Elastic N.V. (ESTC) Q4 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary and Q&A session highlight strong growth in enterprise segments, AI-driven product excitement, and strategic customer commitments. Despite flat SMB growth, the enterprise segment's robust performance and AI contributions (500 basis points) indicate positive momentum. Price adjustments and strategic partnerships, like displacing Splunk, further enhance future prospects. Overall, the positive sentiment from analysts and management's clarity in responses suggest a favorable market reaction, predicting a stock price increase of 2% to 8%.
Key Financial Performance
Total Revenue (Q4 FY '26) $451 million, growing approximately 16% as reported and 14% on a constant currency basis. Growth driven by strong customer commitments and stable consumption patterns.
Sales-led Subscription Revenue (Q4 FY '26) $375 million, representing growth of 19% as reported and 16% on a constant currency basis. Growth attributed to demand for Elastic's platform for AI, search, observability, and security.
CRPO (Q4 FY '26) $1.2 billion, 20% growth both as reported and on a constant currency basis. Growth driven by increased customer commitments in search, security, and observability solutions.
RPO (Q4 FY '26) $1.98 billion, growing 28% as reported and 27.4% in constant currency. Growth attributed to multiyear commitments and strong customer relationships.
Noncurrent RPO (Q4 FY '26) Grew 43% year-over-year. Growth reflects deepening customer relationships and increasing multiyear contracts.
Operating Margin (Q4 FY '26) 14.8%, exceeding guidance. Reflects disciplined cost management and efficiency improvements.
Operating Margin (FY '26) 16.4%, expanded by over 120 basis points year-over-year. Reflects efficiency improvements and strategic investments.
Adjusted Free Cash Flow Margin (FY '26) Approximately 20%. Reflects strong cash generation and disciplined financial management.
Customers with $1 Million+ ACV (FY '26) Grew approximately 14%, adding more than 30 net new customers. Growth driven by strong expansion among high-value customers.
Customers with $5 Million+ ACV (FY '26) Grew 30%. Reflects strong expansion among high-value customers.
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Operating Highlights
AI-driven SOC and SRE: Elastic's AI-driven SOC and SRE solutions for security and observability are gaining traction, with over 600 customers using AI capabilities, including 40 serverless customers.
Prometheus time series data support: Elastic introduced native support for Prometheus time series data in Elastic Search, offering up to 30x faster query speeds and storage efficiency.
Cross Project Search: Introduced Cross Project Search, enabling users to query disparate projects without centralizing data.
Public sector growth: Elastic's partnership with CISA is expanding, with more civilian agencies adopting Elastic SIEM as a Service, driving cloud commitments.
AI adoption: AI use cases now penetrate over 1/3 of Elastic's $100,000 ACV customer cohort, with demand from global organizations and AI-native companies.
Revenue growth: Elastic achieved 16% total revenue growth in Q4 FY '26 and 17% for the full year, with a non-GAAP operating margin of 16.4%.
Customer expansion: Added over 30 net new customers to the $1 million-plus ACV cohort, with customers spending over $5 million annually growing by 30%.
AI-driven transformation: Elastic is leveraging AI to modernize internal operations, aiming to simplify processes, reduce complexity, and scale effectively.
Platform consolidation: Elastic is driving platform consolidation by supporting both security and observability on a single data tier, enhancing cost efficiency and performance.
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Risk or Challenges
Shift to Cloud Commitments: The shift towards cloud commitments, particularly driven by U.S. public sector agencies adopting CISA SIEM as a Service, impacted in-quarter revenue recognition. Cloud commitments ramp over time, unlike self-managed commitments, which recognize a portion of revenue upfront. This variability could create short-term revenue fluctuations.
Economic Uncertainty in AI Adoption: While AI adoption is a growth driver, there is market noise and questions about AI's impact on software. This uncertainty could affect customer confidence and investment decisions in the short term.
Operational Complexity: The company is undergoing organizational changes to align with AI automation, aiming to simplify operations and reduce complexity. However, such transitions could pose risks to operational efficiency and employee morale during the adjustment period.
Dependence on High-Value Customers: A significant portion of revenue growth is driven by high-value customers with $1 million-plus ACV. Over-reliance on these customers could pose risks if any of them reduce their commitments or face financial difficulties.
Regulatory and Compliance Risks: The company operates in sectors like public security and financial services, which are heavily regulated. Changes in regulations or compliance requirements could increase operational costs or limit market opportunities.
Competitive Pressures: Elastic faces competition from legacy vendors and other AI-driven platforms. Maintaining a competitive edge requires continuous innovation and investment, which could strain resources.
Supply Chain and Infrastructure Costs: The shift to cloud and the need for scalable infrastructure to support AI-driven solutions could lead to increased operational costs, impacting margins.
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Guidance & Outlook
Revenue Growth FY '27: Elastic expects total revenue in the range of $1.985 billion to $2 billion, representing 14.6% year-over-year growth at the midpoint or 14.5% year-over-year constant currency growth at the midpoint.
Sales-Led Subscription Revenue FY '27: Expected to range between $1.673 billion to $1.688 billion, representing 16.9% year-over-year growth at the midpoint or 16.8% year-over-year constant currency growth at the midpoint.
Non-GAAP Operating Margin FY '27: Expected to be approximately 19%, reflecting a 2.5 percentage point expansion compared to FY '26.
Non-GAAP Diluted Earnings Per Share FY '27: Expected to range between $3.21 to $3.29, using between 107.5 million and 108.5 million diluted weighted average ordinary shares outstanding.
Adjusted Free Cash Flow Margin FY '27: Expected to increase to 21.5%, excluding any acquisitions or onetime charges.
Revenue Growth Trajectory FY '27: Revenue and sales-led subscription revenue growth expected to build momentum throughout the year, with Q1 showing the lowest growth and Q4 showing the highest growth.
Public Sector Cloud Momentum: Anticipated continued adoption of Elastic's cloud solutions by U.S. public sector agencies, particularly through CISA SIEM as a Service.
Medium-Term Non-GAAP Operating Margin Target FY '29: Raised from more than 20% to approximately 25%, with associated improvement in Rule of 40.
Medium-Term Sales-Led Subscription Revenue Growth Target FY '29: Expected to achieve 20%+ growth.
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Shareholder Return Plan
Share Repurchase Program: Elastic announced a $500 million share repurchase program in October. During the fourth quarter, the company returned approximately $40 million to shareholders, representing purchases of approximately 650,000 shares. As of the end of the fiscal year, Elastic has used approximately 68% of the $500 million authorized amount, ahead of its goal of using half of the authorized amount in FY '26. Since the beginning of the repurchase program, Elastic has repurchased approximately 4.4 million shares. The company plans to return 50% of its free cash flow through share repurchases unless attractive acquisition opportunities arise.
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Key Q&A
Q:What do you think is driving the success in bookings, particularly in CRPO and RPOs?
A:The success is attributed to the platform's efficiency, strong context capabilities for AI applications, and specialized agents for AI SRE, observability, and AI SOC. These factors are driving automation, workload consolidation, and longer-term commitments from customers.
Q:Have you been able to replicate the success of CISA SIEM as a Service in the commercial markets?
A:Yes, the success has been replicated in commercial markets. For example, a Fortune 50 global bank chose Elastic as their SecOps platform due to its efficiency and AI capabilities. The CISA SIEM as a Service deal has also exceeded its $26 million commitment as more civilian agencies adopt the platform.
Q:How should we think about CRPO growth as a leading indicator for subscription sales growth?
A:CRPO growth is a leading indicator of subscription sales growth. The company expects an accelerating trajectory for both revenue and sales-led revenue, progressing from Q1 to Q4, aligning with the 20% sales subscription growth target.
Q:Are there any significant go-to-market changes expected this year?
A:No significant changes are planned. The company is satisfied with the current go-to-market structure and plans to add more sales capacity to drive future growth.
Q:What segments are seeing the most productivity gains from AI, and where will hiring focus be?
A:AI-led automation is being leveraged across all functions, including engineering, marketing, sales, and finance. Hiring will focus on sales capacity, while other functions may scale differently due to AI efficiencies.
Q:What are the dynamics between enterprise and SMB segments, particularly regarding churn in the monthly cloud business?
A:The enterprise segment is the primary focus, showing strong growth and commitments. The monthly cloud business, driven by SMBs, grew 3% and is expected to remain flat. The annual cloud business grew 26%, reflecting strong enterprise adoption.
Q:What kind of demand signals are you seeing for Omni V5, and how does it affect platform usage?
A:Omni V5 is generating excitement due to its ability to handle multimodal data like PDFs, audio, and video. It expands the total addressable market (TAM) by enabling more workloads, though it does not necessarily increase compute usage.
Q:How do you plan to bridge the FY '27 exit growth rate to the 20%+ growth target in FY '29?
A:The bridge involves accelerating growth from Q1 to Q4 in FY '27, driven by existing commitments and ramped sales reps. This trajectory is expected to continue into FY '28 and beyond, supported by increasing sales capacity and customer commitments.
Q:How does the spend profile of AI-attached customers compare to non-AI customers?
A:AI-attached customers within the $100,000 ACV cohort are growing faster than non-AI customers, with a growth rate over 5% higher. AI use cases span vector databases, context platforms, and AI SOC capabilities.
Q:What is driving the acceleration in CRPO and RPO growth, and how are customers viewing Elastic strategically?
A:Growth is driven by strong adoption across search, observability, and security solutions. Customers are making longer-term commitments, viewing Elastic as a strategic partner for their use cases.
Q:What is the contribution of AI to the fiscal '27 guidance, and how can it drive upside?
A:AI contributes approximately 500 basis points to growth, with increasing adoption across the customer base. This trend is expected to drive further acceleration.
Q:Are there any meaningful contributions from new products or features in fiscal '27 guidance?
A:The guidance is based on organic growth from existing products. The revamped metrics engine is expected to expand TAM and drive growth, particularly among existing log analytics customers.
Q:How much of the back-half acceleration in fiscal '27 is driven by ramped sales capacity versus existing commitments?
A:The acceleration is driven by a combination of ramped sales capacity and existing commitments. Approximately 70% of revenue coverage comes from CRPO, with the rest driven by new commitments.
Q:Are there any anticipated pricing or packaging changes in fiscal '27?
A:A 3% price increase for cloud and a 5% increase for self-managed products were implemented, reflecting new features and efficiencies. These changes are not expected to significantly impact revenue year-over-year.
Q:What assumptions are baked into the fiscal '27 guidance regarding U.S. federal contributions?
A:The guidance assumes continued strong performance in the U.S. public sector, including the CISA SIEM as a Service platform, which is seeing increasing adoption among civilian agencies.
Q:How are different customer cohorts expanding, and are newer customers growing as quickly as older ones?
A:Older cohorts continue to expand through upsell and cross-sell motions. AI-attached customers are growing faster, with newer AI features driving additional growth across all solutions.
Q:How do you view the Splunk displacement opportunity, and could it be an upside catalyst?
A:The opportunity to displace incumbents like Splunk is significant, driven by Elastic's efficient and AI-enabled platform. This is expected to contribute to revenue acceleration over the next 12 months and beyond.
Q:How big of a growth vector is the MCP initiative, and does it provide a durable advantage?
A:The MCP initiative is seen as a durable advantage, enabling smart and cost-efficient data access for agents. This capability is expected to grow in importance as data volumes and agent usage increase.
Q:Are AI growth trends broadening beyond search to security and observability?
A:Yes, while initial AI growth was driven by search, newer AI features are gaining traction in security and observability, contributing to overall growth.
Q:Does the AI selling motion require more technical sales teams, and is Elastic prepared for this?
A:Elastic's sales motion has always been technical, targeting developers and specialists. The AI motion aligns well with this approach, supported by a small specialist team to assist broader sales efforts.
Q:Review of Unclear Management Responses
A:No questions were avoided or lacked clarity in the responses provided by management.
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Earnings Word Cloud
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ESTC Report
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