Elastic (NYSE:ESTC) Q2 Sales Beat Estimates But Stock Drops 16.9%

Radek Strnad /
2022/11/30 4:24 pm EST

Search software company Elastic (NYSE:ESTC) reported Q2 FY2023 results beating Wall St's expectations, with revenue up 28.3% year on year to $264.4 million. However, guidance for the next quarter was less impressive, coming in at $273 million at the midpoint, being 1.69% below analyst estimates. Elastic made a GAAP loss of $47.3 million, down on its loss of $47 million, in the same quarter last year.

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Elastic (ESTC) Q2 FY2023 Highlights:

  • Revenue: $264.4 million vs analyst estimates of $261.6 million (1.05% beat)
  • EPS (non-GAAP): $0 vs analyst estimates of -$0.10 ($0.10 beat)
  • Revenue guidance for Q3 2023 is $273 million at the midpoint, below analyst estimates of $277.6 million
  • The company dropped revenue guidance for the full year, from $1.08 billion to $1.07 billion at the midpoint, a 1.2% decrease
  • Free cash flow of $10.2 million, up from negative free cash flow of $10.1 million in previous quarter
  • Net Revenue Retention Rate: 125%, down from 130% previous quarter
  • Customers: 19,700, up from 19,300 in previous quarter
  • Gross Margin (GAAP): 71.7%, down from 73.9% same quarter last year

β€‹β€‹β€œIn Q2, we exceeded both our revenue and profitability targets, demonstrating the operating leverage inherent in our business model,” said Ash Kulkarni, CEO, Elastic.

Started by Shay Banon as a search engine for his wife's growing list of recipes at Le Cordon Bleu cooking school in Paris, Elastic (NYSE:ESTC) helps companies integrate search into their products and monitor their cloud infrastructure.

Generating insights from system level data is an increasing priority for most businesses, but to do so requires connecting and analyzing piles of data stored and siloed in separate databases. This is the demand driver for cloud based data infrastructure software providers, who can more readily integrate, distribute and process information vs. legacy on-premise software providers.

Sales Growth

As you can see below, Elastic's revenue growth has been very strong over the last two years, growing from quarterly revenue of $144.8 million in Q2 FY2021, to $264.4 million.

Elastic Total Revenue

This quarter, Elastic's quarterly revenue was once again up a very solid 28.3% year on year. On top of that, revenue increased $14.3 million quarter on quarter, a very strong improvement on the $10.7 million increase in Q1 2023, which shows acceleration of growth, and is great to see.

Guidance for the next quarter indicates Elastic is expecting revenue to grow 21.9% year on year to $273 million, slowing down from the 42.5% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 25.9% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Customer Growth

You can see below that Elastic reported 19,700 customers at the end of the quarter, an increase of 400 on last quarter. That is a little slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing a little bit.

Elastic Customers

Key Takeaways from Elastic's Q2 Results

With a market capitalization of $5.61 billion Elastic is among smaller companies, but its more than $856.2 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.

It was good to see Elastic deliver strong revenue growth this quarter. And we were also glad to see the improvement in gross margin. On the other hand, it was unfortunate to see that Elastic's revenue guidance missed analysts' expectations. Overall, it seems to us that this was a complicated quarter for Elastic. The company is down 16.9% on the results and currently trades at $51 per share.

Elastic may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.