Elastic CEO predicts "observability and security are going to merge together"

Enterprise search technology company Elastic reported fiscal Q2 revenue and profit that both topped analysts' expectations.

Enterprise search technology company Elastic this afternoon reported fiscal Q2 revenue and profit that both topped analysts' expectations, raising its outlook above consensus. 

Despite the upbeat report, Elastic shares declined 8% in late trading. 

"The area that we're very proud of is our Elastic Cloud growth," CEO and founder Shay Banon told ZDNet in an interview via Zoom. That product saw sales rise 84%, year over year, to $69 million, of a similar magnitude as the 89% growth in the previous quarter. 

"We've made significant investments in our cloud offering," he added. "We believe this is the best way to engage with our products and our solutions." 

The Elastic Cloud service is a SaaS offering built on the open-source Apache Elasticsearch program, distinct from the on-premise version of the product. The Elastic Cloud integrates with the three biggest cloud provider networks: Amazon AWS, Microsoft Azure, and Google Cloud. 

Elastic's total company revenue in the three months ending in October rose 42%, year over year, to $206 million, yielding a net loss of 9 cents a share, excluding some costs.

Analysts had been modeling $194.6 million and a net loss of 16 cents per share.

For the current quarter, the company sees revenue of $207 million to $209 million and net loss in a range of 20 cents to 24 cents. That compares to consensus for $202 million and a 22-cent loss per share.

For the full year, the company raised its forecast to an outlook for revenue in a range of $826 million to $832 million, up from its prior forecast for $808 million to $814 million; and a net loss of 51 cents to 61 cents, improved from the prior forecast of negative 57 cents to negative 67 cents. 

That compares to consensus of $813.6 million and a 60-cent loss per share.

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"We're working to be the best in observability, the best in security, and have the best features in each one. But they become features; they're no longer product categories," Banon says.

Banon said the company is seeing an increase in Elastic Cloud business thanks to changes it made back in January to its licensing policy. The company shifted from using the Apache 2.0 open-source license to using a dual-license scheme, including its own Enterprise License and the Server Side Public License developed by database maker MongoDB. 

The result of that license change was that Amazon's AWS could no longer offer its own hosted version of the open-source Elasticsearch under the name Elasticsearch, as Amazon did not contribute source-code changes back to the Elasticsearch distribution. 

"We are very happy that we changed the license, to remove the confusion and get the clarity we deserve," Banon told ZDNet. "In order to get Elasticsearch now, you need to collaborate with us as a company. I see that increased clarity reflected in the market, and I think that represents a significant tailwind for Elastic Cloud over the next couple of years."

In other business developments, Banon told ZDNet the company's acquisition in October of "continuous profiling" startup Optimyze was part of the buildout of a complete observability suite, which is a natural convergence of technologies.

"Our technology allows you to search across Slack and Office365 and Google Docs and Microsoft Teams," said Banon. "You want a unified search box, and we see the same thing happening in the observability market." 

Also: Elastic to buy 'continuous profiling' startup Optimyze

"There's application performance monitoring, there's logging, there's metrics, there's eBPF, continuous profiling -- all of these are just data streams," said Banon. "People are looking for a unified way to search and apply AI and ML logarithms on top of it to just keep their applications running." 

The same convergence is happening in security technologies, he said, such as SIEM, end-point protection, cloud security, and posture management, which are also streams.

Those technologies of observability and security "are still expanding faster than they are converging," observed Banon, because attack surfaces are expanding in size very rapidly.

"Those markets are huge," he said. 

But in years to come, there will be consolidation. 

"Two to three years from now, observability and security are going to merge together," he said. 

"We're working to be the best in observability, the best in security, and have the best features in each one. But they become features; they're no longer product categories."

The ultimate consolidation is a natural development of roles in enterprise coming together, he said. 

"It's no longer just technology, it's the organization melding," he said. "It's not very dissimilar from what happened 15 years ago between developers and operations.

"It took a few years before you had DevOps, and built trust between those two teams, and the same thing needs to happen between developers, operations, and threat hunters to a point where they merge together." 

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