ESTC Q2 2021
3 Dec 2020
My thoughts
Pre-call:
The market loves to hate ESTC although they’ve been heading up lately. They haven’t been a stellar performer, and have to-date been a drag on my total performance. However, I think
their story is getting clearer as they separate into their separate solutions.
So I keep a reasonably significant position in them (8%) because I believe in their long-term positioning. Has this hurt to date? Yes, but we can’t all be Saul 
Post-call:
Looked like a very strong call to me, coming in way over guidance. To be fair, ESTCs guidance methodology is complete rubbish, so you shouldn’t even consider it. They should use
some of their fancy Elastic analytics or something, because the best I think they’ve done this year is out by 10% vs actual. Hopeless.
Story is intact, and potentially even stronger as they get a bit clearer with their messaging. Assuming the “single tech stack” + “unified pricing” resonates, the current
environment IMO supports their approach even more (more cost sensitivity). I note they’ve headed a bit away from the “run it anywhere” messaging.
Was a really good quarter I think. The one dark spot was them only adding 20 >$100k customers in the quarter which is not awesome.
I’m still not super-sure their go-to-market is firing, and they have a kind of ‘naturally slow’ land-and-expand motion, ie, developers use them to dump logs etc., then gradually
expands. Compare with something like ZS, where the motion is more top-down, big-bang. Or CRWD, which as far as I can tell, has a crazy effective go-to-market that suits everyone
from SMEs to giant enterprises.
However DDOG is the obvious comparison, DDOG released earnings in November and its an interesting comp.
DDOG is ‘growing faster’ yoy. This is true. But the absolute dollar amounts are not that different. In the last quarter reported, DDOG generated $155m in revenue, vs ESTC with
$145m this quarter, TTM Revenue was $539m vs $510m. Gross margins are similar, with DDOG coming out ahead (78% vs 73%). Operating expenses, similar, but ESTC slightly more, and
DDOG coming out with a lower operating loss.
However, it’s not super different in actual money terms, and DDOGs growth rates are dropping. The major difference is the market thinks DDOG (EV $29b) is almost 3 times the company
that ESTC is (EV: $11b). DDOG has been a great performer (+159% YTD), with ESTC maybe surprisingly for most here a good performer (+110% YTD).
They’re also starting to report some large wins involving Security.
After looking at this conference call, I’ll be moving more into ESTC, probably from DDOG. DDOG is a good company, but the valuation delta doesn’t make much sense to me.
cheers
Greg
ps. As always, https://dillinger.io for a pretty version
Other discussions
Not much interest on Saul’s board. firefreedom pointed out the negative FCF, but that was expected as they ramp up spending again.
Checklist
Q: What is revenue doing yoy? A: +70% +63% +58% +59% +61% +53% +44% +43%. {GD: solid much better than guidance. Would be nice to see uptick}
Q: What is cashflow doing? A: Back to negative FCF as investing increased.
Q: What are customers doing q-1? A: Solid. ACV >$100k still not back to previous levels, but Revenue/Customer ticked up.
| | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | Q1 2021 | Q2 2021 |
|:-----------------|:--------|:--------|:--------|:--------|:--------|:--------|
| Customers | 8800 | 9700 | 10500 | 11300 | 12100 | 12900 |
| -- q-1 | 9% | 10% | 8% | 8% | 7% | 7% |
| -- >$100k ACV | 475 | 525 | 570 | 610 | 630 | 650 |
| ---- q-1 | | 11% | 9% | 7% | **3%** | **3%** |
| Revenue/customer | 10194 | 10423 | 10779 | 10940 | 10650 | 11232 |
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 | Q2 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 | 46,688 |
| | 36% | 35% | 34% | 40% | 36% | 38% | 39% | 38% | 41% | 37% | 35% | 32% |
| S&M | 20,727 | 27,927 | 30,422 | 34,634 | 37,196 | 45,044 | 52,011 | 54,020 | 54,829 | 58,180 | 56,151 | 64,474 |
| | 50% | 56% | 54% | 54% | 53% | 56% | 58% | 53% | 48% | 47% | 44% | 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 | 23,705 |
| | 18% | 20% | 18% | 19% | 16% | 16% | 21% | 31% | 19% | 16% | 17% | 16% |
Solid, slightly down on percent of revenue basis, despite increased spending.
Q: Is the story intact? **A:**Yes. As their products gain maturity, would expect to see increased traction. The unified pricing model seems likely to become more attractive in
this environment, especially as the products get better.
Q: What does guidance imply? A: Q1: 128.9 + Q2 guidance + Q2 guidance * growth + Q2 guidance * growth^2
| | Guide | Guess | What if |
|:---------------------|:-------|:-------|:--------|
| Q1 revenue | $128.9 | $128.9 | $128.9 |
| Q2 revenue | $145 | $145 | $145 |
| Q3 | $146 | $155 | $160 |
| Q4 | $152 | $166 | $176 |
| Straight line growth | | 7.0% | 10.0% |
| FY | $572 | $595 | $610 |
CC Discussion
Building business for the long-run.
Great second quarter: Revenue +43% yoy
- 12,900+ subscription customers
- 650 ACV >$100k
First Virtual conference 25k registrants 85 countries – Google, Microsoft sponsors. GCP CEO - opening keynote = real recognition
- Cisco, Audi, Rockethomes, Wells-Fargo shared stories. All renewed business.
{GD: Big theme - 3 solutions built on a single stack, which means if you use one, you sort of already have the others in the background. For example, if you use Observability
(logs, APM etc), you have to install the Unified Agent to get the data. But that Unified Agent is set up to capture Security data as well, so its just a single-click to enable
Security.
Similarly, all improvements, speed, visuals etc, are developed once and rolled out to all Solutions.}
3 Solutions
- Enterprise Search
- Observability
- Security
“Innovate once, apply everywhere”
Adopt one, expand. Choose where they run.
Unified pricing model - grow with flexibility not friction.
Search - fastest data insight action.
Elastic Agent - beta. Single click install
Kibana Lens - GA in Q2
Searchable Snapshots - store more data with search (eg: Store data on S3)
Strong broad-based demand
US Fed, Global public sectors
Anecdotes
Enterprise Search
7.1 Release
- More connectors Slack, ServiceNow, M365 etc.
- Security and enhanced admin controls
US Govt Entity - Needed granular security controls to surface right content.
Leading US Aerospace company - ESTC powers search for airplane maintenance program. Find parts, repair schematics, etc.
Searchable Snapshots {GD: this is cool - Archive data to S3 etc, and still search on it}. Application content and “search across years of email without breaking bank” using S3 etc
(long-term inexpensive storage)
Observability (Log, Metrics, APM)
Grab - Renewed and expanded. Log analytics, pickup and dropoff. Waiting times, across taxi, ride-sharing and food and grocery
Global Payments Company - log analytics, APM, real-time business monitoring.
7.10 release - Monitoring user experience.
One-click workflows - “enables pre-built workflows to detect common infrastructure issues”
Security
7.10 Release
New correlation rules - help automate detection and prioritisation. Reduces alert fatigue.
Prebuilt detections for Azure, GCP and Zoom.
“Continue to see customers rapidly adopt Elastic for Security in Q2”
Global online travel agency - lodging and reservations.
Bell Canada - operations and network security.
US Property, Casualty and Auto Insurer - new multi-year business for security. Complements existing Search and Observability workloads. “Optimise cost and reduce complexity”
ElasticCloud
Available on AWS, GCP, Azure
Rocket Homes - Renewed and expanded. Simplify cluster management. App Search across property data. “Speed literally name of the game”.
Expanded into new regions (AWS Mumbai, Azure Iowa and New South Wales)
Azure Marketplace integration - single billing.
Building diverse and distributed company - “great place to work for women in technology”
Large market opportunity - align with customer spending priorities
Single vs multi-solutions
Solution is one of:
- Enterprise Search
- Observability
- Security
So if a customer uses APM and log analytics - thats one solution (Observability)
| | 1 solution | multi solutions |
|:-----------|:-----------|:----------------|
| ACV >$100k | >50% | |
| ACV >$1m | | >75% |
{GD: this is kind of obvious. It would probably be pretty difficult to spend >$1m on one solution for any company. But does suggest value in the expansion, ie, the other solutions
are ‘good enough’ to prevent companies adding another vendor to solve the problem}.
Finances
Demand environment similar to Q1. Some headwunds from COVID (longer sales cycles). But demand for Cloud.
| | Q4 20 | Q1 21 | Q2 21 | | Comments |
|:--------------------------|:-----------|:------------|:-----------|:-----|:--------------------------------------------------|
| Revenue | $123.6m | $128.9m | $144.9m | +43% | |
| FY Revenue | $427.6m | | | | |
| --- International | 42% | 44% | 45% | | |
| Professional services | | $7.5m | $10.7m | | 7% total revenue. |
| **Subs revenue** | $104.2m | 121.3m | $134.2m | +46% | 93% total revenue. |
| --- SaaS (ElasticCloud) | $29.0m | $32.6m | $37.4m | +81% | Both annual and monthly business. Confident |
| Billings | $175.1m | $130m | $177.7m | +42% | EMEA > Americas > APJ. Strong US Federal. |
| Deferred revenue | $259.7m | $278m | $309.2m | +54% | |
| RPO | $535.6m | $576m | $644m | +57% | |
| Av. Contract length | >1.5 years | 1.5 years | ~1.5 years | | Slightly longer |
| Customers | 11300 | 12100 | 12900 | | |
| --- Customers > $100k | 610 | 630 | 650 | | |
| --- Customers > $1m | >50 | | | | |
| --- NER | >130% | >130% | >130% | | Down vs q1 slightly |
| Non-GAAP gross profit | $89.4m | $98.7m | $111.5m | | |
| Non-GAAP gross margin | 76% | 76.6% | 76.9% | | Elastic Cloud modest headwind |
| Non-GAAP operating loss | -$12.7m | -$4.3m | -$1.7m | | |
| Non-GAAP operating margin | -17.8% | **-3.3%** | -1.2% | | better than expected = strong revenue performance |
| Shares outstanding | 82.1m | 96.1m | 86.4m | | |
| Net loss / share | -$0.12 | $0.06 | $0.03 | | |
| Operating cash flow | -$5.9m | | | | |
| Free cash flow | -$6.8m | **+$21.6m** | -$18.6m | | Look at it annually. FCF Y2D =+$3m. |
| Cash and equivs | $297m | $350m | | | |
Expect positive FCF in F22.
Assumed COVID = headwinds. Expected gradual improvements.
Given global situation - expect headwinds will continue for rest of fiscal year.
More savings from travel etc. Expect to normalise in F22
| Guidance Q3 | | | Fiscal 21 | | |
|:----------------------------|:-----------------|:---------|:--------------------------|:---------------|:---------|
| Revenue | $145m to $147m | +29% yoy | Revenue | $568m to $572m | +33% yoy |
| Non-GAAP operating margin | -8.5% to 7.5% | | Non-GAAP Operating margin | -7% to -6% | |
| Non-GAAP net loss per share | -$0.16 to -$0.14 | | Non-GAAP net loss/share | $0.40 to $0.32 | |
| Shares | 88.5m to 89.5m | | Shares | 87m to 89m | |
| FCF | | | FCF | -2% to -4% | |
{GD: They’re guiding a massive deceleration in 2H. It should be noted that ESTC are complete rubbish at providing guidance. They’re expecting linear sequential growth of 4%.
My guess is Fy will be closer to $600m. Q3 will be $155m, Q4 $166m 7% linear growth}
Question and Answer Session
- Demand environment - later in quarter. Strong execution across segments and geographies. Steady demand. Similar to Q1. Continued momentum in business. Year played out as
expected. Linearity - August normal slower, Sept - better with Federal. Played out normally. - Federal - Really strong quarter. Can be lumpy. Pulled forward a few million expected in Q3.
- NER - strong track record driving expansion, and saw that again in Q2. NER did dip a couple of points in Q2. Looking ahead, customer dynamics across verticals, expect similar
across verticals. COVID verticals soft, ecommerce etc strong. New business, renewals and expansion = MORE. Feel good about relevance of solutions and customer alignment. - Competitive dynamics - Observability - Shay - feel we’re leading pack. Invested heavily in tech stack, treating as features not products on the single stack with unified
pricing. eg: logs, every log event is a security event {GD: basically he bangs on about ‘single tech stack’} - Schema on read {GD: OnRead means applying structure to data as its read (~casserole! slow, flexible, difficult) . OnWrite means storing the data in a schema/indexing etc as its
written (meat + 3 veg, fast, know how data looks) } - Splunk/Sumo have - Now you have it. “Runtime fields” - not released yet, over next few quarters. Implementing in seamless
way. Single click to transform OnRead to OnWrite. Index everything by default. So fast, but now allowing flexibility to define OnRead schema. Still deeply believe Schema OnWrite
is the way to go.
Also announced Searchable Snapshots which depend on Schema OnWrite, which makes S3 searching much faster than alternatives.
- Guidance - well above, but calling for big slowdown in Q3. But you said “Q3 similar to Q2”. What surprised you, and what gives caution in 2nd half? Executed strongly in 1H
strength in SAAS, stronger services revenue q-1. 2H = demand environment unchanged. We were modelling 2H to improve, but now expecting to stay the same as 1H {GD: but guiding for
a massive slowdown
}. Customers are taking a bit longer “to get there”, sales cycles a bit longer. Raised full-year by quite a bit - more than the Q2 beat. Think guidance for
back half balances opportunity vs near-term risks. - New customers adds ticked up - top of funnel strong. Seasonal strengths or… quite pleased with new customer additions. Consistent with prior quarters. Trends = clean, new
customer adds, a lot on monthly SAAS. Nothing exceptional to call out. - New product drivers - multiple product category drivers. Bottom-up adoption model. Developers, threat hunters, infrastructure, devops, security practitioners. Adoption thanks to
value. Multiple factors of growth 1. Projects become mature, more resources being used. 2. we grow with customers. eg: Logging use-case, used for multiple apps. 3. eg: expands
from logging to APM. All enabled by single tech stack. Moving from logs to APM is a single click. Then move from Observability to eg: ES or Security. $100k ACV - typically use
single solution. $1m more than one solution. Same tools, same API, same user experience, same pricing model. - Splunk - growth down {GD: SPLK down 21% today}. Splunk competitive dynamic remains the same. Happy with where we stand vs Splunk Observability and Security. Next few quarters
security = full feature set to replace incumbents. Ahead of pack with single unified product and product. Endpoint security. Continuous innovation eg: Schema On Read,
Searchable Snapshots. - Margins - improvements? Q1 slowed pace of investment. Then increased Q2 investments. H2 continue to invest in the business. “Signs from customers indicate that their spending
priorities aligning well with our solutions”. Strength in operating margin was because of revenue beat. Important to continue to invest. - Hiring plans R&D vs Sales. Investing across all functions. Proven we can be nimble in hiring. 2H investing in R&D and go-to-market, and G&A. Geographies - distributed.
- AWS, other cloud services - competition? Strategy is to run on AWS, GCP, Azure. Integrate natively. Strong with GCP and Azure. Very happy with partnerships. Our area are at
forefront of needs for companies.