Q4 2023 Elastic NV Earnings Call
We ended the quarter with more than 1160 customers with annual contract values over 100 Kt.
And more than 140 customers with annual contract values over $1 million.
Highlighting once again that our land and expand strategy is working.
During the quarter customers remained focused on optimizing their cloud consumption at the same time customers continued to make large multiyear commitments as they sought ways to consolidate onto the elastic platform for more use cases to lower their total spend without sacrificing innovation.
We continued to leverage our competitive strengths in our core areas of search log analytics and security analytics to drive our land and expand strategy.
This quarter, we renewed a seven figure multi year deal with a fortune 500 financial services and digital payment technology for them.
That uses elastic across all three of our solutions for absorbing <unk> security and search.
The company has built an enterprise wide center of excellence around elastic absurdity to power its customer facing applications and ensure its payment transaction systems remained healthy in addition to leveraging elastic for anomaly detection that hunting cyber identity and access management and internal.
<unk>.
Like we have discussed previously our customers routinely tell us the total cost of ownership of our platform is dramatically lower than competitive offerings, enabling us to compete very well in this environment.
We have also been driving campaigns to motivate customers to displace incumbent tubes and consolidate onto our platforms and are seeing success with this approach.
In Q4, we signed a deal with a large county in California, where we displaced the existing logging solution doubled it and just capacity and still save them close to 40% of what they were spending on their prior vendor.
Basically more than three times.
Higher total value than the incumbent solution.
Our differentiated platform capabilities and a compelling total cost of ownership they called platform incredibly sticky and have allowed us to maintain strong gross retention rate in Q4 similar to prior quarters.
Now I'd like to share our progress across our three key focus areas.
Driving durable growth.
Widening our competitive moat and fueling profitable growth.
Starting with durable growth.
Our durable growth is driven by three pillars.
First the strength and versatility of our search analytics platform that enables us to succeed in multiple markets, including search Absorbability and security, giving us access to $88 billion total addressable market.
Second our innovation engine with a track record of delivering capabilities like Vectra search.
I ops, APM and security analytics innovations that give our customers the confidence that they can trust the elastic now and in the future to continue delivering value.
And third our cloud partnerships b.
We see strong momentum with our cloud partners and then the Hyperscale marketplaces as customers continue to expand their engagements with us in.
In Q4, we further strengthened our relationship with AWS.
Through a strategic collaboration agreement that will help accelerate integrated go to market activities globally, and streamline migration of on premise workloads to make the cloud adoption journey easier for customers with elastic cloud on AWS.
Our work with our Hyperscale partners is continuing to help us close large deals through their marketplaces.
In Q4, we renewed and expanded a three year deal with Corelogic.
Leading global property information analytics and data enabled solutions provider.
Which began its absurdity migration journey with US two years ago moving to elastic cloud why are the Google cloud marketplace.
As an elastic observed that the customer corelogic leverages capabilities, such as uptime and APM to monitor business critical applications.
Corelogic also heavily relies on elastic enterprise search, but its data indexing and retrieval capabilities.
We also expanded and renewed a seven figure deal this quarter with the leading buy now pay later provider.
The company uses elastic absurdity for log monitoring as well as elastic security for Sip.
They signed a multiyear contract in Q4 for elastic cloud why are the AWS marketplace, enabling them to optimize costs and accurately scaled their environments as their data usage continues to grow, especially during peak shopping seasons, such as Black Friday and cyber Monday.
Now onto our widening competitive moat.
Our solutions continue to be bolstered by innovation on the elastic search platform driven in part by our AI and machine learning capabilities.
It continues to be a major driver for customers adopting our higher subscription tiers.
We already have over 20% of our annual cloud subscriptions, using Rms functionality or search observe ability or security.
For example in enterprise search we expanded a three year deal with one of the largest home improvement retailers in the United States for elastic on Google Cloud.
A longtime customer the company uses elastic to power its online retail business, enabling customers to search browse and discover products at scale efficiently.
They use elastic but multiple use cases and are leveraging our machine learning capabilities and observed beauty as well as testing capabilities like vector search to enhance search experiences for their customers using a single cost efficient platform compared to legacy solutions.
The increased focus on AI and in particular large language models is shaping customer perspectives and business expectations. Our goal is to democratize generative AI and make it possible for everyone to build generative AI applications and domain specific copilot.
There are relevant to their businesses and optimized with their proprietary data.
Our recently announced elastic search relevance engine RSV is powered by built in Vectra search and transformer models that had been designed specifically to bring the power of AI innovation to proprietary enterprise data.
A key part of our approach to machine learning is allowing our customers to integrate their own models. In addition to leveraging the models that we offer.
By natively integrating machine learning into the corridor of elastic search we have enabled our customers to adopt new ml based features across each of our solution areas.
This means that thousands of companies that have invested in elastic solutions can advance AI initiatives to date.
Without a lot of additional resources.
This is a big competitive strength for elastic.
Our announcement of as rate last week at the Microsoft build conference has been very well received by our customers and partners alike.
Now I will share some details about additional innovations in security and observed beauty solutions.
This past quarter, we expanded capabilities for elastic security, including cloud security posture management put AWS container workload security and cloud vulnerability management.
Elastic now delivers a comprehensive security analytics solution that includes complete.
Native application protection or seen App for AWS, providing organizations with the power they need to modernize their cloud security operations improve attack surface visibility reduced vendor complexity and accelerated remediation.
We also announced that we are contributing elastic common schema or ECS to open telemetry and committing to joint development of a common schema or absorbability and security logs.
Open telemetry or hotel is the second highest velocity project and the cloud Native Computing Foundation.
Also known as tncs.
And as the emerging industry standard for elementary data encompassing metrics logs and traces.
C NCS choosing the elastic common schema as the basis for their hotel schema for logs reflects the incredibly broad adoption of elastic for logging analytics and security analytics.
Our continued leadership in this area.
The merging of ECS and Oded will help advance hotels adoption and help our customers get increasing value from debt investments in our platform.
In addition, we launched the beta for new service level objective or a slow monitoring capabilities in elastic observed beauty.
Rich, let customers measure and monitor service quality, such as latency availability or other custom defined key performance metrics.
These new capabilities help customers define a soloist monitor and track performance against these silos and alert on a slow violations to deliver on service levels.
Now moving onto my last key point.
Profitable growth.
As we've demonstrated this quarter, we are committed to managing the business with discipline.
We delivered a non-GAAP operating margin of eight 6% in Q4 and are on track to deliver on our 10% target for FY 'twenty four.
We continue to expect further margin expansion in fiscal 'twenty five.
Our fundamentals remained strong.
We remain committed to continuing our growth strategy, while delivering increasing profitability.
In closing I want to thank our employees for their dedication and contribution to our performance.
I also want to thank our customers partners and investors for their continued support and confidence.
Our conviction in the long term opportunity in front of us, especially in elastic cloud remains unabated.
It is based on the strength of our many exciting product innovations and continued customer confidence in elastic.
We are focused on execution.
As the amount of data being generated and used increases and the need for finding answers that matter from all that data becomes more critical elastic is well positioned to take advantage of this generational opportunity.
With that I'll turn it over to Jim <unk> to go through our financial results in more detail.
Thanks Ash, we delivered solid results in the fourth quarter, finishing a goodyear for elastic despite the current economic environment.
We are pleased that we once again came in above the high end of both our topline and bottom line guidance for the quarter.
In Q4, we delivered 19% year over year constant currency growth in total revenue and elastic cloud grew 30% year over year in constant currency.
Importantly, we delivered non-GAAP operating margin of eight 6% and are on track to achieve our goal of 10% for fiscal 'twenty four.
The overall trends we saw in the quarter remained consistent with the prior quarter customers wanted to do more with elastic there are three compelling reasons customers pick elastic in the current business climate.
First our platform innovation to drive multiple use cases with any kind of data on a single stack.
Second a lower total cost of ownership.
And third the flexibility of a consumption model.
In addition, our many years of experience in AI and ml and the broad adoption of elastic search for all sorts of search analytics use cases is enabling new conversations with our customers on generative AI.
At the same time, we are helping customers optimize current consumption in the near term.
Being a reliable partner to our customers in challenging times increases our strategic importance to them for the long term.
As they bring more workloads onto the elastic platform over time and as data volumes grow substantially customer see greater business benefits, which in turn drives growth for us.
This sets us up nicely for the long term.
Let's get into the results for Q4.
Total revenue in the fourth quarter was $280 million up 17% year over year or 19% in constant currency.
Subscription revenue in the fourth quarter totaled $256 million up 16% year over year or 18% in constant currency comprising 91% of total revenue.
Within subscriptions revenue from elastic cloud was $112 million growing 28% year over year or 30% in constant currency.
Elastic cloud represented 40% of total revenue in the quarter up from 37% a year ago.
Elastic cloud revenue based on month to month arrangement has continued to be 16% of total revenue similar to the prior quarter and compared to 17% in the same quarter last year.
Professional services revenue in the fourth quarter was $24 million growing 35% year over year or 38% in constant currency.
Although professional services may fluctuate across quarters based on the timing of services delivery, we do not expect it to very significantly in mix over time.
To add more contexts around deal flow of the Americas grew the fastest followed by EMEA and a P. J.
We also saw a healthy balance across our solutions and continued to maintain a similar solution makes an annual contract values versus the prior quarter.
Moving onto customer metrics.
And the over $100000 ACD customer category, we added approximately 50 customers, bringing us to over 1160, such customers as of the end of the fourth quarter.
As we've said before this customer category provides a strong foundation for our land and expand motion as we build a multibillion dollar company over time.
The strength of this motion is also reflected in the number of customers over $1 million E. C V, which was over 140 customers at the end of this year compared to over 115, such customers at the end of the prior year.
Looking at customer additions more broadly we added approximately 100 customers above $10000 in ECB to end at over 4100 such customers.
Our total subscription customer count was approximately 20200 at the end of the quarter.
Turning to the net expansion rate net expansion rate was approximately 117% which was in line with our expectation.
As we've shared before for customers on consumption arrangements on net expansion rate reflects only the actual consumption and not their commitment.
Also as a reminder, since the net expansion rate is a trailing 12 month measure it will decline for a couple more quarters as higher expansion rates from prior periods roll off.
Our customer metrics indicate that our strategy of focusing on customers with a higher propensity for growth is working.
Customers can consolidate workloads, both within and across our solutions growing their commitments to elastic overtime.
Moreover, they can flexibly scale without consumption model.
Now turning to profitability for which I will discuss non-GAAP measures.
Gross margin in the quarter was 76, 3% versus 75, 5% in the prior quarter with the sequential improvement driven by both better subscription gross margin and better professional services gross margin.
As we've said before our professional services gross margin can fluctuate based on the timing of service delivery.
Our operating margin in the quarter was eight 6%, which was better than expected given the revenue outperformance higher gross margin and continued focus on managing our expenses.
Diluted earnings per share in the fourth quarter was 22 cents.
Free cash flow margin on an adjusted basis was 9% or approximately $26 million in the fourth quarter.
We ended the year with adjusted free cash flow of $57 million, which was a substantial improvement against the prior year consistent with our overall operating profitability improvement.
We continue to maintain a strong balance sheet. We ended the fourth quarter with cash cash equivalents in marketable securities of $915 million.
Turning to guidance.
Our overall guidance for fiscal 'twenty four is predicated on the assumptions similar to those in the framework, we had outlined on our prior call.
We are assuming macro conditions will remain unchanged.
While our customer momentum as reflected in contractual commitments, we have already secured will translate to revenue the pattern and timing of consumption may fluctuate.
We believe that it is prudent to anticipate that consumption trends in the near term may stay similar to recent quarters.
We are reflecting this expectation and our guidance for the first quarter.
Further as we've shared earlier, we expect first half year over year growth in total revenue to be slightly lower than our expectation for the full year given tougher comparisons against the first half of fiscal 'twenty three.
In terms of operating expenses, we are investing with discipline in the business and are continuing to grow enterprise and commercial sales capacity.
We intend to carefully monitor our progress each quarter, ensuring we're getting the right outcomes as we consider further investments in the business.
This will help us not only achieve our 10% non-GAAP operating margin goal for fiscal 'twenty four but also set us up for further margin expansion in fiscal 'twenty five as we drive natural operating leverage inherent in the business.
Additionally, as we've said before Q1 will be the low point on non-GAAP operating margin given a seasonally higher expenses in the first quarter and considering revenue ramp over the year.
Finally, though we don't formally guide to cash flow, we are expecting free cash flow margin on an adjusted basis for fiscal 'twenty four to be slightly above the non-GAAP operating margin for fiscal 2004.
Cash flow on a quarterly basis will fluctuate given timing issues on seasonality. So we continue to look at this primarily on a full year basis.
With that background for the first quarter of fiscal 2004, we expect total revenue in the range of $283 million to $286 million.
This represents 14% 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 24 in the range of five 6% to 6% and non-GAAP earnings per share in the range of 10 to 12 cents using between $100 five and $101 5 million diluted weighted average ordinary shares outstanding.
For full fiscal 'twenty four we expect total revenue in the range of one to three $8 billion to $1 billion to $5 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 'twenty four in the range of nine 7% to 10, 3% and non-GAAP earnings per share in the range of 94 cents to $1.06 using between 102 and 104 million diluted weighted average ordinary shares outstanding.
In summary, we remain focused on delivering profitable growth as we build a multibillion dollar revenue business.
Confident that we are still in the early stages of this growth journey.
With that let's go ahead and take questions operator.
Thank you very much.
I'll now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
I think what Youre asking the question queue. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Today's first question comes from Matt Hedberg with RBC capital markets. Please go ahead.
Okay.
Hey, Matt are you there.
Yes can you hear me okay.
Yes. He can go ahead guys, okay, okay, sorry about that doubled.
Double muted.
So I wanted to dig into vector search and AI.
To us it seems like a large opportunity for you guys to see higher density models on the elastic platform just kind of curious about what the early interest has been are you seeing any increased activity as it relates to vector.
Yes, Hey, Matt this is assia.
I can talk about that so.
Ever since we made the announcements of the elastic search relevance engine.
Literally we've been having conversations with customers on a daily basis like it's the interest has been just wonderful to see and even with vector search, but it's when you think about generative AI. There are really two aspects to generative AI to build applications that are incredibly important to you can do without either of these two components. So the first is.
The large language model itself, whether it's G.
GPT for Bart or what have you.
But these models are trained on publicly available data and these models have no concept of businesses proprietary private data and so if you are a business and you're trying to build a tentative AI application you really need to provide that private context to these larger.
Language models for it to be contextual to your business and your needs and for those answers to make sense in the context of the business and that's really where elastic search comes in so the announcements that we've made all the developments that we've done around vector search in the last year and a half bringing that vectren capability together.
With the actual search functionality to be <unk> 25 functionality that we've had in the past providing the hybrid search functionality and more importantly doing it all on the same platform. So our customers don't need to purchase anything different and they don't have to get used to a new technology. They can just stop.
Got to use the machine learning functionality and the vector functionality that's in the product with the same Apis like this is a huge differentiator and so from my perspective.
Believe that we are uniquely positioned to be a winner in this space, especially when it comes to generative AI in the enterprise. So we're seeing that momentum in terms of customer conversations.
Very excited about what this opportunity represents in the long term how this translates into the expansion of the total addressable market I think that we're going to get a sense of as we progress because there are lots of things that.
Customers are working through you know how do you do all these things innovate that your data privacy Youre data security is handled in a good way how do you think about model biases. So theres a lot of the stuff that you typically tend to see getting worked out in the early days.
A new platform emerging so that's what I expect we are we are seeing right now.
What is happening but in the long term I believe that this is going to be massive and we're going to be in a really really strong position to take advantage of this.
Maybe just a quick follow up to that do you think when you start to see more of our monetization efforts is that one of the things that could start to inflect elastic cloud growth regardless of sort of broader macros like do you think that some of these trends are stronger than sort of the depressed macros and you could start to see a rebound in elastic cloud growth maybe even sooner.
Okay.
Yes.
When I think about the.
The.
In which we monetize vectra search and all this AI functionality that we're talking about here.
All in our premium editions right and the other thing is the machine learning capabilities tend to be pretty compute intensive and as you know both these factors tend to drive consumption for us So obviously as customers move from.
Today, it's mostly individuals consumers using something like a chat GBT for all kinds of fun use cases and.
<unk> businesses are still trying to understand what are the kinds of use cases, they want to they want to build one of the agenda to be applications that they want to build for their own use cases.
And we are at that stage as this turns into actual production.
This is when we believe that it is going to really become very impactful and meaningful for us.
At this point, but it's hard to predict how fast this will move and we are we are appropriately just focusing on the execution right now and not thinking too much about when this turns into.
A significant tailwind for us, but in the long run I'm very confident this is going to be significant.
Thanks, guys.
The next question comes from Tyler Radke with Citi. Please go ahead.
Yeah. Good afternoon. So asked another question for you on generative AI.
I'm curious just as you look at the new customers that have come on to the elastic platform. I think you added about 300, this quarter, which was up from the 200.
Last quarter, what are you seeing any of these new kind of nextgen.
AI companies.
Using the elastic technology and using some of your new.
New products that you announced if you could just kind of talk about the composition of customers in and maybe the use cases.
Kind of these nextgen generative AI companies.
Are you seeing your technologies.
Yes, so what we talked about even last week, we announced that at Microsoft build even there we gave some customer examples that we've talked about relativity the customer that's using us.
For search use cases, using us in conjunction our retrocession functionality in conjunction with larger language models to deliver the kinds of use cases that they are looking to deliver for their customers in my prepared remarks, and I also talked about the large home improvement stores in the U S.
Yes.
Looking to do something similar they are working very closely with us and these kinds of use cases I believe we're not just going to be for the tech first kinds of organizations, they're going to be for just about every business out there.
Just thinking in terms of the home.
<unk> customer.
Customer that I mentioned.
Today, they use elastic for all the products search on their platform. So if you go onto the website and you search for miter saw are you search for <unk>.
AMA like it's elastic that's figuring out what's the best.
Not to actually like what's the most relevant product to show them. What they are interested in is effectively the kind of chat experience on their website, which would be tremendously interactive and powerful like I'll give you. An example.
If a user comes to their website and says I want to.
To build a irrigation system for my two acre backyard, what do I need. It now if you ask this question to Jack GBT Youre going to get very generic answers because he has no idea what this particular store sell.
So the experience that this store this company wants to wants to deliver is effectively something along the lines of.
Or what are you trying to bid based on where you live now youre going to need three sprinkler heads youre going to need these kinds of pipes for the temperature that is right for where you live and so on and Oh by the way. These are available in store and can ship to you in the next 24 hours click here if you wanted to.
That's the kind of powerful experience that effectively helps then monetize and improve their own business performance in a very significant way and we are talking to customers and hearing about all kinds of interesting use cases, not just for search, but even for absorbing it and security for observed at the one side if I have an issue.
And if I get an alert.
You see something in my logs that's related to some kubernetes cluster, that's not performing well.
Imagine an asahi wanting to know Oh, what do I do about this is there a prescriptive set of steps that I need to follow here and you know this notion of co pilots can be incredibly helpful. Like youre seeing that interest in security to be able to take remedial action on threats that you see without needing very.
<unk> threat hunters. So there is a tremendous amount of interest and we're seeing use cases, and we are seeing active interest across the board and that's one of the reasons why I also talked about the fact that.
We have a lot of experience with machine learning.
And we've been working with customers on machine learning for many years now. So this is just taking it to the next level.
That's helpful.
So.
Dennis just on the cloud.
Revenue here. So could you just talk about did you see any incremental.
Macro headwinds in the quarter and then as you.
Think about the guidance for FY 'twenty four.
What are you assuming just to get to that.
Half acceleration.
Thats implied in then.
And apologies if I missed it.
Are you targeting a certain percentage of revenue is elastic cloud by by year end. Thank you.
Hey, Tyler so overall when I step back and just look at our performance in Q4, we were actually quite pleased with the quarter played out as we expected. It would there were many positives for us too to highlight in the quarter.
We touched on the number of customers earlier, the customers in the greater than 100 K category.
We generally saw from a macro standpoint to answer your question. We generally saw the same trends that we saw in Q3, they continued into the fourth quarter.
So we didn't see anything significantly different our customers continue to engage with us theyre looking to bring more workloads onto the elastic platform, they're looking to both do that to drive <unk> savings, but also just get greater business value and at the same time. They are continuing to focus on ways in which they can optimize their consumption in the near term and we're continuing to <unk>.
Help them with that because our belief is that if we work closely with partners at.
At this time, we emerge from this much more relevant to them and as they bring more workloads onto elastic that actually helps us scale, the business, even better and faster over time so.
That's what we saw it was a consistent pattern I would say it was also consistent throughout the course of the quarter it.
It did not change in any meaningful way and as I said earlier it was sort of what we expected would happen.
And also just a reminder for folks at Q4 is a bit of a shorter quarter than Q3. So that does have an effect on the sequential growth rate in Q4.
And then.
Looking ahead as I mentioned earlier in the prepared remarks, we're excited about the momentum that we're enjoying with our customers. We're entering the year with a pretty strong base of commitments that we've already secured and just given the nature of our contracts and how we think about the.
Structuring of those contracts.
Keep in mind that our contracts typically have their one year contracts or if they have if they're longer term then we have annual breakpoints. So they're a very natural mechanisms that we have embedded in the contracts to ensure that certain amounts of revenue do get recognized within fiscal 'twenty four, particularly as you think about the base of contracts would be signed here in the.
Half of fiscal 'twenty three as those anniversary in the second half of fiscal 2004.
And you can see that for example, if you look at the growth in the total dollars of short term deferred revenue that we added in the second half of fiscal 2003, and you compare that to the total dollars that we had added in the second half of the previous year, you will see that it's a substantial increase so that's.
That's one of the pieces that we talked about as we built the plan for the year.
And finally as I think about just ongoing sales execution and other things within the business, we feel pretty good about the increased capacity that we've got as we entered fiscal 'twenty forward the right amount of capacity in our sales team as we have talked about before we continue to hire both enterprise and commercial sales reps and so overall the night.
Set back and look at the quarter played out as we expected it would.
Turned out to be a pretty good fiscal year overall, despite the macro climate and we feel pretty good about this year coming up.
Your next question comes from Koji Ikeda with Bank of America. Please go ahead.
Hey, guys. Thanks, so much for taking the questions I wanted to ask another one on vector search and thanks, so much ash on the on the use case examples I think that's super helpful and I just wanted to ask a couple of questions here on <unk>.
On back to search one I think you mentioned that vector is only available on the premium edition I just wanted to confirm that it's a paid feature only and there is no vector search and the open source and the free version of <unk>.
Number one and then number two I totally hear you on elastic being differentiated I mean, when I'm doing my checks out there I hear that all the time from your user base too, but could you help maybe explain it very simply on how elastic vector searches differentiated from the other vector search vendors out there.
Yes, great question.
Could you respond to both of them in order so in terms of that.
Product features and the monetization.
The vector searching functionality itself.
Is in all editions, but.
Machine learning, how do you actually do the ingestion and creation of all of the vectors all of that functionality.
<unk> model that we announced the hybrid search capabilities that we announced all of those are in the premium additions. So for all practical purposes, you need the premium editions to be able to build generative AI applications on our platform. So that's the monetization model now in terms of the differentiation.
I can break it down for you in a few ways right. So the first thing is when you think about that.
The emerging AI stack right like I mentioned, there are two things that you're going to definitely need the first as youre going to need an LLM large language model and the second thing that you need going to need is.
Some systems that will allow you to provide the relevant context and this is the most important piece because for every business. They don't want to ship all of their private data to the LLS and more importantly, the llm's it won't even be able to use everything because theyre not built on.
Having everything in real time right. So your private data is constantly changing it's moving in real time. So the key is to provide for any given query from the any interaction with the large language model just say relevant context.
For this purpose you need at times, the vector search functionality at times, you need the extra search functionality and more.
Recently, what people are discovering is you actually need a combination of the two in many many different cases, and then for practical use cases as you're building. These applications you need to be able to incorporate things like filtering things like aggregation of these visits so for that reason if you. All you have is the vector data.
Base.
Then need to still combine it with some technology like elastic to be able to bring all of this together in our case.
Built everything in one consistent platform the API as they are consistent with each other and you can actually get take advantage of all of these capabilities, including the ability to bring in.
Journal models directly from hugging case, or any <unk> model and run them.
On elastic so it's just a much more complete and much more capable solution than anything that's out there on the market and that's the reason why we feel so confident about the unique opportunity that we have to be a real winner in the space of generative AI for enterprise.
Yes.
Got it loud and clear ash. Thank you so much and just one follow up here for <unk>.
Just thinking about the 2024 guide in cloud it was just 40% of revenue in the fiscal fourth quarter. So for the guide.
Does that assume that that mix of that 40% mix does it assume it goes up stay flat or go down throughout the year. Thanks guys.
Yeah, Great question. So we don't disaggregate the guide across the pieces, but overall I just given the momentum that we've had in cloud given all of the product investments we are making given the go to market focus that we've had I would fully expect that cloud will grow significantly faster than the overall rate of growth in the business. So we should see a mix shift.
In cloud over the course of the year, we've just not quantified it but but we fully expect that that will happen.
Got it. Thank you so much guys. Thank you so much.
Looking forward to seeing you next week.
The next question comes from <unk> with J P. Morgan. Please go ahead.
Hey, guys. Thanks for taking the question.
<unk> another question on on January <unk>.
And maybe help us understand for obviously elastic search is known.
By developers.
For somebody who has been working using deploying implementing elastic search how difficult would that be for them to now shift and deploy.
Yes Ari.
Ken that become kind of debt that familiarity with elastic search could that become an advantage for you guys as you kind of pivot towards generally the opportunity.
Yes.
The pendulum. Thank you for the question, it's a massive differentiator for US if you think about the fact that elastic search is.
The de facto platform when you think about search within the enterprise.
And the way we have built the editing functionality. The relevance engine is effectively brings together all of the vector functionality along with all of the B M 25 next year.
Search functionality break the hybrid capability to bring all of those too.
Two things together and it's all in a common platform with consistent Apis and that last part about the consistent API is huge because that means that if you are familiar with elastic search you now are naturally going to be able to take advantage of all of these capabilities easily you don't have to learn completely.
New.
If you don't have to.
Figure out how to manage a new system and monitor it effectively what you have from elastic but there you have it in the elastic cloud as an example, you can just get started with this immediately and.
That's the reason why we feel very good about the conversations that we're having with customers is sort of reflecting.
This excitement and like I said, the key is going to be seeing how this evolves and how businesses start to move these things into production.
Personally very excited about what this means for us in the future.
Got it very helpful and one for John is diminished the guide when I'm looking at it.
You talked about the sequential growth in Q4 to subscription sequential growth is basically flat youre guiding to about 16% sounds like it's more of a second half story.
Help us understand the kind of the confidence on that second half build from what Youre seeing it sounds like there's some mechanics with the contracts that I guess, we can see but obviously you have a strong our appeal, but I'm just trying to understand what gives you confidence for that to kind of reach that guide in the second half and maybe help us understand the.
Gumption trends so far in Q1 that you are seeing.
Yes, pendulum as I think about the full year couple of things and I touched on this a little bit earlier, but I'll elaborate a bit further.
So if you think about the way our contracts mechanically work because we have either one year contracts or we have if we have multiyear contracts. So you typically have annual breakpoints and given the strength that we saw in contractual commitments that customers have made to us over the course of Q3 and Q4 and we.
We're actually quite pleased with the outcome overall, even here in this quarter that we just wrapped up as I look at all of those commitments. There are effectively naturally mechanisms embedded in those contracts so that as customers consume against those contracts over the course of this year, we will see that translate to revenue.
We're working actively with them for commitments that they've made to bring those workloads onto elastic and to see that consumption ramp.
But consumption can fluctuate from quarter to quarter, depending on what actually happens with respect to that customer activity. So if the consumption ramps that's great but.
Even if consumption trends stay similar to where they are in the first half and that's the way we've built the model based on the Q1 guide and just thinking about the first half overall.
We will naturally start to see those contracts anniversary and we will then hit those breakpoints in the second half so that gives us.
Good degree of visibility to ensure that there are certain amounts of revenue that will be recognized in fiscal 2004. So thats the mechanical aspects of the contracts and that's what I was referring to the.
If you looked at the short term deferred revenue and you look at how much short term deferred revenue. We've added in the second half of fiscal 'twenty three you'll see it's significantly higher than the short term deferred revenue. We added in the second half of last year and that gives me a degree of comfort and confidence around around the full year.
And then the other piece is.
With respect to the sales capacity that we've been adding we've entered fiscal 'twenty four with the right amount of capacity that we expect it to have we continued hiring in the back half of fiscal 'twenty three and so those salespeople will also naturally start to to achieve that productivity three.
Thresholds that we have in the business so putting all that together, we feel really good about our outlook for the year.
In terms of what May has looked like and Q1, so far in general the top of funnel activities that would be generally have in the month of may have been very consistent with what we've seen in the past.
I mean, because it's the first month of our fiscal year there is always.
Other kinds of activities that happen. We've we've had our sales kickoff for example in the month of May.
I'd say, it's been a fairly typical may in terms of what we would have expected based on some of the internal activities and some of the general top of funnel activities.
Got it thank you.
The next question comes from S. K.
Hey, Jordan with Oppenheimer. Please go ahead.
Hey, guys. This is our Herschel Lon R E.
I wanted to ask you about the new AWS collaboration.
What do you expect this to bring to elastic in terms of dollars.
Is there any color you can maybe give on how the integrated go to market activities will look and then how is this different from how you bid.
Up to now.
So maybe I'll take that one so as I think about the overall AWS relationship.
The contract that we just signed it built further on the partnership that we've enjoyed with AWS until now.
Through these contracts both parties are committed to significantly greater investments in areas like co marketing cloud adoption for workloads and so forth.
The the partnership itself covers a few broad areas.
Some of the integrated go to market activities that I mentioned.
Including marketing campaigns guides workshops.
And those kinds of activities the right technology integrations that are commercial incentives that we have embedded in them.
To drive the migration of on premise workloads to elastic cloud on AWS.
And then we're extending some of these these practices globally as well and within that there's also additional work being performed for us to drive certain competency designation as you saw the security competency designation.
That we already announced so.
It's a comprehensive partnership it focuses on go to market. It focuses on the technology side in terms of additional reference architectures and better integrations.
And some of these investments from both sides will happen over time, and they will bear fruit over time.
But overall when I step back and look at the evolution of the relationship and how far we've come we've been really proud.
I am pleased with the partnership and we look forward to providing you with further updates on the progress as we go.
Got it thank you.
Okay.
The next question is from Charlotte <unk> Bari with Baird. Please go ahead.
Hi, Thanks, a lot.
On the strong execution and the customer commitments.
I was just wondering like how do you see the dynamic between of course, we are hearing customers optimizing their the consumption versus the strong commitments that you guys called out of course, there are all these product innovations.
As announced the relevance engine and the battery storage transfer models.
And and SQL as well the feedback has been strong so on your on our go to market in.
And product strategies.
Just curious if if it involved.
More flexible.
Solutions.
No pricing terms.
Driving more value into into existing packages just curious.
Again unpack some of some of the go to market strategies there.
Yeah, Hey, this is actually maybe I can take a crack at that so this is what you're describing sort of fundamental to our platform.
<unk> strategy right.
What we're seeing right now in the market, but then our customers is everybody.
As being very cost conscious and towards that towards that aim theyre looking to optimize their current workloads onomastic right. So as an example, we are.
Often we'll see customers moving more data to lower cost object storage and.
We often hear from customers that are frozen tier, which is their customer store a lot of their data in low cost subject storage tends to be faster than the hot tier.
Our our largest competitor.
That's really pretty amazing so we are able to serve our customers.
Not only in terms of total cost of ownership, but also deliver far greater value at a much lower cost and that's one of the reasons why even as customers are optimizing their current workloads. They are making larger commitments to elastic to be able to consolidate more onto our platform.
And move workloads that are currently on other competitive products onto elastic now that takes a little bit of time to actually materialize in terms of moving those workloads or.
The commitments are really strong and this is where I get very excited.
The fact that we have amazing total cost of ownership and I gave a very concrete example of this in my prepared remarks.
The County in California was able to really get the extra value.
Effectively these are the kinds of anecdotes that we are seeing this is the kind of data that we're seeing we're really leaning into it. So we know that as more workloads come onto our platform. Eventually that's going to translate into revenue and that's really going to set us up very nicely for strong continued growth.
Got it thanks, Thanks, a lot I appreciate it.
The next question comes from Blair Abernethy with with Rosenblatt Securities. Please go ahead.
Thanks, very much ash just.
One more question if I might on the relevance engine like I guess I'm looking at this annoying.
Very very important and very.
Our powerful technology, but I'm wondering.
How are you looking at.
From a go to market standpoint, helping your customers to really get full leverage out of this is it is it through a step up in professional services on your part or is it through partnerships training.
And if you look back a few years you guys built quite a significant solutions around observer ability and security is there a similar kind of path here eventually.
Yes so.
The best way to think about our go to market on this is effectively it's both the combination of the bottom up motion that we've always driven really strongly with developers and the dropdown motion that we drive through our.
Our go to market teams in the enterprise and commercial segments. So in terms of.
Youre seeing a lot of.
Blogging from us you're seeing us be very involved in terms of the.
The events that we are driving like stand ups and meet ups and so on and Youre going to see more and more of that from us because right. Now. This is in these early phases.
The developer community, that's really leaning in and stepping ahead to build new kinds of generative AI applications.
These developers are in every business and every small and mid and large business and they are the ones who are experimenting we're playing with all of these capabilities to be making sure first and foremost that we are front and center with that community.
Leveraging the fact that elastic search is so well known and really leaning into it at the same time.
Sales teams are going out there and making sure that all of our large customers that they are using us for either search or absorbed 30 or security understand this new capability in what it can mean for them. We are having sessions that we're doing brainstorming with our customers on what are the kinds of opportunities within.
Your enterprise that this could unlock for you and so it's going to be both.
In the bottom up and down but what we will continue to build on top of is an amazing brand that elastic search had out there in terms of search.
Great. Thank you.
The next question comes from Raimo <unk> with Barclays. Please go ahead.
Oh thank.
Thank you for squeezing me in.
We talked a lot about AI.
But it's probably more of the future of it I think.
Ill talk more about the current situation can.
Can you see a little bit what you're seeing in terms of the optimization journeys, we see with your clients where are we on that it's obviously a question that comes up with a hyper scaler.
It does impact you a little bit as well can you kind of talk a little bit of what you're seeing there in terms of where our customers are and kind of identifying where they could spend less at elastic and.
Pushing that through versus like most of that is done from now on when people are.
Efficient.
Catherine.
Spending more with you.
Any update there.
Yeah, Hey, this is Asher maybe I'll lead off and then Gen instrument when I add to it.
In terms of the most common kind of optimization that we are seeing.
Customers doing with the existing workloads.
Moving more and more data to object storage to our frozen here like that's one of the most common practices and frankly.
We're leaning into that and helping them because like I mentioned.
The feedback that we're getting is there a frozen tier.
Is actually faster than the Hospira.
Some of our.
Most common competitors and so that's a huge advantage now the reality is that there's only so much that you can move to the frozen tiered and also when it comes to the fact that data itself is continuing to grow like that are naturally limits to what you can do in terms of optimization.
The fundamental question that you're asking in terms of their view on this journey like what youre not seeing any increased pressures right. So like like Jaenisch mentioned, where we are today is is roughly like what we saw.
In the last quarter as well, but.
The data volume the fact that data volumes are continuing to grow and the fact that newer workloads that are coming onto our platform as customers consolidate onto our platform gets means that that's going to be the offset.
In the coming year and beyond and that's what we're just leaning into because it also allows us to take market share.
And people become more comfortable in terms of their spending patterns like that it's going to be by that time youre going to be in such a better position in terms of market share that it's really going to set us up very nicely for the future.
Yeah, Okay perfect. Thank you.
The next question comes from Brent Thill with Jefferies. Please go ahead.
John as you mentioned the May sales kickoff. When you go into this next fiscal year are there any major changes or tweaks, you're making on the go to market or is it pretty much. Following the same playbook you felt in the fall of last fiscal year.
Okay.
Hey, Brent the go to market model fundamentally for us.
Largely continue to be the same if I think about.
The structures that we've had and the model that we've put in place it's looking quite nicely.
We're continuing to focus on building commercial and enterprise sales coverage. We've also had success with a focus on cloud and we see that in the strong commitments and the sales force is effectively much more focused on selling cloud we are increasing our focus on consumption as well a little bit and starting this fiscal year. We've actually included a small.
The <unk> piece of the sales compensation plan as well I think that will help overall as we think about scaling the cloud business in the future and if I think about the other elements of our go to market around our partnerships with the Hyperscale is in the market places those are all working very nicely for us as well.
As you saw with the announcements from AWP with AWS, we are putting a lot of energy into this area. So we feel good about our overall go to market structure, but.
Looking forward to executing here in Q1, and the rest of the year.
And real quickly for ash.
On the AI solutions when do you expect the kind of Standalone.
Monetize <unk> solutions on top of the platform will be able to monetize I know, you're maybe you can't give an exact date, but is that the front half of the fiscal year back half of fiscal year, how do you think about the timing.
Yes in terms of.
Actual features like they are available now so it's not about GE, it's more about customers themselves building these applications and putting them into production right. So it's less about us delivering any functionality.
Delivered the core platform <unk>.
<unk> announcement was like the key announcement there and we are also building our own co pilots for observed lithium security are all built on top of that same functionality.
She analogy.
And those will be coming very shortly but fundamentally the platform for building generative AI applications are.
There to date and it's more about customers sort of moving from where they are today, where they are trialing things theyre, playing around with things to getting to the point, where they put things into production.
That happens.
In my opinion that is going to follow some of the natural curve that we've seen in the past you've seen like major technology platforms emerging but when the when the pendulum swings it swings in a very big base, So concord predict the timing, but feel very good about.
Both.
Presenting the long term.
For us and our ability to be a winner in this space.
Thank you.
Okay.
The last question comes from Rob Owens with Piper Sandler. Please go ahead.
Hi, Thanks for taking my question. This is Ethan on for Rob Josh I wanted to ask around the 100, K plus customer base it.
It seemed like consistent net adds here again in the quarter, but I wanted to ask around kind of revenue growth from this cohort for the year, whether that's in terms of an IRR relative to the rest of the base or kind of what the revenue mix was from these customers for the year relative to recent years any color you'd be able to provide on that would be helpful. Thank you.
Yes, happy to talk about that a little bit we don't discreetly breakout the size in terms of dollars or the revenue from this space.
On a quarterly basis, but what I can tell you is that larger customers are increasingly focused on two two consolidation. They see the benefits of the platform that we've talked about they see the benefits of the of the consumption model. So when you think about our core land and expand motion that continues to work quite nicely. Most of these customers that we added in this category started off.
Is less than 100 key and then eventually grew into the 100 K plus category.
And then the sales team of course also did well to close a number of meaningful deals in the quarter. So.
It's a it's part of the business that is a good indication of expansion. It's a good indication of our progress on the enterprise on the commercial side and we expect that we will continue to drive that motion going forward.
This concludes our question and answer session I would now like to turn the call back to ask Kulkarni for any closing remarks.
Well, thank you all for joining us today.
As I mentioned, we remain confident in our ability to drive both growth and profitability as we've demonstrated and are excited about our unique position in generative yet.
We look forward to updating you on our progress as we go have a great evening.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yeah.