ESTC - NYSE

Good afternoon, and welcome to the Elastic N.V. Fourth Quarter Fiscal 2025 Earnings Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Anthony Luscri, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon and thank you for joining us on the conference call to discuss Elastic's fourth quarter fiscal 2025 financial results. On the call, we have Ashutosh Kulkarni, Chief Executive Officer, and Navam Molyanda, Chief Financial Officer. Following their prepared remarks, we will take questions. Our press release was issued today after the close of market and is posted on our website. Slides, which are supplemental to the call, can also be found on the Elastic Relations website at ir.elastic.co. Discussion will include forward-looking statements, which may include predictions, estimates, or expectations regarding the demand for our products and solutions, our future revenue, and other information. 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 the risks and uncertainties included in the press release that we issued earlier today, included in the slides posted on the Investor Relations website, and those more fully described in our filings with the Securities and Exchange Commission. We will also discuss certain non-GAAP financial measures. Disclosures regarding non-GAAP measures, including reconciliations with the most comparable GAAP measures, can be found in the press release and slides. Unless specifically noted otherwise, all results and comparisons are on a fiscal year-over-year basis. A webcast replay of this call will be available on our company website under the Investor Relations link. Our first quarter fiscal 2026 quiet period begins at the close of business on July 17. We will be participating in the Bank of America Technology Conference on June 5, and the Rosenblatt Virtual AI Conference on June 11. Also, Elastic will host a Financial Analyst Day in combination with our New York City Elastic on October 9, and we hope many of you will join us there in person. With that, I'll turn it over to Ash.

Thank you, Anthony. Good afternoon, everyone, and welcome to our Q4 earnings call. Elastic achieved a strong quarter culminating in a solid finish to the fiscal year. Building on our momentum, we delivered strong growth fueled by our sales execution and the persistent demand for our solutions. Our innovation velocity thrived. We exceeded guidance across all revenue and profitability metrics, demonstrating our platform strength and the extraordinary efforts of our team. In Q4, revenue grew 16%. Elastic Cloud revenue grew 23%, and we delivered a non-GAAP operating margin of 15%. We ended FY 2025 with more than 1,510 customers spending over $100,000. Q4 was a great quarter and a great close to a pivotal year in driving customer adoption of the Elasticsearch AI platform. In Q4, we continued to benefit from our sales strategy of landing and expanding enterprise and high-potential mid-market customers. We ended the fiscal year with more than 210 customers over a million dollars in committed annual contract value, representing more additions to this cohort than ever before. The sales segmentation changes we implemented at the start of the fiscal year have started to pay off. We saw progress in enterprise and commercial accounts and significant breakthroughs in our strategic segment, where we are helping our largest customers leverage our technology for consolidation and generative AI application development. For example, we closed an 8-figure expansion deal this quarter with a global financial institution for Elastic Observability, displacing a competitor. With our real-time alerting and monitoring features, we addressed critical feature gaps for the customer, giving them deeper insights into system performance. This deal also led to an expansion of Elasticsearch for GenAI applications as part of an internal efficiency initiative, positioning Elastic as a strategic partner in their GenAI journey. GenAI and consolidation remain powerful drivers accelerating our momentum and influencing customers and prospects to choose Elastic for their search, observability, and security needs. Now more than ever before, enterprises are scrutinizing their solution investments as they look to control costs and prioritize expenditures that drive productivity and ROI at scale. Leveraging AI to automate business processes and drive innovation and efficiency is a big priority for customers. We provide mission-critical technology able to flex to data complexities and accommodate diverse use cases for every industry. We continue to strengthen our position as the platform of choice for customers building GenAI applications as our pace of innovation drives superior performance, scalability, and ease of use. Enterprises remain committed to GenAI investments as a key business strategy. We continued our strong GenAI momentum in Q4. Now over 2,000 Elastic Cloud customers are using Elastic for GenAI use cases, with over 310 of these customers spending $100,000 or more annually. Of our customers with over $1,000,000 in committed ACV, more than 25% are utilizing Elastic for GenAI initiatives. Over the course of FY 2025, we saw customers progress from GenAI application ideation to implementation. As GenAI evolves, the importance of relevance and context increases, criteria where Elasticsearch leads as the industry's most used vector database. This drove continued strength in our overall search business in Q4 and all of FY 2025. We recently announced the general availability of our better binary quantization or BBQ technology, our pioneering technology that compresses vectors for lightning-fast retrieval. Since its debut, we have improved its performance and accuracy, now achieving even more relevance gains, making it appealing for enterprise customers with large-scale production workflows. Elasticsearch is the first and only vector database with this quantization technique on the market. This feature helped us upgrade an international defense agency from a free version of Elasticsearch in a 7-figure deal to leverage our vector database. They require a solution capable of ingesting diverse data types for their intelligence applications, one able to handle immense data volumes without sacrificing performance or accuracy. BBQ is the solution for their needs. In Q4, we continued to drive consolidation onto our Search AI platform as our core value proposition is built on our industry-leading innovation at a very attractive cost-to-value ratio. For instance, we secured a multi-year 7-figure expansion deal with a leading international banking group in 50-plus global markets. Elastic was selected as one of the key platforms in their centralized observability strategy spanning across all business units. This move supported a broader technology initiative aimed at consolidating multiple monitoring and observability tools into a streamlined ecosystem. As part of the expansion, the customer upgraded to an enterprise license to cost-effectively manage their environment with features such as the frozen tier, AI assistant, and synthetic source for logs DB indices. They also recently deployed our AI assistant, which has already demonstrated value by identifying anomalies in retail banking data. Globally, our business performed well overall. Though we saw some pressure in the U.S. public sector where agencies face constraints, our team executed effectively, and our compelling value-to-cost proposition was key to driving traction with these customers, with features like Log

Thank you, Ash. Echoing Ash's comments, I would like to thank our team for their hard work in fiscal year 2025. Delivering strong Q4 results across all areas of the business. I am delighted to join Elastic at this pivotal time. The company's leadership in GenAI and our business momentum, both reflected in our Q4 print, were key reasons why I came on board. We finished the year strong and outperformed against the high end of both our revenue and profitability guidance. So let's get to the numbers. Our total revenue in the fourth quarter was $388 million, growing 16% on an as-reported and constant currency basis. Subscription revenue in the fourth quarter totaled $362 million, growing 16% as reported and 17% in constant currency. Elastic Cloud, which sits within subscription revenue, grew 23% on an as-reported basis and constant currency basis. As we mentioned last quarter, Q4 has three fewer days than the other quarters, creating a sequential headwind. We also faced a less straightforward year-over-year comparison as we lap a leap year. Still, revenue remains strong across the business, bolstered by strong customer commitments and ongoing tailwinds from GenAI. We had a solid quarter in our self-managed business, and we achieved significant wins across both our cloud and self-managed environments. This go-to-market progress is a direct outcome of the sales strategy we put in place at the start of the fiscal year. You can measure revenue from our sales-led motion by excluding monthly cloud revenue from subscription revenue. Subscription revenue excluding monthly cloud was $315 million, growing 19% in Q4 as reported and in constant currency. For fiscal year 2025, subscription revenue excluding monthly cloud was $1.195 billion, growing 20% as reported and 21% in constant currency. This momentum is a positive sign of our go-to-market success, and we expect to disclose our progress on this metric quarterly as we believe it best captures the results of our sales team, whose focus is on securing commitments from our enterprise and high-potential mid-market customers. Additionally, our current remaining performance obligations, or CRPO, in Q4, which is the portion of RPO that we expect to recognize as revenue within the next twelve months, was approximately $1 billion and grew 18% year-over-year and 17% in constant currency. To support this further, we saw strong growth, particularly among our largest customers. Our customers with more than $1 million in annual contract value grew approximately 27%, where we added approximately 45 net new customers this year. And our customers with more than $100,000 in annual contract value grew approximately 14% this year, where we added approximately 180 net new customers. We saw strong field execution across all geographies, where APJ grew the fastest, followed by EMEA, and The Americas. We saw some pressure in the U.S. public sector, which caused sales cycle elongation, specifically in the federal civilian side of our business, as agencies face personnel and budget constraints. Even though we saw an impact in the quarter, given the strategic importance of our solutions to the agencies we serve, and our compelling value-for-cost proposition, we believe our solutions are well aligned with the efficiency focus in Washington. Turning to Q4 margins and profitability, I will discuss all measures on a non-GAAP basis. We delivered a strong gross margin in Q4, representing 77% of revenue and a solid operating margin of 15%. For the fiscal year, we delivered approximately 400 basis points of operating margin improvement to end the year at 15%. This was a result of our concentrated discipline to deliver profitable growth. Our business has achieved a scale that allows us to maintain a strong and consistent free cash flow generation as we continue our operational discipline. We grew our adjusted free cash flow margin by approximately 100 basis points in fiscal year 2025 to end the year with a 19% adjusted free cash flow margin. We are actively focused on this metric and believe we have the potential to maintain and expand on this strong free cash flow margin percentage over the long term. Looking ahead to fiscal year 2026, I would like to lay out several assumptions that relate to how we model the business before going into guidance. First, historically, sales-led bookings ramp throughout the year, with the second half bookings greater than the first half. This is a typical pattern within an enterprise sales force, and we expect this pattern to continue. Second, as our cloud business has been getting bigger, we've seen modest seasonal revenue patterns emerge. And for the last couple of years, once we normalize for the number of days in the quarter, we've seen slower sequential cloud growth in our fiscal Q1 period, with more ramp typically occurring in fiscal Q2 and Q3 in conjunction with the back half of the calendar year. Now on to guidance. We are in a very dynamic macro environment. And as such, we are approaching our guidance with prudence. Although we did not see macro impacts beyond the U.S. public sector in Q4, we extrapolated constraints that we saw in the U.S. public sector to potentially extend to our broader business. This is the largest factor affecting our revenue guidance range. The lower end of our guidance range also assumes we see headwinds to consumption from Q2 to Q4, though we did not see them in Q4 of FY 2025. We believe we have adequately derisked our revenue guidance, with the conservatism largely reflecting the external uncertainty of the full fiscal year. We expect to continue delivering year-over-year margin improvements in fiscal year 2026, though the rate of improvement may moderate if we prioritize investment to support higher top-line growth. If revenue trends are more modest, we expect to outperform our non-GAAP operating margin guidance, and should growth exceed our expectations, we will adjust our investments accordingly to capture any upside while maintaining a balance between growth and profitability. Though we do not formally guide to adjusted free cash flow, we expect to sustain the fiscal year 2025 level of adjusted free cash flow margins in fiscal 2026. With these assumptions in mind, for the first quarter of fiscal year 2026, we expect total revenue in the range of $396 million to $398 million, representing 14% year-over-year growth at the midpoint or 13% year-over-year constant currency growth at the midpoint. We expect non-GAAP operating margin for the first quarter of fiscal 2026 to be approximately 11.5%. We expect non-GAAP diluted earnings per share in the range of $0.41 to $0.43, using between 107.5 million and 108.5 million diluted weighted average ordinary shares outstanding. For fiscal year 2026, we expect total revenue in the range of $1.655 billion to $1.670 billion, representing 12% year-over-year growth at the midpoint or 11% year-over-year constant currency growth at the midpoint. We expect non-GAAP operating margin for the full fiscal 2026 to be approximately 16%. We expect non-GAAP diluted earnings per share in the range of $2.24 to $2.32, using between 109 million and 111 million diluted weighted average ordinary shares outstanding. In summary, while we have taken a measured approach to guidance, there are multiple paths to meeting and exceeding the top end of our guidance. We are committed to maintaining and expanding upon our success and are aiming to build a generational company and sustain profitable growth at scale. We will continue to provide updates as we move through the year and look forward to hosting an Analyst Day on October 9 in New York City, where we will showcase the power of the Elasticsearch AI platform and the business opportunity ahead. And with that, let's go ahead and take questions. Operator?

We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. Our first question today is from Pinjalim Bora with JPMorgan. Please go ahead.

Great. Thanks for taking the questions. Navam, just on the guidance, trying to kind of learn what you're seeing real-time here. But it seems very conservative. So I wanted to ask you, one, would you say it's incrementally more conservative than how Elastic has guided in the past? And two, since you're new in the feed, I would ask you when I look across the metrics, CRPO grew 7%, I think you said in constant currency. Billings grew 16%. I think that's USD. Don't know constant currency. Deferred revenue is in the twenties. So from your perspective, what do you think is kind of the better leading indicator of the business at this point?

Hey, Pinjalim, thanks for that. Thanks for the question. So look, we came off a very good Q4 despite pressure from the U.S. public sector. Our sales-led motion is going well. And given the pipeline and demand signals we're seeing, we feel good about the Q1 guide. Right? And there's no doubt we're in a very dynamic macro environment. But I am new to the business, and I need to be prudent about the first guide. So, what I've done is I've balanced the positive demand signals that we're seeing now, the positive demand signals and the positive pipeline that we're seeing now with broadly macro uncertainty. And I think I've been clear on the assumptions that I've made on what's influencing those guidance numbers that I provided. Meaning, beyond what we're seeing, we're extrapolating the U.S. public sector pressure to the entire business. And I'm assuming more consumption headwinds in Q2 through Q4, even though we haven't seen macro consumption headwinds in Q4. So, you know, I'm not entirely sure I can calibrate myself to Elastic in the prior quarters, but I think what I'm attempting to do is to give you clarity on what I'm putting into the guidance. And all things considered, we've taken a very measured approach. And like I said, there are multiple paths to meeting and exceeding that top end, especially if macro doesn't play out the way we model. So what I've wanted to do and what I've done in my prepared remarks is tell you exactly what's in that guidance number that I provided. On the CRPO, look, you know, I think I spoke to you as well, spoke to a number of analysts and investors, and I heard loud and clear that there were incremental metrics that they would like to hear on the health of the business. And I think there's a couple that are very useful for you to consider. First being the subscription revenue less monthly cloud number that I've provided, and the other one is CRPO, as you mentioned. I think both of these are supplemental measures. You have to look at them in conjunction with the revenue consider. And I'm trying to be more open on disclosing these items for you. And so the best measure of how our business is doing continues to be revenue. The best measure of how our sales team is doing is subscription revenue less monthly cloud, and CRPO is a useful metric as well, and it's showing the positive momentum we're seeing specifically on the subscription revenue less monthly cloud number and how much we have in terms of coverage for that number from a forward basis. So overall, we're going to give you continued visibility into how the revenue number is going through guidance. But both these metrics are going to be useful for you to consider as well.

And just to net it out, Pinjalim, you know, just the strength that we saw in the business in Q4, the visibility that we have into the pipeline in Q1, just makes us feel really good about the business overall. And what you're seeing reflected in the guide is really the conservatism around the fact that we are guiding for the next twelve months, and given the dynamic nature of the external environment, just wanted to take that into account.

Yep. Understood. One quick follow-up, Ash. There has been a slew of partnership kind of news releases from Elastic. I think most interest or most recently is the strategic partnership with AWS. I'd also seen your kind of the default vector search on, I think, the Microsoft semantic kernel and then obviously, the NVIDIA AI. Maybe talk about some of these partnerships. How do we think about the opportunity unlock driven by some of these relationships and specifically on kind of the go-to-market portion of it with AWS.

Yeah. I think the best way to describe it would be that we are seeing a real change in the market where, you know, we are being accepted as one of the most appropriate and favored vector databases out there. Right? So, you know, when you think about it from the perspective of the hyperscalers, you know, we are working very well with them to become sort of the top of the third-party services that they provide in terms of vector database. All have their own vector database functionality. But when you look beyond their own, you know, we want to be number one. And all of these relationships that we are forming, it's all sort of indicating that we are getting that pole position. Now, the relationship with NVIDIA, like, that's, you know, fundamentally, that's beyond just the cloud. Right? Because what they're trying to do is also make sure that they can take these AI factory, these blueprints, to their enterprise customers where these customers want to deploy AI solutions, agents, within their own data center, within their own environment because often that data is one that they don't want to put in external environments. And we want to be everywhere. We want to be in all of these places. And from a go-to-market perspective, you know, as you've heard from us in the past, the marketplace, all three marketplaces are the three hyperscalers. Are amazing places for us to conduct business. Customers are able to use their EDP commitments to purchase Elastic Cloud through those marketplaces. We work very actively with these hyperscaler partners, incentive programs, and so on to work together to get customers to move to the cloud where the customer is trying to move to the cloud and adopt Elastic Cloud as their solution, whether it's for GenAI or observability or security. These are very important partnerships for us. You're seeing the momentum continue to grow.

Thank you very much.

The next question is from Sanjit Singh with Morgan Stanley. Please go ahead.

Thank you for taking the question. I have an overall question to ask on the state of retrieval augmented. There's a debate in the industry whether RAG is going to prove durable, you know, in terms of an access pattern. What's your latest thinking on customers adopting RAG architectures and Elastic's sort of positioning within overall RAG?

Yeah. What we are seeing, Sanjit, is that RAG is being acknowledged as the solution that always makes sense, irrespective of, you know, your data and your environment and your use case, unless your data is absolutely static. The reality is that enterprise data is constantly changing. Data is significant in size. And so it's impractical to assume that you're ever going to be able to take a language model of any kind, large or midsize, and train it entirely on your data. Which means that, you know, effectively, you need some way to provide in real-time context or grounding to the large language model from your data. And that's why RAG, whether you're building conversational apps, whether you are building agents, and automating entire workflows, retrieval is absolutely critical. And that's where we are seeing this adoption of our vector database in all of these use cases. So I think it's here to stay. We feel very confident. We feel that it's going to be something that benefits us both in the cloud and in our self-managed business. And, you know, we are starting to see the adoption really go in the right direction for us. So I'm very excited about this.

I appreciate the response, Ash. And then, Navam, on the cloud performance this quarter, the sequential dollar ads were definitely smaller than they were last year. Do I just chalk that up to sort of leap year impact, or did you see any sort of consumption hesitation in the quarter? I imagine the public sector weakness wouldn't necessarily factor into the cloud growth. I just wanted to make sure I understand the sequential growth in cloud correctly.

Got it. Thanks for the question, Sanjit. It's a good question. So look, the fourth quarter total revenue, we did a really good job. It's a solid bookings quarter. And we had a really good self-managed bookings quarter in Q4 as well. So on the performance on the bookings, very strong. We're biased towards cloud, obviously, on the revenue growth side, but you dig into the cloud revenue number a little bit more, you exactly hit the nail on the head. There is a leap year impact year over year, but specifically to the quarter, this is the one quarter with three fewer days than the other quarters. So Q4 has March, Q2, and Q3. And that is a consumption headwind as you think about the daily consumption rate. So when you think about the sequential ads, you really have to normalize for the number of days. And when you normalize for the number of days, the cloud growth rate is in the mid-20s and quite healthy. So we're happy about the cloud performance in Q4. And just a note, I mentioned in my prepared remarks as well. The cloud numbers getting bigger. So there are some seasonal patterns that are emerging. Now these are patterns we're seeing now. It may change, but the current pattern is that Q1 tends to be a lower sequential growth quarter because people are consuming what they bought in the back half of the year. Q2 and Q3 are higher in terms of sequential growth. And Q4 is variable compared to Q3, and that's essentially what we saw in the business with cloud.

Thanks a lot. Thanks, Navam. I appreciate the response.

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

Hey guys, this is Severin on for Matt Hedberg. Thanks for taking our questions. Congrats on a solid finish to the year. Just thinking about the past fiscal year, you made some pretty big changes on the go-to-market side. As we think about fiscal year 2026, is the majority of the heavy lifting of these larger transformation changes done? And can you just talk a bit about the next steps from here and speak more on the strategy that continues to resonate with enterprise customers?

Yeah. Thank you for the question. So, in terms of the territory changes that we made at the beginning of last fiscal year, look, not only have those fully settled, but they are really starting to pay off in a meaningful way. You know, one of the data points that both Navam and I shared was the fact that we grew our million-dollar cohort more than we ever have in the past, 45 net new adds in that particular category. We are seeing a real, you know, meaningful expansion in our strategic accounts. That's where, you know, the largest tier of our customer base, in our high propensity mid-market customer base, and our enterprise customer base. So all that focus that we drove through that territory change last year is really helping. It's paying off. So at this point, as we go into FY 2026, we are not planning to make any changes like I called out in my prepared remarks. Now there are a couple of small things that I did want to call out. One is that we have been continuing to hire sales capacity, and that's going to continue because we see the growth opportunity ahead of us. So, you know, we will keep doing that. And every time you bring on new sales reps, there are some minor changes that you always make to make sure that there is sufficient coverage and appropriate coverage across all accounts. But that's very common. That's something that's, you know, typical across every enterprise company. The second thing that I'll call out is that this year, and this is something that's new, we are incrementally adding security sales specialists. And it's a small team, but this is a team that's going to act as overlays to help our broader field organization capture an even bigger share of the security platform consolidation opportunity that we see ahead of us. And I'm personally very excited about that. You know, traditionally, we've had a security technical specialist team. Last year, we added a technical GenAI specialist team. And now this is a security specialist sales team. And with all of this, what we're really trying to do is double down on that motion of our sales-led go-to-market being all about our enterprise and mid-market high potential customers, and driving our SMB purely through the self-service motion of monthly cloud. Very excited about that. We are going to continue on this.

Great. Thank you. That's very helpful. And then just one follow-up. Could you speak a bit to GenAI and your positioning into fiscal 2026 and how you would like to see this trajectory throughout the year? And then just more broadly touching on the agentic AI opportunity and cases that you're seeing emerge on that end?

Yes. So we are seeing customers sort of progress along the continuum of first, you know, they were going from just lexical or text-based search to semantic search. We've seen them go from there to building conversational apps using RAG. And now we are seeing them building agentic workflows using, you know, model context protocol or MCP or agent-to-agent interactions. And this is an attempt where they're trying to automate entire work using AI. In all of these, what is critical is retrieval, being able to connect large language model to the just the right internal data in real-time. And that's where accuracy matters. Speed and scale matter. And being able to do it in an efficient way really matters. That's what we've been putting our focus on. In terms of efficiency, we've talked about things like better binary quantization. We've been doing a lot of work around, you know, making things more and more accurate in the algorithms that we have. Provided capabilities like our AI playground where customers can, you know, as they develop, test out things, you know, reduce hallucinations, work on getting the most accurate results. And speed and scale, like, that's something that we've always been known for. So our mission is to be the vector database of choice in every GenAI application that gets built, and we're just getting started. You know, if you think about the total addressable opportunity, most enterprise organizations are still in the early part of the journey on things that they're trying to automate using AI. So I think the path ahead is really exciting. But we have a long ways to go. And that's something that, you know, we are really leaning into.

Thanks, guys.

The next question is from Raimo Lenschow with Barclays. Please go ahead.

Perfect. Thank you. Could I stay on that subject, please, Ash? How do I have to think about the revenue change in revenue contribution from the different parts? Obviously, like there's still a lot of activity in the field when we see that as well around vector database and all the stuff that they're doing there. How do you think that will impact where revenue is coming from going forward? And then the second question I had was like on the monthly side, thanks for breaking that out on the extra disclosure there. Like, how should we think about that line going forward when we model? Because it does look like you're deemphasizing it, and we just all need to make sure that we have that fully covered in the model. Thank you.

Yes, absolutely. I'll talk about it and then also ask Navam to maybe weigh in. So maybe I can touch upon the monthly cloud stuff first. And on the monthly cloud, you know, look, like I've said, that is a self-service driven motion. We believe what we've seen is that that's largely, you know, SMB customers that show up there. Our goal is to really drive our sales-led motion towards the enterprise and high propensity mid-market customer base. And that's where we feel that we are seeing great success. That number gives you a real sense of how our sales-driven go-to-market motion is actually working. And that's the focus within the company. Because, look, for us to become a multibillion-dollar company, it's the enterprise and the high potential mid-market customers that adoption is going to be what matters most. That's the reason why we give data points around 100k plus customers and so on. So that's one part. The second part is on the AI piece. As you know, the way our model works is customers first build us into their application, so they adopt our platform. And we've given, you know, the metrics around it just on Elastic Cloud over 2,000 customers using us. And we also give metrics on the percentage of our 100k cohort that has been using us for GenAI. That is all about adoption. But then we also have customers that have been making commitments. And those commitments have now been translating. They've been contributing to revenue. So we've started to see that. But like I also said in just the prior question, we are still in the very early days. You take any organization, you know, they are still in a phase where they have maybe dozens of these AI applications and projects that they're working on. But the total number of, you know, enterprise workflows, they're in the thousands. So we've got a long ways to go. And as that grows, as the revenue contribution from AI continues to evolve, I would expect that search will become a bigger and bigger part of our business. Because this is expanding the search TAM. Having said that, we are seeing AI benefit all parts of our business. Our AI assistance, things like attack discovery, are helping us become much more competitive in our SIEM and security analytics product. It's helping us drive better adoption of AIOps in our observability product. So from that sense, I would expect all parts of the business to grow. But over time, I would expect that search, as it's growing sort of the fastest within the business, will eventually continue to see more benefit from AI.

Yeah. Hi, Raimo. It's Navam. I'll add to the monthly cloud point that Ash made. In, you know, in 2026, we expect the monthly cloud revenue to be roughly flat. This quarter, it was about 12% of the total.

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

Hey, good afternoon. Thanks for taking my question. Wanted to ask you about the AI commitments. I think you talked about the 100k additions there. But wanted to double click on the million-dollar commitments and just clarify the disclosure that you gave around the 25% using AI. Is that 25% of your million-dollar customers have million-dollar AI commitments? Or just help us understand a little bit more what you saw on the larger customers for AI commitments? And then just be curious on some of the emerging use cases. Are you seeing stuff on the agentic front? What are some of the emerging use cases that might be different from prior quarters?

Right. No. Thanks, Tyler. So the metric on the 25% metric that we were talking about, that was if you take the total number of million-dollar customers that we have, 25% of them are using us for some kind of AI workload. Right? So it's the adoption within that high growth propensity cohort of customers. And, you know, in the past, we've given a similar metric around the 100k cohort. This is also giving you a sense of what it's like in the million-dollar cohort. Hopefully, that makes sense.

Yeah. And then the second part around the emerging use cases.

Yeah. And in terms of emerging use cases, like, look, what we are seeing is people are now starting because of things like model context protocol, because of, you know, people sort of getting beyond ideation, early implementation, are seeing more and more sophisticated use cases across pretty much every industry. And whether this is not just around customer support now. We are seeing use cases that involve sales, that involve sales automation, that involve marketing automation. We are seeing use cases in legal e-discovery. We are seeing, you know, conversational apps that are being built for, you know, interactions with partners. So there's a lot of different use cases that we're seeing across the board. But the pattern seems to be that customers have gotten much more comfortable and are now extending beyond just semantic search kind of use cases that we started with maybe about a year and a half ago. And are now, you know, actually building these kinds of automated agents to automate parts of their workflow. And it's pretty broad. Even in public sector, we are seeing it. And then, obviously, you know about our AI assistance. And those are continuing to see traction.

Great. And, Navam, on the public sector comments, I appreciate all the breakdown and moving pieces on the guide too. Those are helpful. But on the public sector comments, the choppiness you saw in the quarter, I assume that was all kind of in self-managed. But where did you see that show up most? Would we see that more in billings and in RPO? I imagine there's some, you know, in-period rev rec headwinds that you saw just as a result of lower bookings. But anyway to sort of dimensionalize it and quantify, you know, the shortfall that you saw in public sector would be helpful.

Yes. Thanks for that. So look, we saw the pressure in public sector, but it's important to remember that we are a well-diversified business with many verticals. And public sector is an important one. It's one of our top five verticals, but the reason we had a strong Q4 was APJ, EMEA, and North America performed well. And, you know, because of our diversified business, we were able to still have a strong fourth quarter despite the pressure we saw in the public sector. So, I guess it's very hard to quantify the counterfactual of what would have happened had public sector stayed the same. But the point is we're well diversified, and we have the ability to make up for one with other sides of the business.

The other thing I'll also say is, to the point that Navam made, we saw some pressure in, you know, the federal civilian agencies. But, you know, Department of Defense, other parts of U.S. public sector remained strong. Also, we are seeing continued strength in the public sector business that we do outside of the U.S. And, you know, as with everything going on geopolitically, that is something that we believe as we continue to drive our business in global markets, that that will continue to be a source of strength for us.

Thank you very much.

The next question is from Howard Ma with Guggenheim Securities. Please go ahead.

Great. Thank you. Given the AI search momentum that Elastic has been seeing, especially exiting Q3, we were hoping that Q4 cloud growth would have been stable or perhaps even accelerate a little bit. And I understand the leap day adjustment. So I'm talking on a days-adjusted basis, but it downticked a little. And I was hoping Ash or Navam, you could work, you know, ideally, both of you. Can you help us understand the components a little bit more? And the premise is if AI search is pumping on all cylinders, and I believe it is, is the contribution each month higher than the last? And if that's the case, can you talk a little bit more about the offsets? I mean, we hit on the monthly cloud segment a bit. Right? That remains weak. But can you talk, did observability and SIEM use cases perhaps under your expectations a little? Are there optimizations in larger customers or, I guess, lesser overconsumption versus recent quarters? You know, anything more on the mix in the quarter would be tremendously helpful.

Yeah, Howard, I think probably the most important point that I'll make is that it is, in our opinion, not the right way to think about it to associate AI just with cloud. Because we are seeing demand for AI workloads on both cloud and our self-managed business. And if you saw, our self-managed business did well. We are seeing customers adopt AI and adopt our vector database not just in the cloud environments, but we are seeing use cases like in, you know, I gave in my prepared remarks, the example of our customers, a public sector customer, an international public sector customer, that chose us for some of the enhancements that we've done, better binary quantization. So that's an example of a customer that is doing something with AI in their own environment, in their own data center. And so it's important to understand that AI is helping us both in cloud and in self-managed, number one. Second, what I'd say is, look, in terms of consumption, we saw very, we didn't see any challenges like Navam talked about even in his prepared remarks. So but let me turn it to Navam if he has anything to add to that.

No. I mean, I'd reinforce Ash's point that our expectation is both cloud and self-managed continue to be drivers of growth. And the metric we look at is how's our sales team doing against those two metrics. And the new disclosure around subscription revenue less monthly cloud, $1.195 billion growing 20% year-over-year and 21% constant currency, is meant to reflect that expectation that both those lines grow.

Great. Thank you. And as a quick follow-up, and Tyler just hit on this, but on the U.S. public sector, can you help us perhaps quantify the headwind in Q4 and how much you're baking in? How much of the public sector headwind that is you're baking into FY '26 guidance?

Yes. I mean, I'll reiterate that there is a diversity in our verticals that allows us to not be reliant on a single vertical or a single customer because we have a diversity of customers as well. Public cloud was the one macro impact we saw in Q4, but the rest of the teams rallied well. And like I said, the APJ, EMEA, and USPS, sorry, Americas businesses did well in Q4. So there was strength in one side of the business. We've been prudent in extrapolating U.S. public sector pressure into the rest of the year, Q1 through Q4. And like I said, beyond the USPS segment into the broader business, which is what informs the revenue range we gave you in our guidance. So that's how we factored it in. I wouldn't disaggregate it further beyond that. It's a holistic view of the impact of macro should it play out in the ways we've laid out and how the range would turn out. But like I said, we're going to execute on it quarter by quarter. We feel good about the Q1 guide. And we've got multiple paths to get to and exceed the guidance.

Got it. Thank you, Navam. That's helpful. And I appreciate the, looking at the business on a combined basis. So thanks again.

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

Yes. Thank you very much. Congratulations, Navam. I think this is your first call as CFO of Elastic. So welcome to the call. And, Ash, I have a question for you. As you wrap up this fiscal year, last fiscal year was when we got started with that experimentation. Now it seems to be in production mode. That is the segmentation of how you go to market a large enterprise and who's going to pay you that sort of thing. So one year into the new segmentation, what are the big takeaways? What are the things that kind of surprised you, and what are the tweaks you're going to be making because I think we agree that Elastic has the potential to be a multibillion-dollar generational company. Really, really cool stuff right from the early days. But in order to achieve that vision, at some point, the net new revenue, the net new business, the net new ACV, all that stuff has to kind of be up and to the right. We need to start to see some level of acceleration. Granted that Navam's guidance is rightly, it should be, is conservative. But in order to get that vision of a multibillion-dollar generation company, we need to start to see some level of acceleration. So as you apply your learnings from the segmentation as to what your aspirations for Elastic are, how do you change, go about not dramatically altering things and disrupting necessarily, but how do you refine the go-to-market approach going forward to achieve your potential? Thank you so much.

Yeah. Thanks, Kash. I think the first thing I'll start with is by saying that, as Navam mentioned, the right way to look at the business is the way we look at it, which is subscription revenue less monthly cloud. Because subscription, the monthly cloud business, that is largely SMB. It correlates very much with SMB. When SMB starts to really tick up, in that segment, you know, will benefit from it, but we're not counting on it. What we are really pushing for is our sales-led go-to-market motion, which is all targeted towards the enterprise and high potential mid-market base. That's where we spent a lot of time and energy, as you know, at the beginning of last year, to do the territory changes, the segment changes, and start to create more focus. So we are seeing the benefits of that focus paying off. We are seeing larger deals. We are seeing more, you know, interactions with senior-level buyers. We are seeing better platform consolidation opportunities that we are not only participating in but closing and winning. And so all of that to me feels like we've got the right motion now. Now we just need to continue scaling. So part of what we've been working on is adding that sales capacity that we need to continue to move the business in the right direction. Because what you stated is exactly our aspiration. Keep building the growth momentum. And in terms of what we are doing in addition to all of that, one of the things that I touched upon earlier is the security specialization. Look, we have an amazing set of capabilities in all of these areas, not just in search, engine AI, but also in observability and security. But in security, as we go higher, as we do larger and larger deals, you know, what we want to do is really double down on that opportunity to capture from some of the incumbents that, as you know, have seen some disruption in the market. And so we are really putting more gasoline on that fire to see how we can go even faster. And again, I'll reiterate, like, watch that metric about subscription revenue less monthly cloud. I think I've talked about that to many of you in the past. And that's one that we will keep, you know, sharing more details on as we go.

Excellent, Ash. One quick one for you, Navam. As you bring your new mindset into the Elastic model, what are the opportunities you see to uncover leverage in your own unique lens? Thank you so much.

Yes. Thanks, Kash. Look, I mean, Elastic is an amazing company. And that's one of the main reasons I joined. And it's got so much going for it in terms of the momentum it has behind GenAI. So I'm really excited to be part of that journey over the next several, many years actually. So in terms of what I can provide to the business is help with more visibility into how the business is going with all of you is the first one. And to be a partner to Ash to invest in the business appropriately, to actually gain the share that we deserve in that GenAI space. And that's why we've been investing appropriately in R&D and in our GTM motion as we have over the past couple of quarters. And we think that that's the right thing to do given the opportunity ahead. So that's what I'm going to be helping Ash with over the next several quarters.

By the way, I said cash, cash, cash. So we love Ash.

The next question is from George Iwanyc with Oppenheimer. Please go ahead.

Thank you for taking my question. Ash, maybe digging into what you just kind of alluded to with the security specialist team. When you're looking at your million-dollar customers, how many of them are using the entire portfolio? And can you kind of compare that to your 100k customers and how broadly they are exposed to the overall portfolio?

We haven't broken that out, and, you know, that's one of the things that Navam mentioned was the financial investor day that we are going to have in October. And we'll provide a lot of those details there. I will say, though, is that our largest customers typically tend to use us for more than just a single use case. Right? You know, we have a platform approach where when they purchase Elastic, we don't have separate SKUs for observability or security or search or AI. They're purchasing the platform. And when they purchase the platform, then they get to use whatever they want to use. In cloud, the meters spin differently for some of these uses. But there's a lot of value in being able to put all your data in one environment and then leverage that data for observability or for cybersecurity or for other purposes. And so that's a very, very common pattern. But that also means that, you know, if you look at the million-dollar count or the 100k count, it's still a fraction of our overall customer base. So the land and expand motion is working very well for us. And we just want to keep doubling down on it because that's what we see as the opportunity for continued growth.

Thank you. And, Navam, you know, maybe just looking at linearity from April into May, I know you talked about generally solid regional trends, but are there any differences with respect to verticals or customer size?

No. Not really. I mean, our verticals are very diversified, and I don't think that month over month there's much, there's always puts and takes, but in terms of linearity of what happens, I don't think there's much difference between those two months in particular. At this point in time, the macro remains what we've seen in Q4 around U.S. public sector and no real incremental changes on the consumption side or incremental pressure beyond what we've seen in U.S. public sector.

Thank you.

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

Ash, just on the sales productivity, when you mentioned there's no changes, can you just bring us up to speed on where productivity is today? Are you happy? Are they fully at peak capacity? And I guess with the, you know, the age of AI sales team that's at running closer to peak capacity, not making big changes, I think most would have thought you'd see a little more healthy backlog and growth, but maybe just help reconcile what's happening with productivity in your pipeline. Thank you.

Yes. So in terms of the sales capacity, the sales teams that we have, the productivity that we saw in FY 2025, we were very happy with it. Obviously, changes, like I said, that we made at the beginning of the year, caused us some issues in Q1. But then we started to see the benefits accrue, and Q4 was just wonderful to see how, you know, the output that we got from the team. So in terms of productivity, and by the way, the use of AI, we use AI internally even for our own purposes. In terms of how our SDRs or sales development reps and even our account executives use the information that we have about our customers and our prospects with AI to be able to do better targeting, to have better conversations, to sort of follow, and satisfy our customers better. So, you know, productivity, I believe, is something that, you know, we have always paid attention to and we will continue to pay attention to. That's a big focus, but I feel really good about where we are. I'll let Navam, if I don't know if you have anything to add to that.

No. I think you got it mostly. Yeah. Thank you.

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

Well, thank you all for joining us today. As I said, I'm extremely proud of what we accomplished in FY 2025 and more excited than ever about the opportunity ahead as we build a truly generational company. Thank you all, and have a good day.