Elastic N.V. (ESTC) Q4 2020 earnings call dated Jun. 03, 2020

Corporate Participants:

Anthony Luscri — Vice President of Investor Relations

Shay Banon — Chief Executive Officer

Janesh Moorjani — Chief Financial Officer

Analysts:

Brent Thill — Jefferies — Analyst

Raimo Lenschow — Barclays — Analyst

Matt Hedberg — RBC Capital Markets — Analyst

Mark Murphy — JPMorgan — Analyst

Heather Bellini — Goldman Sachs — Analyst

Andrew Nowinski — D.A. Davidson — Analyst

David Hynes — Canaccord — Analyst

Brad Reback — Stifel — Analyst

Ittai Kidron — Oppenheimer — Analyst

Tyler Radke — Citi — Analyst

Presentation:

Operator

Good day, and welcome to the Elastic Fourth Quarter and Full Fiscal Year 2020 Financial Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there’ll be an opportunity to ask questions. [Operator Instructions]

I would now like to turn the conference over to Anthony Luscri, Vice President of Investor Relations. Please, go ahead.

Anthony Luscri — Vice President of Investor Relations

Thank you. Good afternoon, and thank you for joining us on today’s conference call to discuss Elastic’s fourth quarter and full fiscal 2020 financial results. On the call, we have Shay Banon, Founder and Chief Executive Officer; and Janesh Moorjani, 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 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 or expectations regarding the impact of the COVID-19 pandemic 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. Please refer to the risks and uncertainties included in the press release that we issued earlier today, 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 these non-GAAP financial 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 2021 quiet period begins at the close of business, Friday, July 10, 2020.

With that, I’ll turn it over to Shay.

Shay Banon — Chief Executive Officer

Thank you, Anthony. Hello, and welcome to everyone. I am happy to be here with all of you today to share the results of our fourth quarter and full fiscal year. I feel fortunate to report that our business is strong and resilient. We continue to innovate rapidly, and we are executing well in this challenging environment. I’m extremely proud of how the Elastic team continues to support our community of users, partners and customers, and my heart goes out to those affected by the COVID-19 situation. The team did a fantastic job, building on our Q3 results, to achieve an amazing Q4 and strong finish to our fiscal year. And they did so during truly challenging times, with the COVID-19 outbreak, which I will cover before touching on our results and business highlights.

On our February earnings call, we said we would closely monitor the COVID-19 situation and respond as needed. As we learned more, we adapted quickly to manage for safety, cost efficiency, operations and overall business continuity. We are resilient because of our source code and cultural traits. They form a foundation that we believe is unshakable in the face of adversity. Our Company is distributed by design, so transitioning to work-from-home simply required sending an email. We’ve always had the infrastructure, tooling, discipline and mindset for virtual work on a global scale. Engineering continues to ship product. Marketing continues to drive demand. Sales continues to close business. And our community of users and customers continue to engage with us. We are innovating and executing and adapting our go-to-market motion as needed.

We continued to execute on our direct sales motion in a virtual environment, allowing us to keep closing new and renewed businesses. We pivoted all of our in-person training to the online format we’ve had for years. We shifted all our ElasticON events to be virtual and free. We held three virtual events in Q4 and there are more on the way. When an event is no longer restricted to a physical location, we’re able to reach and engage a broader audience. As a result of this shift, we are also seeing increased attendance.

As for what comes next, our strength will help us navigate that. From our distributed-by-design approach to our rapid pace of innovation, development of customer-focused solutions, our large and geographically diverse customer base, efficient go-to-market, solid customer expansion and strong balance sheet, all of these gives us confidence to address the rich market opportunity ahead of us.

Moving on to our results. Looking at the full fiscal year, revenue grew 57% year-over-year. In Q4, we once, again, saw robust customer acquisition and expansion metrics, and grew revenue 53%. We ended the quarter with more than 11,300 subscription customers, including over 610 with annual contract value of more than $100,000. And our net expansion rate continues to be over 130%. This is all made possible by our wonderful community of customers, partners, users and employees. So thank you.

You can see we continue to balance doing the right things for the near-term, with planning for the long-term. Our Company is relentlessly resilient. We believe we are well-positioned to address the changing business landscape, more virtual teams and workplaces, a greater move to the cloud, and increased pressure to consolidate tooling. We’re built on a free and open foundation, which has staying power in challenging times. Our free and open distribution model will continue to fuel rapid adoption and innovation. Our business model will continue to leverage proprietary software that delivers unique and compelling value to our customers. We will continue to invest in our three solutions, built on a single stack, that can be deployed anywhere, under a unified pricing model.

I’d like to share a few highlights with you. I’ll start with our enterprise search solution, because I’m particularly excited about this space. I’ve been in this industry for more than 15 years, and these are words I did not think I would say. That’s because historically, enterprise search meant months to years of setup times to deliver a solution that didn’t scale, didn’t connect to everything you wanted and have confusing and restrictive pricing. The engagement often involve success services. And in the end, the solution just didn’t work all that well. You couldn’t find anything.

Our enterprise search solution is different. We believe in the ability to easily and quickly put a fast, scalable, powerful search box on websites, applications and workplaces. This is validated by customers from across industries, who continue to adopt us for this solution this quarter, from e-commerce to financial services, technology and the public sector.

We’re a rapid release company. We drop major features in minor releases. With our latest release 7.7, we reached a significant milestone. Our proprietary Elastic Workplace Search product became generally available. It’s a completely new set of find for the enterprise. It provides an intuitive single point of search that lets employees find what they’re looking for, whether that’s across common workplace tools like Microsoft 365, G Suite, Slack, Salesforce, GitHub and Zendesk or custom applications. Our out-of-the-box connectors and flexible APIs cover a lot of ground, and there’s more to come. And with resource-based pricing, we keep things simple and flexible. Customers pay for the resources their search consumes. Plus, we’re making Workplace Search even easier to adopt with an upcoming free and proprietary tier and the ability to deploy on Elastic Cloud.

Our product and go-to-market approach, in this space, is timely as a massive shift toward virtual workplaces and phones. And I’m not alone in my thinking. Forrester estimates, we’ll see threefold growth in the enterprise search market in the next three years, as Company look to replace old search technology. Forrester also noted that with the release of Elastic Workplace Search, we are well-positioned as the transition unfolds. So there is definitely more to come.

Now take that search box for enterprise search, and apply it to observability with log, metric and APM data. Our approach to observability eliminates data silos, reduces mean time to resolution, and allows customers to control costs without compromising on visibility. This is important because as observable systems and services continue to multiply to meet business needs, so will the pressure to consolidate a strolling universe of tooling, whether that’s because of cost, efficiency or both.

Leading American mortgage company, Ellie Mae, who is a customer of ours, comes to mind here. They used to have many different technology vendors deployed across their entire business to monitor various systems and services. Tooling bingo, they called it. By choosing Elastic’s unified approach, not only did they cut their logging costs in the half, they became more efficient in finding bugs faster. This has translated into a better customer experience and, in turn, potentially higher revenue. One stack, one pricing model and the ability to move between solutions, this resonates with our customers. And we are constantly delivering more and differentiated value to them.

In our 7.7 release, for example, the team shipped highly requested service maps capabilities for greater visibility in APM use cases. We also introduced many new out-of-the-box integrations, flexible search options over large data volumes and improvements to memory usage and previewed our newly refactored alerting framework. And because features like alerting are implemented at the staff level with the foundation, they are applicable to all of our solutions, not just observability. If you think about all of these value in the context of our unified pricing model and ability to deploy multiple solutions on a single stack, it’s a really powerful thing for our customers. In fact, we have business renew and expand in Q4 with two Fortune 50 companies, one in technology and the other in retail, to power various applications of enterprise search, observability and security.

As the business landscape evolves, the need to detect threats and protect endpoints is increasing along with the need to search across enterprises and observe infrastructure. For example, global financial services company, BNP Paribas, renewed and expanded business with us in the quarter. They’ve used Elastic for centralized logging and application search for a few years. Now they are building out a large security operations center. This expansion opens up the opportunity to integrate SIEM into their Elastic use, and helps them streamline costs and accelerate time to market, with a single technology stack. Another example is OverDrive, a leading digital reading platform for e-books, audiobooks and video from public libraries across the world.

Elastic powers search within their customer-facing applications and log analytics on those applications. In Q4, they closed new business with us for security, seeing the value that a single unified stack that powers quest hunting and endpoint protection in addition to their other use cases, ultimately help them decide to make a multi-year investment with Elastic. In the same way that we believe any observability customer is a potential security customer. We believe that every SIEM customer is a potential endpoint customer. This is why we’re relentlessly executing on our vision of a fast, scalable security solution that unifies SIEM and endpoint protection into a single foundation with unified pricing. And it just gets better and better with each release. In Q4, we introduced new features such as, embedded case management workflows that also natively integrates with ServiceNow. This streamlines incident response and reduces mean time to respond, which is critical to the success of today’s security practitioners.

We also continued to invest in our cloud offerings. Our Elastic Cloud is available on AWS, GCP, Azure, Tencent Cloud and Alibaba. In the quarter, we announced the preview release on AWS GovCloud and our FedRAMP “In Process” status, in addition to the availability of nine new global regions for Elastic Cloud, six on Google Cloud, two on Azure, and one on AWS. It’s exciting to watch our cloud partnerships deepen, especially with Google Cloud and Microsoft. They worked with us to extend our Workplace Search product to G Suite, make our annual subscription offerings available via the Google Cloud Marketplace, and also recognized us as their 2019 Data Management Technology Partner of the Year. We were also fortunate to hear from Scott Guthrie, EVP for Microsoft’s Cloud and AI Groups, at our virtual sales kickoff.

Our commitment to being where our users are remains strong. It starts with a great SaaS experience that drives customer adoption and retention. Take Nordic digital bank Collector Bank, for example, who renewed multi-year business with us in Q4 to run their logging and security workloads with our Elasticsearch Service. And that commitment extends to bare metal or hybrid environment. Products like Elastic Cloud Enterprise and Elastic Cloud on Kubernetes, both of which had new releases in Q4, give customers the freedom to self-manage if they want to. We’ve closed multi-year business in Q4 with a Fortune 50 energy company, who chose this option. They use us to monitor Kubernetes logs by running our Elastic Cloud on Kubernetes product.

As you can see, the team hasn’t lost a beat in terms of innovation or execution. I am honored to work with such an amazing group of people at Elastic, and report on such a strong quarter and fiscal year. They made it possible to respond to the global crisis quickly and efficiently to manage for safety, cost efficiency and business continuity. We believe our Company, our go-to-market, our products and our team are uniquely well positioned. Our free and open approach makes us resilient during difficult times, and helps us come out strong in the long run. Even when times are tough, people still need to solve the same challenges, put a search box on their application or workplace, on their infrastructure to observe it and on their company to protect it. We are here for them.

Throughout all of this, I remain determined as we head into FY ’21 and optimistic, as I look at the future. We will continue to invest in building on a single stack and make it easier for customers to adopt new solutions. We will continue to be where our users are and deliver an unparalleled SaaS experience. We will continue to embrace and build on the amazing developer adoption of our technology as we move up in the enterprise. And we will stay focused on delivering value to our customers, communities and partners.

And with that, I’ll hand it over to Janesh.

Janesh Moorjani — Chief Financial Officer

Thanks, Shay. Q4 was another great quarter for Elastic, capping off a strong FY ’20. Total revenue in the fourth quarter was $123.6 million, up 53% year-over-year or 57% on a constant-currency basis. We finished FY ’20 with $427.6 million in total revenue, up 57% year-over-year or 60% on a constant-currency basis, reflecting strong revenue growth at scale. In terms of business momentum during the quarter, we saw a pause in mid-to-late March, when customers were focused on taking care of their employees and operationalizing their business continuity plans as various lockdowns went into effect. After the distractions faded, we finished March strong, with the momentum continuing into April.

Our customer diversification has been an advantage to us across geographies, verticals and segments. In Q4, 42% of our revenue came from outside the United States, reflecting the strength of our distribution model. Hospitality, transportation, traditional retail and energy on a combined basis make up less than 15% of our business. Although business has been impacted in those verticals by COVID-19, we also have customers in verticals that have benefited from COVID-19 such as e-commerce, gaming, on-demand delivery and media companies.

Further, although SMB growth was slower compared to other segments, we also have limited exposure to the SMB segment at roughly 15% across both self-managed and SaaS formats. Increased customer churn in this segment was offset by even higher new customer additions, reflecting the strategic value of our product offerings. Offsetting the impact in SMB, we benefited from continued strength in government spending outside the United States, and in the enterprise segment, reflecting early indications of success of our strategy to penetrate the enterprise deeper with our solutions. All these trends demonstrate that the benefits of being a distributed company aren’t limited to our internal capabilities. They extend to achieving diversification more broadly, which we view as a long-term advantage.

SaaS revenue in the fourth quarter was $29 million, up 110% year-over-year or 120% on a constant currency basis. SaaS revenue for FY ’20 was $92.3 million, up 101% year-over-year or 109% on a constant currency basis. We saw strength in both our annual SaaS business as well as our monthly SaaS business. Our rapid growth in SaaS reflects the success of our strategy to widen our competitive moat with proprietary features and to leverage our partnerships.

Moving on to calculated billings. Calculated billings in Q4 grew 52% year-over-year or 55% on a constant currency basis to $175.1 million. APJ was once again the fastest-growing region, followed by the Americas and then EMEA. At the end of Q4, total deferred revenue was approximately $259.7 million, up 52% year-over-year. Remaining performance obligations totaled approximately $535.6 million, also up 52% year-over-year. Contract length were longer versus a year ago at over 1.5 years on average. As a reminder, we do not manage the business to a target contract length, and our monthly SaaS business has no deferred revenue or remaining performance obligations.

Turning to customer metrics. As of the end of Q4, we had over 11,300 subscription customers compared to over 10,500 customers at the end of Q3. We saw similar strength in new customer additions in Q4 as we have seen in prior quarters. We also ended the quarter with more than 610 customers with annual contract values above $100,000 compared to more than 570 such customers at the end of Q3, reflecting continued strong renewal and expansion trends despite COVID-19. In Q4, our net expansion rate remained over 130%. We also achieved another important customer milestone in Q4. We now have over 50 customers with ACV over $1 million, reflecting the richness and differentiation of our offerings, the strong alignment of our solutions with customer spending priorities and the success of our go-to-market model as we move further up within the enterprise. Although we do not plan to discuss this number each quarter, we will continue to share important milestones on this journey with you.

Now turning to profitability, which is non- GAAP. Gross margin in the fourth quarter was 76%, largely reflecting a sequential improvement in professional services margin, which can fluctuate based on projects and delivery timing. Subscriptions gross margin was roughly flat compared to Q3. We are tracking well relative to our expectations. In the near term, we will continue to invest in our SaaS business, which will remain a modest headwind to gross margin overall.

Our operating loss in the quarter was $12.7 million with an operating margin of negative 10%, which was significantly better than expected, driven by three factors, strong revenue performance in the quarter, lower discretionary spending due to a shift to virtual across all of our operations and, to a lesser extent, slower hiring as we navigated the uncertainty related to COVID-19 during March and April. The FX impact on operating margin was insignificant. Our strong operating margin performance in Q4 reflects both the underlying leverage in the model as well as our tight focus on investing with discipline as we drive growth. Operating margin for the full year was negative 18%. Net loss per share in Q4 was $0.12 using 82.1 million weighted average shares outstanding. Net loss per share in fiscal 2020 was $0.93.

Turning to free cash flow. Free cash flow was negative $6.8 million in Q4. Full year fiscal 2020 free cash flow margin improved two percentage points year-over-year to negative 8%. We’ve demonstrated free cash flow margin improvement of a few percentage points each year for a couple of years now, indicating the leverage in our business model as we scale. We were pleased that we delivered free cash flow margin improvement again this year despite the dilution from the acquisition of Endgame. We expect that we will drive improvement in free cash flow margin again in FY ’21 to approximately negative 2% to negative 4%, with a goal of achieving positive free cash flow margin in FY ’22. We ended the year with approximately $297 million in cash and cash equivalents. We remain comfortable with our cash position from an operating perspective.

Before I move to guidance, I want to briefly discuss our overall framework for fiscal ’21. In the near term, we believe the trends we experienced in April will continue as our customers continue to prioritize their investments, and we help them achieve their business goals with our solutions. We also expect that our SaaS business will continue to grow at a strong pace and faster than our overall business. Looking ahead, our assumption is that we are going to be operating in a difficult economic environment due to COVID-19 with only a gradual recovery over time, which will likely create headwinds on calculated billings over the next couple of quarters.

In building our fiscal-year plan, we examined various scenarios to better assess the impacts from affected verticals, segments and geographies. Some of these are positive effects and some negative. However, we do generally expect that some customers will scrutinize their spending more carefully given a challenging economic environment, and this might cause sales cycles to become longer. The great thing is that our solutions align well with their business priorities and our competitive advantages are strong and distinct. Therefore, we remain positive on the long-term growth of the business. Given the strength of our balance sheet, our strong execution in fiscal 2020 and the size of the opportunity in front of us, our intention is to continue investing through the cycle.

We expect to maintain a disciplined approach to investing across the entire business. We plan to continue headcount-related investments in R&D to drive innovation and sales capacity and coverage globally to drive growth as well as in G&A investments to drive global expansion and scale. At the same time, we intend to drive margin improvement. We can do both given the leverage inherent in our operating model.

Turning to guidance for the first quarter and the full year fiscal 2021. We are expanding our revenue guidance range to account for the increased uncertainty in the broader economic environment. For the first quarter of FY ’21, we expect revenue in the range of $119 million to $122 million, representing a growth rate of 34% year-over-year at the midpoint. We expect non-GAAP operating margin in the range of minus 12% to minus 11% and non-GAAP net loss per share in the range of $0.19 to $0.17, using between 83 million and 84 million ordinary shares outstanding.

For the full year fiscal 2021, we expect revenue in the range of $530 million to $540 million, representing a growth rate of 25% year-over-year at the midpoint. We expect non-GAAP operating margin in the range of minus 15% to minus 13% and non-GAAP net loss per share in the range of $0.98 to $0.85, using between 85 million and 87 million ordinary shares outstanding. This guidance reflects approximately $9 million in savings from the shift of our Q1 global all-hands meeting to virtual. We expect our spending on this events to return in Q1 of FY ’22. We also expect to see savings from travel and events, which we will reinvest in other programs intended to drive growth.

In closing, I’ll emphasize a few points in relation to our business. First, the Elastic team is distributed by design. And our business is diversified across geographies, segments and verticals, with customers that range in size from a few hundred dollars to several million dollars. This diversification is an inherent advantage for us. Second, our customer spending priorities align well with our solutions. As customers prioritize their spending in a difficult economic environment, we believe that enterprise search, observability and security will all be areas that will benefit. Third, with rapid innovation in our proprietary features over the past couple of years, we have significantly widened our competitive moat. Our technology is also built on a unified stack, which we believe makes our R&D investments more efficient. Fourth, we offer a unified resource-based pricing model, which liberates customers from the burden of paying based on ingest or per host or other pricing models with hidden costs. And finally, we have an incredibly powerful distribution model with a large community of users and a free and open on-ramp. We believe this positions us incredibly well to emerge from the current economic situation as we win both on value for paid features and cost for free offerings.

With that, let’s take questions. Operator?

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Brent Thill with Jefferies. Please go ahead.

Brent Thill — Jefferies — Analyst

Good afternoon. Just on the guidance, your guidance is at the midpoint, 25% revenue growth in ’21 after growing 57% in fiscal ’20. Maybe, if you could just give us a little more around your assumptions and why such a massive decel on the top line?

Janesh Moorjani — Chief Financial Officer

Hey, Brent, it’s Janesh. I hope you can hear me, okay. We had a little bit of trouble with the audio earlier. But in terms of the question, look, we obviously had a very strong finish to Q4, and we’re actually quite pleased with the results that we delivered here. As I mentioned in my earlier remarks, we did see some impacts related to COVID-19 in some areas, and that was offset by strength that we experienced in other parts of the business. That said, just given the broader macroeconomic environment that we think will be difficult over the coming quarters, we do generally expect that some customers will likely scrutinize their spending a little bit more carefully in this environment that might cause sales cycles to lengthen a little bit. And it might present a bit of a headwind to calculated billings over the next couple of quarters. Generally speaking, we expect that the recovery will be gradual.

And so we believe it’s just best to be prudent in our outlook for the rest of the year at this point in time. We looked at various different scenarios as we are building our financial plan internally. Obviously, we went through that process here in the last month or so. And as we looked at all those different scenarios, we considered all of these effects as we set guidance. So we’ll obviously update you as you go. But for now, we are focused on executing here in Q1. The great thing for us is the market opportunity continues to be large and growing. And as you’ve seen here in Q4, our solutions are aligning really well with customer priorities. And our competitive advantages are strong and distinct. So we’re quite positive on the long-term growth of the business but prefer to be a little bit prudent here as we look to the rest of fiscal ’21.

Brent Thill — Jefferies — Analyst

And real quickly, has May felt better to you than April? I think the tone definitely seems to be improving, but are you seeing that in your business right now?

Janesh Moorjani — Chief Financial Officer

Yeah. There’s a couple of different dimensions to that. So the strength that we saw in April coming off the couple of weeks that were slow in the month of March. Generally speaking, the overall business momentum and cadence has continued. When I think about some of our top of funnel activities, April and May have both been at consistent levels compared to sort of the pre-COVID levels. But that said, May is always a little bit of a unique month for us because it’s the first month of our fiscal year. And so we will typically have a slower start as salespeople align to new territories and territories get carved and quotas get assigned and so forth. So generally speaking, I’d say the broad customer trends have continued. But we do think it’s best to just stay focused here on execution in the near term and then update you again in 90 days for Q2 and beyond.

Brent Thill — Jefferies — Analyst

Thanks, Janesh.

Operator

And our next question will come from Raimo Lenschow with Barclays. Please go ahead.

Raimo Lenschow — Barclays — Analyst

Hey, two questions. First one for Shay. Can you see already a change in what the customers are looking for in terms of solutions that they’re kind of wanting to interact with you in terms of like has the — in other words, has the crisis changed what products are hot with you or like — and what are kind of slightly less in demand? And have you changed the marketing around that? And then one for Janesh. Like I get the billings being weak, but you’re obviously guiding for total revenue. So to get to that numbers, I need to have quite a bit of nonrenewals and churn coming into the mix and you gave this kind of some very low numbers on SMB. So just is there any other factors we need to — big nonrenewal or something that we need to be aware of? Or is it just kind of the environment in general? Thank you.

Shay Banon — Chief Executive Officer

Yeah. I’ll start and take the first question. Thank you, Raimo. So when I think about the current environment, obviously, in the context of the pandemic that is going around, companies becoming virtual, closing offices, working from home, probably accelerating their digital transformation if it’s happening and try to figure out how do they go and be there for their employees to make sure that they continue to close business, I look at it at the prism of our three solutions. If I start with enterprise search, then we’re a distributed company. For many years now, we have a saying at Elastic that face-to-face meetings are not searchable, which means that as companies become more distributed and they work virtually, they create much more IT when it comes to written communications, whether it’s on messaging apps, transcribes on video calls and more collaboration on things like Google Docs and Office 365. All of that is critical IP for a company that companies would want to go and search. And I expect our Workplace Search product that just GA-ed to be exactly a good fit for that. So I’m excited about the opportunity of helping our customers be more efficient and successful with capturing the fact that they become more virtual.

When it comes to observability, obviously, as you work more from home, you end up having to manage more servers, more infrastructure, more laptops. You rely on external services and internal services. And all of them needs to be observed not only to satisfy the needs of the customers that you serve as a company but also to serve your employees. If a service is down, then suddenly, the whole company can slow down. And with that sense, we provide a set of observability tools that help support that. And we’ve heard with a few customers of ours that say that thanks to our observability tools, we help them become virtual, and they’re using our tools to be able to go and make sure that they manage through this transition. And last bit around security.

Obviously, as I mentioned, as you have more servers now, you have more laptops, you have more endpoints, and you need to be able to protect them either through the endpoints themselves or by being able to get all of that data correlated and execute against it. As you become more digital and you have more infrastructure, your attack surface grows and our security solution and strategy applies nicely to it. So I’m excited about our ability to take these three main solutions that we focus on and bringing it to our customers. And it seems like it aligns well with where companies are heading today and in the future.

Janesh Moorjani — Chief Financial Officer

And Raimo, to follow-up on the second question about the churn assumptions and our experience with renewals. Broadly speaking, we’ve actually — we are quite pleased with the way Q4 turned out even on renewals and the overall expansion metrics that we’ve got with our customers. We didn’t see any significant differences in churn overall in the customer base. We did see a slightly higher churn in SMB that I had mentioned earlier in my remarks. But given that that’s only around 15% of the business, it didn’t affect the overall churn much at all. In fact, our gross renewal rate was actually similar to where it’s been in the past. So again, kudos to the team on executing during Q4. We’re just pleased that customers continue to see significant value in our solutions and in our paid features. And that’s what we’re executing toward over here. In terms of how that factors into the guidance, as I said, we looked at various different scenarios in terms of where those headwinds might arise. It can come from a number of different areas. We will have to just monitor that as the overall economic environment unfolds. So for now, we’re just focused on executing here in Q1. And we provided the outlook based on the assumptions that we had built into our internal plans as we were modeling the year.

Raimo Lenschow — Barclays — Analyst

Okay. Makes sense. Thank you very much, and stay safe. Thank you.

Operator

And our next question will come from Matt Hedberg with RBC Capital Markets. Please go ahead.

Matt Hedberg — RBC Capital Markets — Analyst

Hey, guys. Thanks for taking my questions. I’m glad you guys are all well. I think I just wanted to ask another question on the guide. I think we’re all trying to reconcile what was really a very strong quarter. I mean 60% constant currency growth for the year. It sounds like April and May have been good. I guess I had a question. In terms of the scenarios that you ran, Janesh, on the guide, are you actually seeing sales cycles extend right now? Or is it more to the assumption that you might expect them to happen? Because it just seems like there’s a real disconnect between the momentum that you’re seeing and maybe the conservatism. And then maybe also, could you comment on the strength of your pipeline at this point kind of relative to where we would normally be in Q1?

Janesh Moorjani — Chief Financial Officer

Yeah. Happy to, Matt. So a couple of things. One is generally speaking, the activities that we saw in the month of April have continued in May, as I said earlier. That relates to overall top of funnel activities in terms of our webinars and conferences, our virtual ElasticON tours, all of our demand gen activities. All of that continues as normal. We’ve seen, I’d say, a consistent level of activity over the past couple of months. And so that’s all good. In terms of the actual performance in May, without getting too much into our overall Q1 performance, as I said, May is usually a little bit of a slow start. It’s the first month of the fiscal year. So I think it’s just too early to tell what that impact will be. And so that’s why we’re staying focused here on just delivering a solid set of numbers for Q1. And then we’ll update you again in 90 days’ time on the rest of the year.

Matt Hedberg — RBC Capital Markets — Analyst

And then maybe, Shay, I mean I guess when we think about the impact of COVID, clearly, there’s significant changes in how I think we all live and work. When you look out longer term, do you see the impact of elevated work from home, increased public cloud adoption? I mean should that be a tailwind for you guys? And maybe you’re not seeing it yet, but I’m just sort of curious, philosophically speaking, should all of this that we’re seeing right now benefit you guys longer-term?

Shay Banon — Chief Executive Officer

Yeah. Thanks, Matt. We definitely think that it’s going to be a tailwind over the long term. We’re simply — first, I’ll just start with FY ’21. We’re being measured around how we look forward. This is an unprecedented times. And we want to make sure that we’re being careful and trying to manage it as much as we can without a crystal ball, if you will. When it comes to the long term, yeah I mentioned in my previous answer I think our three solutions align extremely well with changes that are happening due to COVID. Some of them are simply pulling the future more toward the present or the nearer future when it comes to companies working more virtually, moving more to the cloud. Our strategy as a Company, either through our three solutions, being there for our customers wherever they are, including cloud, is sound. And I feel confident and good about the long-term opportunity that aligns well with what’s going on now.

Matt Hedberg — RBC Capital Markets — Analyst

Thanks, and strong results. Thank you.

Operator

Our next question will come from Mark Murphy with JPMorgan. Please go ahead.

Mark Murphy — JPMorgan — Analyst

Yeah. Thank you. And I will add my congrats on a nice finish to the year. I was curious if you might be able to separate out any kind of tailwind you saw from remote work activity during the quarter. Just in other words, did you sense an uplift from customers who wanted to secure all the network traffic that’s suddenly flowing in and out of their home offices, these projects that are tied to VDI environments? Is there anything like that that’s discrete as an incremental driver?

Shay Banon — Chief Executive Officer

Yeah. So first of all, if I can take it, we definitely see more usage in our observability solution and our SIEM solution. Both of them are driven by volumes of data and companies trying to adjust to a virtual workplace and being able to go and monitor it. There’s many installations out there that suddenly grew because more data, more logs, more network data, packet data and what have you are now being ingested into it to make sure that companies are, number one, well observed, and number two, well protected. So that’s definitely a tailwind. I don’t know. It’s hard to gauge how much of an effect it had over the last 1.5 months. I suspect that that’s going to be a more of a longer-term change. You can imagine that when this hit some companies that we talk to, we’re scrambling to find laptops for their employees. So they have to go and figure that one out and try to find firewalls. But then once they have these laptops and firewalls and they deploy, they need to be able to monitor them, observe them and protect them. And that’s where we are for them.

Mark Murphy — JPMorgan — Analyst

Okay. Thank you for that. I was interested as well whether you saw any customers that were indicating kind of a sense of urgency to spend money in April or in May because they fear that their IT budget might get cut in the coming months, so seeing perhaps some kind of a use it or lose it effect coming into play in April or May rather than where you would normally see that cadence at the end of the — at the calendar year. I think the question is along the lines of what Matt and Brent were sort of asking about trying to reconcile the health of Q4 versus the guidance.

Shay Banon — Chief Executive Officer

Yeah. We haven’t seen anything material when it comes to customers trying to spend money now because their IT budgets are going to shut down or get reduced. So nothing to call out there. I remain excited about the — again, the long-term future. We’re trying to be prudent about FY ’21. And even if IT budget ends up being cut down or get reduced, I am extremely confident about our ability to provide significantly more value for the same amount of dollars that companies spend either because they want to collapse their tooling bingo, if you will, and the observability space into a single technology stack and train their employees only once on it, for example; the ability for us to be there for the customers wherever they are, whether it’s on cloud or on-prem, to make sure that they make the best financial decisions; and then even further than that, being able to collapse their technology investments across SIEM or endpoint with observability. So I think this consolidation of tools is going to be a tailwind for us because we spent quite a few years investing quite heavily in our technology stack and our products to be here for them, for our customers.

Mark Murphy — JPMorgan — Analyst

Thank you.

Operator

Our next question will come from Heather Bellini with Goldman Sachs. Please go ahead.

Heather Bellini — Goldman Sachs — Analyst

Great. Thank you, Shay and Janesh, for taking the question. I just had a couple. I guess, Janesh, I’ll start with you just given all the questions you’ve been getting in Q&A related to this and the guidance. I’m just wondering, specifically, are you expecting — or have you seen the size of your lands be lower because of COVID? And so I’m talking about kind of the new customer lands. And then the net expansion rate, I know you mentioned above 130% yet again. But just wondering, based on your guidance and your comments on the macro, is it assuming that it stays above 130% for the year? And then I just had a follow-up for Shay. Thank you.

Janesh Moorjani — Chief Financial Officer

Heather, so we’re actually quite pleased with the overall rate of new customer additions that we’re experiencing, especially in light of COVID-19. You’ll see that last quarter, it was consistent with what we’ve experienced before. And in terms of the size of those lands, we’ve really not seen any significant differences just yet. And even in the size of the new lands or overall average deal sizes either, they all continue to be consistent with what we’ve seen in prior quarters. And then there is always obviously a backdrop of a strong revenue and billings finish, which reflects the expansion economics in the business as well. And in terms of those expansion economics, you’ve seen that again in the customer metrics around the expansion rate. This is with the customers over $100,000 ACV. And I also shared the data point of the number of customers with ACV over $1 million. And in fact, at the end of ’19, we had only 30 such customers compared to now. So that was a positive. But generally speaking, we’ve seen the trend be pretty strong for us. But actually, as we are thinking about our plan for the rest of the year, we think it’s sort of a measured approach at this point that we execute here in Q1 and as we continue to drive our overall strategy and the execution that we’ve been talking about.

Heather Bellini — Goldman Sachs — Analyst

Okay. So you are assuming the net expansion rate stays above 130% then for the year?

Janesh Moorjani — Chief Financial Officer

Well, we didn’t discretely break out new versus net expansion rate in terms of thinking about the model and the guide for the year, the number of different scenarios. And based on — in some of those — when you have potential headwinds associated with billings, that might show up in different ways and different metrics. We looked at it in a number of different ways, and then we just coalesced around the view that we’ve shared with you here.

Heather Bellini — Goldman Sachs — Analyst

Okay. Thank you so much. And then the question for Shay. I was just — you talked about this a little bit, but just APM seems to be something that, from the partners we talk to, has become even much bigger priority. People seem to be progressing there even faster. I’m just wondering kind of what you could share with us in terms of the momentum in the APM business and if that maybe is inflecting faster than you would have thought. Thank you.

Shay Banon — Chief Executive Officer

Sure, Heather. Yeah, happy to cover it. So first of all, our APM product has matured from my perspective, especially with the recent release, which adds the — probably the last big missing piece, which is service maps that users were asking us for. I’m excited about the usage of our APM product. It really resonates well with our customer base. It took some time to wrap their head, obviously, around the observability story and being able to combine APM and logging. But once they do, it makes a lot of sense. And then we’re there for them. We’re getting extremely good feedback about the capabilities of our APM product, and we’re getting extremely good feedback and reaction from our customers about the ability to combine APM and logs. So I remain very happy about the product that we’ve built and how well it resonates with our customer base. We have our work cut out for us to basically promote the observability story and make sure that users know us not only because of our superior and excellent logging solution but also for APM as well, and I’m happy with our progress there as well.

Heather Bellini — Goldman Sachs — Analyst

Thank you.

Operator

Our next question will come from Andrew Nowinski with D.A. Davidson. Please go ahead.

Andrew Nowinski — D.A. Davidson — Analyst

Great. Thank you. Congrats on a nice quarter, on a nice finish to the year. I want to start off with perhaps a question on contract duration. Splunk talked about seeing a fairly significant reduction in their duration. It looks like you stayed relatively unchanged. I’m just wondering if you’re expecting any variability in the billings for the year attributable to any sort of change in contract duration?

Janesh Moorjani — Chief Financial Officer

This is Janesh. So no, we didn’t see any significant differences. As I mentioned, contract durations were a little bit longer, in fact, in Q4, which was a fantastic outcome for us. It just reflects the fact that as technology adoption has grown for Elastic, our customer relationships have gotten deeper, and customers are increasingly using us in mission-critical environments. So it was great to see customers make longer-term commitments, which really reflects their confidence in Elastic and our importance to them. That said, contract length can vary from quarter to quarter. Usually, they’ve averaged about 1.5 years for us. And so we don’t specifically manage to that number. So I wouldn’t lean too much into that or call that a trend just yet. In terms of thinking about some of the factors that might cause duration to shorten, whether it’s billing terms or what have you, we haven’t seen any significant volumes of requests for shorter billing terms or for longer payment terms. That’s obviously something we’ll keep an eye out on as the quarter and the year unfolds. But at this point, we haven’t seen anything in particular. So nothing is changing there. It’s sort of steady as she goes and something that we’re quite proud about.

Andrew Nowinski — D.A. Davidson — Analyst

Okay. Thank you very much for that. And then I was wondering if you could provide any more color with regard to pricing pressure in the industry and sort of maybe the puts and takes as it relates to your gross margin for the year and how we should think about that relative to fiscal ’20?

Janesh Moorjani — Chief Financial Officer

Yeah. So as I said overall, our average deal sizes haven’t changed. Generally speaking, our pricing and our discounting practices continue to be consistent with where we were. As for larger deals, we’ll obviously have larger discounts. We manage that in the overall mix. And then, of course, as SaaS continues to increase in terms of the mix, that does present a headwind to gross margins overall. But as you’ll see, we’ve managed that quite nicely over the course of fiscal ’20 here. And in fiscal ’21, as SaaS continues to become a bigger portion of the business, we do expect that we’ll have some level of headwinds associated with that in the gross margin number. But that’s all factored into the guidance that we’ve laid out here.

Andrew Nowinski — D.A. Davidson — Analyst

Got it. Thank you very much.

Operator

And our next question will come from David Hynes with Canaccord. Please go ahead.

David Hynes — Canaccord — Analyst

Hey. Thanks for taking my questions, guys. Maybe for Shay, I want to ask about the Workplace Search release. If we think of the out-of-the-box capabilities, how far would you say they get the average organization to where they need to be? And then the second part of that question would be, given it’s a throughput model, how does this increase the search surface area in your view? And kind of what are the implications there in terms of potential for customer spend?

Shay Banon — Chief Executive Officer

Sure, of course. So I’ll start with the maturity of the product. We spent a lot of time trying to create, if you will, a consumer-first-oriented product, one that users will be able to go, download or deploy on cloud and get started within minutes, being able to connect to services like Office 365, G Suite, Zendesk and ServiceNow and others. So that’s where we spent most of our time when we create the products. We pick the top seven or eight connectors that our customers talked about. We heavily focused on SaaS services versus self-managed ones in order to be able to provide this seamless experience. And now we’re going to work on adding this set of connectors. I’m happy that out of the gate, we have coverage for the more successful and use virtual tools from Google G Suite and Microsoft Teams — Microsoft Office 365, for example.

I think as we add more and more connectors and more and more support to other tools, we’ll obviously be able to go and support more customers as they grow. When it comes to how it is going to drive our business, we still have the same pricing model when it comes to our Workplace Search, which I’m super excited about. It basically drives with the customer demand, the more data they store, the faster they want results, then they’ll be able to go and spend more money with us. I do think that Workplace Search can be the place where people go and search their Wikis and tickets and incident response and mails and chats and transcribes and what have you. And that obviously means quite a bit of data. And that aligns with the value that we give to our customers, and that aligns with our business model.

David Hynes — Canaccord — Analyst

Yeah. Perfect. Okay. Thanks very much.

Operator

Our next question will come from Brad Reback with Stifel. Please go ahead.

Brad Reback — Stifel — Analyst

Great. Thanks very much. Janesh, two of your competitors have raised close to $2 billion over the last sort of 1.5 weeks. And with less than $300 million, and I understand you’ll be cash flow positive in the next sort of 12 to 18 months, but any reason you wouldn’t go out and raise capital currently?

Janesh Moorjani — Chief Financial Officer

Yeah. A couple of thoughts on that. One is that when you think about the position that we’re in with almost $300 million of cash on the balance sheet, we feel like we are in a pretty good condition from an operating standpoint. So it’s not like we need the cash from an operational perspective. You will see that we’ve pointed to continued improvement in our free cash flow margin for fiscal ’21 as well. So we don’t expect to burn a lot of cash. And so our view has been that we will manage the balance sheet comfortably and conservatively. And at this point in time, we don’t foresee the need for that. Our operating position is relatively comfortable. And in the future, if the opportunity were to present itself and we needed capital for any other purposes, I’m sure we can consider things at that point. But at this time, we didn’t feel the need to raise capital.

Brad Reback — Stifel — Analyst

Great. Thank you very much.

Operator

And our next question will come from Ittai Kidron with Oppenheimer. Please go ahead.

Ittai Kidron — Oppenheimer — Analyst

Thanks. I promise no questions on guidance. Shay, why don’t we start with you on security? Can you talk about the integration of endpoint? You had some milestones that we’re hoping to achieve, and I think the integration was scheduled for later in the year. But where do we stand on that process and then selling this as a full solution? And then for you, Janesh, on the government side, I think you mentioned that government outside the US was solid. Is that what was kind of you’re short on a quarter or two ago? Execution-wise, can you — do those two tie? Or are there something else? Can you talk about the execution generally in that vertical?

Shay Banon — Chief Executive Officer

Sure. Ittai, let me take the first one. First of all, I’ll start with just saying that I remain excited and impressed and humbled by the Endgame team that joined us. We had more than 100 people join our engineering team, all of them experts in the security space. And that has really improved, if you will, our security DNA, augmented our DNA to be more security-oriented. And I think you see the results of it not only in the endpoint capabilities that we have but with things like our SIEM maturity and the fact that we GA-ed it and the breadth of support that we provide, including getting into other areas like case management and incident response management, which I’m excited about. When it comes to endpoint specifically, we continue to execute based on our plans. Our plan is to take endpoint security and fold it into the stack to be an integral and intimate feature within it, which means that we can go to all of our existing customers and all of our future customers, whether it’s observability, enterprise search or security and with a click of a button, enable them to be able to go and enable endpoint security. So that integration continues based on our plan. And the engineering team is on fire, making sure that, that happens, which I remain very excited about it.

Janesh Moorjani — Chief Financial Officer

And Ittai, with respect to the question on the Fed performance. Overall, we are quite pleased with public sector performance not just outside the US, but in the US as well. So the Fed performed quite well for us. Given the couple of deals that you had talked about, the slipped deals from a couple of quarters ago, they were not a factor in this quarter at all. As you know, we had closed some of those in Q3 itself. And as I’ve mentioned on the prior call, these are just now — any remaining deals are just part of the bigger pipeline. So Fed performed nicely as the public sector worldwide. And broadly speaking, we continue to be confident about our opportunities in the Fed space and the overall opportunity ahead of us.

Ittai Kidron — Oppenheimer — Analyst

Very good. Good luck.

Operator

And our next question will come from Tyler Radke with Citi. Please go ahead.

Tyler Radke — Citi — Analyst

Hey. Thanks for taking my question. I wanted to ask you a little bit about your spending and hiring plans. Janesh, I think you made some comments that in response to COVID, you did kind of take a closer look at managing things more prudently. And then obviously, the guidance, it looked like operating margins came in well above The Street, even despite lower revenue. So just kind of curious how, if at all, your plans have changed with hiring. And maybe what prevents you from investing more aggressively in what might be actually a more favorable labor market just as some of your peers that have less resources have had to make layoffs?

Janesh Moorjani — Chief Financial Officer

Tyler, thanks. It’s a great question. So look, based on the strength we saw in Q4, we are continuing to invest in the business. And that includes investments in all functions including sales. If I look back at the way we managed the business over the course of fiscal ’20, we had deliberately accelerated investments into the front half of the year and then moderated the investments in the back half of the year. So we essentially executed to plan and demonstrated that we can actually be quite nimble in hiring, and we’ve got our hands on the dial of the level of investment in the business. So given that we’ve got that nimbleness, we will continue to use that to our advantage here in fiscal ’21 given the backdrop of COVID-19. So in the near term, we are hiring at a more moderated pace just given the impact of COVID-19, focusing on the areas that are best positioned for us to drive growth. We also need to absorb some of the investments that we have taken on with Endgame, for instance.

And looking ahead, I do expect that we’ll invest even more with an eye toward driving long-term growth. We continue to invest in innovation and coverage as well as in scale. And then within the sales function, it’s not just adding capacity but also thinking about other forms of selling. So adding inside sales capacity, scaling out our renewals team. We’re investing in the technical selling functions. We’re investing in our partner program and continuing to drive growth with an eye on the long-term opportunity, and we continue to just be excited about that.

Tyler Radke — Citi — Analyst

Great. And then a follow-up for Shay. I think you talked about the potential for customers to scrutinize investments a little bit going forward. And Elastic as a company has targeted quite a broad range of use cases from enterprise search to logging, observability, security. I guess, I’m curious, as you think about that broad range of use cases, are there certain ones that may stand out as maybe more or less discretionary? And have you kind of focused efforts on more specific set of use cases that you think are going to be more valuable and maybe less likely to be considered discretionary in this environment?

Shay Banon — Chief Executive Officer

Yeah, of course. Well, first of all, I think that I consider the three solutions that we have, from my perspective, tend to be mission-critical for organizations. If that search box within your workplace doesn’t work, it means that it’s very hard for you to find information and for the company — for the team to work efficiently. I know when that doesn’t work in our company, we get a lot of noise about it, and we stop working. So I’m excited about being able to be the crux of something that helps companies move forward, at least on the internal level. I think in observability, it’s a similar manner. If you can’t observe your infrastructure or your deployments, then you’re probably in a challenge. And the same thing with security. If you’re not going to secure your company, then you’re going to be challenged as well. I think if you go and see how companies will then go and scrutinize their business, I would probably rank security slightly ahead of observability. And then if a company really needs to go and cut money, then maybe they can do less of enterprise search. But again, this is trying to find very small differences between what I consider to be three crucial services to a company well-being.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Shay Banon for any closing remarks. Please go ahead.

Shay Banon — Chief Executive Officer

Thank you, and thank you all for joining us today. Q4 was an amazing end to a strong financial year, and we look forward to continuing the momentum in fiscal ’21. Thank you very much. Ciao.

Operator

[Operator Closing Remarks]