximately 112%, which was in line with our expectations. Our customer retention rates during the quarter also remained strong. Now turning to profitability and cash flow for which I'll discuss non-GAAP measures. Gross margin in the quarter was 76.9%, consistent with the past several quarters. Our operating margin in the quarter was 17.6%, which was significantly better than expected, driven primarily by our strong revenue outperformance and continued discipline in spending, with some of our expense efficiency actions that we had previously discussed coming in larger than expected and also taking hold earlier in the quarter than we had anticipated. Diluted earnings per share in the second quarter was $0.59. Adjusted free cash flow was approximately $38 million in the second quarter, which translated to 10% adjusted free cash flow margin. Cash flow on a quarterly basis fluctuates, given timing issues and seasonality so we continue to look at this primarily on a full year basis. Although we don't formally guide to cash flow, we continue to expect adjusted free cash flow margin for fiscal '25 to be slightly above the non-GAAP operating margin for fiscal '25. As you know, our adjusted free cash flow is on an unlevered basis. Turning to guidance. Looking ahead, our market opportunity remains large. The Elasticsearch AI platform is highly differentiated, our GenAI traction is strong and customers are continuing to consolidate workloads onto our platform. Given the revenue outperformance in the second quarter and our conviction around our opportunity ahead, we are raising our full year total revenue outlook. As we look into the second half of fiscal '25, we assume that the current business environment will remain similar to the first half of the year. We remain focused on execution and believe that we are well-positioned for long-term growth and profitability. In the third quarter, we expect both self-managed and annual cloud revenue to grow slightly in dollar terms compared to the second quarter. I'll highlight some of the factors we considered in our guidance. First, while our most recent performance gives us confidence in our improving sales execution, the shortfall on customer commitments we experienced in the first quarter of this year will remain a headwind to year-over-year revenue growth in the back half of this year. Second, we have considered that consumption revenue on both annual contracts and in the month-to-month motion can fluctuate. Since we've seen such fluctuations before, we have been prudent in our assumptions on consumption rates on annual contracts for the remainder of the year. We also continue to expect revenue from our month-to-month motion on Elastic Cloud will remain somewhat flat for the rest of this year. Third, we have considered the revenue headwind from the recent strength in the U.S. dollar. Finally, in terms of seasonal effects in the third quarter, professional services revenue is typically impacted by the holiday season. With respect to GenAI, as Ash described in his remarks, customer interest around generative AI use cases remains very strong. The strength of our technology and our pace of innovation underpins our position as a market leader in this space. We are still in the very early stages of capturing the substantial and rapidly growing market opportunity, and we continue to believe this will be a significant growth driver for us over the long term. As we consider investments in the business, we plan to continue to balance investing for revenue growth with profitability. Given the improvements we saw in our sales execution in the second quarter, we are selectively increasing some investments in the second half of the year. We will continue to prioritize investments toward areas intended to drive growth, particularly in GenAI. With the operating leverage inherent in our business model, we are also raising our profitability guidance for the year. We remain well-positioned to drive higher operating margins as we scale the business in future years. With that background, for the third quarter of fiscal '25, we expect total revenue in the range of $367 million to $369 million. This represents 12% year-over-year growth at the midpoint on an as-reported basis and 13% year-over-year growth at the midpoint in constant currency. We expect non-GAAP operating margin for the third quarter of fiscal '25 to be approximately 15% and non-GAAP diluted earnings per share in the range of $0.46 to $0.48 using between 106 million and 107 million diluted weighted average ordinary shares outstanding. For full fiscal '25, we expect total revenue in the range of $1.451 billion to $1.457 billion. This represents 15% year-over-year growth at the midpoint, both on an as-reported basis and in constant currency. We expect non-GAAP operating margin for full fiscal '25 to be approximately 13.5% and non-GAAP diluted earnings per share in the range of $1.68 to $1.72 using between 106 million and 108 million diluted weighted average ordinary shares outstanding. In summary, we are pleased with our performance in the second quarter and remain confident in our ability to continue to drive profitable growth going forward. And with that, let's go ahead and take questions. Thank you. We will now begin the question-and-answer session. [Operator instructions] The first question comes from Matt Hedberg with RBC Capital Markets. Matthew Hedberg -- Analyst Great, thanks for taking my questions, guys. Congrats on the results. Really a nice bounce-back quarter. There's a lot of things that stood out to me. I think the success in cross-selling, but also Janesh, you said something about larger enterprise, particularly their consumption patterns accelerated. I'm wondering if you could double-click on that. Was there any commonality there that drove that trend? Janesh Jamnadas Moorjani -- Chief Financial Officer and Chief Operating Officer Matt, so just digging into that consumption number, overall consumption was quite strong across Q2. We are very pleased with the results that we saw. And that was across enterprise and commercial. It was across the different geos as well, across the solution areas. We did see some strength among some of our larger customers that accelerated their consumption. And that was really encouraging because they're continuing to use the Elasticsearch AI platform for both new and expanded workloads. In terms of whether there was any particular commonality there or similarity to the past, we have seen consumption be stronger in prior periods as well, but it's not necessarily the same customers that are always stronger so there can be some variations there. So, I wouldn't read too much into that. We were obviously pleased with the results but we will continue to monitor it carefully to see if there's any particular patterns or trends that emerge. From our standpoint, as we built our guidance for Q3, although we are very pleased with the consumption rates that we saw in the second quarter, we have seen these rates fluctuate in the past. So, we built our guidance quite prudently. And just for clarity, we've not actually seen any change in the business so far. We are simply considering the possibility that consumption patterns may revert to what we previously experienced prior to Q2. So, that's the way we approached it. Matthew Hedberg -- Analyst Well, that's great. Well, it seems like there's others that are also talking about better consumption trends from last night. Maybe just, Ash, for you, it was great to see the sales force bounce back here. I'm wondering, is there anything that you'd put your finger on that drove to that better sales execution? I know there was a lot of changes in 1Q. But curious if you can understand sort of what the positive change factor was this quarter. And I know Janesh is being conservative in back half guidance, but the opportunity for continued improvement there, just sort of curious on your thoughts there. Ash Kulkarni -- Chief Executive Officer Yes, Matt. Thanks for the question. So, even in the last earnings call, in the Q1 earnings call, like I had mentioned, we felt pretty confident that the changes that we had made at the beginning of the year were the right changes. And what we've seen is with rigor, as we've been inspecting the pipeline and making sure that we are doing all the right things with discipline, a few things have already happened or are happening at the pace that we want them to. First, we have seen that the pace of pipeline creation and pipeline progression has come back to normal levels, so we are really happy about that. The second thing that we have seen is just the changes, the reason why we made the changes to begin with were all about focusing more on the enterprise segment, on the high-propensity, mid-market segments, and the benefits of those are now starting to take hold. And just as our reps have had more time to work on their accounts, to work with their accounts, we have started to see all the right kinds of behaviors that we were expecting to see, and that's what gives me a lot of confidence going forward. And as we've said, the thing that happened in Q1 was a near-term impact, and I'm really happy that the team really delivered in Q2 and we are moving in the right direction. Matthew Hedberg -- Analyst Great. And Janesh, it's been great working with you. Best of luck in your future endeavors. Janesh Jamnadas Moorjani -- Chief Financial Officer and Chief Operating Officer The next question comes from Pinjalim Bora with J.P. Morgan. Please go ahead. Pinjalim Bora -- Analyst Great. Congrats on the quarter. Janesh, from me as well, great working with you, and all the best. And Eric, congrats on the interim role. I want to ask you, Ash, on binary quantization. Seems like it's a differentiation for Elastic from a vector D perspective. But my understanding is quantization is kind of a trade-off between accuracy and cost. Help me understand how pervasive is that going to be across kind of different GenAI use cases. Ash Kulkarni -- Chief Executive Officer It is something that I am personally very excited about. Our team is very excited about it. Like you correctly pointed out, quantization is always a trade-off between accuracy and efficiency or performance. And better binary quantization, we are the first to really deliver this capability. And what it does is it delivers an absolutely amazing level of efficiency, everything from how much memory is required to the time it takes to do the actual quantization to even query performance, and all of those with very little impact on accuracy. And that's what's so great about this algorithm. Like I mentioned in my prepared remarks, this, we feel, is a true game changer. And at this phase, we are still in the very early phases of the whole AI revolution, the way I see it, the way we see it. This is the time when we want to make sure that we are delivering the kinds of asymmetric innovations that will allow us to really gain maximum share in this market. And so, I'm personally very excited. The applicability is pretty broad and we are just going to drive this hard. Pinjalim Bora -- Analyst Yes, understood. Janesh, one question for you. It seems like a very strong cloud consumption quarter. But when I look at the RPO numbers, especially on the sequential trend, it seems a little bit muted, given that a number of deals pushed out of last quarter. You had noted you had closed a lot of those. So, maybe how would you characterize kind of the bookings cadence at this point versus historical norms, given the changes that you see? It's improving but we are not there yet. Janesh Jamnadas Moorjani -- Chief Financial Officer and Chief Operating Officer Pinjalim, we were actually very pleased with our overall sales execution in Q2. Really happy to see that the team bounced back and the additional measures that we had taken following Q1, they are having the desired effect, and sales reps have also had more time to engage with their new accounts. So, I think all of that played quite nicely for us. While there were many deals that moved out of Q1 that we closed in Q2, those were not the main driver of strength for us in the second quarter. But overall, looking ahead, I think we feel pretty good about the outlook for the rest of the year. With respect to the RPO timing and the quarter-over-quarter changes in RPO, that was consistent with what we've delivered before and, in fact, probably even slightly higher than the sequential change that you may have seen in the year-ago quarter. So, we felt pretty good about that as well. The next question comes from Tyler Radke with Citi. Please go ahead. Tyler Radke -- Citi -- Analyst Janesh, it's been great working with you, and all the best. Good to see you leave on a high note here. Ash, I wanted to go back to some of the GenAI use cases. Sounded like a very strong quarter in terms of commitments, the doubling quarter over quarter. But I'm curious how you're kind of seeing those types of use cases unfold. It sounded like you referenced some use cases where you're kind of the backbone in terms of being the vector database supporting 40 different use cases with agents and chatbots and then some other use cases just around semantic search. So, maybe help us understand, are you kind of orienting the sales force around kind of discrete go-to-market motions, particularly around GenAI to serve those use cases? Just give us a flavor of kind of how you're standardizing the GenAI go-to-market and use case evaluation here. Ash Kulkarni -- Chief Executive Officer Yes, that's a great question, Tyler. So, the first thing I'd say is as we look at the market broadly, across pretty much every industry and every vertical, what we see is that there are a lot of processes, business processes that depend upon unstructured data being manually processed and moved from one step of the process to the next step. And all of those have the ability to be automated through generative AI. So, we are looking at that. And effectively, our strategy is to be that runtime platform for retrieval augmented generation, for anybody building those kinds of generative AI applications. Now some of those will begin, first and foremost, by somebody just implementing better search through semantic search, techniques like hybrid search to get the most relevant precise data for their use cases and their applications. And then they'll evolve from there to building the kinds of chatbots and generative applications that then automate that process. And we just want to be the underlying layer, the underlying platform for all of those things. And so instead of taking a vertical-by-vertical approach, we're basically taking a platform approach. And as you know, that's been really something that has worked very, very well for us in the past. And our motion around this is very simple. Our field just goes in and talks about semantic search. And the simple question is, how are you thinking about vector databases? What vector database are you using? And it just leads from there naturally to either a semantic search sale or a hybrid search sale or a retrieval augmented generation search kind of opportunity. And we are starting to see, like in the past, I've said that a lot of these tend to be internally focused applications. But now you're starting to see a blend of both internal-focused and external as people are getting more and more comfortable. I think that's exciting. Tyler Radke -- Citi -- Analyst Yes, thanks. Ashton. Janesh, for you, just going back to the commentary around the large customers consumption in the quarter. I guess as you think about the stronger-than-expected trends that you saw, would you say that that was kind of one-time in nature? Or was this kind of onboarding new use cases? And just to clarify, you're saying that you're seeing these strong trends continue, you're just not embedding it into the guidance? Just wanted to clarify that. Thank you. Janesh Jamnadas Moorjani -- Chief Financial Officer and Chief Operating Officer Tyler, yes, so in terms of what we saw, absolutely, we saw the strength be broad-based. I wouldn't characterize it as one-time. It was just some of our larger accounts consumed at a faster pace and that was really encouraging to see. I think that's reflective of all of the things that we've been doing and driving over the past several quarters that ultimately get reflected in customer commitments that then translate into consumption. We've talked about the momentum that we've seen in GenAI. We've talked about the platform consolidation. So, I think that there's a lot of goodness in terms of what the teams have been driving, which has translated into higher consumption rates. So, it was higher than what we expected but I wouldn't characterize it as onetime. In terms of what that means for the future and the assumptions that we're using for the future, you're right. We have not seen any change in the business. We have not seen anything adverse, but we're just being prudent in terms of how we build our forecast because we have seen historically, consumption rates can fluctuate, and we think we just want to be careful with that and not get ahead of our ski tips. Tyler Radke -- Citi -- Analyst Yes. I guess you're guiding before Thanksgiving for the first time so a lot more days in the quarter. Janesh Jamnadas Moorjani -- Chief Financial Officer and Chief Operating Officer Janesh Jamnadas Moorjani -- Chief Financial Officer and Chief Operating Officer The next question comes from Koji Ikeda with Bank of America. Please go ahead. Koji Ikeda -- Analyst Yes, hey, guys, thanks. Thanks for taking the questions. Hey, Ash, and Janesh, thanks for everything. All the best to you. And Eric, looking forward to working with you. So, I have a question on the sales organization, and I guess the question is on a scale of 1 to 10, how would you rate where you are today with the sales org? 10 being back in business and fully ramped on the new strategy. Where are you at today? And if it's less than 10, what needs to happen to get it to 10? The reason why I ask is the fiscal second quarter results are really strong. But I keep staring at that implied fiscal fourth quarter exit growth rate of 11%. So, I'm just wondering if we could still see effects of the sales org change playing out over the coming quarters. Or is there just massive conservatism embedded in the guide? Ash Kulkarni -- Chief Executive Officer Koji, thank you very much for the question. So, I'm not a huge fan of putting anything on a scale, but here's what I'll say. First of all, I'm really happy not only at the way we performed but the metrics that I look at internally are effectively, are we creating pipe at the right pace? And are we progressing pipe at the right pace? And in both of those areas, I've seen that our pace of pipeline creation and our pace of pipeline progression has come back to normal. Also, our win rates continue to be incredibly strong, and those are the fundamentals, right, when you think about your sales strategy. All of those things are working as they should. And the Q2 results from that perspective give me a lot of confidence about where we are. Now in terms of the guidance so on, why don't I ask Eric and Janesh to maybe weigh in? Eric Prengel -- Group Vice President, Finance Yes, sure. I'll take this. Thanks, Koji. What I'd say is, as Ash has said and as Janesh said on the call, we're very pleased with our revenue outperformance in our second quarter, which was driven by both stronger commitments and strong levels of consumption. And as you think about our guidance for the rest of the year, in terms of the year-over-year revenue growth, you need to keep in mind that the effects of the shortfall on customer commitments in the first quarter are going to have an ongoing impact on the year-on-year growth of the business. For self-managed, that's already playing through in the second quarter and so it will be similar. But for cloud, there's going to be an increased headwind in the second half, given it usually takes several months to fully ramp cloud consumption. This dynamic is something we anticipated and we've considered and it is in our outlook as we've shared it. So, that's the way I'd think about it. There's also a slight headwind year over year on year-over-year growth in the back half from currency effects. Most importantly, I think that our focus is to maintain our sales execution the way it was in Q2 so we can continue the positive momentum that we saw and continue to secure customer commitments. Janesh Jamnadas Moorjani -- Chief Financial Officer and Chief Operating Officer Thanks. Yes. Koji, I'll just add that, obviously, it's too early to talk about '26 specifically. But as you think about that exit growth rate, our revenue next year will largely be determined by sales activity from here on out in Q3 and Q4. And we feel pretty good about where we are on that trajectory as Ash said. Koji Ikeda -- Analyst OK. And just one follow-up here. Ash, in your prepared remarks, you talked about three deals, generative AI deals being $1 million in annual contract value. Super impressive there. The question here is, are these for specific generative AI projects? And what I'm trying to understand is that we've been waiting for these big commitments to come. And so, if these are for specific generative AI contracts, does that really imply that as experiences, generative AI experiences come to fruition, I mean, Elastic could be a beneficiary of lots of these big, big six-, seven-figure deals for very specific generative AI projects? Thank you. Ash Kulkarni -- Chief Executive Officer Yes, that's a great question. And what I'd say is, first of all, generative AI is sort of the fastest-growing part of our business at this point, like we are seeing a lot of traction in it. Keep in mind, Koji, that we don't have a discrete generative AI SKU, as you know. And because of that reason, the metrics that we look at and the metrics that we are sharing with you are sort of the directional metrics that we've shared, right? The fact that we are now seeing commitments really grow very nicely because, as you know, it starts with the design wins. We've talked about those design wins in the past, and we are now even in cloud, we have over 1,550 customers. Then it moves from there to customers actually making meaningful commitments and now we're giving you some color on that. And then that translates into revenue. So, this is exciting. This is why I feel really good about the long-term trajectory for the business. And that's the reason why like our focus now is to continue to execute like we did on the sales front in Q2, so we can keep building that up and keep progressing. The next question comes from Brent Thill with Jefferies. Please go ahead. Brent Thill -- Analyst Thanks, Ash. I'm On the go-to-market, I guess I'm confused. You say that you're pleased with your sales team, yet your RPO is flat Q1 to Q2. Your competitors are growing RPO twice the speed of you. And so, I'm just trying to reconcile this. Is it you're pleased with a pipeline that's building back because it hasn't converted in the backlog yet? So, I just want to make sure we clarify what you mean by that. Janesh Jamnadas Moorjani -- Chief Financial Officer and Chief Operating Officer Brent, maybe I'll jump in, and then Ash can add. In terms of the math behind the RPO, if you look at the RPO in year-over-year terms, it's roughly flat. But in year-over-year terms, keep in mind that RPO is a point-in-time cumulative measure of all prior activity. So, the Q1 shortfall from commitments does impact the Q2 year-over-year growth rate in RPO. But if you think about more current activity from Q2 and you consider the sequential growth, it is up a little bit. And usually in Q2, sequentially, RPO has gone down. So, if you look at last year, for example, RPO was a little bit lower in Q2 than in Q1. So, we were actually quite pleased, and again, we're not declaring mission accomplished on the sales execution side. We've said that we are pleased with the progress that we've made in terms of our return to that. And you see that reflected in these numbers, and you see that reflected in all of the other indicators of the business as well, RPO being just one of the several indicators of the business that we all look at collectively. Brent Thill -- Analyst OK. And when you think about search as a percent of total revenue versus broader observability, is it still roughly a 30-70 split or is that changed? Ash Kulkarni -- Chief Executive Officer Yes, let me maybe touch upon that, and I'll ask Janesh and Eric to also weigh in. But look, the overall mix of the business changes from quarter to quarter, but at an annualized level, it takes a while for mix shifts to happen. Search has definitely been accelerating for us and I've talked about that in Q1. It was the same in Q2. This quarter, all parts of our business grew. When I look at the actual customer commitments that we got and the way we are seeing our business grow, I feel good that in all three solution areas, we are taking share, but search is definitely benefiting more, given the trends that we are seeing in generative AI. The next question comes from Raimo Lenschow with Barclays. Please go ahead. Raimo Lenschow -- Analyst Can I stay on search and maybe one more question? Ash, if you think about the offering there, and you have a very large installed base in search because that's kind of where you guys started out, how do you think about the opportunity there in terms of going back to all of them or to a lot of them and just kind of saying, OK, like, look, we have hybrid search now. You can get better outcomes as kind of a starting point for doing more stuff around GenAI than anyway. But like where are we on that journey of the whole client base understanding what you can offer now and kind of working on that one? Because it does feel like it's still very early. Ash Kulkarni -- Chief Executive Officer Yes, Raimo. What I'd say is that that is the natural motion for us. And as you can imagine, for our customer base, the data is already in Elasticsearch. So, for us to go to them and make that case that now they can get even better, more relevant results is a pretty straightforward thing. So, for sales teams, when you see a motion, when you see a sales motion that is natural, that your customers relate to, where you already have a good setup because the data is in Elasticsearch already, like that's just a natural place for them to go. And we are seeing that happen. We're seeing our sales teams do that naturally. A big part of the success that we are seeing in generative AI is because of that. So, where are we in that overall journey? We've got a large customer base, as you know. And if you see the progress that we have made, we now have 240 customers in Elastic Cloud that are part of that greater than $100,000 cohort. And we've gotten there this quickly because that is the motion that our sales team is driving. So, lots more to go but very excited and happy about the progress. Raimo Lenschow -- Analyst Yes, perfect. And then one follow-up for me was you mentioned, Ash, you talked earlier about the SIEM opportunity. Obviously, there has been a lot of disruption in the market with some of the takeout, et cetera. What are you seeing there in terms of customer engagement with you guys around SIEM? And Janesh, it was an honor working with you. Ash Kulkarni -- Chief Executive Officer Yes, thank you for that question. Even on SIEM, like even in my prepared remarks, I talked about a couple of consolidation deals that we won. They were both security-related. In SIEM, to your point, like what we're really seeing happening is AI is now becoming not just a nice-to-have but almost a must-have when people think about security analytics and SIEM. And people are looking at ways in which AI can be used to fundamentally improve the entire detection and remediation process. And given the early foray that we made into this, like we were ahead of most in terms of leaning in with AI, just given our core strengths in vector database and so on, we've seen a tremendous opportunity and we are seeing that momentum build. So, I'm quite excited about it. Things like the Express Migration program that we launched are also helping because some of these are greenfield opportunities, but many of them are ones where there is a displacement opportunity. So, I would expect that you should expect us to continue pushing hard in this area in security and also leaning into the whole AI space to allow us to win. The next question comes from Ittai Kidron with Oppenheimer. Please go ahead. Ittai Kidron -- Analyst Janesh, my thanks to you as well, and good luck on the next move. Ash, I wanted to ask again about the search AI. I'm sorry, getting back to these 1,550 customers, that's quite impressive and quite nice. But can you tell us how many of these customers were historical search customers, I mean, you just added the AI capabilities, or were net new to the company? And perhaps what's the penetration right now of AI within your search base? Ash Kulkarni -- Chief Executive Officer Several of these are new customers. And as you can imagine, a large number of them are existing customers. At the end of the day, when you think about the sales-led motion for our sales team, the expand motion is the most natural thing for them to do. It's the most efficient way for them to go in and meet their numbers. So, in that sense, like we are naturally seeing that happen. But then because of our self-service motion, we see new customers come to our platform. And this is an important reason why customers have the opportunity to come to our platform, just the vector search capabilities. So, it's a mix, that's the best way to describe it. And in terms of the opportunity for us to go across our entire customer base and get them to start using this capability, especially the search part of our installed base, there's still a lot of room for continued expansion and growth. Ittai Kidron -- Analyst Very good. And then maybe on the competitive front, can you elaborate a little bit more? What do you view is your toughest competition here on the GenAI side and on the SIEM? Like who are the one or two vendors that you see most frequently? And when you talk about the displacements, I think you talked about it more in the context of SIEM on the call. Where are the greatest displacement opportunities that you see right now? Ash Kulkarni -- Chief Executive Officer Yes. Look, when it comes to displacement opportunities, there's a whole host of incumbent vendors. Like the way I like to think about it is sort of the early generation of SIEM players, everybody from Splunk to a QRadar to ArcSight, I mean, there's a pretty large set of players that have been in this space. And for us, the way we describe ourselves, we are a modern next-generation SIEM. We think of ourselves as a security analytics product. The way our customers are able to do adhoc AI-based analysis on our platform is something that's incredibly differentiated. And because of the flexibility of our back end, we are able to bring in data from just about everybody. And that's a big part of why we are succeeding in this area. When it comes to GenAI, look, we don't have our own large language models, right? So, we partner with just about everybody. You saw the announcement that we made about the AI ecosystem. So, we are partnering with a lot of players that provide their own large language models. Our core place, the way we want to position ourselves is as the platform for retrieval augmented generation. We want to be the vector database of choice and then also provide some of the capabilities around it. So, we aren't the only vector database in town. There are pure plays out there that you might have heard of. And then in my opinion, every data platform is likely going to have their own vector functionality. And our core strength is when it comes to unstructured messy data, right, whether it's logs, whether it's Word documents, whether it's product descriptions, that data is always is best suited to bring into Elasticsearch. And we have the best vector database to support those kinds of use cases. And that's a massive amount of data that exists in every company. So, I feel that as long as we focus on what we are doing in that area and continue to innovate the way we have been, the market opportunity is huge. The next question comes from Howard Ma with Guggenheim Securities. Please go ahead. Howard Ma -- Guggenheim Partners -- Analyst Great, thank you. My question is for Janesh and/or Eric. So, it sounds like you did not make up for the Q1 shortfall in customer commits in Q2 despite the bounce back. But when you factor in the acceleration in consumption trends, it sounds like maybe you were back on track with your revenue targets before the cut last quarter, and that you're just being a bit conservative with your back-half assumptions. Is that true? Or maybe just ask another way, had you known you would achieve the Q2 performance that you did, both commits and consumption, would you still have lowered your full year guide last quarter? Eric Prengel -- Group Vice President, Finance Thanks, Howard. And I think what I'd say to that is that given the headwinds that we saw in Q1, it's going to impact the full year and I think we still would have lowered our guidance. Q2 was obviously strong and we're very happy with the outcome in Q2. But what happened in Q1 is unfortunately going to play out over the rest of the year. And particularly, as we said before, cloud is going to have a little more of a headwind in the back half specifically versus what it had in Q2, given the timing of the customer commitments. So, while we are very happy with the performance in Q2, we would have still made the same decision that we did. Howard Ma -- Guggenheim Partners -- Analyst OK. Thanks for clarifying that, Eric. I just had a follow-up for Ash. When you look over the last 12 months, how would you describe the pace of adoption of vector database, ELSER, hybrid search for GenAI use cases? And compare that to how you expect the pace of adoption will play out over the next 12 months. And on a related note, could you, in the next few quarters, next quarter or the quarter after, we start seeing a disclosure of AI contribution to total revenue, maybe when it hits 2%, 3%, 5%? Like is that perhaps in the works? Thank you. Ash Kulkarni -- Chief Executive Officer Yeah. So, let me touch upon the first, and then I might invite Janesh and Eric to also talk about the second piece. So, in terms of the adoption, the phases of adoption that I'm seeing are not that different from the phases of adoption of other technologies in prior generations, like cloud computing and so on. It all starts with people sort of trying to build prototypes first. There's a lot of design work that goes in. You want to be baked into those designs. People are still trying to figure out how many of those go into full-scale production versus not. We saw a lot of that about 18 months ago and so on. Since then, we've started to see people actually take many of these into production. First, it was internal-facing applications. Now it's also external-facing applications. This is very similar to the pattern that we would have expected. What I'd say is it's happening in a much more compressed time frame. So, the time it's taken from this being sort of early to now people building these applications and deploying them, it's happened much faster than anybody would have expected. So, that's been the exciting part. Now what we see is customers actually being very, very thoughtful about things like efficiency, things like performance, things like scale because they really want to not only put it in production but put it in very large-scale production. And so, the kinds of innovations that we are working on are all related to those kinds of things, right? We're past the basics and now it's into the more sophisticated stuff, which you see from us even in terms of the capabilities that we are delivering like better binary quantization and so on. In terms of the metrics, your second question, I'll just say one thing that keep in mind that we don't have a separate SKU, right? But with that, like, Eric, any thoughts, Eric or Janesh? Eric Prengel -- Group Vice President, Finance Yes. To Ash's point, we don't have a separate SKU. And what we have done is we've always tried to give appropriate indicators and color around the traction that we're seeing in generative AI. We shared that we have 1,550 of our cloud customers who are using generative AI and that of those 1,550, 240 of them are 100K-plus customers. Ash already also shared some of the traction that we saw this quarter with the generative AI commitments more than almost doubling relative to what we saw in Q1. So, it is something that will be evolving what we share but it is not something that we have a specific SKU on to that point. The next question comes from Austin Dietz with UBS. Please go ahead. Austin Dietz -- UBS -- Analyst Great. Thanks guys. Maybe just another question on RPO. Janesh, it sounded like you felt good about the trajectory of the business in Q3 and Q4. Could you maybe talk about the second half what you're seeing? And is it possible, especially as we have more time for that sales execution motion to continue to improve, could RPO see an uptick kind of on a sequential dollar growth basis in the second half, especially relative to last year? Thanks. Janesh Jamnadas Moorjani -- Chief Financial Officer and Chief Operating Officer Austin, yes, happy to talk about that. So, look, as we continue to execute in the back half of the year, especially if we execute well, you will see that reflected in all of the metrics that we talk about. And as I was talking about the guidance and the specific assumptions, I've used for building the guidance, I laid them all out earlier so I won't repeat them necessarily here. But fundamentally, you're right. If we execute well, you will see that reflected not only in RPO but in all the other metrics, including in revenue. Austin Dietz -- UBS -- Analyst OK, great. And then just last, Ash. As a part of those go-to-market changes, it seemed like there was more of a focus on greenfield opportunities, new logos. Can you update us on how that's progressing? Thanks. Ash Kulkarni -- Chief Executive Officer Yes, thanks for the question. So, like you said, there one of the things that we did was we took a lot of the accounts that weren't really being worked, and we turned them into distinct greenfield territories and assigned sellers to go pursue those. As you know, typically, it takes a lot longer to build pipeline in greenfield territories and to convert those opportunities. So, what I'd say is that we are still in the early days. But when I look at the overall pipeline creation and progression, I feel very good about the pace coming back to what we've seen historically. And the area of greenfield territories, we're going to just keep tracking it and make sure that we continue to build the momentum in those areas. The next question comes from Kash Rangan with Goldman Sachs. Please go ahead. Kash Rangan -- Analyst Janesh, good luck with the next gig here. One for you, Ash, maybe two things. One is when you talk about the GenAI progress, what are the metrics that you are tracking? So, granted that you do not have a revenue to disclose to us, you talk about use cases, but how would you define GenAI success in a way that we can say, OK, that makes sense relative to say a Microsoft or a ServiceNow that seem to be talking about GenAI bookings or AI bookings? And also, another question for you. When you look at the go-to-market motion, you sell a platform so you do not really know the use cases instance-by-instance. How does that percolate into having the right go-to-market strategy granted that GenAI is emerging as a use case? Do we not know what the sales force is hunting for and they come back and tell you, and then sometime later, when the implementation happens you find out that it's implemented for search versus observability versus SIEM versus AI, whatnot? So, trying to understand how, if we do not know what the sale is for, how do you articulate and fine-tune the go-to-market strategy? Thank you so much. Ash Kulkarni -- Chief Executive Officer That's a great question. I'm glad that you asked it, Kash. So, let me clarify. Yes, so first and foremost, the internal -- let me address your first question. When we look at generative AI, the metrics that we look at, first and foremost, we see how many customers are using us specifically for generative AI in the cloud because there we have perfect telemetry and we know exactly how they're using us because we can see that they have created indexes specifically for dense vectors and so on. The second thing that we look at is the customer commitments that are being made that are related to generative AI use cases. Now there, it is all based on the information that we get from our sales teams at the time of the deal closure, right? So, we know that a particular deal is related to semantic search or it's related to somebody in that company that I talked about building a chatbot or several chatbots. So, at the time of the sale, we know what that customer commitment is related to. Now that is customer commitments. But when you think about revenue, once the customer has purchased something from us and they are running, they have stood up a cluster of Elasticsearch, and they are now, let's say, doing semantic search or RAG on that cluster, at some point of time, they might decide that they also want to do some observability workload on that same cluster. If they do that, we would not know exactly how to parse out what percentage of that compute, of that actual consumption, is related to the GenAI piece versus the observability piece. So, all the data that we have, when it comes to things other than cloud, effectively are at sale time. And even on cloud, if it's in the same cluster because we don't have a separate SKU, it's hard to disambiguate. So, what we look at is customer commitments. And that's true even for our other solution areas. So, that's why when we talk about the solution mix, we always say that it's based on reported information from our sales teams. And there, we absolutely do have that clarity. That also guides our go-to-market motion. So, based on that information, we know exactly what is working, where we are seeing success, and that's how we guide our sales teams to make sure that we are maximizing the opportunity ahead of us. Kash Rangan -- Analyst Got it. And we can save this for another discussion maybe at your Analyst Day or whatever, but I'm curious in the long term, how does the go-to-market strategy evolve and the product marketing and the product management evolve? So, you can actually go to market with a case bundle. You don't have to address this now, but I'm just throwing it out there. But the real question I wanted to follow up with was, at what point do you feel like you need to add or accelerate the sales capacity growth rate? Because clearly, if things work out the way you would like to, the growth of the company can be better. For that to happen, you need to also have another round of investing in sales capacity, go-to-market. I'm just curious how you look at the trade-off of faster revenue growth rate versus enjoying the margin structure that you do currently. Thank you so much and that's it for me. Ash Kulkarni -- Chief Executive Officer Yes. Thanks, Kash. So, we see our growth opportunity as continuing. And just to be very clear, even when at the end of Q1, we said that we are going to be taking some near-term cost control actions, all of them were such that we did not affect our selling capacity. We are continuing to make sure that we give ourselves the room to continue to grow in the best way possible. But to talk about some of those investments and so on, let me actually turn it to Janesh. Janesh Jamnadas Moorjani -- Chief Financial Officer and Chief Operating Officer Kash, so as Ash mentioned, we are seeing the course on investments. And in fact, as we look at the second half of this year, just given our revenue outperformance in the second quarter, we are actually increasing our investments in the second half a little bit. And given the strength of the operating leverage inherent in the model, we're able to do both, add to the margin, as well as increase the investments. And those investments will go toward a variety of functions, including selling capacity, which, as you know, is important for us to make sure we enter fiscal '26 with the right amount of productive selling capacity as well. So, we're definitely keeping an eye toward that growth in the future and investing appropriately toward it. 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. Ash Kulkarni -- Chief Executive Officer Thank you all for joining us today. We are extremely excited about the continued momentum in our business, driven by generative AI, and we look forward to continuing our strong execution. For those of you who will be at AWS re:Invent, I look forward to seeing you there. Have a great day.