Q4 2022 Elastic NV Earnings Call
Good day and welcome to the elastic fourth quarter fiscal 2022 financial results conference call.
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I would now like to turn the conference over to Nikolai Belly Oh. Please go ahead.
Thank you good afternoon, and thank you for joining us on today's conference call to discuss it last six fourth quarter and fiscal 2022 financial results.
On the call we have a school Gardner Chief Executive Officer, and Jim Nice more Johnny 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 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 adult elastic adult C L.
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.
<unk> 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.
But easily for these risks and uncertainties include in the press release that we issued earlier today, including the slides accompanying this webcast and those more fully described in our filings with the Securities and Exchange Commission. We also discuss certain non-GAAP financial measures disclosures regarding non-GAAP measures.
Including the reconciliations with the most comparable GAAP measures can be found in the press release and slides. The web cast 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 'twenty 'twenty free quiet period begins at the close of business.
As of Friday July 15, 2022.
During the week of June 6th we will be participating in the bank of America Global Technology conference with that I will turn it over to ash.
Thank you Nikolay.
Hello, and welcome everyone.
I'm happy to be here with you today and share our Q4 and fiscal year 2022 results.
I'm very pleased with our execution in Q4 and in FY 'twenty two overall.
Strength in the demand environment continued which fueled a strong quarter and fiscal year for elastic.
In Q4 revenue grew 35% year over year and.
And 37% year over year in constant currency and.
And we once again saw robust customer acquisition and expansion metrics.
We ended the quarter with more than 18600 subscription customers.
Including over 960 with annual contract value of more than 100000.
And our net expansion rate was just under 130%.
Looking at the full fiscal year revenue grew 42% year over year.
Lastly, cloud did especially well with revenue of $298 6 million in FY 'twenty, two up 80% year over year.
Throughout the year, we saw customers continuing to adopt elastic cloud and grow with us expand across use cases and grew consumption as their enterprise data continued to grow.
In Q4 annual commitments from new and existing customers to elastic cloud nearly doubled versus the prior year, reflecting the value that elastic cloud delivers to them.
We saw growth across all geographies and increased mind share at all levels of the business.
I would like to thank everyone, who makes our continued momentum possible from our customers and partners to our community and most importantly, our employees.
We're adding talent across the business and strategically hiring leaders and critically important roles.
I'm happy to share that we recently appointed industry veteran Carlin Herzog as our chief legal officer and appointed Jaenisch more Johnny as our Chief operating Officer. In addition to his role as Chief Financial Officer.
Now I would like to talk a little bit about the fundamentals of our business.
Our core strength is our data analytics platform powered by search that customers use every day for security observable at the enterprise search and a long tail of other use cases.
Right now we are.
We're in the early stages of addressing a $78 billion total addressable market.
Our business is driven by the convergence of several durable secular trends.
The growth of digital transformation.
Ever increasing data volumes.
Steady enterprise transitions to the cloud.
The continued importance of the developer.
The proliferation of enterprise applications, and the unrelenting cyber threats.
In Q4, I met with customers, including I N G Telefonica, the Swedish police Swift.
And many others.
As I spend time with customers. They tell me, how they're leveraging elastic technology to address the growing demands of their businesses.
From supporting security infrastructure needs.
To moving to the cloud.
We are seeing the relevance of our platform continued to grow as we help customers transform data into insights and actions.
It is these proof points from customers.
Coupled with our robust growth in cloud that excite me about the future.
As another indicator of our deepening customer relevance and the criticality of our solutions.
Net expansion rate for elastic cloud has been increasing for the past several quarters and was over 140% in Q4.
Based on the continuing customer adoption of all our solutions and our momentum and elastic cloud.
We expect to achieve $2 billion in revenue in fiscal year 'twenty five.
Within the next three years.
While also continuing to grow our operating margin over time.
With that in mind today.
I'd like to share more with you about our three key areas of focus as we move into FY 'twenty three.
First our durability of growth.
Second our widening competitive moat.
And third our focus on profitable growth.
Starting with durability of growth I will touch on our increasing cloud mix, our enhanced go to market motion and our collaboration with cloud Hyperscale.
We finished Q4 with cloud representing 37% of total revenue.
An acceleration from 29% in Q4 of FY 'twenty, one and 23% in Q4 of FY 'twenty.
Going into FY 'twenty, three we continue to double down on driving cloud adoption and expect cloud to exceed 50% of total revenue by Q4 of fiscal 'twenty four which is ahead of our prior target.
Cloud is the cornerstone of our investment strategy cloud.
Cloud drives better customer retention expansion and easier new customer acquisition over time.
We are positioned for success with multiple vectors of durable growth within our sales and go to market strategies.
Our bottoms up motion enables us to maintain developer relationships, while raising visibility with it decision makers and delivering greater value for our customers.
And elastic cloud makes it easier than ever for customers to adopt our products and solutions directly.
And through partner marketplaces.
We also continued to execute on our land and expand approach as customers look to adopt more than one elastic solution to support their business initiatives.
Of customers with more than 100000, HCV. We ended Q4 with almost 400 customers using at least two elastic solutions and almost 100 customers using all three solutions.
When customers adopt us for multiple use cases, it helps them consolidate their spend onto elastic while significantly reducing third party costs.
Something that we believe will serve us well for years to come.
Do you see a significant opportunity for us to continue our land and expand motion for many years to come.
To further enable our growth engine, we are incentivizing, our sales teams with a new compensation structure in FY 'twenty, three with an explicit bias towards cloud.
And we are continuing to build momentum with our cloud hyperscale is through product integrations and go to market motions.
For example.
We recently announced an expanded collaboration with AWS to accelerate momentum and build market and deliver seamless access for shared customers to elastic cloud on AWS.
By leveraging AWS as global footprint and breadth of services.
Areas of collaboration include expanding competencies to ease migration to elastic cloud on AWS.
Simply find onboarding to elastic cloud on AWS.
And streamlining data ingestion.
And new go to market initiatives.
We also recently announced an expanded strategic partnership with Microsoft Azure.
Simplifying cloud operations, launching cross selling activities and making it easy to bring data from Azure services into elastic.
And in Q4, we joined the data Cloud Alliance led by Google Cloud as a founding member.
The modern data challenges of enterprises and accelerate their path to value creation.
Across all three cloud providers, we have grown revenue by more than 100% year over year.
And now I'll share more about our growing competitive mode.
As our customers leverage elastic to solve a multitude of business problems across their data applications and infrastructure. This increases our strategic relevance in three main ways.
First we have found that one cell customers adopt elastic our footprint naturally expands overtime to support multiple use cases across their organizations.
Second one of our biggest differentiators is our ability to Frictionlessly ingest index and search data at scale.
With nearly one four petabytes of incremental data being indexed then queried in real time in elastic cloud every day.
To put this into context, that's equivalent to 140 years of data generated by the Hubble space telescope coming to elastic cloud each day to be created in real time.
Third we are able to help customers solve their biggest challenges with AI and machine learning powered analytics.
That deliver greater relevance predictive insights and streamlined workflows.
We are monetizing our AI and machine learning capabilities with our platinum and enterprise offerings.
We have seen increased traction within our installed base of these higher tiered subscriptions fueled by impactful features including searchable snapshots and cloud orchestration.
Moving on to security, we are seeing strong demand for elastic security.
Which direction that represented roughly 25% of HCV and FY 'twenty two.
Customers tell us that security continues to be top of mind as they prepare for and respond to growing global cyber security threats.
A great example of this is the recent win with Connectwise.
It software provider.
They use elastic to power their network threat detection and response product.
With the power of elastic such <unk>.
Connectwise delivers full scale managed security services, providing an improved experience for their partners and MSP community.
Our innovations continue.
As the next week at RSA will be announcing new Clos.
<unk> security capabilities, complementing our strength in Sim and endpoint security.
Which is the result of integrating the acquisitions, we completed last year.
This creates an end to end comprehensive security solution, which enhances their ability to up sell customers within security.
And our strength has further solidified by market recognition.
This quarter, we were named a strong performer by Forrester research in the endpoint detection and response with.
We are very proud of this accomplishment as we believe it demonstrates the tremendous progress we have made in bringing together the power of endpoint security and Sim.
<unk> that we believe sets us apart in the security market.
We believe the convergence of observed beauty and security creates robust cross sell opportunities for elastic.
Observing and security are two sides of the same coin and we often find that the data that organizations typically pull in to ensure their applications are up and running.
Overlaps with the data they pull in to detect indicators of compromise in their applications and systems.
Elastic absurdity our largest solution.
Directionally, representing more than 40% of our HCV and FY 'twenty two.
Enables customers with insight into their underlying organizational infrastructure to accelerate their digital transformation.
In Q4, we expanded business with a fortune 50 technology company.
Elastic solutions this quarter they doubled their usage of elastic absurdity to support that analytics and monitoring functions.
They are using elastic to collect and monitor unstructured logs from devices and deployments across their business.
We continued to build and innovate our absorbability solution accelerating service application development life cycles for Dev ops.
Elastic observed that the users can now collect races from AWS Lambda and correlate them with other observatory data, including <unk> ICD pipelines for faster and more comprehensive root cause analysis.
Moving to enterprise search we continue to help organizations solve their biggest business challenges, but the power of search significantly.
Significantly improving our customers' user experiences.
In Q4, we extended our business.
With the BBC, which uses elastic to build internal services that help their journalists search thousands of historical archives of scripts and articles to assist in the creation of detailed and informed news content.
We also significantly expanded business with one of the largest financial services providers in Australia.
They are using elastic to support their anti money laundering program, a business initiative, requiring the ability to quickly search and store years' worth of transaction data leveraging searchable snapshots.
This quarter, we enhanced our machine learning and natural language processing capabilities to deliver more relevant results for enterprise search use cases.
We believe the elastic search platform is truly the best Foundation for addressing modern security Absorbability and enterprise search needs.
No.
Moving onto my last key point.
Profitability growth.
The markets, we operate in are immense and growing.
And we are poised to succeed, especially as we increase our focus on the cloud.
We have demonstrated discipline in how we run the business.
We achieved free cash flow breakeven in FY 'twenty one.
non-GAAP operating margin breakeven in FY 'twenty two.
We have a strong balance sheet with the healthy cash position and we are advancing the business in a way that allows us to build a profitable and durable high growth company for many years to come.
In light of the secular tailwind that benefit our business.
The high value, we provide to our customers.
Our continued success with elastic cloud adoption.
And our track record of strong execution across all aspects of our business.
We are confident that we can drive profitable growth over a multiyear period.
As data continues to grow in volume and importance.
Believe that the elastic data analytics platform.
By search will be essential to our customers continued success.
Hackers don't take vacations companies do not shut down business critical applications during challenging times.
And end users will keep searching for the things they need and want.
And with our focus on our durability of growth.
Our widening competitive moat and our profitable growth we are confident about our business success in FY 'twenty three and beyond.
Thank you and now over to Dinesh.
Thanks Ash, we once again delivered strong results capping off an outstanding year for elastic we delivered fiscal 'twenty to total revenue growth of 42% year over year and elastic cloud revenue growth of 80% year over year.
In fiscal 'twenty, two with the majority of our incremental revenue dollars over fiscal 'twenty, one came from elastic cloud we.
We exited the year with elastic cloud representing 37% of total revenue in Q4 compared to 29% in Q4 of the prior year.
The momentum in elastic cloud provides a solid foundation to deliver strong growth for many years to come.
And we achieved non-GAAP operating margin breakeven for the full fiscal year, which was a significant milestone considering it was only a year after achieving free cash flow breakeven in fiscal 'twenty. Two was only our third full fiscal year as a public company.
Let's get into the results for Q4.
Total revenue in the fourth quarter was $239 $4 million up 35% year over year or 37% in constant currency.
Ascription revenue in Q4 totaled $221 $7 million, comprising 93% of total revenue within.
Within subscriptions revenue from elastic cloud was again strong at $87 $7 million growing 71% year over year or 72% in constant currency driven by customer growth and usage.
Elastic cloud revenue grew 9% on a sequential basis versus the prior quarter.
As a reminder, the fourth quarter had only 89 days compared to 92 days in the third quarter and this represented a sequential growth headwind of over 3%.
The vast majority of elastic cloud revenue is derived from consumption based arrangements. We saw continued strong consumption trends throughout the quarter in both the annual and monthly format.
Monthly cloud revenue was once again approximately 17% of total revenue in Q4.
Professional services revenue in Q4 was $17 6 million growing 35% year over year we.
We do not expect professional services to increase significantly in mix.
Deal flow in the quarter was once again broad based across our three solutions driven by new and existing customer growth an exciting data point for us was that customer orders for annual cloud commitments nearly doubled year over year in the quarter.
We saw balance and strength in total deal flow across geographies segments and industry verticals.
Suffocation has the strength of our business model and reflects the breadth and resilience of the solution supported by our search platform.
In terms of year over year growth rates APG grew the fastest followed by EMEA and then the Americas.
To unpack EMEA performance given the regional conflict, we experienced healthy deal flow across EMEA throughout the quarter, we do not have any meaningful business in Russia, Belarus, Ukraine.
Looking at customer metrics, we ended Q4 with over 18600 total subscription customers with the vast majority of the additions in the quarter once again, an elastic cloud.
As we drive profitable growth, we are focused on acquiring and nurturing customers at a higher quality rather than solely focusing on quantity.
This increases the overall dollars of consumption revenue both in the near term and the long term.
This in context of the customers. We added in Q4 over 130 were annual contracts greater than $10000 and this was the strongest net customer addition in this category in the past two years.
We've provided additional historical data on this customer category and the accompanying slide deck.
We are pleased with our new customer additions and the pace of consumption growth in our customer base.
Flex the success of our strategy of focusing on customers with whom we can drive expansion over time, rather than the very long tail of smaller dollar accounts, who spend only a few hundred dollars a month with limited expansion potential.
We saw the success of this strategy also reflected in the count of larger customers.
Had over 960 customers with annual contract values over $100000 at the end of Q4 compared to over 890, such customers at the end of Q3.
This reflects a record number of quarterly net customer additions for us in this larger contract category.
And looking at the pool of customers with over $1 million in annual contract values, we exited the year with over 115 customers compared to over 75, such customers at the end of fiscal 'twenty one.
These expansion trends reflect the strength of our product portfolio and our ability to drive expansion across the solutions.
Our net expansion rate in Q4 continued to be strong at just under 130% and was the same as Q3.
Over the past few quarters, we have also begun to see the success of our cloud strategy reflected in our net expansion rate.
Our net expansion rate for cloud has been increasing for the past several quarters and it was over 140% in Q4.
This reflects the strong growth we've seen in elastic cloud, which we believe is a result of our investments our partnerships and the benefits of the consumption model.
We're very pleased with this metric and expect to continue to drive strong new and expansion motions and elastic cloud.
Now turning to profitability for which I will discuss non-GAAP measures.
Gross profit in the quarter was approximately $179 2 million, representing a gross margin of 75%.
We continue to track well relative to our expectations.
Looking ahead elastic cloud will remain a modest headwind to gross margin overall as it increases in mix and we continue to invest to drive growth.
We also reached an important milestone by achieving operating margin breakeven for fiscal 'twenty, two I'll talk more about our operating leverage and outlook when I discuss guidance in a moment.
Loss per share in Q4 was 16, using 94 million weighted average shares outstanding.
Now turning to free cash flow free.
Free cash flow on an unlevered basis was negative $5 3 million in Q4, which was in line with our expectations. We finished fiscal 2002 with Unlevered free cash flow of $10 $7 million also in line with our expectations.
We maintain a strong balance sheet Q4, close with cash and cash equivalents of approximately $861 million, we remain comfortable with our cash position from an operating perspective.
Before discussing our outlook for fiscal 2003, I will briefly discuss our overall long term framework.
Elastic thesis is simple as data volumes grow rapidly. We believe that every company will need a data analytics platform powered by search for security Observer ability and enterprise search we see this play out every day.
Our market opportunity remains massive and we believe that market trends such as data growth and the convergence of observer ability and security play to our competitive advantage and we remain unparalleled at scale.
We are well positioned to deliver durable long term growth achieving $2 billion in revenue in fiscal 2025.
We are confident in our ability to achieve our growth objectives, given the strength of our products are significant momentum and elastic cloud a healthy new customer trends net expansion rate and clouded over 140% and our investments in go to market.
And as Ashley mentioned, we now expect elastic cloud to exceed 50% of total revenue in the fourth quarter of fiscal 2024, which was ahead of our prior expectations.
Consistent with the theme of profitable growth mentioned earlier and continuing to demonstrate operating leverage in the model, we expect to expand operating margin by several percentage points each year in fiscal 2004 in fiscal 'twenty five.
Turning to the outlook for fiscal 2023.
We believe our products are core to our customer success, which helps us build a healthy business that performs consistently through both upswings and downturns.
Clear, we have not seen any broader macroeconomic impact in our business.
We will continue to monitor the environment and to ensure that we operate our business in a disciplined way as we always have.
We anticipate significant growth opportunities, particularly in the cloud across new customers renewals and expansion and spanning our solutions segments geographies and verticals.
With the strengthening of the U S. Dollar at current rates, we expect currency movements to present, a headwind to year over year total revenue growth of approximately 5% for Q1 and approximately 3% for fiscal 'twenty three.
As you consider year over year growth in Q1. In addition to the currency headwind I'll remind you that the first quarter of fiscal 2002 was an exceptionally strong quarter.
It was the highest year over year growth rate across the last eight quarters for both total revenue and elastic cloud revenue. So presents the toughest comparison point this fiscal year.
As I had said on the prior call. We expect the strong anticipated growth and elastic cloud will create near term pressure on gross margin.
We're not going to provide guidance on gross margin, formerly but to help you with your models I'll share that I expect this to be an approximate 2% to 3% headwind to gross margin in fiscal 'twenty three.
This is a near term impact, which we expect will gradually resolved through economies of scale.
We expect to continue targeted investing in all functions in fiscal 'twenty three to drive growth you've previously seen us demonstrate disciplined investing including in the most recent quarter.
Some investments in fiscal 'twenty, three will be in sales capacity and some in engineering and other functions to support growth.
Also as I shared on our last call, we expect to travel and in person events to resume in a meaningful way.
Travel expenses will be higher than during the pandemic, but lower than pre pandemic.
This adds approximately 8 million to $12 million to operating expenses.
We expect to offset these near term effects on gross margin and the return of travel through natural operating leverage and expect to remain operating margin breakeven in fiscal 'twenty three.
Some of the expenses are weighted in the model early in the year, while revenue ramps for the year and consequently, we expect Q1 to be the low point for our operating margin.
In terms of free cash flow, we expect to continue to have slightly positive unlevered free cash flow in fiscal 'twenty three similar to fiscal 'twenty two.
Finally, our overall guidance philosophy stays unchanged compared to the fourth quarter, we continue to guide thoughtfully and without excessive conservatism.
With that background for the first quarter of fiscal 2003, we expect total revenue in the range of 244 million to $246 million, representing 27% year over year growth at the midpoint on a constant currency basis, we expect total revenue growth of 32% year over year at the midpoint.
As I mentioned earlier this was based on a tough comparison point from last year.
We expect non-GAAP operating margin in the range of negative three 8% to negative two 8% and non-GAAP net loss per share in the range of 2016 using between $94 million and 95 million ordinary shares outstanding.
For full fiscal 2003, we expect total revenue in the range of 1.08 billion to 1.086 billion, representing 26% year over year growth at the midpoint on a constant currency basis, we expect total revenue growth of 29% year over year at the midpoint.
We expect non-GAAP operating margin in the range of zero percent to positive, 0.5% and non-GAAP net loss per share in the range of 36 to 28 cents using between $95 million and 97 million ordinary shares outstanding.
Before we open the call up to Q&A a final point.
As you know as a requirement of accounting rules, we have been presenting license revenue on the income statement as one component of total subscription revenue.
Given our momentum and elastic cloud license revenue was less than 10% of total revenue in fiscal 'twenty, two and is expected to be less than 10% of total revenue in fiscal 2003.
Accordingly, starting this quarter, we will no longer present license revenue on the income statement and will simply presented total subscription revenue and professional services revenue.
We will continue providing the supplemental table detailing revenue from elastic cloud other subscriptions and professional services.
In summary, we had an outstanding fiscal 'twenty, two with strong revenue growth and incredible cloud momentum, while achieving operating breakeven.
We believe that we are well positioned for long term durable growth and profitability and we look forward to another strong year ahead and with that let's go ahead and take questions operator.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
Any time your question has been addressed and you would like to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from John .
One with Oppenheimer. Please go ahead.
Thanks, Hey, guys and congrats <unk> on your promotion to COO double the salary and good for you.
I guess I have a question for you ash, just kind of thinking about the environment.
<unk> clearly said that we don't see any change to the business environment, but what are you hearing from customers clearly those voices, especially in Europe .
With respect will get here in the U S as well.
Where macro is still very much a concern and how much is that starting to impact.
Customers sidekick, and how they're thinking about their investment plans for the next coming year.
Hey, Tom Thank you for the question so.
Incidentally I spent a fair amount of time in Europe . Just this past quarter I was there a couple of times met with many customers.
And you know the demand for our offerings remains very strong what I heard you know when I was meeting with customers like Swift and IMG and so on fundamentally the use cases that we are primarily used for weather.
Whether it's security, whether it's observable 80.
Even certain aspects of enterprise search when youre dealing with tier one applications security and absorbed it tend to be much more mission critical much more front and center of customers' minds and they are the kinds of use cases that.
Tend to be very important not just in good times, but even when youre dealing with difficult situations like what you have right now with Russia and aggression in Ukraine. So I found the interest and demand for security the interest and demand for Absorbability, especially for tier one applications, which is where we typically tend to be used.
And to be very strong and so that.
Is is what I believe is fundamental strength in the business.
In terms of the use cases that we have.
Very good and then maybe as a follow up.
On the on the comps you talked about the changes to the comp plan too.
To be more biased towards cloud, maybe you could talk about some of the details around this.
How do you feel.
As your sales force adjusted to this change is there a potential risk.
In sum.
Gaps are or kind of in a transitional period from one component to another where potentially some of your performance for a quarter or two it takes time for it to find its footing.
Yes, it's a great question.
Is something that I had mentioned even in my last earnings call right now.
Cloud I believe very strongly we all believe that cloud is our is our future that's really where our customers are taking us. It's good for customers. It's good for us.
So even the sales teams have.
Ben not only embracing this would really driving this.
You know very wholeheartedly as Dinesh mentioned.
And I talked about this as well in Q4.
Our customer commitments to annual cloud almost doubled so that should be an indication of the way in which our field is really leaning into this and that gives me a lot of confidence that this is not something that we're going to have to.
Really work hard through this is something that the field is embracing wholeheartedly because it's just generally right.
In terms of the compensation structure in the compensation plan.
Definitely biasing towards cloud so when you sell cloud there is a there is definitely a.
The compensation is higher and the field gets it because of that there is more interest we've done effectively sales incentives in the past around cloud and what you saw in Q4, you know thats the kind of reaction that we know as we go into FY 'twenty three we want to drive throughout the year and into the future and that's really what.
Gives me confidence that.
Cloud is going to continue to be the source of strength for us going forward.
Good luck guys. Thanks. Thank you.
Our next question comes from Raimo <unk> with Barclays. Please go ahead.
Hi, Thanks for taking my question and I appreciate some of the new disclosures and that's kind of where I want to start.
Can you give us a sense of maybe some of the adoption of elastic newer observed annuity solutions like APM infrastructure, and then talk about the adoption of distributions over the last couple of quarters versus some of your more established products. When they are a little bit earlier in the adoption lifecycle.
Yeah, that's a great question and we don't we don't breakout the sub segments, because as you know tip.
Typically our customers tend to use us for one use case, even within observed beauty and then they tend to <unk>.
From there our pricing model is such that we don't differentiate we don't have separate skus for infrastructure monitoring versus APM versus log analytics now having said that as you can imagine are the first solution and probably the most mature aspect.
Absorbability very first started was log analytics.
So you know the typical use case for elastic and observed that it starts with log analytics, but I'd given some insight last quarter into just the fact that with APM, we have been seeing significant expansion.
Even with infrastructure monitoring as you've seen some of the capabilities that we've delivered around CIC monitoring kubernetes monitoring all of that is something that customers naturally tend to adopt and we are seeing good success in all of them, but we're not breaking down sort of the details because frankly.
That's not our model our model is to get customers to start using in one small way and then just quickly adopt more and more and where that gets seen best is in our cloud expansion, our net expansion rate in the cloud.
The 140% the generation I talked about that comes from that constant expansion motion.
And like are described in the past this is much easier in the cloud than with self managed and receipt in a much more pronounced way there.
And if I could just add to that I know with one of the data points that we had mentioned around us.
He also was talking about the momentum in cloud, particularly with respect to observe ability. We now have more than 2000 customers on APM and cloud as an example, so that's just another kind of data point that helps indicate the momentum that we're seeing there.
No I appreciate that thanks, and then just one more for me on you.
You have.
I think if I heard correctly it looks like over half of your 100 Kt and the customers are still using a one product can you maybe talk about some of the strategy you can employ and any cross sell more solutions to them.
What's kind of been the main obstacle that's prevented.
Some of these big customers from adopting more solutions.
Yeah. So.
Ill touch upon that.
You're absolutely right that there's a there's a lot of opportunity for us to continue the expansion motion and it's more than just two right. So our goal is to get our customers to use all three of our solutions and in time.
We have even more solutions in the future.
The land and expand motion that we want to continue driving.
What our strategy is very simple it all starts with the product. So the product itself, we want to make sure that we make it very easy to allow the customer to use the data that they are bringing into our platform for more and more use cases. So the investments that we've put into building out elastic agent, which provides one single.
Mechanism for ingesting data that can be used for either absorbability purposes.
For security purposes, that's the kind of mechanism that makes it easier for customers to start using the data that they've brought in for more than just one thing. We also then have our pricing model, which really makes it easy for you to start trying out.
Our next solution in the next solution after that.
Out having to have a purchase conversation with somebody from elastic. It's very frictionless you just start using it every tier has capabilities associated with all solutions and really that product led growth model is the primary factor that will drive it and then it becomes easier for our sales teams to come in.
And have the conversation on how you can expand even more how through commitments you can get a.
Consolidated spend onto elastic and reduce costs in other places that's what ends up helping us displace incumbents now in terms of.
How this plays out obviously.
Our customer is using some other technology for a part of their observed beauty or security solution said it takes a little bit of time to make that transition, but it's the pricing model and the product and then coupled with our go to market really makes that all seamless and easy.
The next question comes from Kash Rangan with Goldman Sachs. Please go ahead.
Alright. Thank you so much congrats on the quarter and congrats street in Charlotte.
Well.
I'm curious to get your take on the transition to the cloud as you move to the cloud what are the new use cases, and new kinds of opportunities that are available to elastic that were previously not available with the self managed on premises of course and also if you could talk about.
The specifics of any of the cloud architecture that will.
Permit you to do things in the future for your customers that it's just simply not.
I guess, both these aspects are somewhat interrelated, but I just wanted to understand what that cloud structurally desperate elastic.
Could it do it for me.
Any perspective that you are likely to start. Thank you. So much cash that's a that's a great question and you know when we look at the usage of the elastic data analytics platform.
As you know the fundamental strength that we have a search and the kinds of use cases that we typically tend to drive our ones that tend to be more mission critical more operational nature security absurdity enterprise search what we see in the cloud is the use cases themselves are very similar.
However, the rate of adoption the rate of expansion the ability to try out new capabilities the ability to expand from one use case to another tends to be much more rapid and that's that's reflected in the net expansion rate difference that we highlighted this quarter and it's really.
All about the fact that when you are in the cloud you don't have to worry about.
Hardware deployments and you don't have to worry about purchasing new licenses from elastic it's a consumption based model. It's a model that naturally has no shelf.
And customers tend to just use the capabilities that they need grow with the platform and then automatically theyre paying us for that usage. So it tends to be much more frictionless than anything and self managed especially the fact that they don't need to worry about monitoring and managing the system, which tends to be a big advantage in.
The cloud and we're seeing all of that reflected in terms of the architecture pure point, you're absolutely right that there are things that you can do in the cloud that tend to be.
Even more differentiated than anything that somebody could do on prem or in self managed mode in their own data centers.
A great example of that would be utilizing the latest and greatest infrastructure and hardware.
As an example, the graviton based systems from AWS. The latest hardware systems based on newer AMD chips from GCB, we are able to utilize those in much smarter ways, which are which tend to be.
Which tend to give customers greater advantages in the performance and scalability of the system and they find that to be much more beneficial than trying to do everything and self managed mode themselves. So we are seeing similar use cases, but much faster adoption and growth.
Terrific. Thank you so much.
The next question comes from Matt Hedberg with RBC capital markets. Please go ahead.
Thanks, guys. Thanks for my questions Congrats on the results to ash.
Clearly all in on the cloud and AWS news from two weeks ago, which was great to see can you talk about how big of a deal that enhanced collaborations with them and maybe how customers or what can we go to market initiatives are and maybe some customers use <unk> for AWS cloud credits to purchase purchase Alaska Club.
Yes, it's a great question and look.
The fact that the matter is that when you when you have alignment.
All the way from the executive level to product level integration.
To engagement and collaboration in the field.
That's a that's a great thing and this is this has taken us time to get to the state, but we are very happy with where we are.
In terms of the announcement that we made there's a lot of work that we've been doing in the background in terms of deeper product integration. A great example of that would be the fact that now if you're a customer.
Who has lots of commitments on AWS, you can actually start to trial of elastic directly from the AWS marketplace. And then you can immediately start to consume it from there and pay for it using your AWS credits we've been.
<unk> doing more in terms of engagement with AWS selling teams to partner in a.
Jointly drive go to market activities and even at an executive level. When we think about the overall relationship. It's gotten obviously much better. So we see this as a really good thing for the long term at the end of the day customers are looking for.
Stick on all clouds, and a lot of customers run elastic on AWS, that's great for us it's great for AWS.
It's wonderful for the customer.
That's no that's really good to hear I, we've covered the stock for a long time and it just feels like it removes.
One of the overhangs on the stock historically, who really great to hear Ash and then <unk>, maybe just a quick one for you I know there's a lot of good things to talk about from the results, but I think.
The biggest news from my perspective, too is the $2 billion Guide revenue guide for fiscal 'twenty five.
We think about the bridge to that.
Your fiscal 'twenty three guide calls for about $220 million of net new revenue, but to get to the mid point from $23 billion to $2 billion in fiscal 'twenty five in place about $920 million of net new revenue.
In fiscal 'twenty, four until fiscal 'twenty, five or really an acceleration of growth can you help us maybe think about the bridge of how we get from your midpoint of your fiscal 'twenty three guide to 2 billion.
Hey, Matt happy to so first off just to pause and reflect on fiscal 'twenty two for a moment, obviously a V.
Very strong year for us as we capped out with 42% year over year growth for the full year with cloud growing 80%.
And in terms of the confidence for the future as you know a number of things beyond just beyond a massive Tam I think it comes down to a couple of things first just strong adoption of our products Ash talked about this at length in his prepared remarks, and some of the earlier questions and customers just show us how they are using us in mission critical use cases.
At scale and they're ramping their use of elastic even further and then the second piece for US is just the tremendous momentum and elastic cloud.
If you think about it it's now 37% of the business growing 71% year over year, and we just see this momentum continuing and.
The sheer heft of that will we will start to impact the model overall as you heard us talk about earlier, we expect that cloud will be more than half of the business by Q4 of fiscal 'twenty four.
As significantly earlier than we expected so when I look at all of those pieces together and together with the net expansion rate and cloud, which has been increasing and now stands at over 140% all of that gives us confidence in the future.
And then to back that up we made heavy investments in fiscal 'twenty. Two as you know to capture this market opportunity and as you've seen we've been delivering results against those investments and those investments are ramping quite nicely.
So we think that all of those elements come together in terms of the.
<unk> view behind the $2 billion in three years and to put the growth in context, a little bit in terms of thinking about the bridge to fiscal 'twenty three and then a couple of years after that we're guiding to 29% constant currency here in fiscal 'twenty three for the full year and.
And it's obviously still early in the year, we're off to a great start if you think about the Q1 guide is at 32% constant currency growth and thats against a tough comp.
And so it's still early in the year, we feel very good about the outlook and the growth implied for fiscal 'twenty four and 'twenty five we've had a great track record of doing what we say, we'll do and we're just staying focused on the opportunity ahead of us and staying focused on execution.
Yeah.
The next question comes from Tyler Radke with Citi. Please go ahead.
Hi, Good afternoon, guys. Thanks for taking my question is why.
Questions on pilot on question is on <unk>.
Well nice close to the year here as you mentioned some company that has better uses especially the F. Four.
Safety company that double usage.
The quarter here.
Curious.
Any usage.
How has some of your highest growth customer in a posture trended in the quarter here given some of the commentary among some of your peers.
So slower momentum.
Yeah. Thanks for the question no we have not seen any indication of slowdown in the demand and the consumption.
As I mentioned, both in my prepared remarks and engineer it as well.
I think part of part of what I want to make sure that.
Everyone sort of.
Recognizes just the criticality of the kinds of use cases that customers use elastic for.
Do you think about security and analytics.
Absorbability use case that that particular customer is using us for they are using us to observe and make sure that they're tier one applications are up and running it's the the logging infrastructure that ensures that every every major tier one application that they are that they care about these things.
Our mission critical to them so from their perspective as data grows they need to use elastic and they continue to use elastic and that's not a place where we see customers trying to make any any optimization. So that is an inherent strength for us and it's continuing.
Alright, John nationally.
Just touch on some of their total customer counseling slightly slower than before.
She is slowing for a few quarters here just wondering have you seen some of your smaller customers like change to open source.
Our total customer expectation are trending.
Hey, Thanks for the question. So as I mentioned earlier this was actually part of our strategy that we initiated so as we drive profitable growth, we're focused on making sure that as we acquire customers and nurture those customers that they are higher quality and not focused solely on quantity and we've been evolving the sense.
So we've now started to see the benefits of the strategy.
What that does for US is it allows us to drive higher consumption revenue both in the near term as well as on the long term because these customers are just more likely to expand their spend with us over time, we qualify them better upfront, we understand their needs better we engage more deeply with them from a technical standpoint.
We do all of the things that nurture and encourage that growth and then we see that growth and expansion over time and it's one of the ways in which we are staying focused on more profitable growth and I think this will help both our customer acquisition costs as well as drive just higher lifetime values. So this is something that we initiated and that's why we provided the additional information on the.
Customer count more than 10 $10000 of spend and you'll see that in Q4 that was a very strong number the strongest in at least a couple of years, which then points to you that pointed to the fact that most of the reduction really came in the really small dollar accounts, which is really what the intended strategy wise.
So the strategy is playing out as we expected and we are quite happy with it.
The next question comes from Brent Thill with Jefferies. Please go ahead.
Thanks.
Thanks to the go to market into the next fiscal year can you just walk through some of the changes that youre, making.
Hi.
Is it just the incentive on cloud or you know make.
We're making additional.
Additional tweaks can you just compare and contrast, what has happened in the past.
Do you think it looks like going forward.
Yeah. Thanks for the question and there are a couple of things that that we are focused on so first and foremost it's just the compensation.
At the end of the day, we want to make sure that our sellers.
When there is a when there is a question in the customers' mind on what is a better answer than that our sellers are focused on cloud the deposition the cloud and lead with cloud and towards that end, we are making sure that they are incentivized to do so so the compensation for selling cloud.
Is going to be higher is set to be higher than the compensation for selling self manage that's the first thing. The second thing is consumption like we've talked about is <unk>.
Something that is a really great thing for us as customers come onto our platform they tend to consume more.
And they just grow with the platform with more use cases.
We've now made it possible for our sellers to also have visibility into the consumption of their accounts. So we can make sure that the entire customer journey, it's something that they drive with the lens of consumption. We believe that's going to be really good for the customer and how we support them through their growth.
For us in the long term, that's what's going to be again.
Big aspect of our growth in the cloud.
Okay.
I know you've mentioned multiple times you haven't seen any of the macro factors, but a lot of companies in your space are starting to see it.
When you think about these kind of long term aspiration that you put in are you baking in enough kind of wiggle room, if the macro gets tougher you just baking in hey, we're going to hit this revenue target based on current macro because I don't think anyone is believing that things are going to stay at what we're seeing that as right now.
So can you just give us a sense of what you factored in from a macro assumption.
Yes, Brent happy to so as he said, we're not seeing these signals in any of our demand patterns today and as I think about the $2 billion goal, we actually have multiple paths to getting there.
If there is a downturn it obviously depends on the severity and the duration, but fundamentally we're in very strong market areas and ash touched on this earlier, where our solutions are sticky and core demand drivers they stay intact, even during the downturn.
Data volumes keep growing threats don't stop apps and infrastructure don't shut down customers are still spending on security and observe ability and I think this differentiates us from many of the other software companies out there, including some of the ones that don't.
A little bit more generic in their in their approach. So we actually feel very good about the long term outlook and as I said, we have multiple paths to getting there the momentum that we're enjoying an elastic cloud the expansion that we've been experiencing the strong customer feedback including from from Europe . As Ash described I think all of those things.
Nicely to our advantage over the long term so we feel pretty good about the outlook we are providing here.
The next question comes from Camille Muzak with William Blair. Please go ahead.
Hey, Thanks for taking my question and great to hear about the broad strength.
I, just kind of a higher level one for ash.
Think about your three core product suite, there is a wide range of functionality that under license area.
Ability to launch ATM infrastructure, I think EUR management et cetera.
As you look toward that $1 billion target, how do you think about prioritizing R&D investments across our product portfolio and possibly leaning into areas of strength security, while ensuring youre not under investing products, where you historically had big competitive advantages.
Log management.
Yes, so that's a great question and one of the greatest strengths that we have is the fact that we have a very well vertically integrated platform so effectively.
Effectively all of the data is in elastic search.
Cabana as our visualization layer for everything our mechanisms for ingesting data are very similar.
It's agent elastic agent is what is used to bring in data for all of our use cases, so fundamentally we get a lot of leverage just from having that vertical integration.
It's really something that also simplifies the overall stack and overall technology and then when we look at our opportunities the teams within.
The R&D organization for elastic observed beauty and security and enterprise search they really their goal is to make sure that they are delivering the best solution in the market for their use case.
And when it comes to the overall opportunity the market is big enough that we believe that we can actually do well with our platform in all three and we don't see a need to compromise on one for the other.
And the natural leverage that we get from the vertically integrated platform again, you know when it comes to overall R&D efficiency ends up being a big source.
Source of strength for us so.
I don't know, whether I would I would look at it as us having to compromise on one solution versus another it's more about how do we make sure that we are investing appropriately with the right efficiency that we have in R&D to drive for leadership positions in all three of these solutions and overtime.
Just given the fact that it is a data analytics platform. It is powered by search.
We see customers using us for a long tail of other solutions.
We're effectively led to security and absorb city based on what we saw our customers doing with our platform. So as you look forward. As you look ahead multiple years and I would fully expect that there'll be other solutions that emerge that are just as mission critical that are just as interesting and have large total addressable markets.
That we might choose to enter into but all of them will have one thing in common which is this notion of building on top of a vertically integrated stack, that's a huge element of strength and we intend to retain that.
That's great detail, Thank you and congrats again.
Our next question comes from Rob Owens with Piper Sandler. Please go ahead.
Great. Thank you guys for taking my question I was hoping you could drill down into security and the use case that you are seeing more prevalent right. Now is it more of a sim replacement cycle that youre seeing or is it <unk> and I know those two categories are emerging but you do have the engineering capability, so want to understand where youre seeing.
Near term momentum and if youre still seeing a line of demarcation between where some starts and stops and where <unk>. Thanks.
That's a great question.
We see tremendous strength in Sim and continued opportunity there.
The trends that we're seeing in the market is just given the overall environment around cyber security and there is a there is a real serious concern amongst organizations to make sure that there are missing any threats and what that means is just a need to make sure that they are storing.
All data analyzing all their data.
And not not taking the chance that there might be something hidden.
In some aspects of the data that could downstream turned to be a big issue. So Sim is front and center, we see customer.
Customers.
Developing new Sim.
Capabilities expanding their Sim capabilities. The fact that we can store massive amounts of data at scale is a big differentiator that results in us being able to displace incumbents. We are seeing a fair bit of that so <unk> is definitely the foremost aspect that we're leading with security.
Our Edr and Xdr solution as you know is relatively new we launched that xdr capability late last calendar year, we've been seeing a lot of good traction with that and even analysts recognition I talked about the fact that Forrester recognized our edr functionality.
<unk> reported the road recently and we are seeing that that pickup within our customer base, but it is it is relatively newer and we are seeing the kind of execution that you would expect where we lead with seven typically.
And then you often see customers starting from there and starting to use some edr capabilities expanding to xdr using us across multiple threat vectors Incidentally next week at RSA, if youre going to be announcing our cloud security functionality. We made a couple of acquisitions last year and that functionality is now coming into the platform.
Israel, So that will be another interesting area gives us the ability to now talk about.
Xdr across cloud threat vectors as well, which is also going to be very exciting.
Great. Thank you for the color.
Our next question comes from Koji Ikeda with Bank of America. Please go ahead.
Oh, Hey, guys. Thanks for taking my questions I wanted to ask about the cloud net expansion rate of.
140% plus year, but you also noticed noted that.
It's been expanding over the past several quarters. So I was wondering if you can quantify that a little bit.
And about one to two points a quarter expansion or whereas it may be step functions of expansion and that cloud net.
Right and.
You answered most of my questions already with your answer to the use cases with.
With the cloud, but just wanted to be sure is there anything else to call out with the cloud that is driving that expansion.
Nice expansion in that any are right for the cloud thanks guys.
Hey, Koji so I missed the second part of your question, but.
Maybe you can repeat that but just to get to the first part of it we have been seeing a steady increase thats been increasing a few percentage points every quarter and as you know it is computed the same way as our trailing 12 month metric just like a regular net expansion rate. So it will be slow moving but it has been trending up steadily a few points every quarter for the <unk>.
Past few quarters and are happy to take the second part of your question as well.
Yes, it was actually kind of a follow up to cashes.
<unk> about about use cases in the cloud you guys mentioned the ability to try things out.
And things like that so I just wanted to make sure is there anything else to call out with the cloud or use cases with the cloud that is kind of driving that expansion rate there yes.
We don't we don't see the.
Long tail of use cases, as I, usually think of them as being the source of the expansion and the source of the expansion is happening just within the three primary use cases that typically customers tend to use us in the cloud for its more about how frictionless. It is for them to grow and if you are in self managed that as a natural there are many nash.
Friction points. If you if you want to expand bringing more data you've got to go procure the hardware. Even if you are in public cloud you've got to go allocate that you've then got to figure out how to go and get licenses from elastic so it tends to be much more.
There are there are too many hurdles and the process that don't make it easy enough for you to grow the neuron elastic cloud. It's just frictionless you bring in more data. Your systems are your automated Apis are just pulling in more data and we are metering. It and we're letting you know what your consumption is and you are paying us for it. So it's a it's a much more.
More friction free environment.
Look the long tail of use cases that we see are extremely varied.
<unk> seen customers.
Use elastic for everything from.
Risk analytics to anti money laundering, and so on and so forth. If you go onto our website you will see all kinds of interesting use cases, but the three primary use cases that customers use us for our security Absorbability in enterprise search and that's why our go to market motion is based on that.
The way the way we lead with our business is based on those three.
And over time like I said, there might be others that emerge that are significant enough, we see a big enough opportunity that we might choose to look at them as solutions that we want to go after but the three are massive the total addressable markets are huge and we see tremendous potential for multiple years to continue growing the way we are.
It just those three.
Got it thanks, guys. Thanks for taking my question.
This concludes our question and answer session.
I'd like to turn the conference back over to Ash Kulkarni for any closing remarks.
Thank you everyone for joining us today.
Ended the fiscal year with a strong Q4 and look forward to another great year ahead, thanks, again and have a great evening.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.