Elastic’s quarterly report and conference call
This was their first release since their IPO. I started a position in November. This is a very recent IPO, it’s a very small company with revenue about $200 million, it isn’t yet cutting down its losses, its reinvesting everything into growing, and it’s selling at a very high market cap to sales ratio, but it’s growing revenue at huge rates, so what would you expect?
There have been a lot of deep dives and discussion on the board, but in case you haven’t read them I’ll tell you what they do, borrowing from Matt’s (TMF BreakerForce’s), discussion.
Here’s a description borrowed from Matt’s (TMFBreakerForce’s) post:
They are a SaaS company and they do “Search” but it’s nothing like a Google Search, it’s a different animal altogether. When you hail a ride home from work with Uber, Elastic helps power the systems that coordinates nearby riders and drivers. When you shop online at Walgreens, Elastic helps power finding the right products to add to your cart. When you look for a partner on Tinder, Elastic helps power the algorithms that guide you to a match. When you search across Adobe’s millions of assets, Elastic helps power finding the right photo, font, or color palette to complete your project. As Sprint operates its nationwide network of mobile subscribers, Elastic helps power the logging of billions of events per day to track and manage website performance issues and network outages. As SoftBank monitors the usage of thousands of servers across its entire IT environment, Elastic helps power the processing of terabytes of daily data in real time….
You get the idea. It’s a different kind of search, a lot of which I don’t understand at all. I think of it as a Category Crusher, but I rate it as only 4 stars because it’s new to me. Here’s what their earnings (which came out last week) looked like:
Total revenue was $63.6 million, up 72%. This is actually slower than they are used to growing, but as a small company, their rate bounces around a bit. Last year they grew 74% in the same quarter, but they’ve been as high as 82% in the past year.
International revenue was only 14% of revenue, and represents a big opportunity for us.
Subscription revenue was 92% of total revenue ($58.5 mill). …………SaaS Revenue was $10 million of this, and was up 79%
(Note that most of their subscription revenue is recurring but not SaaS. It’s leased to an enterprise that customises it for its own needs, but keeps it on premises. The SaaS part, managed in the cloud by Elastic, is only about 17% of all subscription revenue, so they are different than most of our SaaS companies, except perhaps Nutanix and Mongo. Note also that Elastic is growing like mad!)
Calculated billings was $88.5 million, up 73%. TTM calculated billings were up 77% (less lumpy)
Deferred revenue was $127 million, up 78%
Adj op loss was $14.8 million;
Adj op margin was -23.3%.
Adj net loss was $16.9 million or 26.6% of revenue
Adj net loss was 38 cents per share
Op cash flow of -$0.6 million
Free cash flow of -$1.4 million.
Cash was $319 million
Subscription customer count was over 6,300. This was up 800 or 15% sequentially from 5500!!!
Customer count with ACV over $100,000 was over 340.
Net Expansion Rate over 130% for the eighth consecutive quarter.
Total diluted shares – 87.5 million
• Released versions 6.4 and 6.5 of the Elastic Stack with many new features
• Released new SaaS features on Elasticsearch Service, the hosted and managed Elasticsearch offering on Elastic Cloud
• Released version 2.0 of Elastic Cloud Enterprise (ECE) bringing all the new SaaS features to hybrid and on-premise environments.
• Held 11 successful Elastic{ON} Tour events with waitlists driven by strong demand.
Conference Call
When you catch a ride on Uber, we are the engine that matches the driver with you; when you look for groceries on Instacart, Elastic provides you with relevant results and recommendations; when you swipe left or right on Tinder, Elastic powers finding a match you might like and who might like you back.
Now, all of these experiences I just described need to be monitored, checked and observed. Elastic powers that to you. So, customers like Tinder and Barclays take their infrastructure logs or remote server metrics and put them into Elastic to understand what’s working and what’s not, both on the technology side and on the business side. (Sounds like it partly competes with New Relic).
And it doesn’t take much to go from analyzing machine data to analyzing security events. So, a customer like Indiana U. can build their cybersecurity operations on top of Elastic in order to protect thousands of devices and critical data. Everything I just talked about is search.
So, what is about our search technology that makes us different? Three things: speed; scale; relevance. These three elements, speed; scale; relevance, they are the core of the Elastic Stack.
Now, at the heart of the stack is the Elasticsearch. It’s what stores, searchers and analyzes data, structured or unstructured, and it’s what everything gets built around. Beats and Logstash are ways to ingest data into Elasticsearch from many sources, and Kibana is how you visualize data in Elasticsearch. We also build solutions that are vertically integrated into our stack. They include app search, site search and enterprise search; logging, metrics and APM; business analytics and security analytics.
You can think of solutions as ways we’ve made it easier for users to get started with our software to address a particular use case. For example, today with our logging solution, you can start analyzing log files or add search to your website with our faster service in a matter of minutes.
We also provide a hosted service, Elastic Cloud, which is our family of SaaS offerings and it includes our Elasticsearch Service, Elastic Site Search Service and Elastic App Search Service. We’ve also found that as customers grow their self-managed Elastic deployments and scale to many and many clusters, they want to enjoy a SaaS like experience to centrally provision, manage and monitor our products. Elastic Cloud Enterprise or ECE lets some do that. It’s a paid proprietary product that customers download and run in the environment of their choice.
As we consider our market opportunity, we believe that it expands for current use cases and also as our technology deployed towards new use cases. For example, when we founded Elastic, many of our users took our products and applied them to solve use cases like apps search and enterprise search. This space had a total addressable market of $3 billion back in 2012. As our users deployed our products to power new used cases and we expanded our offerings, our TAM has grown to $45 billion in 2018.
I attended the Washington D.C. tour event. And at this D.C., event I noticed there was a lot of discussion around new security features we released in this quarter. This included support for running Elastic and FIPS 140-2 mode, which is critical to defense space, and Kerberos authentication, which has broader applicability to not only government audiences but also to larger enterprises across the world.
Take Liberty Global, one of the largest telecom companies in the world, they became our customer, thanks to our advanced security features that I just mentioned, as well as our world-class support and additional commercial features. They are using us to analyze their log data, monitor systems, and investigate intrusion events. They expanded their usage with us in the quarter.
Another highly requested feature we released is Kibana spaces. When users adopt Elastic and probably ingesting data, one of the first things they do is create a handful of visualization and dashboards. And that handful often grows to be hundreds or even thousands very quickly. So users needed a better way to organize their visualizations into defined workspaces. One for the marketing team, another for DevOps, another for finances and so on. Kibana spaces makes this possible by allowing users to segment and secure Kibana for different audiences and used cases…another Kibana benefit we call Canvas. We are inspired by the fact that our users are proud to display their data. And we took this to heart and spent the last year working on Canvas to give users a personal way to display living dashboards that are not just pleasant to use but also pleasant to look at.
To give an example, Brazil’s Ministry of Health renewed their business with us in Q2 through one of our partners. They have Kibana dashboards onpermanent display in the Health Minister office. They show real-time health spending and service quality information that is aggregated from 400 data basis in systems. This is awesome.
Approximately 90% of our revenue typically comes from subscriptions, which represents recurring revenue.
Our subs for self-managed deployments generally range from one to three years for which we typically invoice customers annually in advance.
Our SaaS customers purchase subscriptions either on a month to month basis or on a committed contract of at least one year in duration.
The remainder of our revenue comes from professional services, which consists of consulting and training. The primary objective of this is to make our customer successful, which in turn drives higher subscription revenue as these customers expand their usage of the Elastic Stack and our solutions.
Q on Free Cash Flow generation
A - We think that the appropriate thing for us to do currently is to grow the business. And so, back in fiscal ‘18, our free cash flow margin was minus 15%. Here in the first half of fiscal 2019 we’ve been skating close to breakeven here in the first half, but that’s really the effects of seasonality. The back half tends to be seasonally weaker and that’s mainly because of strong collections that we typically have in Q1. So we look at it really on an annual basis ourselves. And we expect that from a full-year perspective, the free cash flow margin will be negative. We don’t formally guide to it as I mentioned in my prepared remarks. But, we do expect to see some improvement in free cash flow margin on an annual basis. But, it won’t be straight up. Right now, we’re still focused on investing to drive growth.
My take (Saul): It looks great to me. As I said above, I don’t understand the technology of what they do, but I see they are signing up huge clients in spite of being still a tiny company, and their growth rate is enormous.
Saul
PS - OT - If you made it all the way to the end of this write-up, here’s an OT bonus: Today is another day when the market is off fairly big time (1% or more) and our stocks like OKTA and Elastic are up, and my portfolio is up. We may be on to something here!
