Elastic NV

NYSE:ESTC

Earnings Call Transcript 2022-Q4

[Operator]

Good day, and welcome to the Elastic’s Fourth Quarter Fiscal 2022 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Nikolay Beliov. Please go ahead.

[Nikolay Beliov, IR]

Thank you. Good afternoon, and thank you for joining us on today’s conference call to discuss Elastic’s fourth quarter and fiscal 2022 financial results.

On the call, we have Ash Kulkarni, Chief Executive Officer; and Janesh Moorjani, Chief Financial Officer and Chief Operating Officer. Following the prepared remarks, we will take questions. Our press release was issued today after the close of market and is posted on our website. Slides, which accompany this webcast, can be viewed in conjunction with live remarks and can also be downloaded at the conclusion of the webcast on the Elastic Investor Relations website, ir.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 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. Please refer to these risks and uncertainties included in the press release that we issued earlier today, included in the slides accompanying this webcast and those more fully described in our filings with the Securities and Exchange Commission.

We also discuss certain non-GAAP financial measures. Disclosures regarding non-GAAP measures including 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 for the next 60 days on our company website under the Investor Relations link. Our first quarter fiscal 2023 quiet period begins at the close of business, Friday, July 15, 2022.

During the week of June 6th, we will be participating in the Bank of America Global Technology Conference.

With that, I will turn it over to Ash.

[Ash Kulkarni, CEO]

Thank you, Nikolay. Hello, and welcome, everyone. I’m happy to be here with you today and share our Q4 and fiscal year 2022 results. I’m very pleased with our execution in Q4 and in FY22 overall.

Strength in the demand environment continued which fueled a strong quarter and fiscal year for Elastic. In Q4, revenue grew 35% year-over-year and 37% year-over-year in constant currency. And we once again saw robust customer acquisition and expansion metrics. We ended the quarter with more than 18,600 subscription customers, including over 960 with annual contract value of more than $100,000. And our net expansion rate was just under 130%.

Looking at the full fiscal year, revenue grew 42% year-over-year. Elastic Cloud did especially well with revenue of $298.6 million in FY22, up 80% year-over-year. Throughout the year, we saw customers continuing to adopt Elastic Cloud and grow with us, expand across use cases and grow consumption as their enterprise data continued to grow.

In Q4, annual commitments from new and existing customers to Elastic Cloud nearly doubled versus the prior year, reflecting the value that Elastic Cloud delivers to them. We saw growth across all geographies and increased mindshare at all levels of the business.

I would like to thank everyone who makes our continued momentum possible, from our customers and partners to our community, and most importantly, our employees. We are adding talent across the business and strategically hiring leaders in critically important roles.

I’m happy to share that we recently appointed industry veteran, Carolyn Herzog, as our Chief Legal Officer; and appointed Janesh Moorjani, as our Chief Operating Officer in addition to his role as Chief Financial Officer.

Now, I would like to talk a little bit about the fundamentals of our business. Our core strength is our data analytics platform powered by search that customers use every day for security, observability, enterprise search and a long tail of other use cases. Right now, we are in the early stages of addressing a $78 billion total addressable market.

Our business is driven by the convergence of several durable secular trends, the growth of digital transformation, ever-increasing data volumes, steady enterprise transitions to the cloud, the continued importance of the developer, the proliferation of enterprise applications and the unrelenting cyber threats.

In Q4, I met with customers, including ING, Telefónica, the Swedish Police, SWIFT and many others. As I spend time with customers, they tell me how they are leveraging Elastic technology to address the growing IT demands of their businesses from supporting security infrastructure needs to moving to the cloud. We are seeing the relevance of our platform continue to grow as we help customers transform data into insights and actions. It is these proof points from customers, coupled with our robust growth in cloud that excite me about the future.

As another indicator of our deepening customer relevance and the criticality of our solutions, our net expansion rate for Elastic Cloud has been increasing for the past several quarters and was over 140% in Q4. Based on the continuing customer adoption of all our solutions and our momentum in Elastic Cloud, we expect to achieve $2 billion in revenue in fiscal year ‘25, within the next three years, while also continuing to grow our operating margin over time. With that in mind, today, I’d like to share more with you about our three key areas of focus as we move into FY23: First, our durability of growth; second, our widening competitive moat; and third, our focus on profitable growth.

Starting with durability of growth. I will touch on our increasing cloud mix, our enhanced go-to-market motion and our collaboration with cloud hyperscalers. We finished Q4 with cloud representing 37% of total revenue, an acceleration from 29% in Q4 of FY21 and 23% in Q4 of FY20. Going into FY23, we continue to double down on driving cloud adoption and expect cloud to exceed 50% of total revenue by Q4 of fiscal ‘24, which is ahead of our prior target.

Cloud is the cornerstone of our investment strategy. Cloud drives better customer retention, expansion and easier new customer acquisition over time. We are positioned for success with multiple vectors of durable growth within our sales and go-to-market strategies.

Our bottom-up motion enables us to maintain developer relationships, while raising visibility with IT decision-makers and delivering greater value for our customers. And Elastic Cloud makes it easier than ever for customers to adopt our products and solutions directly and through partner marketplaces.

We also continue to execute on our land and expand approach as customers look to adopt more than one Elastic solution to support their business initiatives. Of customers with more than $100,000 ACV, we ended Q4 with almost 400 customers using at least two Elastic solutions and almost 100 customers using all three solutions. When customers adopt us for multiple use cases, it helps them consolidate their spend on to Elastic while significantly reducing third-party costs, something that we believe will serve us well for years to come. We see a significant opportunity for us to continue our land and expand motion for many years to come.

To further enable our growth engine, we are incentivizing our sales teams with a new compensation structure in FY23 with an explicit bias towards cloud. And we are continuing to build momentum with our cloud hyperscalers through product integrations and go-to-market motions. For example, we recently announced an expanded collaboration with AWS to accelerate momentum and build market and deliver seamless access for shared customers to Elastic Cloud on AWS, while leveraging AWS’ global footprint and breadth of services. Areas of collaboration include expanding competencies to ease migration to Elastic Cloud on AWS, simplifying onboarding to Elastic Cloud on AWS, and streamlining data ingestion and new go-to-market initiatives.

We also recently announced an expanded strategic partnership with Microsoft Azure, simplifying cloud operations, launching co-selling activities and making it easy to bring data from Azure services into Elastic. And in Q4, we joined the Data Cloud Alliance, led by Google Cloud as a founding member to solve the modern data challenges of enterprises and accelerate their path to value creation. Across all three cloud providers, we have grown revenue by more than 100% year-over-year.

And now, I’ll share more about our growing competitive moat. As our customers leverage Elastic to solve a multitude of business problems across their data, applications and infrastructure, this increases our strategic relevance in three main ways. First, we have found that once our customers adopt Elastic, our footprint naturally expands over time to support multiple use cases across their organizations. Second, one of our biggest differentiators is our ability to frictionlessly ingest, index and search data at scale with nearly 1.4 petabytes of incremental data being indexed and queried in real time in Elastic Cloud every day. To put this into context, that’s equivalent to 140 years of data generated by the Hubble Space Telescope coming to Elastic Cloud each day to be queried in real time. Third, we are able to help customers solve their biggest challenges with AI and machine learning powered analytics that deliver greater relevance, predictive insights and streamlined workflows. We are monetizing our AI and machine learning capabilities with our Platinum and Enterprise offerings. We have seen increased traction within our installed base of these higher tiered subscriptions, fueled by impactful features, including searchable snapshots and cloud orchestration.

Moving on to security. We are seeing strong demand for Elastic security, which directionally represented roughly 25% of ACV in FY22. Customers tell us that security continues to be top of mind as they prepare for and respond to growing global cybersecurity threats. A great example of this is a recent win with ConnectWise, an IT software provider. They use Elastic to power their network threat detection and response product. With the power of Elasticsearch, ConnectWise delivers full-scale managed security services, providing an improved experience for their partners and the MSP community.

Our innovations continue, as next week at RSA, we’ll be announcing new cloud security capabilities, complementing our strength in SIEM and endpoint security, which is the result of integrating the acquisitions we completed last year. This creates an end-to-end comprehensive security solution, which enhances our ability to upsell customers within security. And our strength is further solidified by market recognition.

This quarter, we were named a Strong Performer by Forrester Research in the Endpoint Detection and Response Wave. We are very proud of this accomplishment as we believe it demonstrates the tremendous progress we have made in bringing together the power of endpoint security and SIEM, something that we believe sets us apart in the security market.

We believe the convergence of Observability and Security creates robust cross-sell opportunities for Elastic. Observability and Security are two sides of the same coin, and we often find the data that organizations typically pull in to ensure their applications are up and running, overlaps with the data they pull in to detect indicators of compromise in their applications and systems.

Elastic Observability, our largest solution, directionally representing more than 40% of our ACV in FY22, enables customers with insight into their underlying organizational infrastructure to accelerate their digital transformation.

In Q4, we expanded business with a Fortune 50 technology company across Elastic solutions. This quarter, they doubled their usage of Elastic Observability to support their analytics and monitoring functions. They are using Elastic to collect and monitor unstructured logs from devices and deployments across their business. We continue to build and innovate our Observability solution, accelerating serverless application development life cycles for DevOps. Elastic Observability users can now collect traces from AWS Lambda, and correlate them with other observability data, including CICD pipelines for faster and more comprehensive root cause analysis.

Moving to Enterprise Search. We continue to help organizations solve their biggest business challenges with the power of search, significantly improving our customers’ user experiences. In Q4, we extended our business with the BBC, which uses Elastic to build internal services that help their journalists search thousands of historical archives of scripts and articles to assist in the creation of detailed and informed news content.

We also significantly expanded business with one of the largest financial services providers in Australia. They are using Elastic to support their anti-money laundering program, a business initiative requiring the ability to quickly search and store years worth of transaction data, leveraging searchable snapshots. This quarter, we enhanced our machine learning and natural language processing capabilities to deliver more relevant results for Enterprise Search use cases. We believe the Elasticsearch platform is truly the best foundation for addressing modern Security, Observability and Enterprise Search needs.

Now, moving on to my last key point, profitable growth. The markets we operate in are immense and growing, and we are poised to succeed, especially as we increase our focus on the cloud. We have demonstrated discipline in how we run the business. We achieved free cash flow breakeven in FY21 and non-GAAP operating margin breakeven in FY22. We have a strong balance sheet with a healthy cash position and we are advancing the business in a way that allows us to build a profitable and durable high-growth company for many years to come.

In light of the secular tailwinds that benefit our business, the high value we provide to our customers, our continued success with Elastic Cloud adoption and our track record of strong execution across all aspects of our business, we are confident that we can drive profitable growth over a multiyear period. As data continues to grow in volume and importance, we believe that the Elastic data analytics platform, powered by search, will be essential to our customers’ continued success. Hackers don’t take vacations. Companies do not shut down business-critical applications during challenging times. And end users will keep searching for the things they need and want. And with our focus on our durability of growth, our widening competitive moat and our profitable growth, we are confident about our business success in FY23 and beyond.

Thank you. And now, over to Janesh.

[Janesh Moorjani, CFO and COO]

Thanks, Ash.

We once again delivered strong results, capping off an outstanding year for Elastic. We delivered fiscal ‘22 total revenue growth of 42% year-over-year and Elastic Cloud revenue growth of 80% year-over-year.

In fiscal ‘22, the majority of our incremental revenue dollars over fiscal ‘21 came from Elastic Cloud. We exited the year with Elastic Cloud representing 37% of total revenue in Q4 compared to 29% in Q4 of the prior year. The momentum in Elastic Cloud provides a solid foundation to deliver strong growth for many years to come. And we achieved non-GAAP operating margin breakeven for the full fiscal year, which was a significant milestone, considering it was only a year after achieving free cash flow breakeven and fiscal ‘22 was only our third full fiscal year as a public company.

Let’s get into the results for Q4. Total revenue in the fourth quarter was $239.4 million, up 35% year-over-year or 37% in constant currency. Subscription revenue in Q4 totaled $221.7 million, comprising 93% of total revenue. Within subscriptions, revenue from Elastic Cloud was again strong at $87.7 million, growing 71% year-over-year or 72% in constant currency, driven by customer growth and usage. Elastic Cloud revenue grew 9% on a sequential basis versus the prior quarter. As a reminder, the fourth quarter had only 89 days compared to 92 days in the third quarter, and this represented a sequential growth headwind of over 3%.

The vast majority of Elastic Cloud revenue is derived from consumption-based arrangements. We saw continued strong consumption trends throughout the quarter in both, the annual and monthly formats. Monthly cloud revenue was once again approximately 17% of total revenue in Q4.

Professional services revenue in Q4 was $17.6 million, growing 35% year-over-year. We do not expect professional services to increase significantly in mix. Deal flow in the quarter was once again broad-based across our three solutions, driven by new and existing customer growth. An exciting data point for us was that customer orders for annual cloud commitments nearly doubled year-over-year in the quarter. We saw balance and strength in total deal flow across geographies, segments and industry verticals. Diversification is the strength of our business model and reflects the breadth and resilience of the solutions supported by our search platform.

In terms of year-over-year growth rates, APJ grew the fastest, followed by EMEA and then the Americas. To unpack EMEA performance given the regional conflict, we experienced healthy deal flow across EMEA throughout the quarter. We do not have any meaningful business in Russia, Belarus or Ukraine.

Looking at customer metrics, we ended Q4 with over 18,600 total subscription customers, with the vast majority of the additions in the quarter once again in Elastic Cloud. As we drive profitable growth, we are focused on acquiring and nurturing customers that are higher quality rather than solely focusing on quantity. This increases the overall dollars of consumption revenue both in the near term and the long term. To put this in context, of the customers we added in Q4, over 130 were annual contracts greater than $10,000, and this was the strongest net customer addition in this category in the past two years. We’ve provided additional historical data on this customer category in the accompanying slide deck.

We are pleased with our new customer additions and the pace of consumption growth in our customer base. It reflects the success of our strategy of focusing on customers with whom we can drive expansion over time rather than the very long tail of smaller dollar accounts who spend only a few hundred dollars a month with limited expansion potential.

We saw the success of this strategy also reflected in the count of larger customers. We had over 960 customers with annual contract values over $100,000 at the end of Q4 compared to over 890 such customers at the end of Q3. This reflects a record number of quarterly net customer additions for us in this larger contract category. And looking at the pool of customers with over $1 million in annual contract values, we exited the year with over 115 customers compared to over 75 such customers at the end of fiscal ‘21. These expansion trends reflect the strength of our product portfolio and our ability to drive expansion across the solutions.

Our net expansion rate in Q4 continued to be strong at just under 130% and was the same as Q3. Over the past few quarters, we have also begun to see the success of our cloud strategy reflected in our net expansion rate. Our net expansion rate for cloud has been increasing for the past several quarters and it was over 140% in Q4. This reflects the strong growth we’ve seen in Elastic Cloud, which we believe is a result of our investments, our partnerships and the benefits of the consumption model. We are very pleased with this metric and expect to continue to drive strong new and expansion motions in Elastic Cloud.

Now, turning to profitability for which I will discuss non-GAAP measures. Gross profit in the quarter was approximately $179.2 million, representing a gross margin of 75%. We continue to track well relative to our expectations. Looking ahead, Elastic Cloud will remain a modest headwind to gross margin overall as it increases in mix, and we continue to invest to drive growth. We also reached an important milestone by achieving operating margin breakeven for fiscal ‘22. I’ll talk more about our operating leverage and outlook when I discuss guidance in a moment. Loss per share in Q4 was $0.16 using 94 million weighted average shares outstanding.

Now turning to free cash flow. Free cash flow on an unlevered basis was negative $5.3 million in Q4, which was in line with our expectations. We finished fiscal ‘22 with unlevered free cash flow of $10.7 million, also in line with our expectations. We maintain a strong balance sheet. Q4 closed with cash and cash equivalents of approximately $861 million. We remain comfortable with our cash position from an operating perspective.

Before discussing our outlook for fiscal ‘23, I’ll briefly discuss our overall long-term framework. Elastic’s thesis is simple: as data volumes grow rapidly, we believe that every company will need a data analytics platform powered by search for Security, Observability and Enterprise Search. We see this play out every day. Our market opportunity remains massive, and we believe that market trends such as data growth and the convergence of Observability and Security play to our competitive advantage, and we remain unparalleled at scale. We are well positioned to deliver durable long-term growth, achieving $2 billion in revenue in fiscal 2025.

We are confident in our ability to achieve our growth objectives given the strength of our products, our significant momentum in Elastic Cloud, our healthy new customer trends, net expansion rate in cloud at over 140% and our investments in go-to-market. And as Ash mentioned, we now expect Elastic Cloud to exceed 50% of total revenue in the fourth quarter of fiscal 2024, which is ahead of our prior expectations.

Consistent with the theme of profitable growth mentioned earlier and continuing to demonstrate operating leverage in the model, we expect to expand operating margin by several percentage points each year in fiscal ‘24 and fiscal ‘25.

Turning to the outlook for fiscal 2023. We believe our products are core to our customer success, which helps us build a healthy business that performs consistently through both, upswings and downturns. To be clear, we have not seen any broader macroeconomic impact in our business. We will continue to monitor the environment to ensure that we operate our business in a disciplined way as we always have. We anticipate significant growth opportunities, particularly in the cloud, across new customers, renewals and expansion, and spanning our solutions segments, geographies and verticals.

With the strengthening of the U.S. dollar, at current rates, we expect currency movements to present a headwind to year-over-year total revenue growth of approximately 5% for Q1 and approximately 3% for fiscal ‘23. As you consider year-over-year growth in Q1, in addition to the currency headwind, I’ll remind you that the first quarter of fiscal ‘22 was an exceptionally strong quarter. It was the highest year-over-year growth rate across the last eight quarters for both total revenue and Elastic Cloud revenue, so it presents the toughest comparison point this fiscal year.

As I had said on the prior call, we expect the strong anticipated growth in Elastic Cloud will create near-term pressure on gross margin. We are not going to provide guidance on gross margin formally, but to help you with your models, I’ll share that I expect this to be an approximate 2% to 3% headwind to gross margin in fiscal ‘23. This is a near-term impact, which we expect will gradually resolve through economies of scale.

We expect to continue targeted investing in all functions in fiscal ‘23 to drive growth. You’ve previously seen us demonstrate disciplined investing, including in the most recent quarter. Some investments in fiscal ‘23 will be in sales capacity and some in engineering and other functions to support growth. Also, as I shared on our last call, we expect to travel and in-person events to resume in a meaningful way. Travel expenses will be higher than during the pandemic, but lower than pre-pandemic. This adds approximately $8 million to $12 million to operating expenses. We expect to offset these near-term effects on gross margin and the return of travel through natural operating leverage and expect to remain operating margin breakeven in fiscal ‘23. Some of the expenses are weighted in the model early in the year, while revenue ramps for the year, and consequently, we expect Q1 to be the low point for our operating margin.

In terms of free cash flow, we expect to continue to have slightly positive unlevered free cash flow in fiscal ‘23 similar to fiscal ‘22. Finally, our overall guidance philosophy stays unchanged compared to the fourth quarter. We continue to guide thoughtfully and without excessive conservatism.

With that background for the first quarter of fiscal ‘23, we expect total revenue in the range of $244 million to $246 million, representing 27% year-over-year growth at the midpoint. On a constant currency basis, we expect total revenue growth of 32% year-over-year at the midpoint.

As I mentioned earlier, this is based on a tough comparison point from last year. We expect non-GAAP operating margin in the range of negative 3.8% to negative 2.8%, and non-GAAP net loss per share in the range of $0.20 to $0.16 using between 94 million and 95 million ordinary shares outstanding.

For full fiscal ‘23, we expect total revenue in the range of $1.08 billion to $1.086 billion, representing 26% year-over-year growth at the midpoint. On a constant currency basis, we expect total revenue growth of 29% year-over-year at the midpoint. We expect non-GAAP operating margin in the range of 0% to positive 0.5%, and non-GAAP net loss per share in the range of $0.36 to $0.28 using between 95 million and 97 million ordinary shares outstanding.

Before we open the call up to Q&A, a final point. As you know, as a requirement of accounting rules, we have been presenting license revenue on the income statement as one component of total subscription revenue. Given our momentum in Elastic Cloud, license revenue was less than 10% of total revenue in fiscal ‘22, and is expected to be less than 10% of total revenue in fiscal ‘23. Accordingly, starting this quarter, we will no longer present license revenue on the income statement and will simply present total subscription revenue and professional services revenue. We will continue providing the supplemental table detailing revenue from Elastic Cloud, other subscriptions and professional services.

In summary, we had an outstanding fiscal ‘22, with strong revenue growth and incredible cloud momentum, while achieving operating breakeven. We believe that we are well positioned for long-term durable growth and profitability, and we look forward to another strong year ahead.

And with that, let’s go ahead and take questions. Operator?

[Operator]

[Operator Instructions] The first question comes from Ittai Kidron with Oppenheimer. Please go ahead.

[Ittai Kidron, Oppenheimer]

Thanks. Hey guys. And congrats, Janesh, on your promotion to a COO. Double the salary, good for you. I guess, I have a question for you, Ash, just kind of thinking about the environment. Janesh clearly said that you don’t see any change to the business environment. But, what are you hearing from customers? Clearly, there’s voices, especially in Europe, but I would suspect we’ll get here in the U.S. as well, where macro is still very much a concern. And how much is that starting to impact customers’ psyche and how they’re thinking about their investment plans for the next coming year?

[Ash Kulkarni, CEO]

So incidentally, I spent a fair amount of time in Europe just this past quarter. I was there a couple of times, met with many customers. And the demand for our offerings remains very strong. What I heard when I was meeting with customers like SWIFT and ING and so on, fundamentally, the use cases that we are primarily used for, whether it’s security, whether it’s observability, even certain aspects of Enterprise Search when you’re dealing with Tier 1 applications, Security and Observability tend to be much more mission-critical, much more front and center of customers’ minds. And they are the kinds of use cases that tend to be very important, not just in good times, but even when you are dealing with difficult situations like what you have right now with Russia and the aggression in Ukraine. So I found the interest and demand for Security, the interest and demand for Observability, especially for Tier 1 applications, which is where we typically tend to be used to be very strong.

And so, that is what I believe is the fundamental strength in the business just in terms of the use cases that we have.

[Ittai Kidron, Oppenheimer]

Very good. And then, maybe as a follow-up on the comp, you talked about the change to the comp plan to be more biased towards cloud. Maybe you could talk about some of the details around this. And how do you feel has your sales force adjusted to this change? Is there potential risk in some gaps or kind of in a transitional period from one component to another where potentially some of your performance kind of for a quarter or two takes time for it to find its footing.

[Ash Kulkarni, CEO]

Yes, it’s a great question. And this is something that I had mentioned even in my last earnings call, right, that cloud -- I believe very strongly, we all believe that cloud is our future. That’s really where our customers are taking us. It’s good for customers. It’s good for us. And so, even the sales teams have been not only embracing this, but really driving this very wholeheartedly.

As Janesh mentioned, and I talked about this as well in Q4, our customer commitments to annual cloud almost doubled. So, that should be an indication of the way in which our field is really leaning into this. And that gives me a lot of confidence that this is not something that we are going to have to really work hard through. This is something that the field is embracing wholeheartedly because it’s just generally right.

In terms of the compensation structure and the compensation plan, we are definitely biasing towards cloud. So, when you sell cloud, there is definitely a -- the compensation is higher and the field gets it. Because of that, there is more interest. We have done effectively sales incentives in the past around cloud, and what you saw in Q4, that’s the kind of reaction that we know as we go into FY23, we want to drive throughout the year and into the future. And that’s really what gives me confidence that cloud is going to continue to be the source of strength for us going forward.

[Operator]

Our next question comes from Raimo Lenschow with Barclays. Please go ahead.

[Unidentified Analyst]

This is Vinod [ph] on for Raimo. Thanks for taking my question. And I appreciate some of the new disclosures, and that’s kind of where I want to start. Can you give us a sense of maybe some of the adoption of Elastic’s newer Observability solutions like APM or infrastructure? And just talk about the adoption of these solutions over the last couple of quarters versus some of your more established products when they’re a little bit earlier in the adoptions life cycle?

[Ash Kulkarni, CEO]

Yes. Raimo, that’s a great question. And we don’t break out the subsegments because, as you know, typically, our customers tend to use us for one use case, even within Observability, and then they tend to grow from there. Our pricing model is such that we don’t differentiate. We don’t have separate SKUs for infrastructure monitoring versus APM versus log analytics.

Now, having said that, as you can imagine, the first solution and probably the most mature aspect of observability where we first started was log analytics. So, the typical use case for Elastic and Observability starts with log analytics. But I’ve given some insight last quarter into just the fact that, with APM, we’ve been seeing significant expansion even with infrastructure monitoring. As you’ve seen some of the capabilities that we have delivered around CICD monitoring, Kubernetes monitoring, all of that is something that customers naturally tend to adopt. And we are seeing good success in all of them. But we are not breaking down sort of the details because, frankly, that’s not our model. Our model is to get customers to start using in one small way and then just quickly adopt more and more. And where that gets seen best is in our cloud expansion, our net expansion rate in the cloud. The 140% that Janesh and I talked about, that comes from that constant expansion motion. And like I’ve described in the past, this is much easier in the cloud than with self-managed, and we see it in a much more pronounced way there.

[Janesh Moorjani, CFO and COO]

And if I could just add to that, Vinod, one of the data points that we had mentioned around this previously also was talking about the momentum in cloud, particularly with respect to Observability, we now have more than 2,000 customers on APM in cloud as an example. That’s just another kind of data point that helps indicate the momentum that we are seeing there.

[Unidentified Analyst]

I appreciate that. Thanks. And then just one more for me. You have -- I think if I heard correctly, it looks like over half of your $100,000 ACV customers are still using one product. Can you maybe talk about some of the strategies you can employ to maybe cross-sell more solution to them? And what’s kind of been the main obstacle that’s prevented some of these big customers from adopting more solutions?

[Ash Kulkarni, CEO]

Yes. So, I’ll touch upon that. You’re absolutely right that there’s a lot of opportunity for us to continue the expansion motion. And it’s more than just two, right? So, our goal is to get our customers to use all three of our solutions. And in time, as we have even more solutions in the future, that’s the land and expand motion that we want to continue driving.

Our strategy is very simple. It all starts with the product. So, in the product itself, we want to make sure that we make it very easy to allow the customer to use the data that they’re bringing into our platform for more and more use cases. So, the investments that we put into building out Elastic Agent, which provides one single mechanism for ingesting data that can be used for either observability purposes or for security purposes. That’s the kind of mechanism that makes it easier for customers to start using the data that they’ve brought in for more than just one thing.

We also then have our pricing model, which really makes it easy for you to start trying out our next solution and the next solution after that without having to have a purchase conversation with somebody from Elastic. It’s very frictionless. You just start using it. Every peer has capabilities associated with all solutions. And really, that product-led growth model is the primary factor that we drive it. And then, it becomes easier for our sales teams to come in and have the conversation on how you can expand even more, how through commitments, you can get a consolidated spend on to Elastic and reduce costs in other places. That’s what ends up helping us displace incumbents.

Now, in terms of how this plays out, obviously, if a customer is using some other technology for a part of their observability or security solution set, it takes a little bit of time to make that transition, but it’s the pricing model and the product, and then coupled with our go-to-market, that really makes that all seamless and easy.

[Operator]

The next question comes from Kash Rangan with Goldman Sachs. Please go ahead.

[Kash Rangan, Goldman Sachs]

Congrats on the quarter, and congrats to Janesh as well. Ash, I’m curious to get your take on the transition to the cloud. As you move to the cloud, what are the new use cases and new kinds of opportunities that are available to Elastic that were previously not available with the self-managed on-premises approach?

And also if you could talk about the specificity of the cloud architecture that will permit you to do things in the future for your customers that is just simply not -- I guess both these aspects are somewhat interrelated. But I just want to understand what the cloud structurally does for Elastic that on-prem just couldn’t do it from any perspective that you’d like to describe.

[Ash Kulkarni, CEO]

Yes. Kash, that’s a great question. And when we look at the usage of the Elastic data analytics platform, as you know, the fundamental strength that we have is search and the kinds of use cases that we typically tend to drive are ones that tend to be more mission critical, more operational in nature, Security, Observability, Enterprise Search. What we see in the cloud is the use cases themselves are very similar. However, the rate of adoption, the rate of expansion, the ability to try out new capabilities, the ability to expand from one use case to another tends to be much more rapid. And that’s reflected in the net expansion rate difference that we highlighted this quarter.

And it’s really all about the fact that when you are in the cloud, you don’t have to worry about hardware deployments and you don’t have to worry about purchasing new licenses from Elastic. It’s a consumption-based model. It’s a model that naturally has no shelf there, and customers tend to just use the capabilities that they need, grow with the platform and then, automatically, they are paying us for that usage. So, it tends to be much more frictionless than anything in self-managed, especially the fact that they don’t need to worry about monitoring and managing the system, which seems to be a big advantage in the cloud. And we’re seeing all of that reflected.

Now, in terms of the architecture, to your point, you’re absolutely right that there are things that you can do in the cloud that tend to be even more differentiated than anything that somebody could do on-prem or in self-manage more in their own data centers. A great example of that would be utilizing the latest and greatest infrastructure and hardware. As an example, the Graviton-based systems from AWS, the latest hardware system is based on newer AMD chips from GCP. We are able to utilize those in much smarter ways which are -- which tend to give customers greater advantages in the performance and scalability of the system, and they find that to be much more beneficial than trying to do everything in self-managed mode themselves.

So, we are seeing similar use cases, but much faster adoption and growth.

[Operator]

The next question comes from Matt Hedberg with RBC Capital Markets. Please go ahead.

[Matt Hedberg, RBC Capital Markets]

Thanks for my questions. Congrats on the results too. Ash, you’re clearly all in on the cloud and the AWS news two weeks ago was great to see. Can you talk about how big of a deal that enhanced collaboration is with them? And maybe how customers -- or what the go-to-market initiatives are and maybe can customers use AWS cloud credits to purchase Elastic Cloud?

[Ash Kulkarni, CEO]

Yes. It’s a great question. And look, the fact of the matter is that when you have alignment all the way from the executive level to product level integration to engagement and collaboration in the field, that’s a great thing. And this has taken us time to get to the state, but we are very happy with where we are.

In terms of the announcement that we made, there’s a lot of work that we’ve been doing in the background in terms of deeper product integration. A great example of that would be the fact that now if you’re a customer who has lots of commitments on AWS, you can actually start the trial of Elastic directly from the AWS marketplace. And then you can immediately start to consume it from there and pay for it using your AWS credits. We’ve been doing more in terms of engagement with AWS selling teams to partner and jointly drive go-to-market activities.

And even at an executive level, when we think about the overall relationship, it’s gotten obviously much better. So, we see this as a really good thing for the long term. At the end of the day, customers are looking for Elastic on all clouds. And a lot of customers run Elastic on AWS. That’s great for us. It’s great for AWS. And it’s wonderful for the customer.

[Matt Hedberg, RBC Capital Markets]

No, that’s really good to hear. We’ve covered the stock for a long time, and it just feels like it removes one of the overhangs on the stock historically. It’s really great to hear, Ash.

And then, Janesh, maybe just a quick one for you. There’s a lot of good things to talk about from the results. But I think the biggest news from my perspective, too, is the $2 billion guide -- revenue guide for fiscal ‘25. When we think about the bridge to that, your fiscal ‘23 guide calls for about $220 million of net new revenue. But to get to the midpoint of from ‘23 to $2 billion in fiscal ‘25, implies about $920 million of net new revenue between fiscal ‘24 and fiscal ‘25 or really an acceleration of growth. Can you help us maybe think about the bridge of how we get from your midpoint of your fiscal ‘23 guide to $2 billion?

[Janesh Moorjani, CFO and COO]

Hey Matt, happy to. So, first off, just as I pause and reflect on fiscal ‘22 for a moment, obviously, a very strong year for us as we capped out with 42% year-over-year growth for the full year with cloud growing 80%. And in terms of the confidence for the future, there’s a number of things, right, beyond the -- just beyond the massive dam, I think it comes down to a couple of things. First, a strong adoption of our products. Ash talked about this at length in his prepared remarks and some of the earlier questions. And customers just show us how they are using us in mission-critical use cases at scale and they are ramping their use of Elastic even further.

And then the second piece for us is just the tremendous momentum in Elastic Cloud. If you think about it, it’s now 37% of the business, growing 71% year-over-year. And we just see this momentum continuing. And the sheer heft of that will start to impact the model overall. As you heard us talk about earlier, we expect that cloud will be more than half of the business by Q4 of fiscal ‘24, which is significantly earlier than we expected.

So, when I look at all of those pieces together, and together with the net expansion rate in cloud, which has been increasing and now stands at over 140%, all of that gives us confidence in the future.

And then, to back that up, we made heavy investments in fiscal ‘22, as you know, to capture this market opportunity. And as you’ve seen, we’ve been delivering results against those investments, and those investments are ramping quite nicely. So, we think that all of those elements come together in terms of the view behind the $2 billion in three years.

And to put the growth in context a little bit in terms of thinking about the bridge to fiscal ‘23 and then the couple of years after that, we are guiding to 29% constant currency here in fiscal ‘23 for the full year. And it’s obviously still early in the year. We’re off to a great start. If you think about the Q1 guide, it’s at 32% constant currency growth, and that’s against a tough comp.

And so, it’s still early in the year. We feel very good about the outlook and the growth implied for fiscal ‘24 and ‘25. We’ve had a great track record of doing what we say we will do, and we’re just staying focused on the opportunity ahead of us and staying focused on execution.

[Operator]

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

[Unidentified Analyst]

This Yitchuin [ph] taking a question for Tyler here. Congrats, Janesh, on the new COO title as well. Nice close to the year here. Ash, you mentioned some company that has better use, especially the Fortune 50 company that doubling usage in the quarter here. But I’m curious if you see any weaker usage or how has some of your highest growth customer in the past year trended in the quarter here given some of the commentary among some of your peers that saw slower momentum?

[Ash Kulkarni, CEO]

Yes. Thanks for the question. No, we have not seen any indication of slowdown in the demand and the consumption. As I mentioned both, in my prepared remarks and Janesh did as well. And I think part of what I want to make sure that everyone sort of recognize is just the criticality of the kinds of use cases that customers use Elastic for. When you think about security and the analytics observability use case that that particular customer is using us for, they are using us to observe and make sure that their Tier 1 applications are up and running. It’s the logging infrastructure that ensures that every major Tier 1 application that they are -- that they care about, these things are mission-critical to them. So from their perspective, as data grows, they need to use Elastic, and they continue to use Elastic. And that’s not a place where we see customers trying to make any optimization. So, that is an inherent strength for us, and it’s continuing.

[Unidentified Analyst]

Got it. Janesh, just touch on some of your total customer accounts being slightly slower than before. It’s actually slowing for a few quarters, too. Just wondering, have you seen some of your smaller customers like change to the open source version, either just how your total customer expectations are trending?

[Janesh Moorjani, CFO and COO]

So, as I mentioned earlier, this was actually part of a strategy that we initiated. So as we drive profitable growth, we’re focused on making sure that as we acquire customers and nurture those customers that they are higher quality and not focus solely on quantity. And we’ve been evolving this. And so we’ve now started to see the benefits of the strategy.

What that does for us is it allows us to drive higher consumption revenue, both in the near term as well as in the long term because these customers are just more likely to expand their spend with us over time. We qualify them better upfront. We understand their needs better. We engage more deeply with them from a technical standpoint. We do all of the things that nurture and encourage that growth. And then, we see that growth and expansion over time. And it’s one of the ways in which we are staying focused on more profitable growth. And I think this will help both, our customer acquisition costs, as well as drive just higher lifetime values. So, this is something that we initiated. And that’s why we provided the additional information on the customer account more than $10,000 of spend. And you will see that in Q4, that was a very strong number, the strongest in at least a couple of years, which then points to you that -- points you to the fact that most of the reduction really came in the really small dollar accounts, which is really what the intended strategy was. So, the strategy is playing out as we expected, and we are quite happy with it.

[Operator]

The next question comes from Brent Thill with Jefferies. Please go ahead.

[Brent Thill, Jefferies]

As it relates to the go-to-market into the next fiscal year, can you just walk through some of the changes that you’re making? Is it just the incentive on cloud? Are you now making additional tweaks? Can you just compare and contrast what has happened in the past to how you think it looks like going forward?

[Ash Kulkarni, CEO]

There are a couple of things that we are focused on. So, first and foremost, it’s just the compensation. At the end of the day, we want to make sure that our sellers, when there is a question in the customer’s mind on what is a better answer that our sellers are focused on cloud, they position the cloud and lead with cloud. And towards that end, we are making sure that they are incentivized to do so. So, the compensation for selling cloud is going to be higher, is set to be higher than the compensation for selling self-managed. That’s the first thing.

The second thing is consumption, like we’ve talked about, is something that is a really great thing for us. As customers come on to our platform, they tend to consume more and they just grow with the platform with more use cases. And we’ve now made it possible for our sellers to also have visibility into the consumption of their accounts, so we can make sure that the entire customer journey is something that they drive with a lens of consumption. We believe that’s going to be really good for the customer and how we support them through their growth. And for us, in the long term, that’s what’s going to be, again, a big aspect of our growth in the cloud.

[Brent Thill, Jefferies]

Okay. Janesh, I know you mentioned multiple times you haven’t seen any of the macro factors. But a lot of companies in your space are starting to see it. When you think about these kind of long-term aspirations that you put in, are you baking enough kind of wiggle room if the macro gets tough? Or are you just baking in, hey, we’re going to hit this revenue target based on current macro because I don’t think anyone is believing that things are going to stay what we’re seeing as right now. So, can you just give us a sense of what you factored in from a macro assumption?

[Janesh Moorjani, CFO and COO]

Yes, Brent, happy to. So as we said, we’re not seeing these signals in any of our demand patterns today. And as I think about the $2 billion goal, we actually have multiple thoughts to getting there. If there is a downturn, it obviously depends on the severity and the duration. But fundamentally, we’re in very strong market areas. And Ash touched on this earlier, where our solutions are sticky, and our core demand drivers, they stay intact even during a downturn. Data volumes keep growing, threats don’t stop, apps and infrastructure don’t shut down, customers are still spending on security and observability. And I think this differentiates us from many of the other software companies out there, including some of the ones that are a little bit more generic in their approach.

So, we actually feel very good about the long-term outlook. And as I said, we have multiple parts to getting there. The momentum that we’re enjoying on Elastic Cloud, the expansion that we’ve been experiencing, the strong customer feedback, including from Europe, as Ash described, I think all of those things play nicely to our advantage over the long term. So, we feel pretty good about the outlook we are providing here.

[Operator]

The next question comes from Kamil Mielczarek with William Blair. Please go ahead.

[Kamil Mielczarek, William Blair]

Great to hear about the broad strength. Just kind of a higher level one for Ash. As you think about your three core product suites, there’s a wide range of functionality that underlies this area. And Observability alone, you APM, infrastructure, [indiscernible] loss management, et cetera. As you look toward that $2 billion target, how do you think about prioritizing R&D investments across the product portfolio and possibly leaning into areas of strength and security, while sharing you’re not under-investing products where you historically had big competitive advantages such as management?

[Ash Kulkarni, CEO]

Yes. So that’s a great question. And one of the greatest strengths that we have is the fact that we have a very well vertically integrated platform. So, effectively, all the data is in Elasticsearch, Kibana is our visualization layer for everything, our mechanisms for ingesting data are very similar. It’s Agent -- Elastic Agent is what is used to bring in data for all of our use cases. So, fundamentally, we get a lot of leverage just from having that vertical integration. It’s really something that also simplifies the overall stack and overall technology. And then, when we look at our opportunities, the teams within the R&D organization for Elastic Observability and Security and Enterprise Search, they really -- their goal is to make sure that they are delivering the best solution in the market for their use case.

And when it comes to the overall opportunity, the market is big enough that we believe that we can actually do well with our platform in all three, and we don’t see a need to compromise on one or the other. And the natural leverage that we get from the vertically integrated platform, again, when it comes to overall R&D efficiency, ends up being a big source of strength for us.

So, I don’t know whether I would look at it as us having to compromise on one solution versus another. It’s more about how do we make sure that we are investing appropriately with the right efficiency that we have in R&D to drive for leadership positions in all three of these solutions. And over time, just given the fact that it is a data analytics platform, it is powered by search, we see customers using us for a long tail of other solutions. We were effectively led to Security and Observability based on what we saw our customers doing with our platform.

So, as you look forward, as you look ahead multiple years, and I would fully expect that there will be other solutions that emerge that are just as mission-critical that are just as interesting and have large total addressable markets that we might choose to enter into. But all of them will have one thing in common, which is this notion of building on top of a vertically integrated stack. That’s a huge element of strength, and we intend to retain that.

[Operator]

Our next question comes from Rob Owens with Piper Sandler. Please go ahead.

[Rob Owens, Piper Sandler]

I was hoping you could drill down into Security and the use case that you’re seeing more prevalent right now. Is it more of a SIEM replacement cycle that you’re seeing, or is it XDR? And I know those two categories are emerging, but you do have the end game capabilities. So I want to understand where you’re seeing that near-term momentum. And if you’re still seeing a line of demarcation between where SIEM starts and stops and where XDR is? Thanks.

[Ash Kulkarni, CEO]

That’s a great question. We see tremendous strength in SIEM and continued opportunity there. One of the trends that we are seeing in the market is just given the overall environment around cybersecurity, there is a real serious concern amongst organizations to make sure that they’re not missing any threats. And what that means is just a need to make sure that they are storing all data, analyzing all their data and not taking the chance that there might be something hidden in some aspect of the data that could downstream turn to be a big issue.

So, SIEM is front and center. We see customers developing new SIEM capabilities, expanding their SIEM capabilities. The fact that we can store massive amounts of data at scale is a big differentiator that results in us being able to displace incumbents. We are seeing a fair bit of that. So, SIEM is definitely the foremost aspect that we are leading with, in Security.

Our EDR and XDR solution, as you know, is relatively new. We launched that XDR capability late last calendar year. We’ve been seeing a lot of good traction with that. And even analyst recognition. I talked about the fact that Forrester recognized our EDR functionality in the Wave report that they wrote recently, and we are seeing that pickup within our customer base. But it is relatively newer, and we are seeing the kind of execution that you would expect where we lead with SIEM typically, and then you often see customers starting from there and starting to use some EDR capabilities, expanding to XDR, using us across multiple threat vectors. Incidentally, next week at RSA, we are going to be announcing our cloud security functionality. We made a couple of acquisitions last year, and that functionality is now coming into the platform as well. So, that will be another interesting area, gives us the ability to now talk about XDR across cloud threat vectors as well, which is also going to be very exciting.

[Operator]

Our next question comes from Koji Ikeda with Bank of America. Please go ahead.

[Koji Ikeda, Bank of America]

I wanted to ask about the cloud net expansion rate. 140% plus here. But you also noted that it’s been expanding over the past several quarters. So, I was wondering if you could quantify that a little bit. Are we talking about 1 to 2 points a quarter of expansion, or is it maybe step functions of expansion in that cloud net NER rate? And I think you answered most of my questions already with your answer to the use cases with the cloud. But I just wanted to be sure, is there anything else to call out with the cloud that is driving that expansion, that nice expansion in that NER rate for the cloud?

[Ash Kulkarni, CEO]

Hey Koji. So, I missed the second part of your question, but - and maybe you can repeat that. But just to get to the first part of it, we have been seeing a steady increase. It’s been increasing a few percentage points every quarter. And as you know, it’s computed the same way as a trailing 12-month metric, just like our regular net expansion rate is. So, it will be slow moving, but it’s been trending up steadily a few points every quarter for the past few quarters. And I’m happy to take the second part of your question as well.

[Koji Ikeda, Bank of America]

Yes. It was actually kind of a follow-up to Kash’s question about use cases in the cloud. You guys mentioned the ability to try things out and things like that. So I just wanted to make sure, is there anything else to call out with the cloud or use cases with the cloud that is kind of driving that expansion rate there?

[Ash Kulkarni, CEO]

Yes. We don’t see the long tail of use cases, as I usually think of them as being the source of the expansion. The source of the expansion is happening just within the three primary use cases that typically customers tend to use us in the cloud for. It’s more about how frictionless it is for them to grow. And if you are in self-managed, there is a natural -- there are many natural friction points. If you want to expand, bring in more data, you’ve got to go procure the hardware, even if you’re in a public cloud, you’ve got to go allocate that, you then got to figure out how to go and get licenses from Elastic. So, it tends to be much more -- there are too many hurdles in the process that don’t make it easy enough for you to grow.

When you’re on Elastic Cloud, it’s just frictionless. You bring in more data, your systems are -- your automated APIs are just pulling in more data, and we are metering it and we are letting you know what your consumption is and you’re paying us for it. So, it’s a much more friction-free environment. Look, the long tail of use cases that we see are extremely varied. We’ve seen customers use Elastic for everything from risk analytics to anti-money laundering and so on and so forth. If you go into our website, you will see all kinds of interesting use cases. But the three primary use cases that customers use us for are Security, Observability and Enterprise Search. And that’s why our go-to-market motion is based on that. The way we lead with our business is based on those three. And over time, like I said, there might be others that emerge that are significant enough. We see a big enough opportunity that we might choose to look at them as solutions that we want to go after. But the three are massive. The total addressable markets are huge. And we see tremendous potential for multiple years to continue growing the way we are with just those three.

[Operator]

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

[Ash Kulkarni, CEO]

Thank you, everyone, for joining us today. We ended the fiscal year with a strong Q4 and look forward to another great year ahead. Thanks again, and have a great evening.

[Operator]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.