Elastic (NYSE:ESTC) Q2: Beats On Revenue But Stock Drops

Full Report / December 01, 2021
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Search software company Elastic (NYSE:ESTC) reported Q2 FY2022 results topping analyst expectations, with revenue up 42.1% year on year to $205.9 million. Guidance for next quarter's revenue was $208 million at the midpoint, 2.79% above the average of analyst estimates. Elastic made a GAAP loss of $47 million, down on its loss of $29.1 million, in the same quarter last year.

Elastic (ESTC) Q2 FY2022 Highlights:

  • Revenue: $205.9 million vs analyst estimates of $194.5 million (5.86% beat)
  • EPS (non-GAAP): -$0.09 vs analyst estimates of -$0.16 (42.9% beat)
  • Revenue guidance for Q3 2022 is $208 million at the midpoint, above analyst estimates of $202.3 million
  • The company lifted revenue guidance for the full year, from $811 million to $829 million at the midpoint, a 2.21% increase
  • Free cash flow was negative $12.2 million, down from positive free cash flow of $12.4 million in previous quarter
  • Net Revenue Retention Rate: 130%, in line with previous quarter
  • Customers: 17,000, up from 16,000 in previous quarter
  • Gross Margin (GAAP): 73.8%, in line with same quarter last year

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.

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 $144.8 million, to $205.9 million.

Elastic Total Revenue

And unsurprisingly, this was another great quarter for Elastic with revenue up 42.1% year on year. But the growth did slow down a little compared to last quarter, as Elastic increased revenue by $12.8 million in Q2, compared to $15.4 million revenue add in Q1 2022. 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 24.3% over the next twelve months, although estimates are likely to change post earnings.

Customer Growth

You can see below that Elastic reported 17,000 customers at the end of the quarter, an increase of 1,000 on last quarter. That's in line with the customer growth we have seen over the last couple of quarters, suggesting that the company can maintain its current 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 Q2. 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, licenses, technical support and other necessary running expenses was at 73.8% in Q2.

Elastic Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.73 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 Q2 Results

We enjoyed seeing Elastic’s impressive revenue growth this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. But investors might have been expecting more and the company is down 9.42% on the results and currently trades at $126.00 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 efficient customer acquisition is better than many similar companies.

Elastic's price to sales ratio based on the next twelve months is 14.1x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. There is definitely a lot of things to like about Elastic and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $186.30 per share right before these results, implying that they saw upside in buying Elastic even in the short term.

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