Elastic N.V. Q4 FY2020 Earnings Call

Good day, and welcome to the Elastic Fourth Quarter and Full Fiscal Year 2020 Financial Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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.

Thank you. Good afternoon and thank you for joining us on today's conference call to discuss Elastic's fourth quarter and full fiscal 2020 financial results. On the call, we have Shay Banon, Founder and Chief Executive Officer; and Janesh Moorjani, Chief Financial Officer. Following their prepared remarks, we will take questions. Our press release was issued today after the close of the market and is posted on our website. Slides which accompany this webcast can be viewed in conjunction with live remarks and can also be downloaded at the conclusion of the webcast on the Elastic Investor Relations website ir.elastic.co. Our discussion will include forward-looking statements which may include predictions, estimates, or expectations regarding the impact of the COVID-19 pandemic and other information. These forward-looking statements are based on factors currently known to us, speak only as of the date of this call, and are subject to risks and uncertainties that could cause actual results to differ materially. We disclaim any obligation to update or revise these forward-looking statements. Please refer to the risks and uncertainties included in the press release that we issued earlier today and those more fully described in our filings with the Securities and Exchange Commission. We will discuss certain non-GAAP financial measures. Disclosures regarding these non-GAAP financial measures, including reconciliations with the most comparable GAAP measures can be found in the press release and slides. The webcast replay of this call will be available for the next 60 days on our company website under the Investor Relations' link. Our first quarter fiscal 2021 quiet period begins at the close of business Friday, July 10th, 2020. With that, I'll turn it over to Shay.

Thank you, Anthony. Hello and welcome to everyone. I am happy to be here with all of you today to share the results of our fourth quarter and full fiscal year. I feel fortunate to report that our business is strong and resilient, we continue to innovate rapidly, and we are executing well in this challenging environment. I'm extremely proud of how the Elastic team continues to support our community of users, partners, and customers, and my heart goes out to those affected by the COVID-19 situation. The team did a fantastic job building on our Q3 results to achieve an amazing Q4 and a strong finish to our fiscal year. They did so during truly challenging times with the COVID-19 outbreak, which I will cover before touching on our results and business highlights. On our February earnings call, we said we would closely monitor the COVID-19 situation and respond as needed. As we learned more, we adapted quickly to manage for safety, cost efficiency, operations, and overall business continuity. We are resilient because of our source code and cultural traits. They form a foundation that we believe is unshakable in the face of adversity. Our company is distributed by design, so transitioning to work from home simply required sending an email. We've always had the infrastructure, tools, discipline, and mindset for virtual work on a global scale; engineering continues to ship product; marketing continues to drive demand; sales continues to close business; and our community of users and customers continue to engage with us. We are innovating and executing and adapting our go-to-market motion as needed. We continued to execute on our direct sales motion in a virtual environment, allowing us to keep closing new and renewed businesses. We've pivoted all of our in-person training to the online format we've had for years. We shifted all our Elastic {ON} events to be virtual. We held three virtual events in Q4, and there are more on the way. When an event is no longer restricted to a physical location, we're able to reach and engage a broader audience. As a result of this shift, we're also seeing increased attendance. As for what comes next, our strengths will help us navigate that from our distributed by design approach to our rapid pace of innovation, development of customer-focused solutions, our large and geographically diverse customer base, efficient go-to-market, solid customer expansion, and strong balance sheet. All of these give us confidence to address the rich market opportunity ahead of us. Moving on to our results, looking at the full fiscal year, revenue grew 67% year-over-year. In Q4, we once again saw robust customer acquisition and expansion metrics and grew revenue 53%. We ended the quarter with more than 11,300 subscription customers, including over 610 with an annual contract value of more than $100,000, and our net expansion rate continues to be over 130%. This is all made possible by our wonderful community of customers, partners, users, and employees. So, thank you. You can see we continue to balance doing the right things for the near term with planning for the long term. Our company is relentlessly resilient. We believe we are well-positioned to address the changing business landscape, more virtual teams and workplaces, a greater move to the cloud, and increased pressure to consolidate tooling. We're built on a free and open foundation, which has staying power in challenging times. Our free and open distribution model will continue to fuel rapid adoption and innovation. Our business model will continue to leverage proprietary software that delivers unique and compelling value to our customers. We will continue to invest in our three solutions built on a single stack that can be deployed anywhere under a unified pricing model. I'd like to share a few highlights with you. I'll start with our enterprise search solution, because I'm particularly excited about this space. I've been in this industry for more than 15 years, and these are words I did not think I would say. That's because historically, enterprise search meant months to years of setup times to deliver a solution that didn't scale, didn't connect to everything you wanted, and had confusing and restrictive pricing. The engagement often involves success services and in the end, the solution just didn't work all that well. You couldn't find anything. Our enterprise search solution is different. We believe in the ability to easily and quickly put a fast, scalable, powerful search box on websites, applications, and workplaces. This is validated by customers from across industries, who continue to adopt us for this solution this quarter, from e-commerce to financial services, technology, and the public sector. We're a rapid release company. We drop major features in minor releases. With our latest release 7.7, we reached a significant milestone. Our proprietary Elastic workplace search product became generally available. It's a completely new set of finds for the enterprise. It provides an intuitive, single point of search that lets employees find what they're looking for, whether that's across common workplace tools like Microsoft 365, G Suite, Slack, Salesforce, GitHub, and Zendesk or custom applications. Our out-of-the-box connectors and flexible APIs cover a lot of ground, and there's more to come. And with resource-based pricing, we keep things simple and flexible. Customers pay for the resources their search consumes. Plus, we're making workplace search even easier to adjust with an upcoming free and proprietary tier and the ability to deploy on Elastic Cloud. Our products' go-to-market approach in this space is timely as a massive shift towards virtual workplaces unfolds, and I'm not alone in my thinking. Forrester estimates we'll see three-fold growth in the enterprise search market in the next three years as companies look to replace old search technology. Forrester also noted that with the release of Elastic workplace search, we are well-positioned as the transition unfolds. So, there is definitely more to come. Now, take that search box for enterprise search and apply it to observability with log, metrics, and APM data. Our approach to observability eliminates data silos, reduces mean time to resolution, and allows customers to control costs without compromising on visibility. This is important because as observable systems and services continue to multiply to meet business needs, so will the pressure to consolidate a sprawling universe of tooling, whether that's because of cost, efficiency, or both. Leading American Mortgage Company, Ellie Mae, who is a customer of ours, comes to mind here. They used to have many different technology vendors deployed across their entire business to monitor various systems and services. Tooling bingo, they called it. By choosing Elastic's unified approach, not only did they cut their logging costs in half, but they became more efficient in finding bugs faster. This has translated into a better customer experience, and in turn, potentially higher revenue. One stack, one pricing model, and the ability to move between solutions. This resonates with our customers, and we are constantly delivering more and differentiated value to them. In our 7.7 release, for example, the team shipped highly requested service maps capabilities for greater visibility in APM use cases. We also introduced many new out-of-the-box integrations, flexible search options over large data volumes, and improvements to memory usage and previewed our newly refactored alerting framework. And because features like alerting are implemented at the stack level, the foundation there is applicable to all of our solutions, not just observability. If you think about all of this value in the context of our unified pricing model and ability to deploy multiple solutions on a single stack, it's a really powerful thing for our customers. In fact, we have business renewal and expansion in Q4 with two Fortune 50 companies, one in technology and the other in retail, to follow various applications of enterprise search, observability, and security. As the business landscape evolves, the need to detect threats and protect endpoints is increasing along with the need to search across enterprises and observe infrastructure. For example, global financial services company BNP Paribas renewed and expanded business with us in the quarter. They've used Elastic for centralized logging and application search for a few years. Now, they are building out a large security operation center. This expansion opens up the opportunity to integrate Endpoint Security into their Elastic use and helps them streamline costs and accelerate time-to-market with a single technology stack. Another example is OverDrive, a leading digital reading platform for eBooks, audiobooks, and video from public libraries across the world. Elastic powers search within their customer-facing applications and log analytics on those applications. In Q4, they closed new business with us for security. Seeing the value that a single unified stack that powers threat hunting and endpoint protection, in addition to their other use cases, ultimately helped them decide to make a multi-year investment with Elastic. In the same way that we believe any observability customer is a potential security customer; we believe that every single customer is a potential endpoint customer. This is why we're relentlessly executing on our vision of a fast, scalable security solution that unifies the same and endpoint protection into a single foundation with unified pricing. And it just gets better and better with each release. In Q4, we introduced new features, such as embedded case management workflows that also natively integrate with ServiceNow. This streamlines incident response and reduces mean time to respond, which is critical to the success of today's security practitioners. We also continue to invest in our cloud offering. Our Elastic Cloud is available on AWS, JCP, Azure, Tencent Cloud, and Alibaba. In the quarter, we announced a preview release on AWS GovCloud and our FedRAMP in-process status. In addition to the availability of nine new global regions for Elastic Cloud, six on Google Cloud, two on Azure, and one on AWS. It's exciting to watch our cloud partnerships deepen, especially with Google Cloud and Microsoft. They worked with us to extend our workplace search products with G Suite and make our annual subscription offerings available via the Google Cloud Marketplace and also recognize us as their 2019 Data Management Technology Partner of the Year. We're also fortunate to hear from Scott Guthrie, EVP for Microsoft's Cloud and AI group at our virtual sales kickoff. Our commitment to being where our users are remains strong. It starts with a great SaaS experience that drives customer adoption and retention. Take Nordics digital bank Collector Bank, for example, who renewed multi-year business with us in Q4 to run their logging and security workloads with our Elastic Search service. And that commitment extends to bare metal or hybrid environment products like Elastic Cloud Enterprise and Elastic Cloud on Kubernetes, both of which have new releases in Q4, giving customers the freedom to self-manage if they want to. We closed multi-year business in Q4 with a Fortune 50 Energy Company who chose this option. They used our Elastic Cloud on Kubernetes product to monitor Kubernetes logs. As you can see, the team hasn't lost a beat in terms of innovation or execution. I am honored to work with such an amazing group of people at Elastic and report on such a strong quarter and fiscal year. They made it possible to respond to the global crisis quickly and efficiently to manage for safety, cost efficiency, and business continuity. We believe our company, our go-to-market, our products, and our team are uniquely well-positioned. Our free and open approach makes us resilient during difficult times and helps us come out strong in the long run. Even when times are tough, people still need to solve the same challenges. Put a search box on their application or workplace, on their infrastructure to observe it, and on their company to protect it. We are here for them. Throughout all of this, I remain determined as we head into FY 2021 and optimistic as I look at the future. We will continue to invest in building on a single stack and make it easier for customers to adopt new solutions. We will continue to be where our users are and deliver an unparalleled SaaS experience. We will continue to embrace and build on the amazing developer adoption of our technology as we move up in the enterprise. And we will stay focused on delivering value to our customers, community, and partners. And with that, I'll hand it over to Janesh.

Thanks Shay. Q4 was another great quarter for Elastic, capping off with strong fiscal 2020 total revenue in the fourth quarter was $123.6 million, 63% year-over-year, or 57% on a constant currency basis. We finished FY 2020 with $427.6 million in total revenue, up 57% year-over-year or 60% on a constant currency basis, reflecting strong revenue growth at scale. In terms of business momentum during the quarter, we saw a pause in mid to late-March when customers were focused on taking care of their employees and operationalizing their business continuity plans as various lockdowns went into effect. After the distractions faded, we finished March strong with the momentum continuing into April. Our customer diversification has been an advantage to us across geographies, verticals, and segments. In Q4, 42% of our revenue came from outside the United States, reflecting the strength of our distribution model. Hospitality, transportation, traditional retail, and energy combined make up less than 15% of our business. Although business has been impacted in those verticals by COVID-19, we also have customers and verticals that have benefited from COVID-19, such as e-commerce, gaming, on-demand delivery, and media companies. Further, although SMB growth was slower compared to other segments, we also have limited exposure to the SMB segment at roughly 15% across both self-managed and SaaS formats. Increased customer churn in the segment was offset by even higher new customer additions, reflecting the strategic value of our product offerings. Offsetting the impact in SMB, we benefited from continued strength in government spending outside the United States and in the enterprise segment, reflecting early indications of success in our strategy to penetrate the enterprise deeper with our solutions. All these trends demonstrate that the benefits of being a distributed company aren't limited to our internal capabilities. They extend to achieving diversification more broadly, which we view as a long-term advantage. SaaS revenue in the fourth quarter was $29 million, up 110% year-over-year or 120% on a constant currency basis. Fast revenue for FY 2020 was $92.3 million, up 101% year-over-year or 109% on a constant currency basis. We saw strength in both our annual SaaS business as well as our monthly SaaS business. Our rapid growth in SaaS reflects the success of our strategy to widen our competitive moat with proprietary features and leverage our partnerships. Moving on to calculated billings. Calculated billings in Q4 grew 52% year-over-year or 55% on a constant currency basis to $175.1 million. APJ was once again the fastest growing region followed by the Americas and then EMEA. At the end of Q4, total deferred revenue was approximately $259.7 million, up 52% year-over-year. Remaining performance obligations totaled approximately $535.6 million, also up 52% year-over-year. Contract lengths were longer versus a year ago at over one and a half years on average. As a reminder, we do not manage the business to a target contract length, and our monthly SaaS business has no deferred revenue or remaining performance obligations. Turning to customer metrics, as of the end of Q4, we had over 11,300 subscription customers, compared to over 10,500 customers at the end of Q3. We saw similar strength in new customer additions in Q4 as we have seen in prior quarters. We also ended the quarter with more than 610 customers with annual contract values above $100,000 compared to more than 570 such customers at the end of Q3, reflecting continued strong renewal and expansion trends despite COVID-19. In Q4, our net expansion rate remained over 130%. We also achieved another important customer milestone in Q4. We now have over 50 customers with ACV over $1 million, reflecting the richness and differentiation of our offerings, strong alignment of our solutions with customer spending priorities, and the success of our go-to-market model as we move further up within the enterprise. Although we do not plan to discuss this number each quarter, we will continue to share important milestones on this journey with you. Now, turning to profitability, which is non-GAAP. Gross margin in the fourth quarter was 76%, largely reflecting a sequential improvement in professional services margin, which can fluctuate based on projects and delivery timing. Subscriptions gross margin was roughly flat compared to Q3. We're tracking well relative to our expectations. In the near term, we will continue to invest in our SaaS business, which will remain a modest headwind to gross margin overall. Our operating loss in the quarter was $12.7 million with an operating margin of negative 10%, which was significantly better than expected, driven by three factors; strong revenue performance in the quarter, lower discretionary spending due to shifts to virtual across all of our operations, and, to a lesser extent, slower hiring as we navigated the uncertainty related to COVID-19 during March and April. The FX impact on operating margin was insignificant. Our strong operating margin performance in Q4 reflects both the underlying leverage in the model as well as our discipline in investing as we drive growth. Operating margin for the full year was negative 18%. Net loss per share in Q4 was $0.12 using 82.1 million weighted average shares outstanding. Net loss per share in fiscal 2020 was $0.93. Turning to free cash flow. Free cash flow was negative $6.8 million in Q4. Full year fiscal 2020 free cash flow margin improved two percentage points year-over-year to negative 8%. We've demonstrated free cash flow margin improvement of a few percentage points each year for a couple of years now, indicating the leverage in our business model as we scale. We were pleased that we delivered free cash flow margin improvement again this year, despite the dilution from the acquisition of Endgame. We expect that we will drive improvement in free cash flow margin again in FY 2021 to approximately negative 2% to negative 4% with a goal of achieving positive free cash flow margin in FY 2022. We ended the year with approximately $297 million in cash and cash equivalents. We remain comfortable with our cash position from an operating perspective. Before I move to guidance, I want to briefly discuss our overall framework for fiscal 2021. In the near term, we believe the trends we experienced in April will continue as our customers continue to prioritize their investments, and we help them achieve their business goals with our solutions. We also expect that our SaaS business will continue to grow at a strong pace and faster than our overall business. Looking ahead, our assumption is that we are going to be operating in a difficult economic environment due to COVID-19 with only a gradual recovery over time, which will likely create headwinds on calculated billings over the next couple of quarters. In building our fiscal year plan, we examine various scenarios to better assess the impact from affected verticals, segments, and geographies. Some of these have positive effects and some negatives. However, we do generally expect that some customers will scrutinize their spending more carefully given a challenging economic environment and this might cause sales cycles to become longer. The great thing is that our solutions align well with their business priorities, and our competitive advantages are strong and distinct. Therefore, we remain positive on the long-term growth of the business. Given the strength of our balance sheet, our strong execution in fiscal 2020, and the size of the opportunity in front of us, our intention is to continue investing through the cycle. We expect to maintain a disciplined approach to investing across the entire business. We plan to continue headcount-related investments in R&D to drive innovation and sales capacity and coverage globally to drive growth, as well as in G&A investments to drive global expansion and scale. At the same time, we intend to drive margin improvement. We can do both given the leverage inherent in our operating model. Turning to guidance for the first quarter and the full year fiscal 2021. We're expanding our revenue guidance range to account for the increased uncertainty in the broader economic environment. For the first quarter of FY 2021, we expect revenue in the range of $119 million to $122 million, representing a growth rate of 34% year-over-year at the midpoint. We expect non-GAAP operating margin in the range of minus 12% to minus 11% and non-GAAP net loss per share in the range of $0.19 to $0.17, using between 83 million and 84 million ordinary shares outstanding. For the full year fiscal 2021, we expect revenue in the range of $530 million to $540 million, representing a growth rate of 25% year-over-year at the midpoint. We expect non-GAAP operating margin in the range of minus 15% to minus 13% and non-GAAP net loss per share in the range of $0.98 to $0.85, using between 85 million and 87 million ordinary shares outstanding. This guidance reflects approximately $9 million in savings from the shift of our Q1 global all-hands meeting to virtual. We expect our spending on this event to return in Q1 of FY 2022. We also expect to see savings from travel and events which we will reinvest in other programs intended to drive growth. In closing, I'll emphasize a few points in relation to our business. First, the Elastic team is distributed by design, and our business is diversified across geographies, segments, and verticals. With customers that range in size from a few hundred dollars to several million dollars, this diversification is an inherent advantage for us. Second, our customers' spending priorities align well with our solutions as customers prioritize their spending in a difficult economic environment; we believe that enterprise search, observability, and security will all be areas that will benefit. Third, with rapid innovation in our proprietary features over the past couple of years, we have significantly widened our competitive moat. Our technology is also built on a unified stack, which we believe makes our R&D investments more efficient. Fourth, we offer a unified resource-based pricing model which liberates customers from the burden of paying based on ingest or per host or other pricing models with hidden costs. And finally, we have an incredibly powerful distribution model with a large community of users and a free and open on-ramp. We believe this positions us incredibly well to emerge from the current economic situation, as we win both on value for paid features and cost for free offerings. With that, let's take questions.

Thank you. We will now begin the question-and-answer session. And our first question will come from Brent Thill with Jefferies. Please go ahead.

Good afternoon. Just on the guidance here, your guidance is at the midpoint 25% revenue growth in 2021 after growing 57% in fiscal 2020. Maybe if you could just give us a little more around your assumptions in why such a massive decline on the topline?

Hey Brent, it's Janesh. I hope you can hear me okay; we had a little bit of trouble with the audio earlier. But in terms of the question, look, we obviously had a very strong finish year to Q4. And we're actually quite pleased with the results that we delivered here. As I mentioned in my earlier remarks, we did see some impacts related to COVID-19 in some areas, and that was offset by strength we experienced in other parts of the business. That said, just given the broader macroeconomic environment that we think will be difficult over the coming quarters, we do generally expect that some customers will likely scrutinize their spending a little bit more carefully in this environment, which might cause sales cycles to lengthen a little bit, and it might present a bit of a headwind to calculated billings over the next couple of quarters. Generally speaking, we expect that the recovery will be gradual, and so we believe it's just best to be prudent in our outlook for the rest of the year at this point in time. We looked at various different scenarios, as we were building our financial plan internally; obviously, we went through that process here in the last month or so. And as we looked at all of those different scenarios, we considered all of these effects as we set guidance. So, we'd obviously update you as you go. But for now, we're focused on executing here in Q1. The great thing for us is the market opportunity continues to be large and growing and as you've seen here in Q4; our solutions are aligning really well with customer priorities. And our competitive advantages are strong and distinct. We're quite positive on the long-term growth of the business, but prefer to be a little bit prudent here as we look to the rest of fiscal 2021.

And real quickly, has May sales picked up for you then? It seems that the tone is definitely improving. But are you seeing that in your business right now?

Yes, there's a couple of different dimensions to that. So, the strength that we saw in April coming off the couple of weeks that were slow in the month of March, generally speaking, the overall business momentum and cadence has continued when I think about some of our top of funnel activities, April and May have both been as consistent levels compared to sort of the pre-COVID levels. But that said, May is always a little bit of a unique month for us because it's the first month of our fiscal year and so we will typically have a slower start as salespeople align to new territories and territories get carved, and quarters get assigned and so forth. So, generally speaking, I'd say the broad customer trends have continued, but we do think it's best to stay focused on execution in the near term and then update you again in 90 days for Q2 and beyond.

Thanks, Janesh.

And our next question will come from Raimo Lenschow with Barclays. Please go ahead.

I have two questions. First, for Shay, have you noticed any changes in customer preferences regarding solutions they want to engage with? What impact has the crisis had on product demand? Are there any products that are currently popular or less sought after? Have you adjusted your marketing strategy in response? And for Janesh, while I understand the links are weak, you are projecting total revenue. To reach those figures, there would need to be a significant amount of non-renewals and churn. You mentioned some very low numbers for SMB, so are there any other significant non-renewals we should be aware of, or is it just a general environmental issue? Thank you.

Yes, I'll start to take the first question. Thank you, Raimo. So, when I think about the current environment, obviously, in the context of the pandemic that is going around, companies becoming virtual, closing offices, working from home, probably accelerating their digital transformation if it's happening and trying to figure out how do they go and be there for their employees to make sure that they continue to close business and look at it through the prism of our three solutions. If I start with enterprise search, then we're a distributed company for many years now, we have a saying at Elastic that face-to-face meetings are not searchable, which means that as companies become more distributed and they work virtually, they create much more information when it comes to written communications, whether it's on messaging apps, transcribes, on video calls, and more collaboration on things like Google Docs and Office 365. All of that is critical information for a company that companies will want to go and search. And I expect our workplace search products and just this integration to be exactly a good fit for that. So, I'm excited about the opportunity of helping our customers be more efficient and successful with capturing the fact that they become more virtual. When it comes to observability. Obviously, as you work more from home, you end up having to manage more servers, more infrastructure, more laptops. You rely on external services and internal services, and all of them need to be observed, not only to satisfy the needs of the customers that you serve as a company but also to serve your employees. If a service is down, then suddenly the whole company can slow down. And with that sense, we provide a set of observability tools that help support that. And we've heard from a few customers of ours who say that, thanks to our observability tools, we help them become virtual and they are using our tools to make sure that they managed to this transition. And lastly, around security, obviously, as I mentioned, as you have more servers, you have more laptops, and you have more endpoints, and you need to be able to protect them either to the endpoints themselves or by being able to get all of that data correlated and execute against it. As you become more digital and you have more infrastructure, your attack surface grows and our security solution and strategy apply nicely to it. So, I'm excited about our ability to take these three main solutions that we focus on and bring it to our customers. And it seems like it aligns well with where companies are heading today and in the future.

And Raimo to follow-up on the second question about the churn assumptions and our experience with renewals. Broadly speaking, we're actually quite pleased with the way Q4 turned out even on renewals and the overall expansion metrics that we brought with our customers. We didn't see any significant differences in churn overall in the customer base. We did see a slightly higher churn in SMB that I had mentioned earlier in my remarks, but given that it's only around 15% of the business, that didn't affect the overall churn much at all. In fact, our gross renewal rate was actually similar to where it's been in the past. So, again, kudos to the team on executing during Q4. We're just pleased that customers continue to see significant value in our solutions and our paid features. And that's what we're executing towards over here. In terms of how that factors into the guidance, as I said, we looked at various different scenarios in terms of where those headwinds might arise, it can come from a number of different areas; we will have to just monitor that as the overall economic environment unfolds. So, for now, we're just focused on executing here in Q1 and we provided the outlook based on the assumptions that we had built into our internal plans.

Okay, make sense. Thank you very much and stay safe. Well done.

Thank you.

And our next question will come from Matt Hedberg with RBC Capital Markets. Please go ahead.

Hey, guys, thanks for taking my question, and glad you guys are all well. I think I just want to ask another question on the guide. I think we're all trying to reconcile what was really a very strong quarter, I mean, 60%, constant currency growth for the year. It sounds like April and May have been good. I guess I had a question. You know, in terms of the scenarios that you ran, Janesh, on the guide. Are you actually seeing sales cycles extend right now or is it more of the assumption that you might expect them to happen? Because it just seems like there's a real disconnect between the momentum that you're seeing and maybe the conservatism and maybe also could you comment on the strength of your pipeline at this point, kind of relative to where we would normally be in Q1?

Yes, happy to Matt. So, a couple of things. One is generally speaking, the activities that we saw in the month of April have continued in May, as I said earlier. That relates to overall top of funnel activities in terms of our webinars and conferences, our virtual Elastic {ON} Tours, all of our demand generation activities, all of that continues as normal. We've seen, I'd say, a consistent level of activity over the past couple of months. And so that's all good. In terms of the actual performance in May, without getting too much into our overall Q1 performance, as I said, May is usually a little bit of a slow start. It's the first month of the fiscal year. So, I think it's just too early to tell what that impact will be. And so that's why we were staying focused here on just delivering a solid set of numbers for Q1 and then we'll update you again in 90 days' time on the rest of the year.

And then maybe Shay, I mean, I guess, when we think about the impact of COVID clearly there's significant changes in how I think we all live and work. When you look out longer term, do you see the impact of elevated work from home, increased public cloud adoption, should that be a tailwind for you guys? And maybe you're not quite seeing it yet, but I'm sort of curious, philosophically speaking, all of this that we're seeing right now benefits you guys longer term?

Yes, thanks, Matt. We definitely believe that this will provide a long-term advantage. To start with fiscal year 2021, we are being evaluated based on our outlook. These are unprecedented times, and we want to be cautious while managing the situation as best as we can without having a clear foresight. Regarding the long term, as I mentioned earlier, our three solutions fit very well with the changes brought about by COVID. Some of these changes are accelerating the future into the present, especially with companies adopting virtual work and transitioning to the cloud. Our company's strategy, through these three solutions and supporting our customers wherever they are, including in the cloud, is solid. I feel confident about the long-term opportunities that align well with current trends.

Thanks and strong results.

Thank you.

Thank you.

Our next question will come from Mark Murphy with JPMorgan. Please go ahead.

Yes. Thank you. And I will add my congrats on a nice finish to the year. I was curious if you might be able to separate out any kind of tailwind you saw from remote work activity during the quarter or just in other words, did you sense an uplift from customers who wanted to secure all the network traffic that's suddenly flowing in and out of their home offices, these projects that are tied to VDI environments? Is there anything like that that's discrete as an incremental driver?

We are definitely seeing increased usage in our observability and SIEM solutions, both influenced by the growing volumes of data and companies adapting to a virtual workplace. Many solutions have experienced significant growth due to the influx of data, logs, and network information that companies now need to monitor effectively. This trend supports two main goals: ensuring companies are well observed and well protected. While it's challenging to quantify the exact impact over the last month and a half, I believe this shift will be more pronounced in the long term. When the transition occurred, some companies we spoke to were hurriedly sourcing laptops for their employees and had to arrange for firewalls. Once they secured these resources, they needed to monitor and protect them, which is where we come in.

Okay, thank you for that Shay. I was interested as well whether you saw any customers that were indicating a kind of sense of urgency to spend money in April or in May, because they fear that their IT budget might get cut in the coming months. So seeing perhaps some kind of a use-it-or-lose-it effect coming into play in April or May rather than where you would normally see that cadence at the end of the calendar year. I think that's the question is, is along the lines of what Matt and Brent were sort of asking about trying to reconcile the health of Q4 versus the guidance?

Yes. We haven't seen anything material when it comes to customers trying to spend money now because their IT budgets are going to shut down or get reduced. So I’ve nothing to call out there. I remain excited about the, again, on the long-term features, we're trying to be prudent about FY 2021. And even if IT budgets end up being cut down or get reduced, I am extremely confident about our ability to provide significantly more value for the same amount of dollars that companies spend either because they want to collapse their tooling or consolidate their systems. If you will, in the observability space into a single technology stack and train their employees only once on it, for example. The ability for us to be there for the customers wherever they are, whether it's on cloud, on-prem to make sure that they make the best financial decisions. And then even further than that, being able to collapse their technology investments across the same or endpoint with observability. So I think this consolidation of tools is going to be a tailwind for us, because we've spent quite a few years investing quite heavily in our technology stack and our products to be here for them for our customers.

Thank you, Shay.

Our next question will come from Heather Bellini with Goldman Sachs. Please go ahead.

Great. Thank you Shay and Janesh for taking the question. I just had a couple, I guess, Janesh, I'll start with you just given all the questions you've been getting in Q&A related to this and the guidance. I'm just wondering, specifically, are you expecting or have you seen the size of your lands be lower because of COVID? And so I'm talking about kind of the new customer land, and then the net expansion rate, I know you mentioned above 130% yet again, but just wondering if based on your guidance and your comments on the macro, is it assuming that it stays above 130% for the year? And then I just had a follow-up for Shay. Thank you.

Yes, Heather. So we're actually quite pleased with the overall rate of new customer additions that we're experiencing, especially in light of COVID-19. You’ll see that last quarter it was consistent with what we've experienced before. And in terms of the size of those lands, we've really not seen any significant differences just yet. Given the size of the new lands or overall average deal sizes either, they continue to be consistent with what we've seen in prior quarters. And then, obviously, a backdrop of a strong revenue and billing finish, which reflects the expansion economics in the business as well. And in terms of those expansion economics, you've seen that again in the customer metrics around the expansion rate, and we also shared the data point of the number of customers with ACV over a million dollars, and in fact at the end of 2019, we had only about 25 of those customers. So that's positive. Generally speaking, we've seen the trends be pretty strong for us. But additionally, as we were thinking about our plan for the rest of the year, we think it's just a measured road at this point. As I said, we executed here in Q1. And it's been a long-term as we continue to drive our overall strategy.

Okay, so you are assuming the net expansion rate stays above 130 then for the year in your guidance?

Well, we didn't discretely break out new versus net expansion rates in terms of thinking about the model and the number of different scenarios, and based on those, when have potential headwinds associated with billings that might show up in different ways and different metrics. We looked at it in a number of different ways, and then we just coalesced around the view that we've shared with you here.

Thank you very much. Shay, you mentioned this briefly, but it seems that APM has become a much larger priority for our partners, and they appear to be making progress even more quickly. Could you share some insights on the momentum in the APM business? Do you think it might be advancing faster than you anticipated? Thank you.

Sure, Heather. Yes, happy to cover it. So, first of all, our APM product has matured from my perspective, especially with the recent release, which adds the probably the last big missing piece, which is service maps that users were asking us for. I'm excited about the usage of our APM product. It really resonates well with our customer base. It took some time to wrap their head, obviously, around the observability story and being able to combine APM and logging, but once they do, it makes a lot of sense. And then we're there for them. We're getting extremely good feedback about the capabilities of our APM product. And we're getting extremely good feedback and reaction from our customers about the ability to combine APM and logs. So, I remain very happy about the product that we built and how well it resonates with our customer base. We have our workload outflows to basically promote the observability story and make sure that users know us not only because of our superior or an accident logging solution but also for APM as well, and I'm happy about our progress there as well.

Thank you.

Our next question will come from Andrew Nowinski with D.A. Davidson. Please go ahead.

Great. Thank you and congrats on a nice quarter, on a nice finish to the year. I want to start off with perhaps a question on contract duration. Splunk talked about seeing a fairly significant reduction in their duration. It looks like you've stayed relatively unchanged. I'm just wondering if you're expecting any variability in the billings for the year attributable to any sort of change in contract duration.

Hey, this is Janesh. We didn't see any significant differences. As I mentioned, contract durations have increased slightly in Q4, which was a great outcome for us. This reflects the growing technology adoption for Elastic, leading to deeper customer relationships, with customers increasingly relying on us in mission-critical situations. It was encouraging to see customers making longer-term commitments, showing their confidence in Elastic and our significance to them. However, contracting can vary from quarter to quarter, and typically averages around 1.5 years for us, so we don't specifically manage to that number. I wouldn't put too much emphasis on that or consider it a trend at this point. Regarding factors that might shorten contract durations, like billing terms, we haven't seen any significant requests for shorter billing terms or longer payment terms. We monitor this as the quarter and the year progress, but currently, we haven't identified anything unusual. So, nothing is changing in that regard.

Okay. Thank you very much for that. And then I was wondering if you could provide any more color with regard to pricing pressure in the industry and sort of maybe the puts and takes as it relates to your gross margin for the year on how we should think about that relative to fiscal 2020?

Yeah. So, as I said, overall average deal sizes haven't changed; generally speaking, our pricing and our discounting practices continue to be consistent with where we were. As you know, for larger deals, we will obviously have larger discounts. We manage that in the overall mix and then of course, as SaaS continues to increase in terms of the mix that does present a headwind to gross margins overall. But as you'll see, we’ve managed that quite nicely over the course of fiscal 2020 here and fiscal 2021. As SaaS continues to become a bigger portion of the business, we do expect that we will have some level of headwinds associated with that in the gross margin number, but that's all factored into the guidance that we've laid out here.

Got it. Thank you very much.

Operator, next question, please.

And our next question will come from David Hynes with Canaccord. Please go ahead.

Thank you for taking my questions, everyone. Shay, I want to ask about the workplace search release. How effective do you think the out-of-the-box capabilities are for an average organization in reaching their objectives? Also, can you provide us with a throughput model and explain how this expands the search surface area and its implications for potential customer spending?

Sure, I see that as the product matures, we've dedicated a lot of effort to creating a consumer-friendly product that users can easily download or deploy in the cloud and start using in just minutes. This allows them to connect to services like Office 365, G Suite, Zendesk, ServiceNow, and others. Our focus has been on the most requested connectors from our customers, prioritizing SaaS services to provide a seamless experience. We are now working on expanding this set of connectors. I'm pleased that we already have strong support for popular tools like Google G Suite and Microsoft Teams. As we continue to add more connectors and support for additional tools, we will be able to assist more customers as they expand. Regarding our business strategy, we maintain the same pricing model for our workplace search, which I am very excited about. It is driven by customer demand; the more data they store, the quicker they want results, leading to increased spending with us. I believe workplace search will become a central hub for searching through wikis, tickets, incident responses, emails, chats, transcriptions, and more. This generates a substantial amount of data and aligns well with the value we deliver to our customers as well as our business model.

Yeah. Perfect. Okay, thanks very much.

Of course.

Our next question will come from Brad Reback with Stifel. Please go ahead.

Hi, great. Thanks very much, Janesh. Two of your competitors have raised close to $2 billion over the last sort of week and a half. And with only less than $300 million, and I understand you'll be cash flow positive in the next sort of 12 to 18 months. But any reason you wouldn't go out and raise capital currently?

Yeah, a couple of thoughts on that. One is that when you think about the position that we're in with almost $300 million of cash on the balance sheet, we feel like we're in a pretty good condition from an operating standpoint. So, it's not like we need the cash from an operational perspective. You'll see that we've pointed to continued improvement in our free cash flow margin for fiscal 2021 as well, so we don't expect to burn a lot of cash. And so our view has been that we manage the balance sheet comfortably and conservatively and at this point in time, we don't foresee the need for that. Our operating position is relatively comfortable. And in the future if the opportunity were to present itself and we needed capital for any other purposes, and I'm sure we can consider things at that point, but at this time, we don't feel the need to raise capital.

Great, thank you very much.

And our next question will come from Ittai Kidron with Oppenheimer. Please go ahead.

Thanks. I promise not to ask about guidance. Shay, let's start with you regarding security. Can you discuss the integration of endpoints and the milestones you aim to achieve? The integration was initially scheduled for later this year; what is the current status of that process, and the plan to market this as a complete solution? Additionally, you mentioned solid government spending outside the U.S. Can you elaborate on the execution aspect and whether there are any challenges in achieving your goals for that sector?

Sure. Hi Ittai. Let me address your first question. I want to express how excited and impressed I am by the end game team that has joined us. We welcomed over 100 experts in the security field to our engineering team, significantly enhancing our focus on security. The impact is evident not just in our endpoint capabilities, but also in our RCM maturity, as we can support a variety of use cases, including case management and incident response management, which I find very exciting. Regarding endpoints, we are following our strategic plan, aiming to integrate endpoint security into our overall product stack. This means we can easily offer endpoint security to all current and future customers, whether they are utilizing observability, enterprise search, or security, all with a simple click. The integration is progressing as planned, and our engineering team is performing excellently to ensure its success, which continues to excite me.

And Ittai, with respect to the question on the Fed performance overall, we are quite pleased with public sector performance not just outside the U.S. but in the U.S as well. So the Fed performed quite well for us, given the couple of deals that you had talked about the slip deals from a couple of quarters ago, they were not a factor in this quarter at all, as you know, we closed some of those in Q3 itself. And as I mentioned on the prior call, these are just now any remaining dues usages for the bigger pipeline. So overall, Fed performed nicely as the public sector worldwide. And broadly speaking, we continue to be confident about our opportunities and the Fed space and the overall opportunity ahead of us.

Very good. Good luck, guys.

And our next question will come from Tyler Radke with Citi. Please go ahead.

Hey, thanks for taking my question. I wanted to ask you a little bit about your spending and hiring plans. Janesh, I think you made some comments that in response to COVID, you did kind of take a closer look at, you know, managing things more prudently. And then obviously, the guidance it looked like operating margins came in well above the street even despite the, you know, despite lower revenues. So just kind of curious how if at all your plans have changed with hiring and maybe what prevents you from, you know, investing more aggressively in what might be actually a more favorable labor market, just as you know, some of your peers that have less resources have had to make layoffs?

Thank you for your question. Based on the strong performance we observed in Q4, we are continuing to invest in our business across all functions, including sales. Reflecting on our approach from fiscal 2020, we intentionally increased investments during the first half of the year and then moderated them in the latter half. This strategy has proven effective, demonstrating our ability to be nimble and adaptable in our hiring practices. We are in control of our investment levels, and with this flexibility, we will leverage it in fiscal 2021, especially considering the impact of COVID-19. In the short term, we are hiring at a more measured pace due to the effects of the pandemic, focusing on areas that are poised to drive growth and managing the investments made with Endgame. Looking forward, I anticipate increasing our investments to foster long-term growth. Our focus remains on innovation, coverage, and scalability. Within the sales team, we are not only expanding capacity but also exploring various sales methods, such as increasing our inside sales team, enhancing our renewal team, investing in technical support functions, and strengthening our partner program, all while aiming for growth with a long-term perspective that excites us.

Great. And then a follow-up for Shay. I think you talked about the potential for customers to scrutinize investments a little bit going forward, and Elastic as a company is targeted, quite a broad range of use cases from enterprise search, to logging, observability, security. I guess I'm curious, as you think about that broad range of use cases, are there certain ones that may stand out as maybe more or less discretionary? And have you kind of focused efforts on more specific sets of use cases that you think are going to be more valuable and maybe less likely to be considered discretionary in this environment?

Yes, of course. First of all, I believe the three solutions we offer are mission-critical for organizations. If the search function in your workplace fails, it becomes difficult to find information and for the team to operate effectively. I know this is a challenge in our company as we receive a lot of feedback about it, and it leads to disruptions in our work. I'm excited to be part of something that helps companies progress on a general level. The same goes for observability; if you cannot monitor your infrastructure or deployments, you're likely facing challenges. The same applies to security—if your company isn't secured, you will encounter difficulties. When companies evaluate their operations, I would probably prioritize security slightly above observability. If a company needs to cut costs, they might reduce their investment in enterprise search. However, this reflects the very subtle differences between what I see as three essential services for a company's health.

This concludes our question-and-answer session. I would like to turn the conference back over to Shay Banon for any closing remarks, please go ahead.

Thank you. And thank you all for joining us today. Q4 was an amazing end to a strong financial year and we look forward to continuing the momentum in fiscal 2021. Thank you very much. Ciao.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.