Elastic (NYSE:ESTC) Exceeds Q1 Expectations, Stock Soars

Full Report / August 31, 2023

Search software company Elastic (NYSE:ESTC) reported results ahead of analysts' expectations in Q1 FY2024, with revenue up 17.5% year on year to $293.8 million. The company also expects next quarter's revenue to be around $304 million, in line with analysts' estimates. Turning to EPS, Elastic made a non-GAAP profit of $0.25 per share, improving from its loss of $0.15 per share in the same quarter last year.

Elastic (ESTC) Q1 FY2024 Highlights:

  • Revenue: $293.8 million vs analyst estimates of $284.5 million (3.26% beat)
  • EPS (non-GAAP): $0.25 vs analyst estimates of $0.11 ($0.14 beat)
  • Revenue Guidance for Q2 2024 is $304 million at the midpoint, above analyst estimates of $302.4 million
  • The company slightly raised its revenue guidance for the full year, which now stands at $1.25 billion at the midpoint
  • Free Cash Flow of $37.2 million, up 43.6% from the previous quarter
  • Net Revenue Retention Rate: 113%, down from 117% in the previous quarter
  • Customers: 20,500, up from 20,200 in the previous quarter
  • Gross Margin (GAAP): 73.6%, up from 71% in the 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 strong over the last two years, growing from $193.1 million in Q1 FY2022 to $293.8 million this quarter.

Elastic Total Revenue

This quarter, Elastic's quarterly revenue was once again up 17.5% year on year. We can see that Elastic's revenue increased by $13.8 million quarter on quarter, which is a solid improvement from the $5.38 million increase in Q4 2023. Shareholders should applaud the acceleration of growth.

Next quarter's guidance suggests that Elastic is expecting revenue to grow 15% year on year to $304 million, slowing down from the 28.4% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 16.7% over the next 12 months before the earnings results announcement.

Customer Growth

Elastic reported 20,500 customers at the end of the quarter, an increase of 300 from the previous quarter. That's in line with the customer growth we observed last quarter but a bit below what we've typically seen over the last year, suggesting that sales momentum may be slowing a little.

Elastic Customers

Product Success

One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.

Elastic Net Revenue Retention Rate

Elastic's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 113% in Q1. This means that even if Elastic didn't win any new customers over the last 12 months, it would've grown its revenue by 13%.

Despite falling over the last year, Elastic still has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great 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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 73.6% 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, sales and marketing, and general administrative overhead. Trending up over the last year, Elastic's gross margin is around the average of a typical SaaS businesses. Gross margin has a major impact on a company’s ability to develop new products and invest in marketing, which may ultimately determine the winner in a competitive market. This makes it a critical metric to track for the long-term investor.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Elastic's free cash flow came in at $37.2 million in Q1, turning positive over the last year.

Elastic Free Cash Flow

Elastic has generated $80.3 million in free cash flow over the last 12 months, a decent 7.09% of revenue. This FCF margin stems from its asset-lite business model and gives it a decent amount of cash to reinvest in its business.

Key Takeaways from Elastic's Q1 Results

Sporting a market capitalization of $5.98 billion, Elastic is among smaller companies, but its more than $957.1 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

It was good to see Elastic beat analysts' revenue and non-GAAP operating profit expectations this quarter. Next quarter's guidance was largely ahead, and the full year outlook was raised as well. On the other hand, its net revenue retention fell. Zooming out, we think this was still a solid quarter, showing that the company is staying on track. The stock is up 5.51% after reporting and currently trades at $65.3 per share.

Is Now The Time?

When considering an investment in Elastic, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. Although we have other favorites, we understand the arguments that Elastic isn't a bad business. We'd expect growth rates to moderate from here, but its revenue growth has been solid over the last two years. On top of that, its customers are increasing their spending quite quickly, suggesting that they love the product.

Elastic's price to sales ratio based on the next 12 months is 4.7x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. In the end, beauty is in the eye of the beholder. While Elastic wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.

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