ESTC - Good and Bad

ESTC reported today.

The Good
4Q 2020
Total revenue - increase of 53% year-over-year, or 57% on a constant currency basis.
SaaS revenue - increase of 110% year-over-year, or 120% on a constant currency basis.
Calculated billings - increase of 52% year-over-year
Deferred revenue - increase of 52% year-over-year.
RPO up 52% (he said on the call) - contract duration went up slightly over 18 months
Non-GAAP operating margin was -10%.
Free cash flow margin -5.5% (-8% for the year)

Huge improvement in margins and good customer metrics much better than MDB, SMAR, FSLY and NET - it used to be -20%.

Key Metrics
Total subscription customer count over 11,300 vs 8,100 in Q4 FY19.
Total customer count with ACV) greater than $100,000 - over 610 vs 440 in Q4 FY19.
Subscription revenue represented 92% of total revenue.
Net Expansion Rate continued to be greater than 130%.
50 customers with >$1 Million in rev vs 30 customers in Q4 FY19!

The Bad
It is all about the outlook
At the midpoint, they are projecting 34% for Q1 FY21 and 25% for FY21. With their usual beats, we should see at least 40% for Q1 and 33% for full year. But this is still a sharp slow down!

When asked by analysts management just said they are being conservative. Their new customer lands are still the same; they did no see slow down in renewals and new business. Their exposure to SMB is only 15% and the impacted verticals is only 15%. So, increased churn there is offset by more consumption by companies doing ecommerce, gaming etc. They see the search, observability and security as the mission-critical to companies. After a brief period in March they saw normal sales activity in April and May. They did say May being the first month of their FY is the slowest and hard to project out of.

So what to make of their guidance? Just for comparison AYX had to do just 30% for the rest of the year but they even pulled that. OKTA has to do only 30% for the rest of the year and they did not raise guidance. I had to say the call sounded more positive than the guidance.

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Thanks for putting this together TexMex.

At the midpoint, they are projecting 34% for Q1 FY21 and 25% for FY21.

I feel like guidance doesn’t match the rest of the call and we know so well how many of these companies sandbag, the question is how much are they sandbagging? Overall, I would think many would be very happy to see the margin move in the right direction after consecutive quarters of doing the opposite.

From a share price perspective, ESTC appears to be finally bucking the trend of lower and lower peaks, which makes sense in my opinion given their performance.

I went through the transcript. Couple more points that stood out:

Company plans to improve FCF margins in FY21 and FCF positive in FY 22.
Talked a lot about their workplace search product
Seeing broad adoption of all 3 products - security, observability, search.

They have $260M in deferred rev, $536M in RPO. They are projecting only $535M for FY 21. 12 months ago they had $172M in DR, and $353M in RPO. They did $428M for FY 20. To get to 25% rev growth for next year they should have no increase in new business or they would have to provide longer payment terms. But CFO said “we haven’t seen any significant volumes requests for shorter billing terms or for longer payment terms”. So, guidance does not add up to their DR or RPO.

On low guidance CFO said - just given the broader macroeconomic environment that we think will be difficult over the coming quarters, we do generally expect that some customers will likely scrutinize their spending a little bit more carefully in this environment that might cause sales cycle to lengthen a little bit, and it might presents a bit of a headwind calculated billings over the next couple of quarters

CFO talked about billings headwinds in a few other places. Could they be getting more requests in May asking for favorable billing terms? This is the only scenario that I can think of.

3 analysts raised targets after the CC and the average price is $96.

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CFO talked about billings headwinds in a few other places. Could they be getting more requests in May asking for favorable billing terms? This is the only scenario that I can think of.

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The guidance is still frustratingly conservative, but the other factor in reading thru CC was:

May = January for most companies.
May = start of new FY
May = new sales targets, shuffling of accounts, etc…the usual sales disruption at beginning of new year

Typically you finish a Q4 strong and sometimes stumble (sales perspective) as you make adjustments to sales coverage in Q1.

May also = heavy pandemic-impacted month.

So I believe they just want to get thru Q1, which they still forecasted at 37% or so growth, and then they understand better how their clients are behaving with budgets.

In general, I loathe when companies do not have standard calendar Q’s…no different here.

What I didn’t see a comment on, was fact they made a CRO (chief sales guy) change, which may further make this May and new fiscal year notable from sales structure. They also continue to hire rapidly, and stated no change to that on the CC…so that is continual tinkering with sales model/coverage.

So if the pandemic hit in mid-November, was bad in Dec, and continued and just started opening in late January as a new year started, that would be the equivalent of how Elastic mgmt is looking at the month of May and/or their Q1.

I think this will mostly be a nothing-burger. Elastic can have whatever calendar they want, but clients will still have their budgets and their (likely) standard calendars that those budgets are based on.

Dreamer

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Dreamer,
Just listened to a very positive interview that the CFO did today. Seems very knowledgeable about the business. He reiterated no shorter billing terms or longer payment terms, new customer lands, deal sizes, renewals as expected. But given that macro they are conservative - V shaped and L shaped recovery, and took middle of road. Severe gdp hit gradual recovery next few Qs. May is their first and slowest month of FY. So, hard to project anything from it. But given the macro if they see low billings in Q1 this will reflect in all 4Qs, unlike if you were say middle of the year when the billings hit is only for next 2Qs of the FY. For example, even Elastic is squeezing their IT vendors for better pay terms, so expect longer sales cycles, big expenses go upstairs for approval etc. So, it seems they want to execute well in Q1 and then reassess. To a question he said their unified search stack, unified pricing model, on-prem and cloud availability, and open-source background as competitive advantages against the likes of Splunk and Datadog. He said Instacart is using Elastic search and is doing well as opposed to Uber which is not doing so well now. I feel good about the company for the long term.

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