Elastic N.V.

Good afternoon and welcome to the elastic fourth quarter fiscal 2024 results conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Anthony Luskri, vice president of investor relations. Please go ahead.

Thank you. Good afternoon and thank you for joining us on today's conference call to discuss elastic's fourth quarter fiscal 2024 financial results. On the call, we have Ash Kolkarni, chief executive officer and Janesh Morjani, chief financial officer and chief operating officer. Following their prepared remarks, we will take questions. Our press release was issued today after the closing market and posted on our website. Slides which are supplemental to the call can also be found on the elastic investor relations website at .elastic.co. Our discussion will include forward looking statements which may include predictions, estimates, our expectations regarding the demand for our products and solutions and our future revenue and other information. These forward looking statements are based on factors currently known to us, speak only as of the date of this call and are subject to risk and uncertainties that could cause actual results to differ materially. We disclaim any obligation to update or revise these forward looking statements unless required by law. Please refer to the risk and uncertainties included in the press release that we issued earlier today, including the slides posted on the investor relations website and those more fully described in our filings with the securities and exchange commission. We also discuss certain non-GAAP financial measures, disclosures regarding non-GAAP measures including reconciliations with the most comparable GAAP measures can be found in the press release and slides. The webcast replay of this call will be available on our company website under the investor relations link. Our first quarter fiscal 2025 quiet period begins at the close of business on Wednesday, July 17, 2024. We will be participating in the Bank of America global technology conference and the Baird global consumer technology and services conference during the week of June 3 and the Mizzou technology conference and the Rosenblatt technology summit during the week of June 10. With that I'll turn it over to Ash.

Thank you Anthony and thank you everyone for joining us on today's call. Elastic delivered yet another strong quarter and a great finish to the fiscal year. We once again outperformed against our guidance on both revenue and profitability metrics. In Q4 revenue grew by 20% and cloud revenue grew by 32% and we delivered an operating margin of 9%. We also continued to execute on our land expand and consolidate motion and we grew the number of customers spending over $100,000 with us to over $1,330. A year ago we kicked off FY24 by releasing our Elastic search relevance engine including our vector database and our sparse encoder model ELSER. Throughout this past year we continued to strengthen our position as the platform of choice for building real time generative AI or gen AI applications and I am happy to share with all of you that we now have well over 1,000 distinct paying customers using our vector database and retrieval augmented generation or RAC capabilities for building gen AI applications. I am particularly pleased with the strong gen AI adoption we are seeing among our largest customers with more than 145 of our customers with annual contract values of over 100,000 already using our gen AI capabilities. The number of gen AI customers in this category has more than tripled in the last year and this represents the fastest pace of adoption we have seen for any new major capability we have introduced in the past. We believe that in time every organization big and small will leverage the power of AI to transform their businesses. This is a significant market opportunity for us that will play out over the long term. Every customer interaction I had in Q4 involved customers actively seeking to explore and use gen AI for business benefit. Our customers are using gen AI to improve all kinds of business processes and to transform customer and employee experiences. This includes customers from newer digital native companies like RoboFlow to more mature enterprises including some of the largest companies in the Fortune 100. RoboFlow is using the elastic platform at tremendous scale for building innovative gen AI applications. The RoboFlow platform is used by hundreds of thousands of engineers to create data sets, train models and deploy computer vision models in production. RoboFlow uses the elastic vector database to store and search billions of vector embeddings at extreme speed. In Q4, within the enterprise segment, one of the world's largest financial services institutions expanded with a multiyear eight figure deal with elastic. The company uses elastic for search and observability in a center of excellence with multiple use cases across the business. The company is now using elastic's vector search capabilities in a strategic new application to provide highly accurate AI based real time recommendations for wealth managers to support the organization's most valuable clients. Not only will clients receive better service from wealth managers, but the managers will be able to double the number of clients that they can support. The company chose elastic over other vendors for this new generative AI use case because of our innovative technology, superior time to value and their ability to use existing in house expertise and technology to quickly deploy this cutting edge interactive application. Another example is a large international electronics company in Asia, which expanded their existing use of elastic and chose elastic for vector search and retrieval augmented generation or RAG to power their internal employee support system. The new LLM based Q&A system for the semiconductor division is expected to improve both employee productivity and product quality. Another large global financial services company signed an expanded deal this quarter to use elastic's gen AI capabilities for bank policy search, helping all employees find and understand the organization's complicated interconnected regulatory policies and procedures. This will increase efficiency and productivity across the business as well as help improve the overall regulatory posture. As the search AI company, elastic is uniquely positioned to help our customers capitalize on the transformative possibilities that generative AI brings. We bring together the precision of search and the intelligence of AI so customers can build innovative applications. The strong and sustained adoption we are seeing for our gen AI capabilities and our continuing pace of innovation that expands our competitive moat in this area reinforces our confidence in our ability to be a long term beneficiary of the massive wave of business transformation being brought about by gen AI. In the areas of observability and security, we are helping customers harness the power of search AI to make their organizations more resilient by bringing more intelligence and automation to their observability and security solutions. In Q4, our AI strength, including our AI assistance for observability and security, continue to help us displace incumbent observability and security vendors and consolidate customers onto the elastic platform. As customers look to consolidate onto a few platforms to reduce costs while increasing their pace of innovation with AI, elastic has continued to be a beneficiary thanks to our relentless focus on innovation and our obsession with customer centricity. For example, one of the largest global providers of insurance, annuities and employee benefits signed a new deal for elastic cloud on Azure. The company consolidated multiple tools onto elastic as part of its AI op strategy, allowing teams to be faster, more efficient and more accurate. Elastic was chosen over competitors because of her ability to ingest any kind of data, aggregate and correlate all data on one platform as well as automate observability using the elastic AI assistant. Now turning to products. In Q4, our team continued to deliver some highly anticipated capabilities to further expand our competitive mode in the areas of search, gen AI, observability and security. We launched the first of its kind search AI lake and announced the technical preview of our new elastic cloud serverless offering, which is built on top of the search AI lake architecture. Data lakes of the past offered low cost, durable data storage, but there was a compromise when it came to speed and the ability to search for relevant information across all of the data in the lake in real time. This has historically inhibited the use of data lakes for real time applications. Elastic's search AI lake is a significant innovation that addresses this need. It's an exabyte scale cloud native architecture with built in search and vector database capabilities. It is optimized for real time, low latency applications including rag, observability and security. Our search AI lake and the technical preview of our serverless offerings are currently available on AWS. Over the next couple of quarters, we plan to expand this offering to all three major cloud hyperscalers and across the major geographical regions, at which point we will make this offering generally available. We see this as an exciting new chapter for elastic cloud as it greatly simplifies the overall user experience and we expect this to be a growth driver for cloud in the coming years. In the area of search and gen AI, we delivered several new capabilities to further differentiate our offering, starting with significant enhancements to the elastic search open inference API. These additions include integration with coheres, vector embedding and re-ranking APIs, as well as the embedding API for open AI on Microsoft Azure. We also delivered improvements to our core vector database, including concurrent multi-segment graph search and native code optimizations that contributed to significant improvements to vector search query speed. We released vector search optimized instance types on both Google Cloud Platform and Microsoft Azure, completing our effort to support optimized hardware profiles on all three hyperscalers. We also released native support for custom learn to rank models, allowing customers to deploy trained models that improve search relevance based on user behavioral data directly in elastic search. In addition, Microsoft announced that elastic search was added as an officially supported vector store and retrieval augmented search technology for Azure open AI service on your data. Similarly, Red Hat also announced their support for elastic search as an officially supported vector store in OpenShift. In the area of observability, elastic has become a platform of choice for customers who are standardizing on open telemetry. Earlier in FY24, we donated the elastic common schema or ECS to the Cloud Native Computing Foundation or CNCF's open telemetry project as its standard schema for logs. And now we've open sourced our profiling agent under the Apache 2 license and contributed it to CNCF pending their approval. Additionally, we also delivered support for AWS Bedrock and the Anthropic Cloud 3 model in our observability AI assistant, improving the overall AI assistant experience and increasing choice for our customers. In security, we unveil our newest innovation, ATT&CK Discovery, powered by Search AI at the RSA Security Conference. ATT&CK Discovery correlates, enriches, sifts through, and prioritizes actionable intelligence from a flood of alerts using the unique RAAG capabilities of our platform, significantly reducing the effort SOC analysts have to put into the alert triage and investigation process. It presents the user with an ATT&CK view that focuses on the few relevant attacks that matter, as opposed to the underlying alerts, which can have way more noise than signal. On average, SOC teams receive thousands of alerts daily and spend many hours manually triaging these alerts, leaving a significant portion of potentially critical threats to slip through the cracks. By leveraging Elastic's AI assistant, ATT&CK Discovery, and other AI-powered ways to remediate or prevent issues, we enable security practitioners to do their jobs more efficiently, while helping our customers remain resilient with less cost and less effort. Our customers have told us that they see this patent-pending innovation as a true game-changer for the SOC. The SIM space is evolving again, this time to an AI-driven security analytics platform, and we are leading the charge in this evolution. Lastly, in security, Elastic Security Labs also delivered our LLM safety assessment, along with detection rules to help customers protect themselves from prompt injection attacks and other threats to the secure adoption of large language models and other GEN-AI technologies. In closing, I couldn't be more proud of our team and the consistent way we have executed our strategy while managing the business with discipline throughout FY24. We continue to strengthen our position as the platform of choice for building real-time GEN-AI applications, and we see increased momentum as customers displace incumbent solutions and consolidate onto Elastic for more and more use cases. Our customers, partners, and the developer communities are what drives our focus and fuels our innovation. As the search AI company, Elastic is exceptionally well positioned to take advantage of the transformative technology shift that Genitive AI is assuring in. With that, I'll turn it over to Janesh to go through our financial results in more detail.

Thanks Ash. Q4 was a great finish to the year, continuing our momentum of strong execution. I am pleased that we once again exceeded the high end of our guidance across all measures. As in prior quarters, we continued to see a number of customers consolidate onto the Elastic platform to realize strong business value and innovation, and we had yet another quarter of healthy cloud consumption. Total revenue in the fourth quarter was $335 million, up 20% -over-year as reported and in constant currency. Subscription revenue in the fourth quarter totaled $311 million, up 21% -over-year as reported and in constant currency. Within subscriptions, revenue from Elastic Cloud was $148 million, growing 32% -over-year as reported and in constant currency. Elastic Cloud represented 44% of total revenue in the quarter. We continue to see consumption patterns similar to the prior quarter. While we are not seeing the level of focus by our customers on optimization that we experienced some quarters ago, cost consciousness and operational efficiency remain important themes for them, which continues to be a reason why customers are picking Elastic as their preferred platform to consolidate workloads. Elastic Cloud revenue based on -to-month arrangements came in at 14% of total revenue. As we've shared before, Elastic Cloud revenue based on -to-month arrangements is driven mainly by a self-service motion in the SMB segment, which remains challenged. Professional services revenue in the fourth quarter was $24 million, growing 1% -over-year as reported and in constant currency. Although professional services may fluctuate across quarters based on the timing of services delivery, we do not expect it to vary significantly in mix over time. To add more context around deal flow during the quarter, we saw a healthy balance across our solutions and continued to maintain a similar solution mix in annual contract values versus the prior quarter. The quarter strength was also balanced across geographies where EMEA grew the fastest, followed by the Americas and APJ. Customers continue to make strong multi-year commitments to us, reflecting their preference for Elastic as they consider platform consolidation and reflecting our increasing relevance to their business. We also saw a higher volume of early renewals than we typically see in Q4, reflecting continued customer confidence and commitment to our platform. As a reminder, early renewals do not impact the timing of revenue recognition, so there was no revenue benefit from this in the quarter. Our strategy of focusing on customers with a higher propensity for growth is working as evidenced in our customer metrics. We ended the fourth quarter with over 1,330 customers with annual contract values more than $100,000. We are pleased with this quarter's customer additions in the greater than $100,000 category, as these larger customers provide a strong foundation for our land and expand motion as we build a multi-billion dollar company over time. The strength of this motion is also reflected in the number of customers over $1 million in annual contract value, which was over 165 customers at the end of fiscal 24 compared to over 140 such customers at the end of the prior year. As a reminder, we generally provide this data point of customers over $1 million ACV annually. Looking at customer additions more broadly, we ended the quarter with over 4,370 customers above $10,000 in ACV and approximately 21,000 total subscription customers. Our net expansion rate was approximately 110%, which was in line with our expectation for the quarter. As you know, this is a trailing 12-month measure, and the effects of the consumption optimization headwinds that impacted some of the prior quarters have now largely abated. Now turning to profitability and cash flow, for which I'll discuss non-GAAP measures. Gross margin in the quarter was .6% in line with our expectations. Our operating margin in the quarter was 8.6%, which was better than expected, driven by our revenue outperformance. Diluted earnings per share in the fourth quarter was 21 cents. Free cash flow margin on an adjusted basis was 18%, or approximately $60 million in the fourth quarter. We ended the year with adjusted free cash flow of $169 million, which was a overall operating profitability improvement. Finally, though we don't formally guide to cash flow, we are expecting adjusted free cash flow margin for fiscal 25 to be slightly above the non-GAAP operating margin for fiscal 25. This is similar to what we experienced in fiscal 24. Cash flow on a quarterly basis will fluctuate given timing issues and seasonality, so we continue to look at this primarily on a full-year basis. Turning to guidance. As we look into fiscal 25, we remain focused on execution and believe that we are well positioned for long-term growth and profitability. Our guidance philosophy remains unchanged from fiscal 24. We remain prudent in the near term and assume that current business conditions will remain stable. Our sales strategy remains focused on the enterprise and commercial segments, where we continue to believe that offering customers the choice on whether to on-premise or in the cloud is a competitive differentiator for us. Accordingly, we expect continued momentum across both self-managed and annual cloud subscriptions, depending on customer preference. As Ash mentioned, we are seeing strong customer interest around generative AI use cases and continue to believe this will be a significant growth driver for us in the long term. This market opportunity is significant for us, but customers are still in the early stages of the cycle. While we anticipate continued growth in fiscal 25, we are not modeling significant revenue contribution from gen AI this year. As we've shared before, fiscal 25 will be a year of focused investment for us as we reinvest some of our natural operating leverage back in the business, in particular towards the gen AI opportunity. These investments will be focused on engineering, sales, and marketing activities. With that background, for the first quarter of fiscal 25, we expect total revenue in the range of $343 million to $345 million. This represents 17% -over-year growth at the midpoint, both on an as-reported basis and in constant currency. We expect non-GAAP operating margin for the first quarter of fiscal 25 in the range of .2% to .4% and non-GAAP diluted earnings per share in the range of $0.24 to $0.26, using between $105.5 and $106.5 million diluted weighted average ordinary shares outstanding. For full fiscal 25, we expect total revenue in the range of $1.468 billion to $1.480 billion. This represents 16% -over-year growth at the midpoint, both on an as-reported basis and in constant currency. We expect non-GAAP operating margin for full fiscal 25 in the range of .7% to .3% and non-GAAP diluted earnings per share in the range of $1.35 to $1.47, using between $107 and $109 million diluted weighted average ordinary shares outstanding. In summary, we are confident that we are still in the early stages of our growth journey. We are pleased with our strong performance in fiscal 24 and are confident in our outlook for the first quarter and fiscal year. And with that, let's go ahead and take questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Our first question today is from Matthew Hedberg with RBC Capital Markets. Please go ahead.

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

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

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

Yeah, Matt. The way I think about it is as follows. If I think about fiscal 24, the year played out really nicely for us. We're very confident in our outlook for this year. To start with, as I think about the overall guidance framework and philosophy, we've not changed that from prior quarters. We continue to guide based on what we know and maintain that prudent stance. As you've seen, we initiated guide for the full year at 16% at the midpoint compared to the 19% we just reported for the full fiscal year 24. If I think about the breakdown of that, we expect that we will see momentum in both self-managed as well as cloud. Depending on customer preference, fundamentally, when we think about the progression in each of those, that's driven by customer choice. We think that's actually a competitive differentiator for us in terms of our ability to offer that choice. Also, in terms of the guide, we are not assuming meaningful revenue upside from Gen. AI either in self-managed or in the cloud. If I think about it from a segment perspective, our sales strategy continues to be focused on the enterprise and commercial segments where we are continuing to see a strong growth of cloud annual subscriptions. The SMB segment, we serve through our monthly cloud offering, we're expecting that that will remain challenged from a macroeconomic perspective. Those are some of the general puts and takes. In terms of Gen. AI, as Ash said, we continue to expect to see progression there, but we're not modeling any significant inflection at this point. I think that's a longer-term play for us.

Thanks, guys. The next question is from Brent Phil with Jefferies. Please go ahead.

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

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

Thanks, Ash. Janesh, just a quick follow-up. When you think about the 16% growth you gave for the year, are you embedding a little more headwind from macro and uncertainty in SMB, but are you changing assumptions or concertedism in terms of how you're setting that guide point?

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

Thank you. The next question is from Pinjalambora with JP Morgan. Please go ahead.

Great. Thanks for taking the questions and congrats on the quarter, guys. Ash, I wanted to ask you on obviously you're seeing a great uptake of the GENI capabilities. Can you talk about the ROI that people are seeing around the vector search? When we have done our own research, seems like when you move a lexical search to vector search, the cost shoots up by a lot, somewhere around 20 to 30x. Wondering anecdotally, what are you hearing around ROI in general and if people are leaning more on sparse encoding versus dense?

Pinjalambora, thanks for the question. We are seeing usage of both sparse encoded models like our ELSER model but also the use of dense vectors. What we are seeing is that the projects that are improving efficiency in the processes that involve supporting either customers, supporting both internal and external customers. The Fortune 100 bank that I talked about, what they are trying to drive is a faster way to deliver precise information on what's happening that affects the portfolios of their high net worth individual clients as quickly as possible. It's enabling them to reduce the time that it takes for their internal employees to provide that kind of information to clients. In effect, per wealth manager supporting more number of clients, but also the overall experience becomes better. When you look at those kinds of dynamics, the overall cost does tend to be more favorable although you are spending more on the technology those are the kinds of projects that we are seeing. We've had customers, whether it was Cisco or CBC bank, Stack Overflow, customers that I mentioned in past calls that have presented at our Elasticon conference events and talked about the specific metrics and benefits that they have seen. A lot of them had clear ROI. That's what we are seeing as a trend. Obviously, more and more customers as they go through that journey of ramping up their use cases, we expect that they'll see greater and greater benefits and that will show up in revenue over time for us. It's really exciting and I'm very excited about the adoption that we have seen, especially amongst our over 100K customer cohort because that's the customer cohort that effectively are some of our largest customers and as they adopt our GNI capabilities, that's going to be very, very meaningful for us in the long run.

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

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

Got it very helpful. Thank you.

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

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

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

Yeah, and Tyler, just to add to that, in terms of serverless, we believe that it gives more choice to customers. So the current Elastic Cloud offering, what we'll end up calling Elastic Cloud hosted, will continue to have the pricing model that it has today. It allows customers to have more control over their Elastic Search, the store itself and the technology itself. With serverless, it's an even more fully managed offering and it sits on top of the Search AI lake that I talked about. And the pricing model there will also be consumption based, but it will be based on metrics that we have seen from customers that they are interested in seeing from us in terms of pricing based on the amount of data ingested and the amount of data stored and queried. And so it's more choice for customers. It's going to unlock more types of workloads. It's going to give them more flexibility to optimize those workloads in ways that really allows them to do more and more with Elastic. So I'm very excited about what that's going to mean for the long term for Elastic Cloud. But as Janesh said, given that it will be generally available only after the next couple of quarters, we are not modeling any benefit from that in FY25.

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

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

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

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

Hey, maybe I'll start and Ash can add to that. So we were actually very pleased with the adoption that we've seen of our overall GEN. AI functionality in that cohort of customers that are more than 100k. As you know, that reflects our higher value customers. And that's the primary that pool is the primary driver of our business. And with more than 10% of those customers already using us for GEN. AI, that's one of the it's been just phenomenally rapid expansion in that category. If I think about the level of adoption there in terms of what that means and by way of a dollar contribution, it's still small. As we've said, most of our customers are still in the very early stages of adopting GEN. AI and relative to the overall opportunity that we see longer term. I think the revenue contribution in the near term is small and we'll continue to take some time to ramp. And that's the way we've built our model. As we said a few minutes ago, we've not built in any meaningful upside into the guidance from that. But in terms of the use cases for which those customers are adopting us, it's a variety of different use cases. Most of them tend to be more focused on their internal enterprise rather than things that they've exposed to external customers at this point just yet. But I think that's just the nature of where the industry overall is in terms of the adoption of GEN. AI. And so we've seen really strong traction across geographies and across different types of use cases in that population.

Thank you.

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

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

Hey, happy to take that. So, you know, fundamentally as I think about our land and expand motion, it's been working quite nicely. We've talked over the last several quarters about the investments that we've been making to drive that and the strength of the commitments and the strength of the consolidation that we're seeing onto the elastic platform. And that's all been playing out quite nicely. We obviously had a strong finish here in Q4 as well. And so fundamentally those drivers continue to play out and we're seeing strength both in the enterprise and commercial segments from that selling motion. And that's offset a little bit, as I mentioned, on the monthly cloud side by some of the broader macro weakness in the SMB segment. But as we move forward into fiscal 25, we're continuing to focus our sales efforts in enterprise and commercial and continuing to drive those expansion plays, particularly in areas like Gen. AI, in areas like platform consolidation. And I think that's actually working quite nicely for us. So we've been pleased with the performance of cloud so far. And we're looking forward to Q1 and the rest of the year.

Great. Thanks, guys.

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

Hey, guys. This is Matt Calidrian for Mike Seacost over at Needham. Thanks for taking our question. You guys have been clear that consumption will vary quarter to quarter. But is there anything you can call out as far as expected seasonality or shape to consumption in fiscal 25? And on that note, are you expecting 2Q to be as seasonally strong as this past year?

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

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

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

Awesome. Thanks so much.

The next question is from Rymoh Lenchow with Barclays. Please go ahead.

Thank you. And congrats from me as well. Like you can compare to everyone else, these are kind of amazing numbers and guidance. Ash, if you think about customer understanding of like, you know, where you guys are going to play going forward. And if you think about like, you know, all the other guys that are trying to say like, oh, I can do this, etc. Like what do you see in the customer conversations in terms of understanding like your offering versus the competitors offering? And where do you see like, where are you on that adoption course? They're coming out of that then.

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

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

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

The only thing I'll add to that is search has, we are seeing that it's becoming more interesting to customers than ever before because of Gen. AI. The willingness for customers to invest in it is something that I'm seeing a very interesting change in conversation on. And people are also looking to look at how elastic and search AI can change their observability and their security solutions for the better. So that's the reason why everything seems to be benefiting from the work that we've done in this really fundamental area of search.

Okay, perfect. Yeah, makes sense. Thank you.

The next question is from Etai Kidrun with Oppenheimer. Please go ahead.

Thanks, and nice results, guys. Ash, I was wondering if you can give us a little bit more color on the ramp profile of the Gen. AI customers. I mean, first of all, congrats on reaching a thousand paying customers. But if I remember correctly, you've already had at least a few hundreds of them that have been with you for more than two quarters. Is there any pattern of behavior and adoption of growth? Is there any color you can give us on how should we expect the usage here to grow? What are you seeing with customers on the pace by which they incorporate it? And then on the flip side, the pace by which those applications are used in driving more demand?

Yeah, it's a great question. And you know, if you think about it in terms of the customer journey, the first step is almost always the adoption, right? What are they choosing as the technology platform of choice? And that's where the thousand plus customer, stat really, that's how you should think about it. So it's the most appropriate leading indicator of the traction, as well as the hundred and forty five plus customers in the hundred K plus category, because those are the customers that tend to really, they're our largest customers. So that's where we see the greatest revenue potential in the future. Now, once customers choose us, you know, they start to go into the implementation phases. And we've had many customers that have, you know, put everything in production, their applications have ramped up. And many of those customers have come and talked at our elastic on conferences. I mentioned a few names earlier, whether it's Cisco or Stack Overflow, and so on and so forth. But other customers I mentioned during this earnings call, you know, the bank, the electronics company, etc., they're putting their technology into production and over time it's going to ramp. One of the things that you have to consider when it comes to generative AI is because in the context of an enterprise, enterprises tend to have much lower willingness to accept hallucinations than consumers would when you're using something like a chat GPT. So the natural amount of time that it takes customers to do testing and so on and feel comfortable with deploying these tends to be longer. So that's, you know, one of the reasons why you're seeing this slightly longer curve. But once once that kicks in, because there is clear ROI associated with it, and the customers that have spoken at conferences have talked about the ROI that they've seen, you know, in our opinion, this is a matter of when. And it's just a matter of timing, which is why we've not modeled it into our FY 25 guide, but we feel very strongly that this is going to be, you know, it's going to increase our total addressable market in a significant and meaningful way in the long run.

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

That's a great question. And you know, what we're seeing, especially in the security market, especially in SIEM, which is our, as you know, I've talked about this in the past, that's our core focus when it comes to security. The market is moving to where we have always been. We've looked at this as a problem, all about data, and as data volumes have been growing, it's becoming very clear to customers that you need a data platform in the back end that's able to ingest any and all kinds of security data, even from other security technologies. Like if a customer is using somebody else's endpoint security or cloud security products, we need to be able to bring that data in and correlate across all of it very, very quickly at speed. That's something that we're exceptionally good at. The second thing is using AI to automate all of the processes around it. The work that we've done with our AI assistants, the attack discovery work that we've done. The market is moving in this direction in this area of security analytics, and we've been beneficiaries of it. We've been able to displace incumbents in a very nice way, and we're seeing the results of that kind of consolidation play, the land expand consolidation play, playing out with the kinds of dynamics that you talked about. So I'm very excited about what this means, and we are leaning in on the -to-market and product side on this.

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

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

Very good. Good luck. Thanks.

The next question is from Srinath Kotari with Baird. Please go ahead.

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

Sure. Yeah, so the hyperscalers, they see a lot of value in partnering with us, because in the context of generative AI and all the spaces that we play in, the data tends to already be on Elasticsearch, just given our prevalence out there in the market. We provide a lot of choice to customers. And the fact is that just a vector database isn't enough. You need all of the other search capabilities that we've built over the last 12 years. And that's one of the reasons why the hyperscalers have worked very closely with us to integrate our technologies very nicely so customers get a great experience. The integration that I talked about in my prepared remarks, that makes Elasticsearch and our vector database functionality available through the Azure interface for building AI applications, which makes it easier for customers and it's going to be a faster way for us to get out there in the market. And we are seeing that also play out in deals like the one that you're referring to. So great things across all three hyperscalers.

Got it. And just a quick follow up for Janesh. In the continuation of the last question on GoToMarket, it seems like, of course, you guys are executing on displacing competitors and, of course, leveraging Gen.AI and also expanding partnerships. But the Gen.AI in particular, I mean, you have highlighted earlier that it's still in kind of early design phase. It's still very kind of looks like pilot programs. And then the new AI workload adoption is also evolving. So how do these initial kind of programs and data are kind of informing your internal models in terms of like anything that you can share from a financial standpoint? Like which innings does it look like? It's still kind of very design phase or things are kind of starting to move or inflect up.

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

Got it. Thanks

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

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

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

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

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

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

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

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