Elastic N.V. Q4 FY2024 Earnings Call

Good afternoon, and welcome to the Elastic Fourth Quarter Fiscal 2024 Results Conference Call. All participants will be in 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 of 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 Fiscal 2024 Financial Results. On the call, we have Ash Kulkarni, Chief Executive Officer; and Janesh Moorjani, Chief Financial Officer and Chief Operating Officer. Following their prepared remarks, we will take questions. Our press release was issued today after the close of market and is posted on our website. Slides, which are supplemental to the 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, our 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, including the slides posted on the Investor Relations website and those more fully described in our filings with the Securities and Exchange Commission. We'll 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 first quarter fiscal 2025 quiet period begins at the close of business on Wednesday, July 17, 2024. We will be participating in the Bank of America Global Technology Conference and the Baird Global Consumer Technology and Services Conference during the week of June 3rd, and the Mizuho Technology Conference and the Rosenblatt Technology Summit during the week of June 10th. With that, I'll turn it over to Ash.

Thank you, Anthony, and thank you, everyone, for joining us on today's call. Elastic delivered yet another strong quarter and a great finish to the fiscal year. We once again outperformed against our guidance on both revenue and profitability metrics. In Q4, revenue grew by 20% and cloud revenue grew by 32%, and we delivered an operating margin of 9%. We also continued to execute on our land, expand, and consolidate motion, and we grew the number of customers spending over $100,000 with us to over 1,330. A year ago, we kicked off FY '24 by releasing our Elasticsearch Relevance Engine, including our vector database and our Sparse EncodeR model ELSER. Throughout this past year, we continued to strengthen our position as the platform of choice for building real-time generative AI or GenAI applications. And I am happy to share with all of you that we now have well over 1,000 distinct paying customers using our vector database and retrieval augmented generation or RAG capabilities for building GenAI applications. I'm particularly pleased with the strong GenAI adoption we are seeing among our largest customers, with more than 145 of our customers with annual contract values of over $100,000 already using our GenAI capabilities. The number of GenAI customers in this category has more than tripled in the last year, and this represents the fastest pace of adoption we have seen for any new major capability we have introduced in the past. We believe that in time, every organization, big and small, will leverage the power of AI to transform their businesses. This is a significant market opportunity for us that will play out over the long term. Every customer interaction I had in Q4 involved customers actively seeking to explore and use GenAI for business benefits. Our customers are using GenAI to improve all kinds of business processes and to transform customer and employee experiences. This includes customers from newer digital-native companies like Roboflow to more mature enterprises, including some of the largest companies in the Fortune 100. Roboflow is using the Elastic platform at tremendous scale for building innovative GenAI applications. The Roboflow platform is used by hundreds of thousands of engineers to create datasets, train models, and deploy computer vision models in production. Roboflow uses the Elastic vector database to store and search billions of vector embeddings at extreme speed. In Q4, within the Enterprise segment, one of the world's largest financial services institutions expanded with a multi-year eight-figure deal with Elastic. The company uses Elastic for search and observability in a center of excellence with multiple use cases across the business. The company is now using Elastic's vector search capabilities in a strategic new application to provide highly accurate AI-based real-time recommendations for wealth managers to support the organization's most valuable clients. Not only will clients receive better service from wealth managers, but the managers will be able to double the number of clients that they can support. The company chose Elastic over other vendors for this new generative AI use case because of our innovative technology, superior time to value, and their ability to use existing in-house expertise and technology to quickly deploy this cutting-edge interactive application. Another example is a large international electronics company in Asia, which expanded their existing use of Elastic and chose Elastic for vector search and retrieval augmented generation or RAG to power their internal employee support system. The new LLM-based Q&A system for the semiconductor division is expected to improve both employee productivity and product quality. Another large global financial services company signed an expanded deal this quarter to use Elastic's GenAI capabilities for bank policy search, helping all employees find and understand the organization's complicated interconnected regulatory policies and procedures. This will increase efficiency and productivity across the business as well as help improve the overall regulatory posture. As the Search AI Company, Elastic is uniquely positioned to help our customers capitalize on the transformative possibilities that generative AI brings. We bring together the precision of search and the intelligence of AI, so customers can build innovative applications. The strong and sustained adoption we are seeing for our GenAI capabilities and our continuing pace of innovation that expands our competitive moat in this area reinforces our confidence in our ability to be a long-term beneficiary of the massive wave of business transformation being brought about by GenAI. In the areas of observability and security, we are helping customers harness the power of Search AI to make their organizations more resilient by bringing more intelligence and automation to their observability and security solutions. In Q4, our AI strengths, including our AI assistance for observability and security, continued to help us displace incumbent observability and security vendors and consolidate customers onto the Elastic platform. As customers look to consolidate onto a few platforms to reduce costs while increasing their pace of innovation with AI, Elastic has continued to be a beneficiary, thanks to our relentless focus on innovation and our obsession with customer-centricity. For example, one of the largest global providers of insurance, annuities and employee benefits signed a new deal for Elastic Cloud on Azure. The company consolidated multiple tools onto Elastic as part of its AIOps strategy, allowing teams to be faster, more efficient, and more accurate. Elastic was chosen over competitors because of our ability to ingest any kind of data, aggregate and correlate all data on one platform, as well as automate observability using the Elastic AI Assistant. Now turning to products, in Q4, our team continued to deliver some highly anticipated capabilities to further expand our competitive moat in the areas of search, GenAI, observability and security. We launched a first-of-its-kind Search AI Lake and announced the technical preview of our new Elastic Cloud Serverless offering, which is built on top of the Search AI Lake architecture. Data lakes of the past offered low-cost, durable data storage, but there was a compromise when it came to speed and the ability to search for relevant information across all of the data in the lake in real time. This has historically inhibited the use of data lakes for real-time applications. Elastic's Search AI Lake is a significant innovation that addresses this need. It's an exabyte-scale cloud-native architecture with built-in search and vector database capabilities. It is optimized for real-time low-latency applications, including RAG, observability and security. Our Search AI Lake and the technical preview of our Serverless offerings are currently available on AWS. Over the next couple of quarters, we plan to expand this offering to all three major cloud hyperscalers and across the major geographical regions, at which point we will make this offering generally available. We see this as an exciting new chapter for Elastic Cloud as it greatly simplifies the overall user experience, and we expect this to be a growth driver for cloud in the coming years. In the area of search and GenAI, we delivered several new capabilities to further differentiate our offering, starting with significant enhancements to the Elasticsearch open inference API. These additions include integration with Cohere's vector embedding and re-ranking APIs as well as the embedding API for OpenAI on Microsoft Azure. We also delivered improvements to our core vector database, including concurrent multi-segment graph search and native code optimizations that contributed to significant improvements to vector search query speed. We released vector search optimized instance types on both Google Cloud Platform and Microsoft Azure, completing our effort to support optimized hardware profiles on all three hyperscalers. We also released native support for custom learn-to-rank models, allowing customers to deploy trained models that improve search relevance based on user behavioral data directly in Elasticsearch. In addition, Microsoft announced that Elasticsearch was added as an officially supported vector store and retrieval augmented search technology for Azure OpenAI service on your data. Similarly, Red Hat also announced their support for Elasticsearch as an officially supported vector store in OpenShift. In the area of observability, Elastic has become a platform of choice for customers who are standardizing on OpenTelemetry. Earlier in FY '24, we donated the Elastic Common Schema or ECS to the Cloud Native Computing Foundation or CNCF's OpenTelemetry Project as its standard schema for logs. And now we've open-sourced our profiling agent under the Apache 2 license and contributed it to CNCF, pending their approval. Additionally, we also delivered support for AWS Bedrock and the Anthropic Cloud 3 model in our observability AI Assistant, improving the overall AI Assistant experience and increasing choice for our customers. In security, we unveiled our newest innovation, Attack Discovery, powered by Search AI at the RSA Security Conference. Attack Discovery correlates, enriches, sifts through, and prioritizes actionable intelligence from a flood of alerts using the unique RAG capabilities of our platform, significantly reducing the effort SOC analysts have to put into the alert triage and investigation process. It presents the user with an attack view that focuses on the few relevant attacks that matter as opposed to the underlying alerts that can have way more noise than signal. On average, SOC teams receive thousands of alerts daily and spend many hours manually triaging these alerts, leaving a significant portion of potentially critical threats to slip through the cracks. By leveraging Elastic's AI assistance, Attack Discovery and other AI-powered ways to remediate or prevent issues, we enable security practitioners to do their jobs more efficiently, while helping our customers remain resilient with less cost and less effort. Our customers have told us that they see this patent-pending innovation as a true game-changer for the SOC. The SIEM space is evolving again, this time to an AI-driven security analytics platform, and we are leading the charge in this evolution. Lastly, in security, Elastic Security Labs also delivered our LLM safety assessment along with detection rules to help customers protect themselves from prompt injection attacks and other threats to the secure adoption of large language models and other GenAI technologies. In closing, I couldn't be more proud of our team and the consistent way we have executed on our strategy while managing the business with discipline throughout FY '24. We continue to strengthen our position as the platform of choice for building real-time GenAI applications, and we see increased momentum as customers displace incumbent solutions and consolidate onto Elastic for more and more use cases. Our customers, partners, and the developer communities are what drive our focus and fuel our innovation. As the Search AI Company, Elastic is exceptionally well-positioned to take advantage of the transformative technology shift that generative AI is assuring in. With that, I'll turn it over to Janesh to go through our financial results in more detail.

Thanks, Ash. Q4 was a great finish to the year, continuing our momentum of strong execution. I am pleased that we once again exceeded the high end of our guidance across all measures. As in prior quarters, we continue to see a number of customers consolidate onto the Elastic platform to realize strong business value and innovation, and we had yet another quarter of healthy cloud consumption. Total revenue in the fourth quarter was $335 million, up 20% year-over-year as reported and in constant currency. Subscription revenue in the fourth quarter totaled $311 million, up 21% year-over-year as reported and in constant currency. Within subscriptions, revenue from Elastic Cloud was $148 million, growing 32% year-over-year as reported and in constant currency. Elastic Cloud represented 44% of total revenue in the quarter. We continue to see consumption patterns similar to the prior quarter. While we are not seeing the level of focus by our customers on optimization that we experienced some quarters ago, cost consciousness and operational efficiency remain important themes for them, which continues to be a reason why customers are picking Elastic as their preferred platform to consolidate workloads. Elastic Cloud revenue based on month-to-month arrangements came in at 14% of total revenue. As we've shared before, Elastic Cloud revenue based on month-to-month arrangements is driven mainly by a self-service motion in the SMB segment, which remains challenged. Professional services revenue in the fourth quarter was $24 million, growing 1% year-over-year as reported and in constant currency. Although professional services may fluctuate across quarters based on the timing of services delivery, we do not expect it to vary significantly in mix over time. To add more context around deal flow during the quarter, we saw a healthy balance across our solutions and continued to maintain a similar solution mix in annual contract values compared to the prior quarter. The quarter's strength was also balanced across geographies where EMEA grew the fastest, followed by the Americas and APJ. Customers continued to make strong multi-year commitments to us, reflecting their preference for Elastic as they consider platform consolidation and reflecting our increasing relevance to their business. We also saw a higher volume of early renewals than we typically see in Q4, reflecting continued customer confidence and commitment to our platform. As a reminder, early renewals do not impact the timing of revenue recognition, so there was no revenue benefit from this in the quarter. Our strategy of focusing on customers with a higher propensity for growth is working, as evidenced by our customer metrics. We ended the fourth quarter with over 1,330 customers with annual contract values more than $100,000. We are pleased with this quarter's customer additions in the greater than $100,000 category as these larger customers provide a strong foundation for our land and expand motion as we build a multi-billion dollar company over time. The strength of this motion is also reflected in the number of customers over $1 million in annual contract value, which was over 165 customers at the end of fiscal '24 compared to over 140 such customers at the end of the prior year. As a reminder, we generally provide this data point of customers over $1 million ACV annually. Looking at customer additions more broadly, we ended the quarter with over 4,370 customers above $10,000 in ACV and approximately 21,000 total subscription customers. Our net expansion rate was approximately 110%, which was in line with our expectations for the quarter. As you know, this is a trailing 12-month measure and the effects of the consumption optimization headwinds that impacted some of the prior quarters have now largely abated. Now turning to profitability and cash flow for which I'll discuss non-GAAP measures. Gross margin in the quarter was 76.6%, in line with our expectations. Our operating margin in the quarter was 8.6%, which was better than expected driven by our revenue outperformance. Diluted earnings per share in the fourth quarter was $0.21. Free cash flow margin on an adjusted basis was 18% or approximately $60 million in the fourth quarter. We ended the year with adjusted free cash flow of $169 million, which was a substantial improvement against the prior year, consistent with our overall operating profitability improvement. Finally, though we don't formally guide to cash flow, we are expecting adjusted free cash flow margin for fiscal '25 to be slightly above the non-GAAP operating margin for fiscal '25. This is similar to what we experienced in fiscal '24. Cash flow on a quarterly basis will fluctuate given timing issues and seasonality, so we continue to look at this primarily on a full year basis. Turning to guidance, as we look into fiscal '25, we remain focused on execution and believe that we are well-positioned for long-term growth and profitability. Our guidance philosophy remains unchanged from fiscal '24. We remain prudent in the near term and assume that current business conditions will remain stable. Our sales strategy remains focused on the Enterprise and Commercial segments, where we continue to believe that offering customers the choice on whether to deploy on-premise or in the cloud is a competitive differentiator for us. Accordingly, we expect continued momentum across both self-managed and annual cloud subscriptions depending on customer preference. As Ash mentioned, we are seeing strong customer interest around generative AI use cases and continue to believe this will be a significant growth driver for us in the long term. This market opportunity is significant for us, but customers are still in the early stages of the adoption cycle. While we anticipate continued growth in fiscal '25, we are not modeling significant revenue contribution from GenAI this year. As we've shared before, fiscal '25 will be a year of focused investment for us as we reinvest some of our natural operating leverage back in the business, in particular towards the GenAI opportunity. These investments will be focused on engineering, sales, and marketing activities. With that background for the first quarter of fiscal '25, we expect total revenue in the range of $343 million to $345 million. This represents 17% year-over-year growth at the midpoint, both on an as-reported basis and in constant currency. We expect non-GAAP operating margin for the first quarter of fiscal '25 in the range of 9.2% to 9.4% and non-GAAP diluted earnings per share in the range of $0.24 to $0.26 using between 105.5 million and 106.5 million diluted weighted-average ordinary shares outstanding. For full fiscal '25, we expect total revenue in the range of $1.468 billion to $1.480 billion. This represents 16% 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 in the range of 11.7% to 12.3% and non-GAAP diluted earnings per share in the range of $1.35 to $1.47 using between 107 million and 109 million diluted weighted-average ordinary shares outstanding. In summary, we are confident that we are still in the early stages of our growth journey. We are pleased with our strong performance in fiscal '24 and are confident in our outlook for the first quarter and fiscal year. And with that, let's go ahead and take questions.

We will now begin the question-and-answer session. Our first question today is from Matthew Hedberg with RBC Capital Markets. Please go ahead.

Great guys. Thanks for taking my questions. Congrats on the results. Obviously, this is a tough selling environment, but really good to see the Elastic Cloud acceleration. I guess for either of you, there have been a lot of divergent data points on consumption companies recently. Even tonight, a database vendor had some divergent results here? You guys are delivering strong Elastic Cloud results. It doesn't seem like GenAI is much of a tailwind for you yet? So I'm kind of curious if you could provide a little bit more color on sort of the consumption trends that you're seeing that seem a bit more favorable than others, and maybe why is that impacting your model maybe differently than others?

Yes. Hey Matt, thanks for asking the question. This is Ash. I'll get started and then ask maybe Janesh to add to it. But just in terms of the overall consumption environment and what we saw in Q4 was largely that consumption was steady. Customers were continuing to consume, increase their consumption towards the commitments that they've made. And as we explained in the past, our model tends to be that we sell commitments for customers related to specific projects, and those commitments, the consumption ramps towards it. And we saw that happening quite nicely. The fact that we have been able to win competitive opportunities where we are displacing incumbents because of the innovations that we've been driving, especially in the areas of observability and security, and the fact that when it comes to search, we have a very strong position. And search, I’d argue, is more important now than ever before because of GenAI and everything that's happening there. So the consumption trends that we saw were very steady based on everything that we had seen through Q4, not that different from what we saw in Q3. I don't know what others have reported. I haven't had a chance to look at it, but we were quite pleased with how Q4 played out.

I think that sums it up nicely, Ash.

Maybe just a follow-up then. Janesh, it sounds like you're not really baking in much revenue contribution from GenAI yet. Yet Elastic Cloud continues to accelerate. I guess, when we think about the full-year growth for fiscal '25, how are you kind of thinking about the progression of Elastic Cloud into this year? And maybe when might we actually see GenAI tailwinds given that it sounds like you already have 1,000 paying customers using vector and RAG?

Yes, Matt. I view it this way. Looking ahead to fiscal '24, the year is shaping up well for us, and we have strong confidence in our projections for this year. Our overall guidance framework and philosophy remains unchanged from previous quarters. We continue to guide based on the information we have, maintaining a cautious approach. We've set our full-year guidance at 16% at the midpoint, down from the 19% reported for the full fiscal year '24. In terms of the breakdown, we anticipate seeing growth in both self-managed and cloud options, reflecting customer preferences. This choice is a key differentiator for us. Additionally, we are not anticipating significant revenue increases from GenAI in either self-managed or cloud segments. Our sales strategy is still focused on Enterprise and Commercial segments, where we are experiencing strong growth in cloud annual subscriptions. However, the SMB segment, which we serve through our self-service monthly cloud offering, is expected to face challenges due to macroeconomic conditions. These are some key factors to consider. Regarding GenAI, as Ash mentioned, we foresee continued progression in that area, but we are not expecting any notable changes in our model at this stage. We believe this will be a long-term opportunity for us.

Thanks, guys.

The next question is from Brent Thill with Jefferies. Please go ahead.

Ash, just to follow-up on Matt's question on the demand environment, I mean, it seems like something's going on in the industry. You've seen in the best of front office and back office, and what you sell with Mongo. There seems to be an air pocket in demand, and I think everyone's scratching their heads trying to figure out what's happening. One of the explanations, maybe that AI is causing some type of investigation or pause, and clearly, it seems like you're benefiting to some degree from that. But I guess just if you had to sum up the conversations with your clients and what you're hearing around the demand environment and are we seeing a sudden change in budgets, is there a pretty clear signal that's coming through the software industry, as Matt said, you're not seeing it.

Yes, Brent, thanks for the question. And the way I'd characterize it is the demand environment really felt stable throughout Q4, and customers are really focused on generative AI and how they can leverage it in their business. And you can see it in the kinds of use cases that they are trying to apply generative AI towards. I talked about some of the use cases, the large Fortune 100 bank that's using generative AI for improving the experience for their high-net-worth individual clients. All of these are designed to improve their efficiency, improve the kinds of customer experiences that they deliver. So there's real value there, and they're trying to make sure that they can fund those, they're funding those initiatives. And it is definitely taking a lot of mind share. In terms of the level of optimizations and stuff that we had seen in the past, those have, like we've said, leveled off. But cost consciousness and operational efficiency remains important themes for customers. And for us, we actually have been leaning into it and we've talked about this in the last many quarters. We lean into it because we believe that we are able to offer the innovations that we deliver based on our generative AI capabilities, both in search for GenAI, but also how we apply that towards observability and security. And I've talked about that in my prepared remarks in how we are really changing the game in security. All of those are helping us compete better, they're helping us deliver greater value to customers at a better price. It's helping us displace incumbents, and we're benefiting from some of these things that are happening. But definitely apart from the SMB area, whereas Janesh said that has remained flat, it has been flat for a few quarters now, we are seeing the benefit of our ability to drive differentiation at a better cost amongst our customer base.

Thanks, Ash. Janesh, I just wanted to follow up quickly. When considering the 16% growth you projected for the year, are you factoring in additional challenges from the macro environment and the slowdown in small and medium businesses? Or have your assumptions or approach to setting that guidance changed?

Yes, Brent, the way I'd characterize it is that we've learned over the last couple of years that when customer spending priorities are shifting, it's really important for us to stay very close to them. That's exactly what we are doing right now with our sales and customer success teams, and it's also really important that we maintain prudent in our outlook and that prudence is reflected in our guidance. So we're going to continue to monitor things carefully as we move forward, but at this point, we feel good about our outlook and we'll obviously update you as we go.

The next question is from Pinjalim Bora with J.P. Morgan. Please go ahead.

Thank you for the questions and congratulations on the quarter. Ash, I want to ask about the significant uptake of the GenAI capabilities. Can you discuss the ROI that users are experiencing with vector search? Our research indicates that switching from lexical search to vector search can significantly increase costs, approximately 20 to 30 times. What anecdotal insights do you have regarding ROI in general, and are people utilizing more sparse encoding compared to dense encoding?

Thank you for the question, Pinjalim. We are observing the use of both sparse encoded models, such as our ELSER model, and dense vectors. The projects currently receiving funding are mainly focused on enhancing efficiency in processes that support both internal and external customers. For instance, the Fortune 100 bank I mentioned is striving to provide their high-net-worth individual clients with timely insights about their portfolios. This initiative allows internal employees to share information with clients more quickly, enabling each wealth manager to assist a larger number of clients while improving the overall experience. Despite increased spending on technology, the overall cost tends to be more advantageous due to these dynamics. We have seen similar trends with customers like Cisco, OCBC Bank, and Stack Overflow, whom I've discussed at previous ElasticON conferences, showing clear ROI benefits. As more customers progress in their use cases, we anticipate they will experience increasing advantages, which will ultimately reflect in our revenue. I'm particularly enthusiastic about the adoption we've witnessed among our customers spending over $100K, as they are some of our largest clients. Their adoption of our GenAI capabilities will be significantly impactful for us in the long run.

Yes, understood. One follow-up for Janesh. Janesh, this is more of a hypothetical question on the guidance, but if I look back in your numbers, fiscal '23 RPO exited the year at 17% growth in constant currency and you did 18% in revenue growth in constant currency in fiscal '24. Seems like RPO is accelerating, exiting fiscal '24 now, but the revenue growth seems to imply a deceleration. So maybe talk about that dispersion and is there any reason because of which you might be longer duration that's driving RPO maybe? But is there any reason that revenue growth will not directionally follow RPO this year?

Yes, Pinjalim, happy to talk about that. So there's a couple of things to consider as you think about the RPO performance. One is maybe just as a starting matter, the Elastic Cloud from month-to-month arrangements that we talked about that is more heavily weighted towards SMB, where there continues to be a greater degree of macro pressure. That part of the business does not have any RPO in it. And so that's one piece to naturally consider in the model. I think the other piece that I would also just highlight, I touched on this a little bit during the prepared remarks that we did see a slightly higher volume of early renewals here in Q4 than we generally see in any other Q4. And that just reflects continuing customer confidence and commitment to our platform. And that was a little bit more than $15 million above what we typically see. And most of those contracts were due in Q1. In some instances, I think those were related to the single-digit price increase for our self-managed products that went into effect in May. Some customers wanted to lock those lower prices in, and they renewed early. And that's obviously something that we had anticipated when we announced the price increase. And just as a reminder, I mentioned this on the call, on the script as well, that early renewals do not impact the timing of revenue recognition. So there was no revenue benefit from that in the quarter. And it doesn't change anything for revenue for fiscal '25 either. The other thing I would point out in Q4 is that we saw very strong multi-year commitments. Many of these are new and renewing customers, and they all elected to sign multi-year contracts with us. And these multi-year commitments are obviously super valuable to us because they create long-term commitments, but those don't necessarily translate into revenue in fiscal '25. So those are some of the things that I would call out as you're thinking about RPO and the connection of RPO to revenue.

Got it. Very helpful. Thank you.

The next question is from Tyler Radke with Citi. Please go ahead.

Yes. Thanks for taking the question. Janesh, just following up on the price increase side of the equation, can you just talk about what you're embedding in for the full year? And then I know you recently released the technical preview of Serverless. If you could just talk about to the extent that Serverless and different pricing models in the cloud are being considered in the guide as well. Thank you.

Thanks, Tyler. So maybe I'll start off with the first piece, which was the self-managed price increase that we did. And for those that may not be familiar with it, we did raise prices for our self-managed products actually starting this month. It was a single-digit percentage increase and based primarily on all the technology enhancements that we've delivered in the platform. That's not a meaningful driver of revenue in the near term for a few reasons. First off, it's obviously limited to self-managed only, and it is a single-digit percentage increase, so it's not that substantial. And also, it'll start to come into renewal contracts only at the time of renewal. And given that we sign a number of multi-year contracts, not all of those will be due here in fiscal '25. And then, of course, you'll have the revenue recognition waterfall on top of that. So it's not a significant impact to revenue. But we do continue to deliver tremendous value to our customers who are willing to pay for the value that we bring to them. And the price increase was a reflection of that and eventually will play out in revenue over the longer term. In terms of Serverless, Serverless is going to go GA only later this calendar year. And as a reminder, Serverless does not replace the hosted offering that we have today, it's an additional offering. So we expect that the adoption of that will be gradual and over time will again play into the model. So we've not baked in any meaningful upside from Serverless either at this point in time in the revenue guide.

Yes, and Tyler, just to add to that, in terms of Serverless, we believe that it gives more choice to customers, right? So the current Elastic Cloud offering, what we'll end up calling Elastic Cloud Hosted, will continue to have the pricing model that it has today. It allows customers to have more control over their Elasticsearch, the store itself, and the technology itself. With Serverless, it's a more fully managed offering, and it sits on top of the Search AI Lake that I talked about. And the pricing model there will also be consumption-based, but it will be based on metrics that we have seen from customers that they are interested in seeing from us in terms of pricing based on the amount of data ingested and the amount of data stored and queried. And so it's more choice for customers. It's going to unlock more types of workloads, it's going to give them more flexibility to optimize those workloads in ways that really allow them to do more and more with Elastic. So I'm very excited about what that's going to mean for the long-term for Elastic Cloud. But as Janesh said, given that it will be generally available only after the next couple of quarters, we are not modeling any benefit from that in FY '25.

Very helpful. And just a follow-up, if I may, on the booking side. And Janesh, appreciate the explanation that there could have been some early renewals ahead of that price increase that drove the booking strength. But I'm just curious, in the context of tying back bookings to the trajectory of net expansion rate, how are you seeing the upsells and contracts expand from an ARR perspective, even if the timing was a little bit earlier? Do you feel like we're at a point now where given your comments on optimization is easing, we can start to see the NRR improve from here? Thanks.

Yes, Tyler, it's a great question. So as we think about the net expansion rate, it played out as we expected. And a couple of things about the net expansion rate. Number one, as you know, it's a trailing 12-month measure. So the effects of the consumption optimization headwinds have now started to wear off and have largely abated. And in terms of thinking about the bookings piece or orders, just keep in mind that for cloud business, the net expansion rate is actually based on actual consumption, it's not based on the commitments. So that doesn't affect the net expansion rate immediately. And if I think about the self-managed business on that side, the net expansion rate will include the commitments that customers have made to us. But overall, the strength that we see in our land and expand motion is playing out quite nicely. We obviously had a great finish here to Q4 and to the full year. And so as I think about what that means for the net expansion rate going forward, we don't provide a specific view on it, but I will say that we feel very good about our expansion motions working nicely both in self-managed and in cloud. And you've seen that in the numbers that we just printed, so we're excited about that for the rest of the year.

The next question is from Rob Owens with Piper Sandler. Please go ahead.

Great. Thanks for taking my question. This is Ethan on for Rob. I wanted to ask about the $100k plus customers that are adopting ELSER right now. Can you speak to how big their ELSER commitments are relative to their overall spend on Elastic? And if you're seeing any material uplift in spend for this specific portion of your larger customer base due to ELSER?

We are very pleased with the adoption of our GenAI functionality among customers spending over $100k, as this segment is crucial for our business. Over 10% of these customers are already using GenAI, indicating rapid growth in this area. However, the revenue contribution from this adoption is still small since most of our customers are in the early stages of implementing GenAI. We're not projecting significant increases in our guidance from this at the moment, and the revenue impact is expected to take time to develop. The adoption tends to focus more on internal enterprise use cases rather than those exposed to external customers, which reflects the current state of the industry. We've observed strong traction across various geographies and use cases within this customer group.

Thank you.

The next question is from Austin Dietz with UBS. Please go ahead.

Hey. Thanks, guys. Janesh, just to unpack the growth in cloud this past 4Q. Looking at the annual business, the annual cloud business, it's been growing in the mid-40s in 2Q and 3Q and it looked like it picked up a little bit further to 50% in 4Q. So I guess what's been the biggest driver of that stability you're seeing in the annual cloud business? And then how are you feeling about the durability of that growth in annual cloud as we move into fiscal '25?

I'm happy to address that. Our land and expand strategy has been quite effective. We've discussed our investments aimed at driving this initiative and the strong commitments we're witnessing on the Elastic platform. This progress has been promising, and we had a strong finish in Q4 as well. The drivers of this strategy are still in play, and we're experiencing solid performance in both the Enterprise and Commercial segments. However, there has been some offset in the monthly cloud area due to broader macroeconomic challenges in the SMB segment. As we look ahead to fiscal '25, we plan to maintain our focus on sales in Enterprise and Commercial while continuing to pursue expansion opportunities, especially in areas like GenAI and platform consolidation. We're pleased with our cloud performance thus far and are looking forward to Q1 and the remainder of the year.

The next question is from Mike Cikos with Needham. Please go ahead.

Hey guys. This is Mike Cikos from Needham. Thanks for taking our question. You've mentioned that consumption will fluctuate from quarter to quarter, but can you highlight any expected seasonality or patterns for consumption in fiscal '25? Additionally, do you anticipate Q2 to be as strong seasonally as it was last year?

Hey, Mike, maybe I'll take that. And as I sort of look back at fiscal '24, I'm actually very happy with the consistent execution that we had across all the four quarters of fiscal '24. Very proud of how the whole team delivered. As I think about fiscal '25, we've obviously just initiated guidance for the full year at 16% year-over-year growth, and for Q1, at 17% year-over-year growth. I expect that revenue will continue to ramp nicely over the course of the year. And so as we think about the specific numbers for Q2 and beyond, I think it's too early to tell. So we'll provide you with a better view on Q2 specifically as we get to the end of Q1, but we expect that revenue will ramp nicely over the course of the year.

Okay. That makes sense. Thank you. And then you've mentioned a couple of times continued softness in the SMB segment, but was there any change quarter to quarter? And what are you doing to counter this softness?

Yes. So in terms of what we experienced over the course of the quarter, it was remarkably stable. We haven't seen any fundamental big shifts in terms of the state of the SMB segment broadly. And if I think about the operating actions that we're taking in that monthly cloud self-serve business, that continues to be an important part of the business to us from a growth standpoint. We're continuing to make appropriate investments. For example, the product investments that we made in Serverless will ultimately make adoption easier and will make scaling more seamless for users in that segment. And that very naturally supports a product-led growth self-service motion. We're working towards making our Serverless offerings available on all three hyperscalers later this year. In addition to some of the product enhancements, we're also focused on driving appropriate demand-gen investments to continue to drive users to the product. And that motion is working quite nicely for us as well. So I think it's more of a broader macro impact in SMB that we are continuing to work our way through. But in terms of both product as well as applying the right kinds of demand-gen motions to it, we're continuing to make the investments through an efficient cost model so that we can continue to serve that segment in a profitable way.

Awesome. Thanks so much.

The next question is from Raimo Lenschow with Barclays. Please go ahead.

Thank you, and I want to congratulate everyone as well. Compared to other companies, these numbers and guidance are impressive. Ash, considering customer awareness of your future direction, and looking at competitors who claim they can do the same, what insights do you gain from customer interactions regarding the distinction between your offerings and those of your competitors? Also, how do you assess your position on the adoption curve as customers progress?

Yes. Hey, Raimo, thanks for the question. So, first of all, what I'd say is every single conversation that I've had in the last quarter, even when customers have been using primarily Elastic for observability and security, every one of those conversations has involved generative AI. And this is something that's coming up from the customer side, because every single customer that I've spoken to seems to be thinking about how they can use generative AI, AI in general to make their offerings, to make their systems, their processes, just better, more automated, more efficient, et cetera. In terms of the awareness of our capability, what I'd say is I think we've done a good job of getting our customers to understand all the vector database functionality that's inherent in our platform. And we're very proud of the fact that because we've built this into our platform, not as an add-on or an adjunct, our customers immediately get the benefit of it as long as they have the right tier of usage. And so they have the skills. Their data is already sitting on Elastic. And now, without having to learn new things, they're able to quickly get started using us for these kinds of generative AI use cases, both for dense vector usage or sparse encoded vectors, and just the breadth of functionality, the integrations that we keep delivering with third parties, the ability to use all of these large language models that are out there, all of these have been tremendous strengths and advantages. And the last year has been a journey for customers to better understand this evolving landscape. What I'd say is we are still in the early phases of the overall journey for GenAI, but the customer awareness, both in terms of differentiation and why they need not just a vector database, but a much more comprehensive platform that includes hybrid search, that includes the ability to re-ranking and so on, the integrations that I talked about, all of those are becoming clearer and clearer. So I'm having fewer conversations where I'm having to do that explanation, and more discussions where customers are asking for us to work with them together to help them not only build these applications, but really define the art of the possible. So the momentum is working very nicely, and I'm quite excited about it.

Thank you. And then Janesh, one for you. In theory, like if you think about it, if the customer was using Search, it should be very easy to upsell that you just go in and say, look, I can give you a hybrid search with vector baked using ELSER, et cetera. Can you remind us like search as a percentage of the different workloads? I know you never gave proper numbers, but is that like a meaningful part of what you did? Like, how does that fit into your overall scheme? Thank you.

Yes, Raimo, I think the solutions mix for us in Q4 across observability, security, and search was very consistent with what we've generally seen over the course of the last year in terms of ACV. All of the solutions are growing nicely for us. In terms of numbers, observability continued to be a little bit more than 40% of the mix in terms of ACV, security continued to be roughly 25% or a bit higher, and then search makes up the rest of it. And over time we think that search will benefit from GenAI, but we also obviously see the opportunity to drive growth in security and observability with the consolidation motions that we've been seeing. So we felt very good about our overall solutions mix.

I would like to add that we are observing increased customer interest in search, largely due to generative AI. There is a noticeable change in conversations regarding customers' willingness to invest in this area. Additionally, people are exploring how Elastic and Search AI can enhance their observability and security solutions. This is why we believe our efforts in improving search are yielding positive results.

Okay. Perfect. That makes sense. Thank you.

The next question is from Ittai Kidron with Oppenheimer. Please go ahead.

Thanks for the positive results, everyone. Ash, could you provide some additional insight into the ramp profile with the GenAI customers? Congratulations on reaching 1,000 paying customers. If I recall correctly, several hundred of them have been with you for over two quarters. Is there any noticeable pattern in their behavior and growth adoption? Can you share how we should anticipate the usage to increase? What trends are you observing regarding how quickly customers are integrating it and, conversely, how fast those applications are being used to drive more demand?

It's a great question. When considering the customer journey, the initial step is usually adoption, which involves selecting a technology platform. This is where the statistic of over 1,000 customers becomes relevant. It serves as a key indicator of our traction, particularly with the more than 145 customers in the $100K plus category, as these are our largest customers and represent the greatest revenue potential. After customers choose us, they enter the implementation phase. Many have successfully put their applications into production, with several sharing their experiences at our ElasticON conferences. I previously mentioned companies like Cisco and Stack Overflow, along with other customers such as a bank and an electronics company, who are also putting their technology into production and will see growth over time. It's important to note that with generative AI, enterprises typically exhibit a lower tolerance for inaccuracies compared to consumers using something like ChatGPT. Consequently, the testing and comfort levels required for deployment generally take longer. This is why we observe a longer timeline. However, once customers begin to adopt and recognize the clear return on investment, as discussed by those who have presented at conferences, we believe it’s a matter of timing. We have not factored this into our FY '25 guide, but we are confident that it will significantly expand our total addressable market in the long run.

Very good. Awesome. And then second question on the SIEM opportunity. This has been clearly a big area of success for you for years with Splunk being the main competitor. But in the last three months, a lot of things are happening in this market. LogRhythm and Exabeam coming together, IBM selling their business to Palo Alto, and of course Cisco closing on Splunk. I guess my question is, how do you see the landscape in SIEM specifically develop for you? And when you see all those things happening in the market, how are you reorienting either product go-to-market, pricing anything internally to try and capitalize on what could be a very big displacement opportunity over the next 12 months, 24 months?

That's a great question. What we're observing, particularly in the security market and specifically in SIEM, which is our main focus in security, is that the market is evolving towards our existing approach. We have always regarded this as a data-centric issue. As the volume of data increases, customers are realizing the necessity of a backend data platform capable of ingesting various types of security data, even from other security technologies. For instance, if a customer is using another company's endpoint security or cloud security products, we need to efficiently gather and correlate that data quickly. This is one of our key strengths. Additionally, we are utilizing AI to automate the associated processes. Our work with AI assistance and Attack Discovery has aligned well with this trend in security analytics, and we have successfully outperformed established competitors. We're witnessing positive outcomes from our strategy of growth and consolidation, as you mentioned. I'm very enthusiastic about the implications of these developments, and we are actively enhancing our go-to-market and product strategies in response.

Can you elaborate on the go-to-market side? Because what you've described is a lot of product enhancements and benefits, but what have you changed on the go-to-market side to try and capitalize on this?

Yes, look, we got out of our sales kickoff just a couple of weeks ago, and this is one of the areas that our sales teams are most excited about. So we have clear campaigns that are going after this opportunity as you can imagine. And literally, the way we talk to our sales team is the two questions that we need to be asking is, one, what vector database are you using to every customer? That's the question that we should be asking. And the second, are you using any of these incumbent security or log analytics technologies that haven't been delivering value, haven't been innovating? And we are seeing success with that motion. So it is absolutely a big go-to-market focus for us, and the discipline and just the up-leveling of everything that Mark Dodds, our CRO, is doing is just something I'm very excited about.

Very good. Good luck. Thanks.

The next question is from Shrenik Kothari with Baird. Please go ahead.

Hey, thanks for taking my question. Congrats on the great execution. So Ash, you mentioned about, of course, the recent deal that you guys signed with the global insurance provider to implement Elastic Cloud on Azure and you highlighted of course consolidation and ingesting data which gives you an advantage. But given the context of all conversations involving GenAI that you highlighted, and Elastic being the first let's say non-Microsoft entity on the Azure OpenAI service, which in itself highlights a strong kind of Azure partnership and relationship, can you elaborate on the strategic importance of this OpenAI service in particular and how it is and it can move the needle and then I have a quick follow-up?

Certainly. The hyperscalers find significant value in collaborating with us, especially in the realm of generative AI. Our extensive presence in the market means that a lot of the data is already on Elasticsearch, which provides customers with ample choices. However, merely having a vector database isn't sufficient; it's essential to have the comprehensive search capabilities we've developed over the past 12 years. This is a key reason why the hyperscalers have closely partnered with us to seamlessly integrate our technologies, ultimately enhancing the customer experience. The integration mentioned in my earlier remarks allows for Elasticsearch and our vector database features to be accessed through the Azure interface for AI application development, simplifying the process for customers. This approach will enable us to penetrate the market more rapidly, and we are witnessing positive outcomes in deals like the one you mentioned. Overall, there are beneficial developments with all three hyperscalers.

Got it. I have a quick follow-up for Janesh regarding the go-to-market strategy. It appears that your team is effectively displacing competitors and leveraging GenAI while expanding partnerships. Specifically regarding GenAI, you mentioned previously that it remains in the early design phase and predominantly features pilot programs. Additionally, the adoption of new AI workloads is maturing. How are these initial programs and data informing your internal models, especially anything you can share from a financial perspective? At what stage do you think you are—still in the design phase, or are things beginning to gain momentum?

Shrenik, just in the interest of time, to keep it brief, I'll just recap that we built our guidance prudently, considering things that we know. We have not modeled in any meaningful upside in our model from GenAI. We expect that we will continue to see some growth because there was some small contribution in fiscal '24. So we expect that we'll see some contribution in '25 as well. But it's not a significant amount that we are modeling. And we're also not modeling in any meaningful upside from Serverless, which obviously happens much later this fiscal year in terms of its general availability. And so that's been the approach we've taken.

Got it. Thanks a lot.

The next question is from Jake Roberge with William Blair. Please go ahead.

Hey, thanks for taking the questions. Just in terms of the thousands of paying customers you now have on ELSER, are those largely existing customers that you're seeing upgrade to premium solutions or are the new capabilities also starting to expand the top of the funnel and drive some incremental new logo activity to you?

Hey Jake, I'll maybe address that. We're seeing both. That's the simple answer. Existing customers obviously are the easiest ones to convert, but then we are also seeing new customers, especially ones coming in through the monthly cloud motion and then translating to being paid customers. So across the board.

Okay. Great. And then just a quick follow-up on the price increases. How often do you push those out to the self-managed base? Is it on an annual basis or is this the first price increase that you've done for a few years?

It's the first one in a few years, Jake. We don't do it on an annual basis. We generally tie up price changes to value that we deliver. And so when we have significant shifts from the standpoint of value added to the subscription tiers, that's when we'll go in and adjust prices because that's when customers see the value in what they've been getting, and it's a much easier conversation at that point. So this is not a standard annual practice for us.

This concludes our question-and-answer session. I would like to turn the conference back over to Ash Kulkarni for any closing remarks.

All right. Thank you all very much for joining our call today. We had a great fiscal 2024, and I'm really proud of how the team executed, continuing to bring exciting innovations and providing value to our customers. We are excited. Thank you and have a great rest of the evening.

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