Q4 2020 Elastic NV Earnings Call
[music].
Good day, and welcome to the elastic fourth quarter and full fiscal year 2020 financial conference call. All participants will be in listen only mode. So do you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one.
Your telephone keypad withdraw your question. Please press Star then too. Please note that this event is being recorded I would now like to turn the conference over to Anthony less Green Vice President of Investor Relations. Please go ahead.
Thank you good afternoon, and thank you for joining us on todays conference call to discuss the last six fourth quarter and full fiscal 2020 financial results on the call. We have shy Bannon founder and Chief Executive Officer engine Ashmore, Johnny Chief Financial Officer. Following their prepared remarks, we will take questions. Our press release was issued today. After the close of market is posted on our.
Website slides, which accompanies this webcast can be viewed in conjunction with lag remarks can also be downloaded the conclusion of the webcast on the elastic investor Relations website, IR dot elastic about CEO.
Our discussion will include forward looking statements, which may include predictions estimates or expectations regarding the impact of the Cove at 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 also 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. Some 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 the.
Close of business Friday July 10th 2020, with that I'll turn it over to shine.
Thank you Anthony Hello, and welcome to everyone I'm 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 to that our business is strong and resilient. We continue to innovate rapidly and we are executing well in these challenging environment.
I'm extremely proud of how at the elastic team continues to support our community of users partners and customers and my hard goes out to those affected by the call, but 19 situation.
The team did a fantastic job building on our Q3 results to achieving a made in Q4 strong finish to our fiscal year.
And they did so during truly challenging times with the call Big 19 outbreak.
Which I will cover before touching on our results and business highlights.
Oh No February earnings call. We said, we would closing monitoring the coffee 19 situation and respond as needed.
As we learn more we adapted quickly to manage for safety cost efficiency operation and overall business continue to see.
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's distributed by design, so transitioning to work from home simply required sending an email.
We've always had the infrastructure tooling disciplined and mindset for virtual work on a global scale.
Engineering continues to shift brought up 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 continue to execute on our direct sales motion virtual environment, allowing us to keep closing new and renewed business.
We 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 entry, we held three virtually events in Q4 and there are more on the way.
Well in any event is no longer restricted to a physical location, we're able to reach and engage a broader audience.
As a result can do shift we're also seeing increased attendance.
As for what comes next are stressed will help us navigate that.
From our distributed by design approach to our rapid pace of innovation.
Development of customer focused solutions are large and geographically diverse customer base efficient go to market solid customer expansion and strong balance sheet.
All of these gives us confidence to address the reach market opportunity ahead of us.
Moving onto our results looking at the full fiscal year revenue grew 57% year over year in Q4, we once again, so robust customer acquisition and expansion metrics and grew revenue 53%.
We ended the quarter with more than 11300 subscription customers, including over 610 with annual contract value of more than $100000 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's relentlessly resilient. We believe we are well positioned to address the changing business plan.
More virtual teams, then workplaces, a greater moved to the cloud and increased pressure to consolidate tooling.
Were built on a free and open foundation, which has same tower in challenging times, our free and open distribution model will continue to fuel rapid adoption and innovation.
Our business model, we continue to leverage proprietary software that delivers unique and compelling values to our customers. We will continue to invest in our three solution.
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 the space I've been in this industry for more than 15 years and these are words I did not think I would say.
Because historically enterprise search men month, two years of setup times to deliver a solution that didnt scale.
They didn't connector everything you wanted and have confusing and restrictive pricing.
The engagement often involve success services in India and the solution just didn't work all that well just 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 web sites applications and workplaces.
This is validated by customers from across the industry will continue to adult us for this solution this quarter from E Commerce to financial services technology and the public sector.
Where a rapid release company, we dropped major features in minor releases, we our latest release 7.7, we reached a significant milestone our proprietary elastic workplace search product became generally available.
It's a completely new sterile fine for the enterprise.
It provides an intuitive single point of search that less employees, finding what they're looking for whether that's across comedy workplace tools like Microsoft 365, G suite, slack, Salesforce, datahub and zendesk or custom applications.
Our out of the box connectors and flexible 80, I cover a lot of ground and there's more to come.
And with resource base pricing, we keep things simple and flexible customers pay for the resources their search consumes plus we're making workplace search even easier to jobs with an upcoming free and proprietary tier and the ability to deploy on elastic cloud.
Our product can go to market approach in this space is timely as the massive shift towards virtual workplaces unfolds and I'm not alone in my thinking.
Mr Estimates will see threefold growth in the enterprise search market. The next three years as companies look to replace all search acknowledging.
Forrester also noted that with the release of elastic workplace search we are well positioned as they transition unfolds. So there is definitely more to come.
Now, let's take that search box for enterprise search and apply to observe ability with low metrics and ATM data.
Our approach to observe the ability eliminates data silos reduces meantime to resolution and allows customers to control costs without compromising on visibility.
This is important because as observable systems and services continue to multiply summit business needs.
So will the pressure to consolidate a sprawling universe of tuning wouldn't that's because of cost efficiency or book.
Leading American mortgage company, Ellie Mae who is the 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 Elastics unified approach not only did they cut their logging cost in half.
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 ships highly requested servicemax capabilities for greater visibility in ATM use case.
We also introduced many new out of the box integration.
Flexible search options over large data volumes and improvements to memory usage and three views our newly we factored alerting framework.
And because features like converting our implemented at the staff level. The foundation there applicable to all of our solution not just observe ability.
If you think about all of these value in the context of our unified plastic bottle and ability to deploy multiple solutions on a single stack.
It's a really powerful thing for our customers. In fact, we have business, we knew and expand into Q4 with two fortune 50 company one in technology and the other in retail to power various applications of enterprise search observe ability and security.
As the business landscape evolves the need to detect threats and protect endpoint is increasing along with the need to search across enterprises and observe infrastructure.
For example, global financial services Company BNP Parima.
We knew then 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 operations Center.
This expansion opens up the opportunity to integrate same into their elastic views.
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 E books audio books and video from public libraries across the world.
Elastic power search within their customer facing applications and log analytics on those applications.
In Q4, they close new business with us for security.
During the value that a single unified staff that powers, representing an endpoint protection. In addition to their other use cases, ultimately help them decide to make a multiyear investment with a lot.
In the same way that we believe any observe ability customer is there potential security customer we believe that everything customer is the potential endpoint customer.
This is why were relentlessly executing on our vision of the past scalable security solution that unifying theme 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 integrated with service now.
These streamlined incident response and reduces meantime to respond which is critical to the success of todays security practitioners.
We also continued to invest in our cloud offerings. Our elastic cloud is available on a ws GCP Asia Hansen cloud and Alibaba.
In the quarter, we announced a preview release on NWS Gulf cloud and our fed ramp in process status.
In addition to the availability of nine new global regions for elastic cloud six on Google cloud to on Asia, and one on SWS.
It's exciting to watch our cloud partnerships, deepen, especially with Google cloud and Microsoft.
They worked with us to extend our workplace search product to G suite.
Make our annual subscription offerings available via the Google Cloud marketplace and also recognized us as their 2019 data management technology partner of the year.
We're also fortunate to hear from Scott Guffey.
VP for Microsoft Cloud and AI groups at our virtual sales kick off.
Our commitment to being where our users are remains strong it starts with a great Catholic space that drives customer adoption and retention.
Take notice digital bank collector band.
For example, we renewed multi year business with us in Q4 to run their logging and security workloads with our Elasticsearch service.
And that commitment extends to bare metal or hybrid environment.
But our clock elastic cloud enterprise and elastic cloud and kubernetes.
Both of which have new releases in Q4 give 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 auction.
So users can monitor kubernetes logs by running our elastic cloud on kubernetes product.
As you can see the team hasn't lost to be in terms of innovation or execution.
I am honored to work with such an amazing group of people added last week and report on such a strong quarterly 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 I'll 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 needs to solve the same challenges put a search box on their application on one place on the infrastructure to observing and on their company to protected we are here for them.
Throughout all of these are relaying determined as we head into asked why 21 and optimistic as I look at the future.
We will continue to invest in building on a single staff and make it easier for customers to adopt new solution.
We will continue to be where our users are and deliver an unparalleled fasick sir.
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 engineer.
Thanks, right Q4 was another great quarter for elastic capping off a strong fytwenty total revenue in the fourth quarter was $123.6 million, 53% year over year or 57% on a constant currency basis. We finished fytwenty with 427.6 million in total revenue.
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 that business continuity plans as better takedowns went into effect.
After the distraction stated 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% for revenue came from outside the United States, reflecting the strength of our distribution model.
Hospitality transportation traditional retail and energy on a combined basis make up less than 15% about business.
Although business has been impacted and those verticals by covert 19, we also have customers in verticals that have benefited from covert 19, such as E commerce gaming on demand delivery and media companies.
Further although SMB growth was lower 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 of our strategy to penetrate the enterprise deeper with our solutions.
All these trends demonstrate that the benefits of being a distributor company aren't limited to our internal capabilities, they extend to achieving diversification more broadly, which we view as long term advantage.
SaaS revenue in the fourth quarter was $29 million up 110% year over year or 120% on a constant currency basis.
That's revenue for Fytwenty 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 among PSS business, our rapid growth and saps reflects the success of our strategy to widen our competitive moat with proprietary teachers and to leverage our partnerships.
Moving onto calculated billings.
Calculated billings in Q4 grew 52% year over year or 55% on a constant currency basis to $175.1 million.
80, Jay 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 length for 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 all remaining performance obligations.
Turning to customer metrics.
As of the end of Q4, we had over 11300 subscription customers compared to over 10500 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 value is about $100000 compared to more than 570, such customers at the end of Q3, reflecting continued strong renewal and expansion trends. Despite cobot 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 a CD over $1 million, reflecting the richness and differentiation of our offerings strong alignment across 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, you'll continue to share important milestones on this journey with you.
Now turning to profitability, which was 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 are 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 do you cruise ships to virtual across all of our operations and to a lesser extent slower hiring as we navigated the uncertainty related to covert 19 during March and April.
The FX impact on operating margin was insignificant.
Our strong operating margin performance in Q4 reflects both the underlying leveraged in the model as well as our tight focus on investing with discipline as we drive growth.
Operating margin for the full year was negative 18%.
Net loss per share in Q4 was 12 cents using 82.1 million weighted average shares outstanding.
Net loss per share in fiscal 2020 was 93 cents.
Turning to free cash flow.
Free cash flow was negative $6.8 billion in Q4.
Full year fiscal Twentytwenty 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 end game.
We expect that we will drive improvement and free cash flow margin again, and Fytwenty, one to approximately negative due to negative 4% with a goal of achieving positive free cash flow margin by 22.
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 Cisco 21.
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 achieved their business goes how 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're going to be operating in a difficult economic environment due to covert 19 with only a gradual recovery over time, which will likely create headwinds when calculated billings over the next couple of quarters.
In building our fiscal year plan, we examined various scenarios to better assess the impacts from affected vertical segments and geographies.
I'm a piece of positive effects and some negative.
However, we do generally expect that some customers were two nights that 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 that business priorities and our competitive advantages are strong and distinct.
Therefore, we remain positive on the long term growth at the business.
Given the strength of our balance sheet, our strong execution and fiscal Twentytwenty 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 head count related investments in R&D to drive innovation and steel capacity and coverage globally to drive growth as well as in G. any 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 Fytwenty, one 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 19 cents to 17 cents using between 83 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% you'll be 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.
Just 98 cents to 85 cents using between 85 and 87 million ordinary shares outstanding.
This guidance reflects approximately $9 million in savings from the shipped about Q1 global all hands meeting to virtual we expect our spending on this event to return in Q1 of Fytwenty too.
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 designed 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 customer spending priorities align well with our solutions as customers prioritize their spending in a difficult economic environment, we believe that enterprise search observe ability and security with all the areas that will benefit.
Third with rapid innovation in our proprietary features over the past couple of years, we have significantly widened our competitive mode.
Technology is also built on a unified stack, which we believe makes our R&D investments more efficient.
Before we offer a unified resource based pricing model, which liberates customers from the burden of paying based on ingest up a host or other pricing models with hidden cost.
And finally, we have an incredibly powerful distribution model with a large community of users and a pre an 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 three offerings.
With that let's take questions operator.
Thank you well now begin the question and answer session to asking questions. You May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before passing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble our roster.
And our first question will come from Brent Thill with Jefferies. Please go ahead.
Hi, Good afternoon, just on the guidance your guidance midpoint, 25% revenue growth in 21, after growing 57 and fiscal 20.
Maybe if you could just give us a little more around your assumptions and why such a massive de Sal.
On on the topline.
Hey, Brent its finish I hope you can hear me, Okay, we had a little bit of trouble with the audio earlier, but.
In terms of the the question look we obviously had a very strong finish here to Q4.
And we're actually quite pleased with it was off that we deliver here as I mentioned in my earlier remarks, we did see some impacts related to covert 19 in some areas and that was offset by strength that 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 scrutinized spending a little bit more carefully in this environment that might cause us sales cycle to lengthen a little but and if my presents 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 best to be prudent and our outlook for the rest of the or at this point in time, we looked at various different scenarios as we are 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.
We as we set guidance. So we'll obviously update you as you go but for now we're focused on executing here in Q1.
The great thing for us as the market opportunity continues to be large and growing and as you've seen here in Q4, our solutions are lining really well with customer priorities and our competitive advantages are strong and and distinct.
Positive on the long term growth of the business, but a preferred to be a little bit prudent terrorists via the link to the rest of fiscal 21.
And real quickly. It has may sound better to you. Then then April I think the tone is definitely seems to be improving but are you seeing then your business right now.
Yeah, there's a couple of different dimensions to that so.
The strength that we saw in April coming off the a couple of weeks that was slow in the month of March generally speaking the overall business momentum and cadence has continued but I think about some of our top of funnel activities April and May have both been asked consistent levels compared to sort of the prequaled at levels, but that said me is always a little bit of a unique fund.
For us because it's the first month of our fiscal year and so we typically have a slower started salespeople aligned to new territories, and and territories get carved and quotas get assigned and so forth.
So generally speaking, let's say the broad customer trends have have continued but we do think it's best to just stay focused here on execution in the near term and then update you again in 90 days for us So Q2 and beyond.
Sure.
And our next question will come from Raimo Lenschow with Barclays. Please go ahead.
Two questions first one for shy.
Can you.
So can you see already a change and what customers are looking for in terms of solutions that they are kind of kind of I'm wondering to interact with you in terms of like half that in other words have to crisis changed what product a hot with you or like you know and what are kind of slightly less than demand and have you changed the marketing around that and then one for deanna.
Like I get the billings being weak, but you know obviously guiding for total revenue.
So to get to that numbers I need to have quite a bit or non renewals some churn coming into the mix and you gave me just kind of some very no lumber some SMB. So.
Just is there any other factors, we need to big Nonrenewal or something that we need to be aware off or is it just kind of the environment in general. Thank you.
Yeah, I'll start and take the first question. Thank you Raimo I when I think about the current environment overseeing the in the context of the put them in the designed around.