Hi all, notes from the CC
My thoughts
Pre-call: I hold a reasonable amount (~7%) of ESTC, and have been trading around the core successfully. I like ESTC, although I did bring ESTC to the board originally, so maybe
theres a bit of loyalty there! Despite its comparatively lackluster performance (~70% ytd vs DDOG >110%), I like the company, and their commitment to a) the single codebase, and b)
the unified pricing model. I think there is enough of a differentiator there to be compelling to a number of businesses and acceleration in digital transformation will help them.
I also like their ‘free’ go-to-market approach. Having said that, you would have been much better to invest in DDOG of course. However, the past is irrelevant, and only future
performance matters and I believe ESTC is worthy of a place in my portfolio.
Post-call:
Surprisingly, not much happened with AH stock prices. The next day, a general meh day, ESTC was down 1.5%, after a strong few weeks.
On an EV/S basis, ESTC is comparatively cheap. For example, MDB is at 29. DDOG is at 55. My personal feeling is that ESTC has a brighter future than MDB, and should be valued more
highly (or perhaps MDB should be valued lower). I also don’t think it deserves to have an EV/S approx 1/3rd of DDOG, although DDOG is executing very well and growing much faster.
This quarter, revenue at ESTC grew +45% CC yoy, while DDOG grew 68% yoy. That’s quite a difference, although they’re all playing in the same space. The ESTC premise is a
longer-term one, of cost savings through unified pricing and flexibility of installation and the power of the unified stack.
- A reasonable call (beat on revenue and eps).
- Guidance was underwhelming (+29% midpoint). They do tend to beat guidance, but not by huge amounts.
- Slowdown attributed to COVID headwinds, but with secular tailwinds. If COVID lifts, they will do better.
- Strong positive cashflow this quarter, but not expecting to be routinely positive until fiscal 2022.
I thought it was a reasonable quarter. The underlying theme was APM has reached ‘good enough’ status for a lot of companies. They’re winning (some) against Splunk. They’ve also
been much clearer on their product set (Observability, Security and Search) which IMO has been a significant weakness of theirs. They also hired Paul Appleby as the new President
World-Wide Field Operations. I think that means Sales.
I’ll continue to add on significant weakness, and trim on strength, not adding to my position at these levels. DDOG is a better company at the moment I think, but you have to pay a
high price for it and I believe that there is an area of the market that will choose ESTC over DDOG over the longer term.
cheers
Greg
ps. As always, https://dillinger.io for a pretty version
Other discussions
Checklist
Q: What is revenue doing yoy? A: +70% +63% +58% +59% +61% +53% +44% {GD: +45% CC. Significant slowdown, but COVID. }.
Q: What is cashflow doing? A: Free cash flow was +$21m so pretty strong. Cash actually increased this quarter.
Q: What are customers doing q-1? A: Solid, revenue/customer down slightly.
| | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | Q1 2021 |
|:-----------------|:--------|:--------|:--------|:--------|:--------|
| Customers | 8800 | 9700 | 10500 | 11300 | 12100 |
| -- q-1 | 9% | 10% | 8% | 8% | 7% |
| -- >$100k ACV | 475 | 525 | 570 | 610 | 630 |
| ---- q-1 | | 11% | 9% | 7% | **3%** |
| Revenue/customer | 10194 | 10423 | 10779 | 10940 | 10650 |
Q: DBNER? A: >130% again. Said they were a few percentage points down.
Q: Expenses as percent of revenue going up or down (ie, any sign of leverage)? A: Expenses as percent of revenue:
| | Q3 | Q4 18 | Q1 | Q2 | Q3 | Q4 19 | Q1 | Q2 | Q3 20 | Q4 2020 | Q1 2021 |
|:----|:-------|:-------|:-------|:-------|:-------|:-------|:-------|:-------|:-------|:--------|:--------|
| R&D | 15,092 | 17,543 | 18,981 | 25,332 | 25,850 | 31,004 | 35,182 | 38,478 | 46,119 | 45,591 | 45,678 |
| | 36% | 35% | 34% | 40% | 36% | 38% | 39% | 38% | 41% | 37% | 35% |
| S&M | 20,727 | 27,927 | 30,422 | 34,634 | 37,196 | 45,044 | 52,011 | 54,020 | 54,829 | 58,180 | 56,151 |
| | 50% | 56% | 54% | 54% | 53% | 56% | 58% | 53% | 48% | 47% | 44% |
| G&A | 7,555 | 9,737 | 10,099 | 12,092 | 11,151 | 13,194 | 18,568 | 31,808 | 21,096 | 20,153 | 21,729 |
| | 18% | 20% | 18% | 19% | 16% | 16% | 21% | 31% | 19% | 16% | 17% |
Solid, slightly down. However, they did state they expect to resume previous levels of spend…
Q: Is the story intact? A: Same as previous. They’ve launched the “single agent” in Beta, where if you have that agent on a server, it powers everything, logs, APM and
security, endpoint monitoring. That will be interesting going forward. They mentioned working in conjunction with Splunk, and also reiterated their belief in the
unified-pricing-model.
Q: What does guidance imply? A: Q1: 128.9 + Q2 guidance + Q2 guidance * growth + Q2 guidance * growth^2
| | Low | High | What if |
|:---------------------|:-------|:-------|:---------------|
| Q1 revenue | $128.9 | $128.9 | $128.9 |
| Q2 guidance | $129 | $131 | $138 (+7% q-1) |
| Straight line growth | 7.01% | 7.0% | 7.0% |
| Q3 guess | $138 | $140.2 | $147.7 |
| Q4 guess | $147.7 | $150 | $158 |
| FY guidance | $544 | $550 | $572.6 |
CC Discussion
Started off strong, resilience.
- +44% Revenue.
- 12100+ subscription customers
- 630+ $100k ACV customers
- 130%+ Net Expansion Rate
Some headwinds - COVID, softness in sectors like hospitality and transport, some customers taking longer to review transactions = slightly longer sales cycles.
Tailwinds from changes is overall spending environment and busines spending priorities.
Anecdotes
US online marketplace for beverage delivery {GD: wth? } - adopted Elastic to power application search. Reduced operational cost and met double demand from customers.
US healthcare industry seen over 30x increase in Telehealth appointments.
Leading managed healthcare customer has seen video appointment volume grow from 700 → 20k per day. Uptime matters. Outage impacts many more patients. They adopted ESTC for
Observability.
One of the largest global beverage companies - expanded to provide endpoint protection for virtual employees. Already used Observability.
Major US provider of high speed satellite broadband - adopted Workplace Search for their enterprise search.
One of big 3 US automakers - renewed Application Search {GD: expanded? }
Government for one of the largest US cities “uses Elastic to easily search databases to derive insights for government-wide initiatives”.
Leading German automaker - expanded. Ingest and store terabytes of vehicle loans and metrics from 100+ microservices (eg: HUD, in-car entertainment system). Unified pricing +
differentiated product = key drivers.
Audi
Top-10 global logistics provider of supply chain solutions - renewed. Significant savings because of Elastics Observability capabilities.
U.S. based global financial services company - new business to address observability and security use cases. They chose Elastic over other incumbents because of our flexible
pricing.
One of the largest GSIs - “committed to build the managed security practice on top of Elastic”. Early days, but allows GSI to sell into C-Level audiences around the world.
Defense Information Systems Agency -uses Elastic for security to discover and mitigate cyber threats. “Continued traction in the public sector”
Etsy runs Observability on Elastic Cloud (GCP).
JFrog - closed new business "chose over incumbent security solutions because of our unified pricing ans scalability (and ease).
Product
“Believe single unified stack gives advantage”.
“Unified pricing model”
Enterprise search
Workplace, Application and Site search usecases. Easy to use and scale.
Launched Workplace Search on ElasticCloud (self-managed launched in May).
Also have Workplace Search in free tier (basic subscription).
Go-to-market strategy makes fully functional products accessible to anyone - free! Can upgrade to paid, SSO, granular document level security controls.
AppSearch on EC, Workplace Search, pace of execution = tremendous. More and more value into solution
Observability
Unifies log metric and APM data in one place, one UI. Eliminates data silos, reduces resolution time, gives customers complete visibility without breaking the bank.
Leading gemrman automaker - expanded. Terabytes of vehicle logs (eg: hud, entertainment systems). Quickly fixed issue.
New “at a glance” views for analysts.
APM capabilities - ML jobs, APM service maps. Easier to see when service health degrading.
Unified agent - “Magical experience” “one agent to rule them all”. Radically simplifying data on-boarding and ingest management. Enhances ease-of-use and decreases time to
value.
- Makes it easy for customers to expand to new use-cases. Anywhere agent is running for observabilty, can use security etc. “All data with single agent”
Security
Unifies Endpoint protection and SIEM. Single experience, fast, scalable.
Unified agent significant step in security journey.
Integrated significant piece of EndGame into Elastic stack (malware prevention) “ahead of schedule”. Part of free payment tier.
Released better version of Out-of-box detection rules beta.
Expanded cloud monitoring AWS CloudTrail and Okta “to detect issues with cloud environment and user activity”.
ElasticCloud
Available on AWS, Global Cloud, Microsoft Azure, Alibaba and Tencent.
New regions (on AWS).
FedRamp moderate authorisation - better support US federal government customers.
- delivered 2 “highly requested” features - integration with AWS Private Link {GD: not sure what this is - I think its VPCs between different orgs (eg, you and a SaaS)} and IP filtering.
Paul Appleby - New President world-wide field operations. Previous CEO Kinetica. BMC. Salesforce, CISCO, Travelex, SAP.
“Unified pricing = Grow with Flexibility not friction”
Finances
COVID - demand environment playing out as expected. Digital transformation and distributed business models = tailwind.
But… adapting businesses, scrutinising or reducing spending. Sales cycles lengthening both in renewals {GD: odd?} and new business.
Strong results - remain confident.
| | Q4 20 | Q1 21 | | Comments |
|:--------------------------|:-----------|:------------|:---------|:------------------------------------------------------------|
| Revenue | $123.6m | $128.9m | +45% CC | |
| FY Revenue | $427.6m | | | |
| --- International | 42% | 44% | | |
| Professional services | | $7.5m | | 6% total revenue. Strong growth in quarter. |
| **Subs revenue** | $104.2m | 121.3m | | 94% total revenue. |
| --- SaaS (ElasticCloud) | $29.0m | $32.6m | +86% CC | Strength in annual and monthly |
| Billings | $175.1m | $130m | +47% CC | Americas, EMEA, APK |
| Deferred revenue | $259.7m | $278m | **+63%** | $5m invoiced upfront from multi-year fed customer. |
| RPO | $535.6m | $576m | **+59%** | |
| Av. Contract length | >1.5 years | 1.5 years | | Slightly longer. |
| Customers | 11300 | 12100 | | Mostly ElasticCloud |
| --- Customers > $100k | 610 | 630 | | |
| --- Customers > $1m | >50 | | | |
| --- NER | >130% | >130% | | **Slowed three percentage points** |
| Non-GAAP gross profit | $89.4m | $98.7m | | |
| Non-GAAP gross margin | 76% | 76.6% | | ElasticCloud modest headwind |
| Non-GAAP operating loss | -$12.7m | -$4.3m | | |
| Non-GAAP operating margin | -17.8% | **-3.3%** | | Better than expected. FX insignificant |
| Shares outstanding | 82.1m | 96.1m | | {GD: this is high again} |
| Net loss / share | -$0.12 | $0.06 | | Unrealised forex gain +$0.11 {GD: so will drop Q2,Q3} |
| Operating cash flow | -$5.9m | | | |
| Free cash flow | -$6.8m | **+$21.6m** | | Stronger than expected collections, expect -2 to -4% in F21 |
| | | | | Goal of + FCF margin in F22 |
| Cash and equivs | $297m | $350m | | Comfortable. |
Headwind to calculated billings for a few quarters.
Expect COVID - longer sales cycles.
Disciplined investment in R&D, S&M, and G&A.
Expect travel and events spending to normalise Fiscal 2022.
“We also expect to continue to drive operating margin improvements demonstrating the operating leverage inherent in the business model.” {GD: this will be key}
| Guidance Q2 | | | Fiscal 21 | | |
|:----------------------------|:-----------------|:-------------|:--------------------------|:-----------------|:---------|
| Revenue | $129m to $131m | **+29% yoy** | Revenue | $544m to $550m | +28% yoy |
| Non-GAAP operating margin | -11.5% to -10.5% | | Non-GAAP Operating margin | -13.5% to -11.5% | |
| Non-GAAP net loss per share | -$0.22 to -$0.20 | | Non-GAAP net loss/share | -$0.83 to -$0.69 | |
| Shares | 86m to 87m | | Shares | 87m to 89m | |
Question and Answer Session
- Lengthening sales cycles - new norm? nothing new for this quarter. Customers scrutinising spend. Maybe another layer of approval. 3 solutions, search, observability and security
align well with spending priorities. Short-term COVID, long-term digital transformation. Still seeing demand - Federal - source of strength. Led using Elastic re: security. Thanks to core capabilities of fast results over large amounts of data. Excited about “extreme” progress. Signed
good deal that extended previous. - Last quarter - said headwinds on billings. Bilings growth consistent with FY 2020. Short-term growth really strong. So not really seeing headwinds play out. Any bad surprises in
Q2? Trends expected was how quarter played out as expected. Billings growth - had benefit of $5m deferred deal paid completely up-front. Solid quarter for us. - New head of sales - how are you thinking about potential disruption. How is he going to impact, leading to conservatism in guidance? Looking for someone to build next set of
foundations to scale to $1b revenue. We have really strong leadership team. No short-term disruption in go-to-market. Guidance - no operational disruption guided. Broad guidance
same framework as Q1. - Big product announcement - one observability umbrella - how much is real now? Investing heavily in Observability. Logs, app logs, infrastructure metrics, APM, just different
facets of single product. Think we’ve done the hardest part - putting it into single place, with single UI. Adding features for less mature bits, eg: APM. Happy about APM
maturity, significant customers mentioned on call adopted APM {GD: which suggests that it’s hit ‘good enough’ levels}. Observability - feel very good, but always things to
improve. Single Unified Agent - in beta release. Single agent- one click for everything. Using for security solution, first milestone (Malware protection) delivered. - Linearity in quarter - comments around cautiousness - Apr/May vs June/July. Top of funnel momentum - trend continued. May is normally slower, so expected some billings related
headwinds. Large transactions timings caused some fluctuations. Strong fed business. - Geography - US and Fed. Seeing green-shoots in buying behaviours. Consistent with experienced across quarter. Headwinds - some budget specific, some lock-down related. US “quite
pleased” on Fed business. In near term, expect similar trends, but will lift eventually. A bit of correlation with WFH, offices opening with our business. - Competitors - changing pricing. Any impact from competitor changes {GD: NewRelic? Splunk? Datadog?}. Haven’t seen impact. We deliver on free solutions, single unified pricing
model since “day one”. Resonates with customer base. We’re a search company that takes data and makes it useful through the power of search. Sales-term disciplined about
discounting, deal sizes consistent with previous. - Quarter and guidance better than expected vs cautions about headwinds. Never be embarrassed to take credit for strong performance. “Humble and ambitious”. Raised by more than
what we beat, just what we see in the market. COVID headwinds vs secular shift that playing in our favour, depends how it all balances out. - Anecdotes - suite strategies - using for search, apm and observability. “Definitely simplification into 3 concrete solutions has helped” - just released single-agent so
customers can see all features in stack. Endpoint protection “a click away”. Many Observability customers mentioned on call not just using logging but also APM. {GD: Note, the
consolidation of these 3 pillars Observability, Security and Search - fits well into the ‘newish’ DevSecOps teams} - Last 10K number of patents doubled YOY. Which solutions (Search, Observability, Security)? Unique IP. Well-balanced across 3 solutions. Big number across all solutions (single
tech stack). - Net expansion rate - slowed. How much? Churn? Few percentage points in NER. re: Churn - Q1 good quarter for us. Lengthening sales cycle both new and renewals. No big shift in
Churn. Gross renewal rates consistent with Q4. - Great quarter. Product - EndGame. Standard, gold, platinum → Enterprise. EndGame focussed on Enterprise, helping with moving to Enterprise. Took old EndGame platform and
provided to selected customers. Folded Endpoint into the stack. Thats our focus. Released Beta (MalWare protection). Don’t expect move en-mass to stack, but foundations are there
so will increase protections. WorkPlace Search - very early. Free distribution tier. Very early in innings. Early response very positive. Take a consumer mindset to enterprise
search use-case. Now just have to execute, add connectors and features. - Lengthening - consistently longer or improve? how does pipeline look? Some variation, pipeline momentum strong. May usually slower month. Some variation on timings. General tone
consistent through quarter. Top-of-funnel activites continued from Q1. Just a question of how long it takes to convert. - Data lakes - Elastic deployed as data lake, both green-fields and against Splunk, Hadoop, others. We’re best search engine out there. Vs Splunk, haven’t seen significant shift.
"We like the fact that when we’re up against Splunk, we’re typically already being used (in the organisation). Believe we provide a holistic single tech stack which is one of
the leading ones in the market. - Observability - DDOG - large public cloud optimised usage {GD: this refers to customers tuning/reducing their cloud spend to save cash (reducing Datadogs revenue)} - haven’t seen
those dynamics. But another level of scrutiny in deal closing, but tailwinds for increased usage and increased adoption of mission-critical solutions.
