The A.I. should have seen that coming.
From D&O Diary, February 13:
The global economy is still adapting to the advent of the Artificial Intelligence (AI) era. It remains unclear what AI ultimately will mean for economies and businesses, and many businesses are struggling to adjust in real time. The firms experiencing these struggles also include companies in the business of providing AI products and services. In many cases, these companies’ struggles can translate into securities litigation. A lawsuit filed earlier this week against Netherland-domiciled AI services company Elastic illustrates the ways securities litigation can arise from AI companies’ business struggles. A copy of the February 11, 2025, complaint filed against Elastic can be found here.
Background
Elastic, whose shares trade on the NYSE, describes itself as “the Search AI Company.” Its platform, which is available both as a cloud-hosted, managed service or as a self-managed software, allows customers to “find insights and drive AI and machine learning use cases from large amounts of data.” The company’s sales teams are organized geographically. The company’s Americas business has consistently accounted for the largest proportion of the Company’s revenues.
On May 30, 2024, Elastic released its fourth quarter and FY 2024 financial results. Among other things, the company also provided financial guidance for FY 2025, among other things projecting revenue of $1.468 billion to $1.48 billion, representing 16% year-over-year growth at the midpoint of the projected revenue range. Among other things in the May earnings call with analysts, company management, according to the subsequently filed securities suit assured investors that “Elastic’s sales operations were working, stable, and helping the company thrive, even though Defendants knew at the time that they had recently made significant changes that had impacted basically the Company’s entire Americas sales operation.”
On August 29, 2024, Elastic announced its financial results for the first quarter of FY 2025. Among other things, the company announced that it was reducing its FY 2025 revenue guidance; as the subsequently filed securities lawsuit complaint put it, the company reduced its guidance “to a range of $1.436 billion to $1.444 billion, representing 14% year-over-year growth at the midpoint – significantly down from their prior FY 2025 guidance of $1.468 to $1.48 billion, or 16% year-over-year growth at the midpoint.”
In explaining this reduction in its FY 2025 guidance, the company cited “a slower start to the year with the volume of customer commitments impacted by segmentation changes that we made at the beginning of the year, which are taking longer than expected to settle.” In a call with analysts, company management said, among other things, that while they had anticipated some degree of change associated with the segmentation alterations, the magnitude of the change was larger than anticipated, and that it might take a couple of quarters to work through.
According to the complaint, the company’s share price fell over 26% on the news.
The Lawsuit
On February 11, 2025, a plaintiff shareholder filed a securities class action lawsuit against Elastic; the company’s CEO; and the company’s CFO. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between May 31, 2024 (that is, the day after its fourth quarter and FY 2024 year-end financial release) and August 29, 2024 (that is, the day of the company’s 1Q25 financial release).
The complaint alleges that during the class period, the defendants made false and/or misleading statements and/or failed to disclose that: “(i) Elastic has implemented significant changes to its sales operations, particularly with respect to its customer segments in the Americas; (ii) the foregoing changes were likely to, and did, disrupt Elastic’s sales operations during the first quarter of FY 2025; (iii) accordingly, Defendants had overstated the stability of Elastic’s sales operations; (iv) as a result of all the foregoing, Elastic was unlikely to meet its own previously issued revenue guidance for its FY 2025; and (v) as a result, Defendants’ public statements were materially false and misleading at all relevant times.”....
....MUCH MORE
Also at the D&O Diary:
