ESTC Q4 2020 CC notes

Hi all,

It was a pretty good quarter I thought. Constant currency growth was solid, they talked about how things were picking up in April and continuing to May, trends all good. And then they guided down a shocker. All the analysts were like … huh? And their response was “no, everything looks good, just being prudent”.

So, we get a weird duality of pretty great results to finish Fiscal 2020 and a terrible guidance to start 2021. Is that ‘prudence’ or major sandbagging? And if it’s sandbagging then what… you can’t trust management?

I always like to compare ESTC with MDB, since they IPO’d at the same time. For some reason the market loves MDB, and doesn’t love ESTC.


|                  | ESTC Q4 2020 | MDB Q4 2020 |
|:-----------------|:------------ |:--------|
| Revenue          | 123,623      | 130,329 |
| --yoy            | +53%         | +46%    |
| --q-1            | +9%          | +6%     |
| Customers        | 11300        | 17000   |
|                  | 8%           | 20%     |
| -- >$100k        | 610          | 780     |
|                  | +7%          | +8%     |
| Revenue/customer | 10940        | 7083    |

ESTCs Operating Loss, Net Loss, and FCF are all better than MDB. And their current FY21 guidance is $10m MORE than MDB. But the enterprise value of ESTC is half MDB. The market is fascinating!

re: DDOG, DDOG is growing faster and spending less to do it. Also, Datadog is (reputedly) more expensive than ESTC, and also cannot run on-premise, ie, ESTCs competitive advantage. However, judging by the growth numbers, not many companies really care about ESTCs competitive advantage.

So, in summary, good quarter, story hasn’t changed, execution seems solid, terrible guidance. Stock didn’t react much, down 4.5% on a generally down day for SaaS stocks. I’ve made money on ESTC, but mainly trading around its value points. I need to think about this some more. If you can’t trust management guidance to be in the ballpark, what does that mean?

cheers
Greg
ps. As always, copy and paste into dillinger.io for a pretty version.

Q4 2020


Other discussions

Bears Thoughts
previously he thought ESTC P/S ratio would expand, now he doesn’t so sold a big chunk. Dreamer is waiting for a actual bad quarter…

MusiCalis thread
The theme I think is the guidance is sand-bagging.

Checklist

Q: What is revenue doing yoy?
A: +70% +63% +58% +59% +61% +53% {GD: this is better than it looks, with CC +57%}.

Q: What is cashflow doing?
A: Free cash flow was -$6m. They did discuss their cash position and why they weren’t raising money when others had, but felt they were in a good position to be FCF positive in Fiscal 2022.

Q: What are customers doing q-1?
A: Solid, revenue/customer increasing slightly.


|                  | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 |
|:-----------------|:--------|:--------|:--------|:--------|
| Customers        | 8800    | 9700    | 10500   | 11300   |
| -- q-1           | 9%      | 10%     | 8%      | 8%      |
| -- >$100k ACV    | 475     | 525     | 570     | 610     |
| ---- q-1         |         | 11%     | 9%      | 7%      |
| Revenue/customer | 10194   | 10423   | 10779   | 10940   |

Q: DBNER?
A: >130% again

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 |
|:----|:-------|:-------|:-------|:-------|:-------|:-------|:-------|:-------|:-------|:--------|
| R&D | 15,092 | 17,543 | 18,981 | 25,332 | 25,850 | 31,004 | 35,182 | 38,478 | 46,119 | 45,591  |
|     | 36%    | 35%    | 34%    | 40%    | 36%    | 38%    | 39%    | 38%    | 41%    | 37%     |
| S&M | 20,727 | 27,927 | 30,422 | 34,634 | 37,196 | 45,044 | 52,011 | 54,020 | 54,829 | 58,180  |
|     | 50%    | 56%    | 54%    | 54%    | 53%    | 56%    | 58%    | 53%    | 48%    | 47%     |
| G&A | 7,555  | 9,737  | 10,099 | 12,092 | 11,151 | 13,194 | 18,568 | 31,808 | 21,096 | 20,153  |
|     | 18%    | 20%    | 18%    | 19%    | 16%    | 16%    | 21%    | 31%    | 19%    | 16%     |

Solid, a drop as % revenue all round which is good to see. The G&A was because of various travel etc from lockdowns, but hoping that won’t increase too much going forward.

Q: Is the story intact?
A: I think so. Nothing has really changed. They’re building out stuff as you’d expect, they offer a unique point of differentiation (running on-premise) and a usage-based pricing model. However, if you look at DDOG, they’re executing much better (try and sign up for APM with Elastic, I dare you :wink:)


CC Discussion

FY revenue: +57%
Q4 revenue: +53% yoy
Subscription Customers: 11300
Customers >$100k :>610
NER: >130%
Release 7.7 (service maps - showing which services make requests to other services {GD: doesn’t look as sexy as Datadogs!})

Enterprise Search

Historically, months to years of setup for something that doesn’t work that well.
Intuitive single point of search (M365, GSuite, Slack, SalesForce, GitHub, ZenDesk, etc…)
Resource-based pricing.
Upcoming free-tier
Massive shift to virtual workplaces.

Forester - ESTC Workplace Search well positioned.

Observability - logs, metrics, APM

Our approach - eliminates silos, reduces meam time to resolution, allows cost control

As observable systems multiply, pressure to consolidate tooling for cost, efficiency reasons.

“One-stack, one pricing model, and the ability to move between solutions”

  1. Service maps
  2. {GD:Tech Geek improvements} = More integrations, search options over large data volumes, memory usage {GD: memory is a big thing for ElasticSearch}
  3. Refactored alerting framework - built on the base application, so available to all solutions.

Anecdotes

Ellie Mae - used to have many tech vendors for monitoring. Tooling bingo. Cut logging costs in half, and more efficient.
F50 Tech, F50 Retail - enterprise search, observability and security
BNP Paribas - renewed and expanded. Logs. App Search, now: Building out large security operation center.
OverDrive - ebooks {GD: I love OverDrive}. Elastic powers search. Log analytics. Q4 → New security business. Single unified stack helped them decide.
Nordics digital bank - renewed multi-year business to run logging and security workloads “with our ElasticSearch service”

ElasticCloud enterprise and ElasticCloud on Kubernetes.

F50 Energy company - Elasti Cloud on Kubernetes to monitor Kubernetes logs.

SIEM

“Any observability customer is a potential security customer…we believe any SIEM customer is a potential endpoint customer”

Unified SIEM and endpoint protection with unified pricing
Q4: embedded case management workflows integrates with ServiceNow → streamlined incidence response.

Cloud

AWS, GCP, Azure, Tenzing, Alibaba
AWS -GOVCLOUD. FedRamp InProcess.
9 new global Elastic-cloud - 6 GCP, 2 Azure, 1 AWS.

  • Calls out GCP and MSFT. Worked with them, recognised ESTC as 2019 data management tech partner of the year.

Finances


|                              |            |                                                                                                |
|:-----------------------------|:-----------|:-----------------------------------------------------------------------------------------------|
| Revenue                      | $123.6m    | +53% yoy **+57%CC**                                                                            |
| FY Revenue                   | $427.6m    | +57% yoy **+60%CC**                                                                            |
| --- International            | 42%        | hospitality, transport, traditional retail and energy <15%. SMB slower ~15% business.          |
|                              |            | benefiting from international govt and enterprise.                                             |
| **Subs revenue**             | $104.2m    | +63% yoy CC (92% of revenue)                                                                   |
| --- SaaS                     | $29.0m     | +110% yoy +120%CC                                                                              |
| --- FY SaaS                  | $92.3m     | +101% yoy +109%CC. Strength in annual and monthly business.                                    |
| Billings                     | $175.1m    | +52% yoy +55% CC. APJ > Americas > EMEA.                                                       |
| Deferred revenue             | $259.7m    | +52% yoy CC                                                                                    |
| RPO                          | $535.6m    | +52% yoy  [GD: SaaS will constrain this since monthly contracts don't have RPO or deferred rev |
| Av. Contract length          | >1.5 years | "longer versus a year ago"                                                                     |
| Customers                    | 11300      | +800 q-1. vs 10500 Q3.                                                                         |
| --- Customers > $100k        | 610        | +40 q-1. vs 570 Q3.                                                                            |
| --- Customers > $1m          | >50        |                                                                                                |
| --- NER                      | >130%      |                                                                                                |
| Non-GAAP gross profit        | $89.4m     |                                                                                                |
| Non-GAAP gross margin        | 76%        | Prof. service margin improvements. Subs margin flat. {GD: prof services is loss making}        |
| Non-GAAP operating loss      | -$12.7m    | "Significantly better than expected" - 1. Strong revenue, 2. lower discretionary spend,        |
|                              |            | 3. lower hiring.                                                                               |
| Non-GAAP operating margin    | -17.8%     | Insignificant FX impact.                                                                       |
| FY Non-GAAP operating margin | -18.0%     |                                                                                                |
| Shares outstanding           | 82.1m      |                                                                                                |
| Net loss / share             | -$0.12     |                                                                                                |
| FY Net loss / share          | -$0.93     |                                                                                                |
| Operating cash flow          | -$5.9m     |                                                                                                |
| Free cash flow               | -$6.8m     |                                                                                                |
| FY 20 FCF margin             | -8%        | FCF margin improvement. Expect improvement in FY 21 (-2% to -4%), aiming to +ve FCF in FY 22.  |
| Cash and equivs              | $297m      |                                                                                                |

“Saw falls in mid-late March… operationalising … finished March strong, continued into April”

“Increased customer churn in SMB… offset by even higher new business”

“Expect trends in April to continue… SAAS to grow faster than overall business”

“Difficult COVID environment, gradual recovery, headwinds on calculated billings”

Sales cycles may extend…


| Guidance Q1                 |                |          | FY 20                     |                  |          |
|:----------------------------|:---------------|:---------|:--------------------------|:-----------------|:---------|
| Revenue                     | $119m to $122m | +34% yoy | Revenue                   | $530m to $540m   | +25% yoy |
| Non-GAAP operating margin   | -12% to -11%   |          | Non-GAAP Operating margin | -15%             |          |
| Non-GAAP net loss per share | 0.19 to 0.17   |          | Non-GAAP net loss/share   | -$0.98 to -$0.85 |          |
| Shares                      | 83-84m         |          | Shares                    | 85m to 87m       |          |
|                             |                |          | FCF margin                | -2% to -4%       |          |

“Continue headcount in R&D, S&M, G&A - global expansion”
“Intend to drive margin improvement as well”

  1. “Diversification an inherent advantage for us”
  2. Believe Enterprise Search, Observability and Security will all benefit in difficult environment.
  3. Widened our competitive moat. Unified stack “makes R&D more efficient”
  4. Unified pricing model.
  5. Incredibly powerful distribution model.

Question and Answer Session

  1. Guidance - mid-point Fiscal 2021 = 25% after 57% in Fiscal 2020. WTH? Very strong finish to Q4. Some COVID impacts seen offset by strengths. Expect some customer scrutiny on spend, might extend sales cycles. Might present calc billings headwinds. Expect gradual recovery, so prudent. Inspected various scenarios. Distinct competitive advantages.
  2. May better than April - momentum has continued. May is first month of Fiscal year, normally slower, as sales people get reassigned etc.
  3. Change in solutions customers want? Enterprise/Workplace search: “Face to face meetings are not searchable”. Distributed companies create more comms. Observability - WFH need to manage more infrastructure. Security - more endpoints need protection. Trends where companies are heading.
  4. Total revenue - need non-renewals and churn to hit lowered guidance - WTH? Quite pleased in Q4. No significant differences in Churn. Slightly higher in SMB (but ~15% of business). Guidance - various scenarios that we’ll monitor.
  5. Guidance - very strong quarter - April and May sound good. Are you seeing sales cycles extend? Real disconnect. Pipeline strength. April activity continues in May, top-of-funnel. Thats all good. May performance in normally slow. Too early to tell impact.
  6. COVID - WFH, cloud adoption, tailwind, maybe longer-term? Think its a long-term tailwind. Being careful (with guidance). Think our 3 solutions align really well with future. Being there for customers wherever they are.
  7. Uplift from new network traffic security? anything like that? Seen more usage in observability and SIEM. More data, logs, network data etc. Hard to gauge over last 1.5 months.
  8. Any customers with a sense of urgency to spend budgets? (Trying to reconcile health of Q4 with guidance) → No. Trying to prudent. Even if reduction in budget, confident in our ability to collapse tooling bingo etc. Cloud or on-prem. Consolidation of tool = tailwind for us.
  9. Have you seen lowered lands? Pleased with new customer additions - consistent with previous cadence. Size of lands consistent.
  10. NER - guidance > 130%. Measured approach. Didn’t break it out. But looked at it in a number of different ways.
  11. APM - bigger priority for customers. Momentum? Service maps last big missing piece in last release. Resonates “took some time to wrap heads around observability story and combining APM and logging”. Extremely good feedback about combining APM and logs. Work cut out for us to promote the observability story. Happy with progress there.
  12. Splunk - reduction in contract duration. Didn’t see difference, contract durations up a bit in Q4. Contract length can vary quarter to quarter. Haven’t seen shorter billing terms or longer payment terms. Will monitor. “Steady as she goes”
  13. Pricing pressure - average deal sizes same. Pricing, discounting consistent. Larger deals larger discounts. SaaS presents a headwind to gross margins.
  14. Workplace Search - out of the box. Spent lot of time creating consumer-oriented product “get started within minutes” (integrations). Adding more connectors. Same pricing model. More data, faster results = more money for us.
  15. 2 competitors raised $2b in last week and a half {GD: who?} - feel like we’re in a good operating standpoint. Don’t expect to burn a lot of cash. Conservative management. In the future, maybe.
  16. Security - EndGame integration. 100 experts joined engineering, so we’re more security oriented. Continue to execute to plan = take endpoint security to integral feature in the stack. So all customers can “click a button” to enable endpoint security.
  17. Government - international. Quite pleased with public sector both in US and outside.
  18. Spend and hiring. Operating margins well above expectations. Hiring? Continuing to invest in business. Focussed on areas best positioned to drive growth. Absorbing EndGame. Expect will invest even more. Sales not just adding capacity, inside sales, renewals team, partner program etc.
  19. Broad use-cases, some more or less discretionary? Think 3 solutions are mission-critical. Shays guess… Security > Observability > Enterprise search but all critical.
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