Elastic (NYSE:ESTC) Reports Q4 In Line With Expectations But Stock Drops

Full Report / June 01, 2023
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Search software company Elastic (NYSE:ESTC) reported results in line with analyst expectations in Q4 FY2023 quarter, with revenue up 17% year on year to $279.9 million. The company expects that next quarter's revenue would be around $284.5 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. Elastic made a GAAP loss of $46.7 million, improving on its loss of $65.6 million, in the same quarter last year.

Elastic (ESTC) Q4 FY2023 Highlights:

  • Revenue: $279.9 million vs analyst estimates of $277.6 million (0.85% beat)
  • EPS (non-GAAP): $0.22 vs analyst estimates of $0.10 ($0.12 beat)
  • Revenue guidance for Q1 2024 is $284.5 million at the midpoint, below analyst estimates of $286 million
  • Management's revenue guidance for upcoming financial year 2024 is $1.24 billion at the midpoint, missing analyst estimates by 1.17% and predicting 16.4% growth (vs 24.4% in FY2023)
  • Free cash flow of $25.9 million, up from $6.97 million in previous quarter
  • Net Revenue Retention Rate: 117%, down from 120% previous quarter
  • Customers: 20,200, up from 19,900 in previous quarter
  • Gross Margin (GAAP): 73.7%, up from 72% 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.

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.

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 very strong over the last two years, growing from quarterly revenue of $177.6 million in Q4 FY2021, to $279.9 million.

Elastic Total Revenue

This quarter, Elastic's quarterly revenue was once again up 17% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $5.38 million in Q4, compared to $10.2 million in Q3 2023. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Elastic is expecting revenue to grow 13.8% year on year to $284.5 million, slowing down from the 29.5% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $1.24 billion at the midpoint, growing 16.4% compared to 24% increase in FY2023.

Customer Growth

You can see below that Elastic reported 20,200 customers at the end of the quarter, an increase of 300 on last quarter. That is a little better customer growth than last quarter but while it is still a bit below what we have typically seen over the last year, it is suggesting that the company may be reinvigorating growth.

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 117% in Q4. That means even if they didn't win any new customers, Elastic would have grown its revenue 17% year on year. Despite it going down over the last year this is still a good retention rate and a proof that Elastic's customers are satisfied with their software and are getting more value from it over time. That is good to see.


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 73.7% in Q4.

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. Significantly up from the last quarter, this is around the average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market, so it is important to track.

Cash Is King

If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Elastic's free cash flow came in at $25.9 million in Q4, turning positive year on year.

Elastic Free Cash Flow

Elastic has generated $33 million in free cash flow over the last twelve months, 3.08% of revenues. This FCF margin is a result of Elastic asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.

Key Takeaways from Elastic's Q4 Results

With a market capitalization of $7.03 billion Elastic is among smaller companies, but its more than $915.2 million in cash and positive free cash flow over the last twelve months give us confidence that Elastic has the resources it needs to pursue a high growth business strategy.

We were very impressed by Elastic’s very strong acceleration in customer 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 for the full year missed analysts' expectations and the revenue guidance for next year indicates quite a significant slowdown in growth. Overall, this quarter's results were not the best we've seen from Elastic. The company is down 8.52% on the results and currently trades at $65.5 per share.

Is Now The Time?

Elastic may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that Elastic is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been strong, over the last two years. And on top of that, its customers are increasing their spending quite quickly, suggesting that they love the product.

The market is certainly expecting long term growth from Elastic given its price to sales ratio based on the next twelve months is 5.6x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Elastic doesn't trade at a completely unreasonable price point.

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