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Elastic (ESTC) Research Report: Q1 CY2024 Update


Full Report / May 30, 2024

Search software company Elastic (NYSE:ESTC) reported results ahead of analysts' expectations in Q1 CY2024, with revenue up 19.7% year on year to $335 million. The company expects next quarter's revenue to be around $344 million, in line with analysts' estimates. It made a non-GAAP profit of $0.21 per share, down from its profit of $0.22 per share in the same quarter last year.

Elastic (ESTC) Q1 CY2024 Highlights:

  • Revenue: $335 million vs analyst estimates of $329.8 million (1.6% beat)
  • EPS (non-GAAP): $0.21 vs analyst estimates of $0.20 (5.6% beat)
  • Revenue Guidance for Q2 CY2024 is $344 million at the midpoint, roughly in line with what analysts were expecting
  • Management's revenue guidance for the upcoming financial year 2025 is $1.47 billion at the midpoint, in line with analyst expectations and implying 16.3% growth (vs 18.5% in FY2024)
  • Gross Margin (GAAP): 73.8%, in line with the same quarter last year
  • Free Cash Flow of $60.1 million, up 17.1% from the previous quarter
  • Net Revenue Retention Rate: 110%, up from 109% in the previous quarter
  • Customers: 21,000, up from 20,800 in the previous quarter
  • Billings: $446.4 million at quarter end, up 24.8% year on year
  • Market Capitalization: $10.31 billion

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.

Data 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.

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 three years, growing from $177.6 million in Q4 2021 to $335 million this quarter.

Elastic Total Revenue

This quarter, Elastic's quarterly revenue was once again up 19.7% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $7.04 million in Q1 compared to $17.35 million in Q4 CY2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Next quarter's guidance suggests that Elastic is expecting revenue to grow 17.1% year on year to $344 million, in line with the 17.5% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $1.47 billion at the midpoint, growing 16.3% year on year compared to the 18.6% increase in FY2024.

Customer Growth

Elastic reported 21,000 customers at the end of the quarter, an increase of 200 from the previous quarter. That's a little better customer growth than last quarter and in line with what we've seen in past quarters, demonstrating that the company has the sales momentum required to drive continued growth. We've no doubt shareholders will take this as an indication that Elastic's go-to-market strategy is running smoothly.

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 110% 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 10%.

Despite falling over the last year, Elastic still has a decent net retention rate, showing us that its customers not only tend to stick around but also get increasing value from its software over time.

Profitability

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 73.8% 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. Elastic's gross margin is around the average of a typical SaaS businesses. It's encouraging to see its gross margin remain stable, indicating that Elastic is controlling its costs and not under pressure from its competitors to lower prices.

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 $60.1 million in Q1, up 132% year on year.

Elastic Free Cash Flow

Elastic has generated $145.3 million in free cash flow over the last 12 months, or 11.5% of revenue. This FCF margin stems from its asset-lite business model and enables it to reinvest in its business without depending on the capital markets.

Key Takeaways from Elastic's Q1 Results

We were impressed by how strongly Elastic blew past analysts' billings and EPS expectations this quarter. We were also glad its customer growth accelerated. On the other hand, its full-year revenue guidance missed analysts' expectations. Overall, this quarter's results still seemed fairly positive and shareholders should feel optimistic. The stock is up 5.7% after reporting and currently trades at $98.50 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.

We think Elastic is a solid business. We'd expect growth rates to moderate from here, but its revenue growth has been strong over the last three years. On top of that, its customers are spending noticeably more each year, which is great to see and its strong gross margins suggest it can operate profitably and sustainably.

Given its price-to-sales ratio of 6.4x based on the next 12 months, the market is certainly expecting long-term growth from Elastic. There are definitely a lot of things to like about Elastic, and looking at the tech landscape right now, it seems to be trading at a reasonable price.

Wall Street analysts covering the company had a one-year price target of $131.59 right before these results (compared to the current share price of $98.50), implying they see short-term upside potential in Elastic.

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