ESTC SaaS Growth to Overtake Atlas?

What? I must be crazy. Atlas grew at 240% YoY in most recent quarter, while Elastic SaaS was up 71%. How could Elastic SaaS possibly hope to grow faster than the monstrosity that is Atlas?

For ease of comparison’s I will use calendar years in this post.

Lets remember this from Elastic’s Earnings Call for July 2019 quarter.

As a reminder, we launched a significant update to our SaaS services in Q2 of last year, offering customers much more flexibility and we revised our pricing model in conjunction with that. Those changes last year present a headwind to calculated billings growth. It’s hard to precisely quantify that headwind, but we estimate that it was in the mid-single digits in terms of year-over-year growth.
Excluding the impact of these changes, calculated billings growth would have been correspondingly higher. Q1 was the last quarter of this billings headwind.

Here is a link to the mentioned press release describing the pricing changes which took effect August 1, 2018, the first day of the October quarter. I won’t take up space if you want to know what changes occurred follow the link.

https://www.elastic.co/blog/elasticsearch-service-on-elastic…

Let’s see how that impacted SaaS revenue and sequential growth. The earliest we can start is July 2018 quarter, which suits our needs because Oct 18 is the first effected quarter.

Quarter     Rev       qoq      yoy
Jul 2018   $10.3M   
Oct 2018   $10M      (Neg)     79%
Jan 2019   $11.74M   +17.4%    68%
Apr 2019   $13.77M   +17.3%    69%
Jul 2019   $17.58M   +27.7%    71%

You can see that Elastic SaaS normally has large QoQ growth and for the effected quarter the SaaS actually saw a decline in revenue. This was the start of the headwinds that expired at the end of this recent July 2019 quarter.

So what can we expect then for the Oct 2019 quarter. As can be seen, if Elastic sees $0 sequential growth, not likely at all, then SaaS YoY growth will be 75.8%. Elastic’s SaaS growth next quarter will accelerate even with no growth whatsoever!

But that’s not likely. Look at July 2019 sequential growth. 27.7%! A significant acceleration over prior quarters’ sequential growth. We’ve discussed Elastic’s advances in their hosted offering, so won’t rehash here. But we can see what’s going on just in the numbers alone. This has no effect from an acquisition as they haven’t made one during this time period. Endgame is expected to close in April 2020 quarter.

Over the last few quarters ESTC has had a SaaS headwind due to pricing changes and Atlas has had a tailwind due to MLabs acquisition. Lets compare to Atlas and look at what next 2 quarters might look like for the two. To look forward I will apply the average of last 2 quarters sequential growth. This will be 16% for Atlas and 22% for Elastic SaaS. This comparison starts Jan 2018 to include MLabs and ends Jan 2019 when the effect sunsets.

Atlas

Quarter     Rev       qoq      yoy
Jan 2019   $27.4M              400%
Apr 2019   $31.3M    +14.4%    340%
Jul 2019   $36.8M    +17.5%    240%
Oct 2019e  $42.7M    +16%      185%
Jan 2020e  $49.5M    +16%      81%

Elastic SaaS

Quarter     Rev       qoq      yoy
Jan 2019   $11.74M   +17.4%    68%
Apr 2019   $13.77M   +17.3%    69%
Jul 2019   $17.58M   +27.7%    71%
Oct 2019e  $21.4M    +22%      124%
Jan 2020e  $26.2M    +22%      123%

At least for Oct 2019 quarter using company guidance and typical beats, those are realistic expectations. Jan 20 is more difficult because we have limited company guidance and both companies have seasonality with increased usage during that quarter.

But there’s little that could be so wrong with those numbers to make it so Elastic SaaS does not overtake Atlas growth rates by the end of the calendar year. Change the numbers to 20% for Mongo. Still going to happen. Change it to 16% for Elastic, still going to happen.

The bottom line is that Elastic SaaS has been growing much faster than the reported YoY numbers have indicated and appears that it may be considerably accelerating(one quarter doesn’t make a trend). Let me know where I’m wrong.

Darth

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The bottom line is that Elastic SaaS has been growing much faster than the reported YoY numbers have indicated and appears that it may be considerably accelerating(one quarter doesn’t make a trend). Let me know where I’m wrong.

Darth, while you may be right, the impact is not that huge because:

  1. SaaS is only about 20% of ESTC’s total revenue.

  2. A 5% headwind in y/y growth is based on last year’s number as the base. For SaaS in the July 2018 quarter, revenue was $10.2M so a 5% headwind is only $500K.

So it seems that a jump from 70% to $120% in SaaS revenue growth will not really move the needle much.

Chris

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Hey Chris,

I left off a critical piece of context from my highlighted quote from the call.

Here’s the fuller quote.

Calculated billings in Q1 grew 51% year over year or 53% on a constant-currency basis to $89.4 million. As a reminder, we launched a significant update to our SaaS services in Q2 of last year, offering customers much more flexibility and we revised our pricing model in conjunction with that. Those changes last year present a headwind to calculated billings growth. It’s hard to precisely quantify that headwind, but we estimate that it was in the mid-single digits in terms of year-over-year growth.

Excluding the impact of these changes, calculated billings growth would have been correspondingly higher. Q1 was the last quarter of this billings headwind.

As you can see they are talking about this quarter yoy total Billings growth rate for where to put the “mid single digit” headwind to.

So instead of Total Billings Growth of 51% it would have been 56% to use 5%.

Previous Q1 (Jul 2018) Billings were $59.2M. 56% growth on top of that would be $92.5M in Billings.

That’s a $3M difference in current Billings, which is pretty meaningful at this run rate.

But more importantly they are going to show triple digit yoy on SaaS starting in current quarter and it will be closer to 22-23% of revenue. That will tick up every quarter.

Darth

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Darth, You got me interested enough to take another look at Elastic, at least at Bert’s write-up and at Elastic’s last earnings report.

How to you deal with these guidances:

Adjusted net loss per share of $1.24 to $1.40.

At the midpoint, that comes out to Adjusted net loss of $104 million dollars (in a company which only guided to $410 million in revenue!)(And a GAAP loss which I can estimate at about $180 million).

Considering that we have other companies that are growing equally as fast and only losing 2% of Revenue, or 10% of revenue, or even making a profit, and are moving towards profitability every quarter, why should we pull money from these companies and put it in Elastic. I don’t get it. Those are truly horrendous figures to guide to, even if they beat them by 10%.

Thanks,

Saul

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“Move the needle?” When Mongo’s Atlas was a mere baby bump and growing at 400% per year the stock started Shelton up and outperforming even a great performing market.

If Elastic Cloud accelerated to 3 figures and guidance remains positive so will the stock. The market loves upside surprises and accelerating fundamentals.

Presently (as I did the calculations) off line Mongo sales are growing at about 43 or 44% (I forget the exact number). No wonder why Atlas caught up in revenue share so fast!

Presently Elastic’s non cloud business growing materially faster than Mongo’s comparable. As such the proportion of revenues will stay disparate for longer but for positive reasons.

I don’t know if Darth’s calculations will end up as true (seems too good to be true) but if accurate it will (or most of the time anyways will be) a very positive factor biased towards stock appreciation.

Does not need to move the needle today. Atlas certainly did not in its earlier days. If the trend continues it will be a big thing. Many have asked why Elastic’s cloud, although growing nicely, was growing much slower than Atlas. Perhaps Elastic’s cloud is now catching up.

I think it’s a big issue to look into along with the impact of this Search Guard suit, what the Endgame acquisition means to the SIEM platform, how is the APM product moving and so on. Elastic has a lot of momentum and events happening around its core product. These are not things that were going on (at least w purpose) last year and these efforts are still in their early phases. Endgame deal has not even closed yet (or if closed) integration happened.

Tinker

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Hey Saul,

Great question as to expenditures. I’ll admit the profitability side of investing has never been a core competency of mine, but no time like the present to get into it. Afraid I have a rather long winded reply in the works.

In the mean time I’ll reiterate the results of the spend. Most recently driving sequential growth of almost 28% in SaaS while maintaining a healthy YOY growth of on-premises subscription growth of 56%. And with guidance only we should see on-premise maintain 50% or higher and SaaS coming in above 100% yoy. They only need $2.4M sequential SaaS growth to meet that threshold. With guidance alone they should get close to that.

Management says:

Turning now to operating expenses, we remain focused on investing to drive top-line growth.

We will continue to add sales capacity and expand market coverage as we drive growth and expect to realize leverage gradually over the longer term as we scale.

As we’ve said before, we are increasing our investments in R&D this year as we continue to invest heavily in both existing and new products and features. G&A expense was $13.5 million, up 54% year over year, representing 15% of total revenue. This includes costs associated with our global expansion and continuing to build the infrastructure to support our growth.

We expect to continue to invest across the entire business in order to drive future revenue growth as we continue to scale. As mentioned in our last call, we plan to accelerate headcount-related investments in R&D and sales capacity and coverage globally to drive growth. Some of these investments will be intended to secure growth this year, while others, particularly in R&D, will help drive growth over the long term.

We’re executing well and delivering growth while investing to address the rich market opportunity ahead of us in so many different use cases.

Within the last few days they’ve expanded Google Cloud coverage to new availability zones in APAC. And also spun up first launch of Elasticsearch Service on Azure in just a few zones. Lots of expansion of availability of Elastic SaaS to go.

There’s much more, I’ll try to get to later, but that’s a start. In short, Elastic is in the very early innings of monetizing this behemoth and proliferate platform they have built. They are a company about to reach full stride. They clearly see a “rich market opportunity ahead” of them and are investing early and often to capture it. Too many other companies from Datadog to McaFee have solutions that leverage Elastic Stack capabilities for different solutions for them not to go after the convergence of them all to one platform from the source.

A side note. The future expenditures for the year include the Endgame acquisition. While they are paying all stock, it does include a cash item for Endgame debt. I believe it’s around $20M.

Darth

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Thanks Darth for taking the time to give such a full response. I appreciate it.
Saul

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