Elastic (NYSE:ESTC) Exceeds Q1 Expectations, Upgrades Full Year Guidance

Full Report / August 25, 2021
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Search software company Elastic (NYSE:ESTC) reported Q1 FY2022 results topping analyst expectations, with revenue up 49.8% year on year to $193 million. Elastic made a GAAP loss of $34.4 million, down on its loss of $19 million, in the same quarter last year.

Elastic (ESTC) Q1 FY2022 Highlights:

  • Revenue: $193 million vs analyst estimates of $173.2 million (11.4% beat)
  • EPS (non-GAAP): $0.04 vs analyst estimates of -$0.12 ($0.16 beat)
  • Revenue guidance for Q2 2022 is $194 million at the midpoint, above analyst estimates of $188.6 million
  • The company lifted revenue guidance for the full year, from $785 million to $811 million at the midpoint, a 3.31% increase
  • Free cash flow of $12.4 million, up from negative free cash flow of -$3.07 million in previous quarter
  • Net Revenue Retention Rate: 130%, in line with previous quarter
  • Customers: 16,000, up from 15,000 in previous quarter
  • Gross Margin (GAAP): 74.2%, in line with previous quarter

Founded in 2012 in the Netherlands, Elastic (NYSE:ESTC) helps companies integrate search into their products and monitor their cloud infrastructure.

Building your own search engine is hard and even the biggest companies want to focus their energy elsewhere. Elastic offers a set of software products that ingest and store data from any source, in any format, and perform search, machine learning, and analysis.

For example Uber is using Elastic to power the systems that locate nearby riders and drivers, eBay is using it to help users find what they want to buy and Facebook is using it to power search in their help centre. Elastic is one of the companies that have been benefiting from the growth of the overall internet economy and has lately started expanding the use of their data processing technology from enterprise search into cloud-infrastructure monitoring and network security monitoring products.

Elastic’s business model is based on a combination of open source and proprietary software and the company uses the open-source part to power their distribution strategy. It is really easy to start using Elastic and developers can download limited versions of the software straight away for free, without speaking to any salespeople. Over time, if the software proves itself and the need for it expands inside an organization, it is easy to upgrade to a paid license.

Enterprises are struggling to keep up with the growing volume of data generated across their systems. That, coupled with the large number of users that are using search as their primary way to access information or functionality inside enterprise apps, is driving the demand for advanced search software.

Elastic competes in a segment that includes companies such as Yext (NYSE:YEXT), Lucidworks, and Splunk (NASDAQ:SPLK).

Sales Growth

As you can see below, Elastic's revenue growth has been impressive over the last year, growing from quarterly revenue of $128.8 million, to $193 million.

Elastic Total Revenue

And unsurprisingly, this was another great quarter for Elastic with revenue up an absolutely stunning 49.8% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $15.4 million in Q1, compared to $20.4 million in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 25.3% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Customer Growth

You can see below that Elastic reported 16,000 customers at the end of the quarter, an increase of 1,000 on last quarter. That is a bit slower customer growth than last quarter but still in line with what we are used to seeing lately, suggesting that the company still has decent sales momentum.

Elastic Customers

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

Elastic Net Revenue Retention Rate

Elastic's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 130% in Q1. That means even if they didn't win any new customers, Elastic would have grown its revenue 30% year on year. That is a great retention rate and a clear proof of a great product. We can see that Elastic's customers are very satisfied with their software and are using it more and more over time.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Elastic's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 74.2% in Q1.

Elastic Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.74 left to spend on developing new products, marketing & sales and the general administrative overhead. This is around the average of what we typically see in SaaS businesses, but it is good to see that the gross margin is staying stable which indicates that Elastic is doing a good job controlling costs and is not under a pressure from competition to lower prices.

Key Takeaways from Elastic's Q1 Results

Sporting a market capitalization of $14.5 billion, more than $991.3 million in cash and with positive free cash flow over the last twelve months, we're confident that Elastic has the resources it needs to pursue a high growth business strategy.

We were impressed by how strongly Elastic outperformed analysts’ revenue expectations this quarter. And we were also excited to see the really strong revenue growth. On the other hand, there was a slight slowdown in customer growth. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is up 3.67% on the results and currently trades at $163.99 per share.

Is Now The Time?

When considering Elastic, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Elastic is a good business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. On top of that, its customers are increasing their spending quite quickly, suggesting that they love the product, and its very efficient customer acquisition hints at the potential for strong profitability.

The market is certainly expecting long term growth from Elastic given its price to sales ratio based on the next twelve months is 17.2. There is definitely a lot of things to like about Elastic and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

The Wall St analysts covering the company had a one year price target of $174.7 per share right before these results, implying that they saw upside in buying Elastic even in the short term.

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