Q3 2025 Elastic NV Earnings Call
Anton Marantz Takes on the Tropics
[music]
Speaker Change: Good day and welcome to the Elastic Third Quarter Fiscal 2025 Earnings Results Call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star then 1 on your touchtone phone. And to withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Anthony Luscri, Vice President, Investment Relations. Please go ahead, sir.
Speaker Change: Thank you. Good afternoon and thank you for joining us on today's conference call to discuss Elastic's third quarter fiscal 2025 financial results. On the call we have Ash Kulkarni, Chief Executive Officer, and Eric Prengel, Interim CFO and GVP of Finance. Following their prepared remarks, we will take questions.
Speaker Change: Our press release was issued today after the closed market and is posted on our website. Slides, which are supplemental to the call, can also be found on the Elastic Investor Relations website at ir.elastic.co.
Speaker Change: Our discussion will include forward-looking statements, which may include predictions, estimates, our expectations regarding the demand of our products and solutions, and our future revenue and other information.
Speaker Change: These forward-looking statements are based on factors currently known to us, speak only as 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.
Speaker Change: Please refer to the risks and uncertainties included in the press release that we issued earlier today, included in the slides posted on the Investor Relations website, and those more fully described in our filings with the Securities and Exchange Commission.
Speaker Change: We will also discuss certain non-GAAP financial measures. Disclosures regarding non-GAAP measures, including reconciliations with the most comparable GAAP measures, can be found on the press release and slides.
Speaker Change: The webcast replay of this call will be available on our company website under the Investor Relations link.
Speaker Change: Our fourth quarter fiscal 2025 quiet period begins with the close of business on Wednesday, April 16, 2025.
Speaker Change: Thank you, Anthony, and thank you all for joining us today. Our Q3 results reflect ongoing momentum across all aspects of our business, led by our strong sales execution, continued market demand for our products, and our relentless pace of innovation.
with strong contributions across all solution areas.
Search, observability, and security.
Speaker Change: We delivered an outstanding quarter. Outperforming our guidance metrics, total revenue grew 17% year-over-year with cloud revenue growing 26% year-over-year and our non-GAAP operating margin represented 17% of revenue.
Speaker Change: The number of customers spending over $100,000 with us increased to over 1,460 during the quarter, demonstrating the strength of our land and expand motion.
Speaker Change: Consolidation and Generative AI are powerful tailwinds driving momentum at Elastic and at the forefront of our interactions with customers and prospects, especially as customers continue to prioritize innovation and efficiency across their businesses.
Speaker Change: During the quarter, we saw continued progress in our go-to-market motion. At the start of this fiscal year, we implemented field segmentation changes that increased our focus on landing and expanding enterprise and high-potential bid-market customers.
Speaker Change: These changes resulted in some unanticipated sales execution issues in Q1 that we have since been addressing.
Speaker Change: Our performance in Q3 demonstrates that we are now back to the levels of sales execution that we have seen in the past. And we are even starting to see the expected positive impact from the earlier segmentation changes.
Speaker Change: Q3 performance benefited from our maniacal focus on these customer segments and deal flow remained strong during the quarter, as we grew commitments from new and existing customers across all of our solutions.
Speaker Change: To that point, we have already added significantly more customers spending over a million dollars with us through the first three quarters of this fiscal year versus all of last year.
Speaker Change: Generative AI is enabling organizations to extract value from unstructured data, documents, and logs.
Speaker Change: Search is core to value extraction, and we saw outperformance from search in Q3, with our search business once again accelerating year over year.
Speaker Change: We are seeing an evolution of search, with customers moving from textual search to semantic search, and then building conversational applications using Retrieval Augmented Generation, or RAG.
Speaker Change: As enterprises experiment with and adopt agentic workflows to automate multi-step business processes, the importance of search for powering AI will continue to grow.
Speaker Change: Customers are choosing the Elasticsearch AI platform as an essential layer on which to build all of these flavors of new, search-powered applications, and we expect this momentum will continue to form a tailwind for our business for many years to come.
Speaker Change: Our vector database resonates with customers. In addition to our best-in-class vector database, we are taking a distinct approach, offering customers an efficient way to create, store, and search vector embeddings beyond those provided by point-solution vector databases.
Speaker Change: In Q3, we signed a seven-figure deal with a digital native career platform, displacing a competitor's vector database as the company scales their business globally and creates new Gen-AI-based customer experiences.
Speaker Change: The Elasticsearch AI platform provides a complete search experience within a single platform, allowing the customer to evolve and deploy critical functionality without the complications of managing third-party APIs.
Speaker Change: We are seeing a positive impact from our leadership position in Gen-AI on our business.
Speaker Change: In the quarter, we signed five deals of greater than a million dollars in annual contract value where customers are building Gen-AI applications using Elastic, building upon our momentum in Q2.
Speaker Change: Now, over 1,750 Elastic Cloud customers are using us for Genii use cases, with over 270 of these customers spending $100,000 or more with us annually.
Speaker Change: We believe that as more companies leverage large language models to create new customer experiences, automate business processes involving unstructured information, and evolve work streams toward agentic AI use cases, we will benefit.
Speaker Change: Elastic has the power to bring all these pieces together to be the runtime platform for Gen-AI applications that simplifies developer experiences and drives greater efficiency and accuracy.
Speaker Change: Outside of GENAI, we also see strength with our observability and security solutions as customers continue to consolidate onto our platform.
Speaker Change: In observability, our strategy centers on logs, knowing that they are a rich data source for monitoring mission-critical systems and often represent the messiest data that is challenging to analyze.
Speaker Change: Elastic excels at transforming logs into understandable, searchable, and analyzable formats. A key reason for why we win with customers.
Speaker Change: Our unified data store, with our emphasis on extremely efficient storage, makes it possible for customers to correlate log data with metrics, APM traces, and other observability signals at a massive scale, making our solution incredibly compelling for enterprises.
Speaker Change: Our investments in pattern analysis, machine learning, and Gen-AI reflect an evolution from traditional monitoring to a modern approach that reveals the unknowns in complex systems.
Speaker Change: New product releases like LogsDB Index Mode continue to differentiate our solution from competitors.
Speaker Change: In another competitive win from the quarter, we signed a seven-figure deal with an industry leader in smart water management. The customer expanded its use of Elasticsearch and Elastic Observability to enhance operational efficiency and customer service.
Speaker Change: We power their analytics and billing platform, which ingests millions of water meter readings daily, enabling them to proactively identify anomalies and resolve issues to ensure their systems run effectively.
Speaker Change: LogsDB index mode was a key factor in how we outperformed two competitors with features that optimized data ordering and storage, and reduced query latency, showcasing our scalability and ability to deliver accurate results.
Speaker Change: Additionally, they have now started to build a rack-powered conversational app on our Search AI platform to strengthen customer service.
Speaker Change: In security, AI-driven security and information management, or SIEM, transforms the modern SOC by automating and simplifying processes.
Speaker Change: helping practitioners work more efficiently and effectively than traditional SIM solutions.
Speaker Change: In 2024, we released our ATT&CK Discovery Solution, leveraging large language models to automate threat discovery.
Speaker Change: I'm pleased to report that we are seeing strong interest from customers looking to enhance their SOC operations, and we have received positive feedback from industry analysts around this groundbreaking functionality.
Speaker Change: Elastic was selected over competitors for a compelling total cost of ownership. These SOC environments ingest terabytes worth of logs per day, and Elastic's cross-cluster search and replication capabilities facilitate efficient workflows for the customer.
Speaker Change: The customer intends to implement ATT&CK Discovery to streamline alerts once their Elastic Security deployments are fully operational.
Speaker Change: Customer consolidation onto our platform drove multiple wins during the quarter as we continue to benefit from the secular tailwind.
Speaker Change: By helping customers reduce complexity and drive efficiency at a lower total cost of ownership, we are securing solid commitments and becoming an increasingly strategic part of their IT infrastructure.
Speaker Change: Madrid Digital, a government agency responsible for the digital transformation of one of Europe's largest capital cities, signed a new agreement with Elastic in a seven-figure multi-year deal for Elastic observability.
Speaker Change: The customer moved from an open source version to Elastic Cloud to consolidate multiple tools onto a single platform and modernize its infrastructure.
Speaker Change: Madrid Digital provides diverse services for its 7 million constituents, requiring a solution to effectively monitor over 3 terabytes of logs per day and reduce the average resolution times for technical incidents.
Speaker Change: They chose elastic observability over competitors due to our scalability and product features like cross-cluster search and our AI assistant.
Speaker Change: Now, turning to product innovations during the third quarter, we released Elastic Cloud Serverless, which is now in general availability on AWS, and Technical Preview on Azure, with general availability expected in March.
Speaker Change: Though in the early stages of our journey, we are starting to see momentum with customers.
Speaker Change: Elastic Cloud Serverless is the fastest way to access Elasticsearch, Elastic Observability, and Elastic Security. We offer customers a dedicated offering for each solution, with distinct pricing and experiences to match different underlying personas.
Speaker Change: Our industry-first Search AI Lake serves as the foundation of our serverless architecture, allowing for low-latency querying across all data with the precision of search.
Speaker Change: We will launch support for Google Cloud instances as we continue to expand this offering to all three major hyperscalers in the coming months.
Speaker Change: The general availability of Elasticsearch LogsDB index mode, which is available in our enterprise tier, was another milestone release during the quarter.
Speaker Change: LogsDB Index Mode makes Elasticsearch more efficient and encourages customers to do more with Elastic.
Speaker Change: By optimizing data storage, indexing, and management, we help our customers extract more value from logs while reducing the total cost of ownership.
Speaker Change: Similar to a release of Searchable Snapshots in 2020, the cost savings of LogsDB Index Mode pushes customers towards the enterprise tier, incentivizing customers to move over workloads from competitor products and consolidate more onto our platform.
Speaker Change: Data consolidation onto Elasticsearch AI platform unlocks more value from the underlying data as customers leverage Search AI across our solutions.
Speaker Change: Customers are expanding their use of Elasticsearch due to LogsDB Index Mode.
Speaker Change: During the quarter, a global software company and long-time Elasticsearch customer upgraded to Elastic Cloud Enterprise from the Platinum tier to access all capabilities of LogsDB Index Mode in a seven-figure deal.
Speaker Change: The customer's previous logging estate was fragmented, with multiple tools and inconsistent standards hindering efficient analysis and troubleshooting.
Speaker Change: Elasticsearch will be providing better logging infrastructure at a compelling total cost of ownership, allowing them to consolidate tools and modernize the observability stack.
Speaker Change: The customer also chose Elasticsearch as their end-to-end rack solution to jumpstart their AI journey and accelerate their ability to ship Gen AI features rapidly to their customers.
Speaker Change: Our re-rank model differentiated our platform from competitors, improving accuracy and reducing latency while remaining affordable.
Speaker Change: We released the Elastic Rerank model in Tech Preview during the quarter.
A re-ranked model boosts search results with more relevance.
Speaker Change: For RAG, providing precise context from the user's data to large language models helps ensure accuracy of responses, and reduces costs by improving the semantic relevance of each query.
Speaker Change: Similar to the blueprint of our ELSR model, we designed RERank to be high-performing with relatively low resource requirements.
Speaker Change: While our architecture supports integration with third-party models, we are also building our own embedding and re-ranking models, up-leveling our platform to a holistic solution where customers can adopt certified components from Elastic into their infrastructure.
Speaker Change: Q3 brought several major opportunities to connect with and learn from our customers, developers, IT professionals and partners.
Speaker Change: We continued our Elasticon conference in Amsterdam, Paris, and London, where our team and I were on the ground engaging with thousands of customers and prospects.
Speaker Change: interested in learning more about how to get the most from Elasticsearch AI platform.
Speaker Change: In November, we attended AWS reInvent, where we were honored with the AWS Global Generative AI Infrastructure and Data Partner of the Year Award, a testament to our strong partnership with AWS and recognition of our work to help customers develop and scale their GenAI capabilities.
Speaker Change: Today, we are also announcing that Navam Velihinda will be joining Elastic as our CFO starting February 28th.
Speaker Change: Navam was most recently the CFO of Grammarly and prior to that spent seven years at HashiCorp, where he helped lead them through many milestones, including their IPO and successful growth to over 650 million in revenue run rate.
Speaker Change: Prior to HashiCorp, Navam spent time in finance leadership roles at IBM and Deem, before which he spent time in venture capital at Sierra Ventures and Insight Venture Partners.
Speaker Change: I'm very excited to have Navam join our senior leadership team, especially given his experience with open source and consumption-based businesses.
Speaker Change: We have an incredible finance team here at Elastic and I am confident that together with Navam, they will help guide Elastic forward to newer and greater business milestones towards becoming a generational company.
Speaker Change: I would also like to thank Eric Prengel, who has done a tremendous job as Interim CFO these past several months, and who continues to be a trusted senior leader within the company.
Speaker Change: Eric will now report to Navam and continue leading finance strategy and FP&A in addition to some new responsibilities.
Speaker Change: I'm looking forward to working very closely with both him and Navam in the years ahead.
Speaker Change: In closing, I am energized by the momentum building in our business and our strong performance this quarter. Thank you to all of our employees for their dedicated execution and to our customers, partners and investors for their ongoing support and confidence.
Speaker Change: I'll turn it over to Eric to review our financial results in more detail.
Eric Prengel: Thank you, Ash, for your kind words and the trust you placed in me as Interim CFO. I had the opportunity to work with Navam while he was at HashiCorp and I was at J.P. Morgan, and I think very highly of him and all that he will bring to Elastic.
Eric Prengel: Now let's get into the numbers. We were pleased that we outperformed against the high end of both our revenue and profitability guidance ranges, driven by another quarter of strong execution, bolstered by strong customer commitments and ongoing tailwinds from our solutions for Gen-AI.
Eric Prengel: Total revenue in the third quarter was $382 million, up 17% year-over-year on both an as-reported and constant currency basis. Subscription revenue in the third quarter totaled $358 million, up 16% year-over-year on an as-reported basis and 17% in constant currency.
Eric Prengel: Within subscriptions, revenue from Elastic Cloud was $180 million, growing 26% year-over-year on both an as-reported and constant currency basis.
Eric Prengel: Elastic Cloud represented 47% of total revenue and for the first time ever crossed 50% of total subscription revenue in the quarter.
Eric Prengel: Aggregate consumption trends in the third quarter remained healthy, with stronger than expected consumption revenue coming from some of our larger customers. Revenue from our Elastic Cloud month-to-month motion, which is driven mainly by self-service SMB customers, was consistent with our expectations and remained flattish in dollar terms, coming in at 13% of total revenue.
Eric Prengel: Professional services revenue is $24 million, growing 18% year-over-year on both an as-reported and constant currency basis. As a reminder, professional services revenue may fluctuate across quarters depending on the timing of service delivery.
Eric Prengel: We saw strong field execution and healthy growth across our solutions, where search saw ongoing momentum from GenAI and continued to be the fastest growing of our three solutions.
Eric Prengel: The quarter's strength is also balanced across geographies, where the Americas grew the fastest, followed by EMEA and APJ. We saw customers make strong multi-year commitments this quarter, reflecting their long-term commitments to standardize on Elastic as their platform of choice.
Eric Prengel: Turning to customer metrics, we ended the third quarter with over 1,460 customers, with annual contract values more than $100,000. We continue to focus on customers with a higher propensity for growth and target these types of customers in the enterprise and commercial segments, providing a strong foundation for our land and expand motion as we continue to scale.
Eric Prengel: Looking at customer additions more broadly, we ended the quarter with 4,540 customers above $10,000 in ACV and approximately 21,350 total subscription customers.
Eric Prengel: Our net expansion rate was approximately 112%, consistent with last quarter and in line with our expectations.
Eric Prengel: Now turning to profitability and cash flow, for which I'll discuss non-GAAP measures.
Eric Prengel: Adjusted free cash flow was approximately $99 million in the third quarter, which translated to a 26% adjusted free cash flow margin.
Eric Prengel: Cash flow can fluctuate on a quarterly basis given timing issues and seasonality, so we continue to look at this primarily on a full year basis.
Eric Prengel: Although we don't formally guide the cash flow, given the performance in the business through the first three quarters, we now expect adjusted free cash flow margin for Fiscal 25 to be a few points above the non-GAAP operating margin for Fiscal 25. As you know, our adjusted free cash flow is on an unlevered basis.
Eric Prengel: Now turning to guidance. We were pleased with the continued improvements in our sales execution in the third quarter. Our guidance philosophy remains unchanged and we continue to be prudent in the near term. We are actively monitoring the many moving parts in the markets in which we operate, including the U.S. public sector.
Eric Prengel: We remain focused on execution and believe that with our highly differentiated platform and the cost of functionality value we offer to our customers, we are well positioned for long-term growth and profitability.
Eric Prengel: Given the revenue outperformance and continued strong go-to-market execution in the third quarter, we are raising our full-year total revenue outlook. I'll highlight some of the factors we considered in our guidance.
Eric Prengel: While our performance in Q2 and Q3 gives us increased confidence in our sales execution, the shortfall in customer commitments that we experienced in the first quarter of this year will remain a headwind to year-over-year revenue growth in the fourth quarter. Also, keep in mind in Q4, we have three fewer days than we had in each of the first three quarters of the year, which will create a sequential headwind of roughly $10 million to revenue in Q4.
Eric Prengel: We are estimating a revenue headwind versus Q3 related to the recent strength of the U.S. dollar of about $1 to $2 million.
Eric Prengel: We continue to expect revenue from our month-to-month motion on Elastic Cloud will remain flat. Given the consumption revenue on both annual and month-to-month terms can fluctuate, and taking into account all of the factors I just mentioned, we have been prudent in our assumptions on cloud revenue in Q4.
Eric Prengel: With the strong operating margin we have seen so far this year, and the leverage inherent in our business model, we are also raising our profitability guidance for the full year.
Eric Prengel: Given the opportunity in front of us and the improvements we have been seeing in our sales execution, we will continue to invest in our business in Q4 while balancing revenue growth and profitability for the long term.
Eric Prengel: Additionally, as is typical with prior Q4 periods, we expect to see seasonally higher expenses related to the timing of employee benefit costs.
Eric Prengel: These expenses were already part of the guidance that we initially laid out for the year.
Eric Prengel: So with all that as backdrop, for the fourth quarter of Fiscal 25, we expect total revenue in the range of $379 million to $381 million.
Eric Prengel: This represents 13% year-over-year growth at the midpoint on an as-reported basis and 15% year-over-year growth at the midpoint in constant currency.
Eric Prengel: We expect non-GAAP operating margin for the fourth quarter of fiscal 25 to be approximately 13.5 percent and non-GAAP diluted earnings per share in the range of 36 cents to 37 cents using between 107.5 million and 108.5 million diluted weighted average ordinary shares outstanding.
Eric Prengel: For full fiscal 25, we expect total revenue in the range of $1.474 billion to $1.476 billion. This represents 16% year-over-year growth at the midpoint and 17% year-over-year growth at the midpoint in constant currency.
Eric Prengel: We expect non-GAAP operating margin for full fiscal 25 to be approximately 14.7%.
Eric Prengel: and non-GAAP diluted earnings per share in the range of $1.91 to $1.96, using between 106 million and 108 million diluted weighted average ordinary shares outstanding.
Eric Prengel: Finally, looking ahead to Fiscal 26, our market opportunity remains large. The Elasticsearch AI platform is highly differentiated. Our GenAI traction is strong, and customers are continuing to consolidate workloads onto our platform.
Eric Prengel: As we go through our planning process, we expect to continue to balance investing for revenue growth with profitability. We will prioritize investments toward areas intended to drive growth, particularly in Gen-AI.
Eric Prengel: We will provide guidance for FY26 on the Q4 call, but in the meantime, let me share our preliminary thoughts on how we are approaching next year from an investment perspective.
Eric Prengel: Over the past several years, we have demonstrated that our business model has inherent operating leverage as we have expanded non-gap operating margin while maintaining strong top-line growth.
Eric Prengel: Given the Gen-AI opportunity ahead of us, we intend to continue to make investments across the business to drive revenue growth over the longer term.
Eric Prengel: As such, we expect to expand non-GAAP operating margin only modestly in Fiscal 26 relative to our current non-GAAP operating margin guidance for Fiscal 25.
Eric Prengel: We expect these investments to be more front-end loaded in Fiscal 26, as our sales kickoff and engineering global all-hands will both be in Q1 of FY26.
We will provide more detail on our Q4 earnings call.
Eric Prengel: In summary, we are pleased with our performance in the third quarter and remain confident in our ability to continue to drive profitable growth going forward. And with that, let's go ahead and take questions. Operator?
Eric Prengel: Thank you. We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster.
Pendulum Bora: And the first question will come from Pendulum Bora with J.P. Morgan. Please go ahead.
Pendulum Bora: Oh, great. Thank you so much for taking the question and congrats on a spectacular quarter here. I want to understand the cloud strength a bit because when we were going into the second half, I guess you were talking about
Pendulum Bora: potential moderation given the Q1 execution issues, but seems like the sequential growth was higher than even the quarter a year ago.
Pendulum Bora: So it's almost like Elastic found a new gear somewhere. So trying to understand what surprised you positively, specifically on the cloud strength, and how should we think of the sustainability of that strength?
Pendulum Bora: In terms of the cloud, we saw healthy consumption from both enterprise and commercial accounts in Q3, and then there was strength from some larger customers.
Pendulum Bora: We've seen the obviously in addition to that we've seen as we think about month to month we've seen that be flashed and we don't think that that's
and Ashutosh Kulkarni.
Speaker Change: Yep, understood. Thanks, Eric. And one for Ash. Ash, the SilverList product, I want to understand something from a long-term perspective. What is the vision around that? I mean, I'm trying to think.
Speaker Change: Serverless obviously dramatically improves kind of the ease of use, aligns resources, cost to usage more linearly. So is the long-term vision to essentially have serverless as the core product?
Speaker Change: with kind of a set of migration plans for existing customers over multiple years.
or will it just exist as...
Speaker Change: a choice across your self-managed as well as cloud. And help us understand kind of the...
Speaker Change: impact on the P&L? How should we see it as serverless becomes a bigger part of the mix?
and Ashutosh Kulkarni, Janesh Moorjani.
Ashutosh Kulkarni: The third thing is, you know, for Elastic, we are able to manage their environment much more efficiently because of how it's architected, because of the Search AI Lake architecture that underpins serverless. So our long-term vision is...
You know, if I look ahead a few years...
Ashutosh Kulkarni: Serverless is going to be the primary way in which our customers experience Elastic Cloud. And over time, we are going to provide migration tools. There's more functionality that we are adding to serverless right now. We need to have it available in all the three hyperscalers. We want to build it out in multiple regions across these hyperscalers. But as we do that and we deliver migration tools, our expectation is that more and more of the workloads will move there. And eventually, that will be the thing.
Eric Prengel: And like we've talked about in the past, there are lots of values even to our business in terms of how we can, you know, better capture some of the gross margin benefit from it. So now to talk about how to think about the financial model, Eric.
Eric Prengel: Thanks, Ash, and I'll just add a few things. Obviously, it's going to take time to feel the financial impact as we're still in the early days. We just went into GA with AWS and Azure as a tech preview. We're going to be live on all three of the hyperscalers in the near term.
Understood. Thank you very much.
Speaker Change: The next question will come from Remo Linchow with Barclays. Please go ahead.
Thank you, and congrats from me as well.
The two questions I have, one is on the...
Speaker Change: If you think about this self-service part of the business, like how do you think about what you saw that this quarter, how does that kind of relate also for what we saw, you know, how the sales changed at the beginning of the year, kind of impact things there. Can you speak to that part of the business and then one follow-up?
Speaker Change: Yeah, maybe I'll touch upon that. So, you know, if you think about the the self-service cloud business, you know, that is targeted towards
Speaker Change: largely the SMB segment, right? And our sales-led motion focuses on our enterprise and mid-market customers.
And for the SMB segment, we've targeted through this.
Speaker Change: That monthly cloud motion, that self-service cloud motion, remained pretty much consistent with what we've seen in recent quarters.
Ashutosh Kulkarni, CEO Alphabet and Google
Speaker Change: You know, all of that is back to the kind of pace that we've seen in the past, so very happy about that.
Speaker Change: Perfect. And then more a technical one now. On the security event management space, you talked about the evolution there. What are you seeing there in terms of willingness of customers to think about
Speaker Change: kind of moving, you know, not just the logs to you, but kind of going there as well. Obviously, there's a, you know, a legacy player that is now part of a bigger entity, where like, then discussion becomes like, well, actually, do you need to continue to pay the higher price there? What are you seeing there on the SimSpace? Thank you.
Speaker Change: Yeah, we are seeing a lot of interest in customers that are looking for two things. One, they're looking for more AI-led automation. You know, security is, at the end of the day, a data problem. And as attacks are becoming more and more sophisticated, it's becoming very clear that, A, you need to be able to look across all of your data sets very fast.
Speaker Change: that we are able to deliver is a tremendous advantage. So those two things taken together are helping us secure wins, and a lot of customers are looking at those two things with a view of consolidating onto our platform.
Thank you, congrats.
Speaker Change: The next question will come from Sanjit Singh with Morgan Stanley. Please go ahead.
Sanjit Singh: Yeah, thank you for taking the questions and congrats on Q4. Just talking about the stronger growth in cloud,
Sanjit Singh: I wanted to get a sense of how much of it has been driven by sort of consolidation opportunities, whether it's on the security side or the observability side, versus let's say Gen-AI. Is Gen-AI and Esri starting to move the needle when we think about either year-over-year or sequential dollar growth?
Speaker Change: Yeah, Sanjeev, thanks for the question. So the, you know, the strength that we've seen has been across the entire business, across all parts of our business.
Speaker Change: search and in search, it's obviously a lot of Gen AI, but then also observability and security where we continue to see consolidation onto our platform. You know, I talked in my in our prepared remarks about
Speaker Change: But a lot of the other functionalities that we've delivered, things like our ELSUR embedding model, you know, our re-ranking model which we recently introduced, our Playground. So we are seeing customers use us more and more as a runtime for building these RAG applications, but the strength was broad-based.
Speaker Change: I would just say the same that Ash said. I think we had healthy consumption across the board. We saw an acceleration sequentially in some of the larger customers, and we talked about that in Q2, and they were actually a different set of customers in Q2 and Q3. But overall, we were happy with what we saw in the consumption business.
Speaker Change: Understood. And then just sort of follow up on sort of the vector search opportunity, you know, a lot of this has been focused on early RAG-style use cases, chatbots.
Speaker Change: and the like, as we sort of move to agentic architectures.
Speaker Change: You know, sort of serving as a memory for agents, is that a...
Bigger opportunity that
Speaker Change: sort of compute intensive in some sense than what we've seen thus far in terms of some of these early lagging cases. I just wanted to get a sense of if the team has a point of view on what supporting agents from a memory perspective, what that opportunity looks like for Elastic.
Speaker Change: that require retrieval. So it's just increasing the total addressable domain for us. You know, what we are seeing is that customers started, you know, that our traditional customers have always started with us with textual search. And those customers, you know, first started moving towards semantic search.
Speaker Change: Then they started building conversational apps. Now customers are looking at how they can automate business processes with these agentic workflows. But effectively what those agentic workflows end up being is like you said, they are multi-step processes that these agentic models are orchestrating. And each of those steps and those workflows effectively need some way to ground your large language models, your inference models. And that's where we come in.
and Ashutosh Kulkarni.
Very interesting, congrats again on the quarter.
Speaker Change: Your next question will come from Matt Hedberg with RBC Capital Markets. Please go ahead.
Matt Hedberg: Great. Thanks for taking my questions, guys. Congrats for me in the quarter as well. Really great to see the momentum.
Matt Hedberg: especially after Q1. You know, Ash, for you, Gen AI continues to resonate, Vector continues to resonate, I guess I'm wondering to me it feels like that's now the tip of the spear. I'm kind of curious, is that the case for like a lot of new customer inbound, and then ultimately how does that help the other aspects of your business, like observability and security?
Matt Hedberg: That's a great question and absolutely, you know, Gen-AI is probably one of the most...
Matt Hedberg: are leading discussions that we tend to have in the field with our customers.
Matt Hedberg: There is a lot of interest in, I mean it's because it's, there's a, there's a...
you know demand within the customer base
Matt Hedberg: But then also talk about how we can, with that same platform, help our customers consolidate more of their workloads onto Elastic, reduce their overall spend by displacing incumbents that might not be innovating as well, not as focused on AI and ML and so on. And so you have seen us.
Matt Hedberg: you know, come up with functionality in the area of observability, in the area of security. You know, be that our AI assistance, things like attack discovery on the security side.
Matt Hedberg: All of those are helping us compete better, take more share in these other business spaces as well. So absolutely AI is the tip of the spear, but it's helping all parts of our business.
Speaker Change: The one thing I'd add to that is that as you think about Gen AI and how it impacts our business, it's really a strong tailwind across all three of the solution areas. It makes the TAM bigger for search, and we're a leader in that space. And then in terms of security and observability, given that there's so much Gen AI really embedded in our platform, it makes us much more competitive in those spaces.
Speaker Change: That's kind of what I'm hearing from some of the fieldwork that we're doing, is it just makes the entire Elastic platform...
Speaker Change: more relevant. And I guess maybe just as a follow-up, you know, I know, you know, especially now with Elastic Cloud and more than 50% of the mix, you have a better sense for usage.
Speaker Change: on the platform. Do you have a rough approximation just given how really it feels like all kind of three aspects of the business are going fast, what the rough mix is these days between search, observability, and security? Thanks again for the questions, guys.
Speaker Change: Historically, we've shared some metrics around what that's looked like from a commitment level. And what we've shared is that about 40% of that business is coming from observability. About a quarter of the business comes from security, and the rest comes from search.
Speaker Change: Over the last couple quarters we've seen search grow really nicely and it has been the fastest growing part of our business and that's really been driven by Gen AI, but nothing that we call out to date that's fundamentally a change from what we've said historically. And what I'd say is keep in mind that, like we said, this quarter the strength was pretty broad-based.
Speaker Change: And, you know, we are seeing the obvious benefits of Gen-AI on the search side, but it's also helping us.
Ashutosh Kulkarni, Janesh Moorjani, Janesh Moorjani, Ashutosh Kulkarni, Janesh Moorjani,
Thanks, guys.
Speaker Change: The next question will come from Rob Owens with Piper Sandler. Please go ahead.
and Ashutosh Kulkarni.
Speaker Change: Great, thanks for taking my question. In your prepared remarks, you did talk about your progress from a go-to-market perspective around land and expanded. Clearly, the larger deals are showing momentum, but was curious from a land perspective. The customer count was a little weaker than you had seen previously, so any call you could add would be helpful, thanks.
and Ashutosh Kulkarni.
Speaker Change: Yeah, so let me maybe take that and then invite Eric if he wants to add anything more, you know, from our perspective Our focus has been on our enterprise and and mid-market high propensity customers
Speaker Change: You know, that's why, as you think about our land and expand motion, the metrics that we really care about are the number of customers spending over 100K with us.
Speaker Change: and we are going to continue, you know, focusing on that area. I think one of the things that I also shared was that in the first three quarters of this year, we, you know, significantly added more million-dollar customers than we did in all of last fiscal year. So you're seeing the benefits of the work that we've been doing in this area, and I'm really happy about that.
and so we're happy with the way it's been working.
Thanks for the color.
Speaker Change: The next question will come from Howard Ma with Guggenheim Securities. Please go ahead.
Howard Ma: Great. Thanks so much. And I want to add my congratulations as well on the strong quarter. I have two questions. The first is, how would you describe the number and the average deal size of potential displacements of competing vector databases within your pipeline? And are you baking in any uptick in vector database displacements in your Q4 guide?
Thank you. Thank you. Thank you.
Howard Ma: very massive because, you know, Gen-AI is relatively young to begin with.
Howard Ma: So, we are not baking in anything specific related to that.
Howard Ma: Our entire focus when it comes to Gen-AI is to win as many deals as possible, right? That's why we focus on land, you know, the 1750 customers.
Howard Ma: by the customer earlier, but that's more just a situational thing as opposed to a strategy.
Speaker Change: Okay, that makes sense. Thanks, Ash. And as a follow-up for Eric...
Speaker Change: Can you help us understand what caused the sequential growth decline in the other subscription revenue line? Is there anything to call out in terms of a renewal timing that could impact this line in Q4? And more broadly, just how we should think about the sustainable growth rate of the self-managed business?
and the cloud business.
If you think about it in...
Speaker Change: the different moving pieces, there's not a ton of variation expected.
Okay, thank you.
Koji Aikida: The next question will come from Koji Aikida with Bank of America. Please go ahead.
Koji Aikida: Hey guys, thanks so much for taking the question. Maybe just one for me in the interest of time. A question for you, Ash.
Koji Aikida: It can be great from a revenue perspective, but maybe not so much from a long-term customer cost perspective. So, you know, I guess the question here is, how much of the revenue upside was driven by bursting ACV from customers, adopting AI features, and how are you managing the long-term value proposition for your customers?
and Ashutosh Kulkarni.
Speaker Change: the revenue performance and so on, like I wouldn't correlate it to that. The strength in our revenue was pretty broad-based, like I mentioned, Koji. You know, the point that you called out, you know, this is something that I've talked about in the past.
Speaker Change: It's really important for us to continue to add functionality that
Speaker Change: brings down the cost over time for people to do things in a much more efficient way.
Speaker Change: And that's true not just in AI, but across the board. And with AI...
Speaker Change: What it does is it just motivates more and more workloads to come to Elastic.
Speaker Change: You know, the capabilities like better binary quantization that we introduced.
Speaker Change: that allow somebody to store these vector embeddings in a much more efficient way and do their Gen-AI, their RAG retrievals in a much more efficient way. That is one of the reasons, one of the many reasons why those kinds of features are why we are winning, the kinds of success that we are winning. That's why customers are increasingly choosing us.
Speaker Change: as the platform of choice for building runtime AI applications. And our focus is on continually doing that, because the more we can win these workloads, the bigger a role that we can play in the whole AI ecosystem over time. And that's going to be the key to long-term success. So we're going to keep doing that and we're going to keep managing it. And because it's early enough right now, it's, you know,
There is no factor there that's affecting revenue per se.
Thanks, Ash. Nice quarter, guys. Thank you so much.
Thank you.
Speaker Change: The next question will come from Mike Sikos with Needham and Company. Please go ahead.
Speaker Change: Hey guys, thanks for taking the questions here. I wanted to cycle back, I believe it was Rob Owens who was asking about the customer account, and I just wanted to get a better understanding. I would have thought that the customer account in some way would be benefiting from industry M&A out there.
Speaker Change: previous customers who were previously dual sourcing their solution are now bringing more of their estate to you. How do we think about how industry M&A might be benefiting you guys where we sit today?
Speaker Change: Yes, so you know if you think about the total customer ads in the past
Speaker Change: A lot of it has also come from the SMB side, if you will.
Speaker Change: And the SMB segment has been generally flat, like we've talked about for many quarters now. And our focus really is on the enterprise and mid-market customers.
Speaker Change: That's where we are really driving our energy, our sales-driven motion is all there. And in that segment,
We obviously, like we've talked about in the past...
Speaker Change: are seeing the benefit of customers wanting to consolidate onto our platform because some of the incumbents...
Speaker Change: that you know either because of M&A reasons or other factors are starting to fall behind on the on the capabilities that they're delivering on the innovation that they're driving and it's just becoming a greater and greater reason for customers to look for alternatives like elastic and we are definitely seeing the benefit of that.
Speaker Change: And so if that's the case, is it fair to think...
Is that a fair conclusion?
Speaker Change: Exactly, exactly, because a lot of it ends up being, you know, effectively expansions, right? It's new workloads that are coming onto Elastic.
And if you just think about that cohort of...
Speaker Change: Many of them are already customers of Elastic, and that's not, you know, it's not a numbers game in that area, right? It's not the long tail of small customers. That's not where our focus is. It's on those larger customers. Many of them have existing relationships with us.
Speaker Change: And they just add more workloads. You know, if they were a search user, now they might be adding us for security or for observability or vice versa. And that's what's driving the expansion. And, you know, that motion is working very well for us.
Ashutosh Kulkarni: Very helpful. Thanks, Ash. I'll keep it to two questions. Thank you, and congrats.
Thank you.
Ashutosh Kulkarni: The next question will come from Cash Rangan with Goldman Sachs. Please go ahead.
Cash Rangan: Hey, thank you very much. Congrats on the quarter. Ash, I'm curious to get your perspective on the rollout of generative AI. If it moves from training to post-training and inference, how does the opportunity set change or not change for Elastic? Thank you so much.
Ash Kulkarni: So, where we play in cash in the whole ecosystem is...
Ash Kulkarni: their inference models and other things in an environment where they're building these Gen-AI applications and need retrieval. And pretty much anything that you do, whether it's...
Ash Kulkarni: As long as you are doing it for the purpose of...
providing some connection to an organization's data.
Ash Kulkarni: The amount of cycles that somebody spins on our platform because these ML jobs tend to be more intensive. And that's the benefit, which is why we are so focused on the whole AI area.
Ash Kulkarni: Got it. And in this world, that's fascinating, as we move into agentic applications being deployed at runtime or inference time,
Speaker Change: How does Elastic differentiate in that marketplace where you have companies like MongoDB and others that are likely to embed RAG capabilities in their architecture? What is the unique proposition that Elastic will have at that point in time? Thank you so much and that's it for me.
Speaker Change: Yeah, great question, Kash. So, you know, it's really important to be a complete platform and, you know, you are seeing that others are now trying to, you know, catch up with where we have been for some time. We saw this very early on, which is why, you know, over four years ago, we invested in building our own vector database.
Speaker Change: And since then you've seen that we also invested in building our own embedding models in building our
Thank you.
Speaker Change: you know, this, at the center of it all, this very very efficient vector database, but then everything else that you need to build...
a Gen-AI application soup to nuts.
Speaker Change: And we give you the choice to connect with whatever large-language inference model you want to connect to, you know, whether that is OpenAI or Anthropic or, you know, Cohere, or even if you want to use something that's open-source-based, right? You're seeing the tremendous amount of innovation in open-source.
Speaker Change: So that's why our platform is as popular as it is, because we are way ahead in terms of the functionality, just how efficient and scalable and complete our platform is for this kind of purpose.
Speaker Change: So, we intend to keep, you know, racing ahead and being ahead of the pack.
Wonderful. Thank you so much.
Speaker Change: The next question will come from Andrew Nowinski with Wells Fargo. Please go ahead.
Andrew Nowinski: Thank you. I want to ask a question on the 100,000 plus customers. So it looks like you, looks like Gen-AI added about 30 out of the 40 large new customers. And I'm wondering...
Andrew Nowinski: Are those existing customers that brought on a new GEN-AI workload and subsequently pushed their spend to over $100,000, are those new customers coming to Elastic and they're just starting at a much larger scale than your non-GEN-AI customers?
Thanks, Andrew. And just to clarify that a little bit...
Andrew Nowinski: As you think about that 270 customers who are using GenAI, who are 100k plus customers at Elastic, it doesn't necessarily mean that those are new customers. It could be that they're new to GenAI. So if you think about the population of 1,460 customers, and we added about 40 relative to last quarter, the 30 or so that were added that are specific to GenAI don't have to... The 40 and the 30 are not necessarily aligned. It could be that those 30 were a subset of the 1,460.
Andrew Nowinski: But I think what you're getting at and what I think is really important is that we are seeing significant traction with Gen-AI across the board and with our larger customers using it. Ash talked about those $5 million plus customers that we landed in Gen-AI and the three that we landed last quarter. So clearly we're seeing a lot of momentum with people adopting Gen-AI, both who are already users at Elastic and now they're adding Gen-AI to their use cases and also with some of these new use cases from customers where they're adding Gen-AI.
Overall, it's been a strong tailwind for the business.
Speaker Change: Okay, thank you. And then as it relates to those GENAI customers, do you see the cross opportunity to sell them observability as a higher percentage maybe of versus a non-GENAI customer just given that how much they've invested in these?
Speaker Change: I would think they'd want to monitor those more so than maybe any other workloads they had in their environment.
And that's it for me. Thanks.
Speaker Change: Yeah, that's a great question. And I don't know if, you know, Gen-AI applications are deserving of more monitoring or not. At the end of the day, and with the way most customers look at it is, you know, they think about the application. If it's an important application, they want to make sure that they monitor it so they can ensure it's uptime, they can, you know, detect failure conditions quickly. And from our perspective, our focus is always on cross-selling and upselling, right? Like we've talked about the land and expand motion.
Speaker Change: drives it more than others, but it's definitely a nice momentum for us.
Thanks, Ash.
Speaker Change: The next question will come from Jake Roburge with William Blair. Please go ahead.
Jake Roburge: Yeah, thanks for taking questions. Ash, sounds like the go-to-market transition is going pretty smoothly at this point. What were some of the changes that you were able to make to really stabilize that motion after Q1 and how are you thinking about the opportunity that new model unlocks for you moving forward?
Jake Roburge: You know, the focus with which we were managing the pipeline and the pipeline progression and the metrics that we look at, is pipeline getting created at the right pace that we have been used to in the past and is it progressing?
Jake Roburge: at the same pace that it used to in the past. And that extra inspection, the effort that we put into it, is now sort of...
Janesh Moorjani: and Ashutosh Kulkarni, Janesh Moorjani, Ashutosh Kulkarni, Janesh Moorjani, Ashutosh Kulkarni,
Janesh Moorjani: You know, a lot of the changes were about creating greater focus.
Janesh Moorjani: on our highest propensity customers, both in enterprise and in mid-market.
And that is allowing us...
Janesh Moorjani: to effectively have, you know, better conversations, richer conversations with customers and grow the deals in a much nicer way. And, you know, one data point that I'm particularly pleased about is the fact that in the first three quarters of this year, we've already closed more million-dollar deals than, sorry, we've added more million-dollar customers.
Janesh Moorjani: than we did in all of FY24. So to me, that's a really good sign about how our expand motion is working. And these are good sort of early data points of what we can continue to do as we focus on our execution.
Janesh Moorjani: That's helpful. And then I know you recently moved the licensing model back to more of an open source model. Can you talk about how that shift has impacted recent top-of-funnel activity, especially as it relates to the vector search and database opportunity?
Janesh Moorjani: where developers go to find open source options for various technologies.
Janesh Moorjani: And you know because we didn't have an OSI compliant license
Janesh Moorjani: Until, you know, we adopted the GPL license a couple of quarters ago, you know, that kept us out of some of those places.
Janesh Moorjani: So that has been a big reason why we did it and just the level of excitement of the community.
Janesh Moorjani: Suggest that we are on the right path. We're on the right track. So, you know in the the overall open source world
Janesh Moorjani: These kinds of payoffs happen over a period of time, but I'm very excited about what this means, because the more customers adopt...
Janesh Moorjani: Our vector database today, the more the opportunity for us to continue to drive this business with the tailwind of Gen-AI for many years to come.
Thanks for taking my questions.
Andrew Sherman: The next question will come from Andrew Sherman with TD Cowen. Please go ahead.
Andrew Sherman: Oh, great. Thanks. Thanks for squeezing me in. Congrats on the quarter.
Speaker Change: Eric, maybe just, Ash and Eric, sales and marketing growth of 9% was, it's below revenue growth, clearly. Sale and the headcount ads sequentially were a bit down versus the past couple of quarters. Maybe just talk about where you stand from a sales capacity standpoint as you close out this year and head into next year. How do you make sure you have enough?
capacity to keep this level of revenue growth higher. Thanks.
Ashutosh Kulkarni, Janesh Moorjani, Ashutosh Kulkarni, Janesh Moorjani, Ashutosh Kulkarni,
Great. Thank you.
Speaker Change: The next question will come from Srinik Kothari with Robert Baird. Please go ahead.
Thank you.
Srinik Kothari: Hey, yeah, thanks for taking my question and congrats for the great quarter. Hey, Ash, so you mentioned the advanced AI features, you mentioned logs, dbindex, more re-rank, vector search.
Srinik Kothari: and it's not all kind of consumption and expansion driven. Can you provide any insights into...
Srinik Kothari: And between AI observability functionalities, could you help us unpack that? What are the most consistent catalysts for customers moving up the tiering? And that's the follow-up for Eric.
Eric Prengel: Yeah that's a great question and you know the motion for us has consistently been to grow along a few vectors. One is you know obviously as more data grows like you know that drives more consumption so we grow with that. The second is to get more workloads onto our platform so that's the expand motion where we are always
Eric Prengel: and the other is about how we can use this for additional different kinds of use cases. We've talked about that on this call. And the third, like you talked about here, is getting customers to higher tiers. And the motion to get customers to the enterprise tier has been something that's worked really, really well for us, even in the past.
Eric Prengel: And they don't normally upgrade to a higher tier just for one feature, right? There are all kinds of different interesting capabilities that we have in the product that encourage customers to step up to higher tiers.
Eric Prengel: Those have been areas that have convinced customers to move up to higher tiers. So it's not one thing, but it's this combination. And our goal is to always give customers more reasons to move up.
Thank you very much.
and Ashutosh Kulkarni.
Eric Prengel: people have is you know really to focus on enterprise and commercial and that's where our business is focused. We've talked about it a lot that that's the part of the you know the this customer segmentation that we're focused on and we think that we've done a really good job with that based on the incentive structure that we have for our reps.
Great. Thanks a lot, Ash. I appreciate it.
Thank you.
Speaker Change: The last question will come from Joel Fishbein with Truist Securities. Please go ahead.
Joel Fishbein: Thanks for squeezing me in. Eric, you've touched on this a few times, but I really wanted to hone in a little bit on Q4 renewals. Can you just remind us?
Joel Fishbein: How big the renewal cohort is in 4Q and with your, you know, it seems like your capacity is there and the pipelines are there. So I'd just love to get a little bit more color around that. That'd be helpful.
Yeah, you know, the way I think about it is...
Speaker Change: Actually, this is a good time to mention this. In Q4, we're not going to give specific color around the dollars of renewals or otherwise, but one thing that's important to note is that, as you will recall from Q4-24, there was about $15 million of pull-forward business that was higher than seasonally normal. And so, you know, it's not specific to this topic, but there were $15 million that pulled forward. And as you think about that in the year-on-year compare, we're
Speaker Change: that's about a $10 million headwind total. And, you know, as you compare with last year, FY24, it's about a one, there's one day less in FY25 because we don't have the leap year. And so that's about a 1% headwind. There's also one to 2 million on FX. And we've talked about how we're modeling consumption. And given that we saw a few larger customers thrive and acceleration in consumption that we don't necessarily expect in Q4, we're not modeling that in our guidance.
Speaker Change: Okay, but is there a pretty big large customer renewal in 4Q?
Speaker Change: There's nothing that's out-of-whack abnormal with what we'd normally see in the fourth quarter of any year. All right, thank you for the clarification.
Yeah, of course.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Ash Kulkarni for any closing remarks. Please go ahead.
Ash Kulkarni: All right. Thank you all for joining us today. I'm excited to welcome Navam as our CFO for this next phase of our growth. I'm encouraged by the continued strong momentum across all aspects of our business, and we look forward to giving you an update next quarter. Thank you all.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.