Elastic (ESTC)

Search software company Elastic (NYSE:ESTC) reported Q4 CY2024 results beating Wall Street’s revenue expectations, with sales up 16.5% year on year to $382.1 million. Guidance for next quarter’s revenue was better than expected at $380 million at the midpoint, 1.5% above analysts’ estimates. Its non-GAAP profit of $0.63 per share was 34.4% above analysts’ consensus estimates.

Company Overview

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.

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.

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last three years, Elastic grew its sales at a decent 21.3% compounded annual growth rate. Its growth was slightly above the average software company and shows its offerings resonate with customers.

This quarter, Elastic reported year-on-year revenue growth of 16.5%, and its $382.1 million of revenue exceeded Wall Street’s estimates by 3.6%. Company management is currently guiding for a 13.4% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 11.9% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is above average for the sector and implies the market is forecasting some success for its newer products and services.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Elastic’s billings punched in at $450.7 million in Q4, and over the last four quarters, its growth was solid as it averaged 17.8% year-on-year increases. This performance aligned with its total sales growth, indicating robust customer demand. The cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth.

Elastic reported 21,350 customers at the end of the quarter, a sequential increase of 50. That’s worse than what we’ve observed previously, but we wouldn’t put too much weight on one quarter given its billings growth over the last year.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Elastic does a decent job acquiring new customers, and its CAC payback period checked in at 49.8 months this quarter. The company’s relatively fast recovery of its customer acquisition costs gives it the option to accelerate growth by increasing its sales and marketing investments.

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

Elastic’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 112% in Q4. This means Elastic would’ve grown its revenue by 11.5% even if it didn’t win any new customers over the last 12 months.

Trending up over the last year, Elastic 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.

For software companies like Elastic, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Elastic’s gross margin is good for a software business and points to its solid unit economics, competitive products and services, and lack of meaningful pricing pressure. As you can see below, it averaged an impressive 74.3% gross margin over the last year. Said differently, Elastic paid its providers $25.72 for every $100 in revenue.

In Q4, Elastic produced a 74.6% gross profit margin, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Elastic’s expensive cost structure has contributed to an average operating margin of negative 6.2% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if Elastic reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.

Over the last year, Elastic’s expanding sales gave it operating leverage as its margin rose by 4.1 percentage points. Still, it will take much more for the company to reach long-term profitability.

This quarter, Elastic generated a negative 1.2% operating margin. The company's consistent lack of profits raise a flag.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Elastic has shown impressive cash profitability, driven by its attractive business model that gives it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 16.6% over the last year, better than the broader software sector. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Elastic’s free cash flow clocked in at $87.29 million in Q4, equivalent to a 22.8% margin. This result was good as its margin was 7.2 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

Over the next year, analysts predict Elastic’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 16.6% for the last 12 months will decrease to 14.5%.

Companies with more cash than debt have lower bankruptcy risk.

Elastic is a well-capitalized company with $1.28 billion of cash and $587.7 million of debt on its balance sheet. This $696.3 million net cash position is 5.7% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Elastic blew past analysts’ billings expectations this quarter, which enabled it to beat on revenue, EPS, and adjusted operating income. We were also glad it lifted its full-year EPS guidance while sharing a 2025 revenue outlook that topped estimates. Overall, we think this was still a solid quarter with some key areas of upside. The stock traded up 17.5% to $119.20 immediately following the results.

Updated: May 22, 2025 at 10:03 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Elastic.

Elastic doesn’t top our investment wishlist, but we understand that it’s not a bad business. First off, its revenue growth was solid over the last three years. And while Elastic’s forecasted free cash flow margin suggests the company will ramp up its investments next year, its customers use its software frequently and increase their spending every year.

Elastic’s price-to-sales ratio based on the next 12 months is 6x. Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $124.59 on the company (compared to the current share price of $93.10).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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