Elastic Lays Off Nearly 400 Employees as SMB Spend DwindlesSearch and Security Firm Will Adopt Automated, Low-Touch Motion for SMB Customers
Security, observability and search vendor Elastic will shrink its workforce by 13% due to small and medium businesses reducing their purchases amid the economic downturn.
The Silicon Valley-based company will lay off nearly 400 of its 3,056 employees as it adopts an automated, low-touch motion for small and midsized business customers, CEO Ash Kulkarni revealed Wednesday. Elastic plans to spend between $25 million and $28 million on severance and termination benefits as well as $7 million to $8 million to optimize office space. The layoffs and office closures are set to conclude by July 2023.
"It has become clear that the global macroeconomic environment is forcing our customers to tighten budgets and review investments more closely," Kulnarni wrote in an email to Elastic employees that was shared on the company's blog. "This is especially true in certain segments of the market like small and medium businesses where the current appetite to spend in uncertain times is limited."
Elastic's stock is down $4.65 - 7.57% - to $56.75 in trading Wednesday afternoon, which is the lowest the company's stock has traded since Nov. 9. The company disclosed Wednesday that it now expects sales for the quarter ending Jan. 31 of between $272 million and $274 million, falling short of analyst expectations of $277.7 million, according to Seeking Alpha.
The company will pay at least 14 weeks of severance to all laid-off employees along with six months of healthcare premiums for departing workers using a company plan, according to Kulkarni. The vast majority of affected workers were notified about the layoffs by late Wednesday, and the remainder will be told within the next 24 hours, Kulkarni says.
"I know that this decision is the right decision for our organization," Kulkarni says. "But that doesn't make it any less painful or humbling."
SMB Not Giving 'Commensurate Returns'
In conjunction with the layoffs, Kulkarni says Elastic plans to reallocate some of the money it had previously been spending to target SMB customers and increase coverage for larger enterprises. Elastic's commentary on SMB spending aligns with what other security vendors are seeing. Okta endured reduced demand from SMB customers, and CrowdStrike experienced a longer sales cycle for SMB customers.
"In order to help our customers through this clearly difficult environment, it is more important than ever before for us to stay close to them," Kulkarni wrote. "This means increasing our focus on those areas of the business that are most critical to our future and finding more efficient ways to service some parts of our business."
Specifically, Kulkarni says fewer SMB customers are signing onto Elastic's cloud platform while those that do have reduced their consumption levels. In addition, Kulkarni says international customers have had to go through more approvals to finalize deals due to the U.S. dollar increasing in value since October.
"We would have customers land on monthly cloud and then we would have an SMB sales team that would spend energy in trying to convert those customers into annual contracts," Kulkarni told investors during a conference call Wednesday. "And given the environment, what we have been seeing is really that, that effort that's being spent on the SMB area is really not giving us commensurate returns."
Getting to 'Durable and Profitable Growth'
As Elastic moves forward, executives say the company plans to focus more on technical areas such as cloud, serverless architecture and engineering as well as digital demand gen and marketing. The layoffs put Elastic on a path to deliver improved non-GAAP operating income growth in the fiscal year ending April 30, 2023, and 10% non-GAAP operating margins in the fiscal year ending April 30, 2024, Kulkarni says.
"While the decision to reduce and rebalance investments was not easy to make, we believe it positions us better for the future to deliver multiyear durable and profitable growth," Elastic CFO and COO Janesh Moorjani told investors Wednesday.
Elastic's security capabilities consist of both its native SIEM technology as well as endpoint protection, detection and response capabilities obtained from the $234 million acquisition of Endgame in June 2019. The company's security DNA goes all the way up to the C-suite. Kulkarni spent two years directing McAfee's enterprise product strategy and three years running Akamai's web security practice.
The company's security practice has in recent years pivoted to newer use cases around XDR and cloud security, which is now what more than 20% of security customers seek from Elastic. Elastic also offers security capabilities around workflow and operations, shareable analytics, incident management, and investigations, according to the company.
Elastic is the third publicly traded vendor with a significant security practice to disclose layoffs in recent months. Varonis disclosed in October that it would be laying off 5% of its workforce - or roughly 110 employees, including 55 in the company's R&D center in Israel. And NDR firm IronNet reduced its workforce by 17% in June and cut an additional 35% of staff in September.