ESTC

Investment Analysis Clubs Saul’s Investing Discussions
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ESTC has sold off 15% after hours! I considering selling some of my position prior to earnings as this has always been one of my lower confidence stocks, not showing a pathway to profitability, but the stock had already been down so much YTD that I decided to wait in hopes the earnings would give the stock a pop…
Instead the opposite happened. ESTC showed that their losses are widening and they are moving further and further from profitability. While they showed strong REV growth this quarter, at 101.1M for 59% or 63% in constant currency, this is an acceleration from last Q. Their earnings showed accelerating losses Q to Q and YOY. Non GAAP loss was 0.22 per share and GAAP was .64 per share. Even worse they are guiding for further losses than analysts predicted for .34-.36 loss per share in Q3, predictions were for -.33 per share. REV guidance is slightly above predictions by about 1 m.

At this point I dont know if I should sell shares for such a loss or stick in there to see what happens over the next few days…

In this current market conditions, profitability matters a lot to wall street so it makes sense that this ER did not go over well with the stock price.

Anyone else in the stock that has a feel on the earnings?
Im listening to the call now

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In this current market conditions, profitability matters a lot to wall street so it makes sense that this ER did not go over well with the stock price.

I won’t disagree that profitability matters and that it seems to be “in favor” more recently. However, Elastic’s quarter had their 2nd best Operating Margins (-18%) in the last 5 quarters and was quite a bit lower than all but the lowest outlier (-16%).

They are guiding to -22% for the year which isn’t much of a change at all and is negatively impacted by 2% due to the Endgame acquisition. Cash hasn’t wavered hardly at all over the past 5 quarters sitting around $300M. They aren’t burning cash.

They are growing at roughly 60% currently with some slowdown suggested in the guidance. They aren’t optimizing the business for profits right now and likely shouldn’t be if they can sustain long term growth.

A.J.

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So then this 15% dip is an incredible buying opportunity if you believe nothing has changed in the company operation?
Wallstreet just doesn’t like that kind of co now, but the sentiment will likely change again at some point, just depends weather the shares continue to decline until it does!

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However, Elastic’s quarter had their 2nd best Operating Margins (-18%) in the last 5 quarters and was quite a bit lower than all but the lowest outlier (-16%).

Should have read:

However, Elastic’s quarter had their 2nd best Operating Margins (-18%) in the last 5 quarters and was quite a bit higher than all but the highest outlier (-16%).

Darn negative numbers.

AJ

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I do not see any slowdown. Next Q with their usual beat should give them a 59% rev growth which is the same as this Q and better than last Q. Billings appears to have slowed down. I did not hear the conf. call. Was management asked about billings?

Question to Ponder: What is in ESTC’s business model that it gives poorer operating margins as compared to say a DDOG? One would say once the company attains scale its margins should improve - but look at SPLK… In a SAAS business model if a company discounts their subscription does it show up in poor gross margin or just poor operating margin?

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In this current market conditions, profitability matters a lot to wall street so it makes sense that this ER did not go over well with the stock price.

I don’t really care what matters to Wall Street right now. So I don’t care about the intial market reaction. All the names we are invested in are very volatile and a 15% drop is meaningless except perhaps as a buying opportunity.

Profits don’t matter at all at this point for ESTC. Growth remains splendid and it was a beat and a raise in this regard.

I’m invested in ESTC for the longer term growth story which hasn’t changed.

Dave

long ESTC

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ESTC had a really good quarter here.

-Revenue growth strong at 59%.

-“Negligible” impact to revenue from Endgame.

-Added 900 customers. Less than 100 net new customers from Endgame

-SaaS came in at 106%, breaking that 100% mark.

-GM improved from 73.3% to 74.4% with a slight improvement in subscription GM to 80.6%

-Operating expenses actually trending in the right direction.

-S&M expense flat over last quarter and grew at 48% compared to 65% last quarter

-R&D up 55% vs 76% last quarter

-GA up 63% vs 54% last quarter and 15% of total revenue both quarters

-Free Cash Flow very near break even at -$1.4M

-Several million dollar SaaS deals with largest in the multi million dollars

-Outlook suggests another quarter with growth in the 59% range

On that multi-million dollar deal

Yes, so I was just going to add a customer example around that actually that can bring that to life even more. So, Raimo, I talked about our largest win in the quarter being multimillion dollar SaaS win, and that was the poster child [ph] for our technology and vision are resonating with customers. At the tip of the spear there in fact was a competitive win in observability the customer bought into our vision, APM was the initial use case, and what was really neat about that was not only did we win against an APM competitor, but the customer actually moved off AWS Elasticsearch, because they saw the value in the proprietary features that we brought. So it’s opened the door for a much broader opportunities for us within the customer as well, so quite excited about that win.

Also Billings growth is missing a part of the story. That is monthly billed SaaS is growing very rapidly. Now makes up 50% of SaaS or about 10% of total revenue. This monthly SaaS grows rapidly but produces no deferred revenue to add to Billings. But if you look at the contribution to ARR it would look differently.

All seems to be going well. Revenue growth intact, no signs of slowing down. Expenses trending well.

Darth

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However, Elastic’s quarter had their 2nd best Operating Margins (-18%) in the last 5 quarters and was quite a bit higher than all but the highest outlier (-16%)

I noticed that as well and was glad to see it since I was paying extra close attention to margins this quarter. Much to my chagrin, I then read this in their transcript:

“Our operating loss in the quarter was $18.4 million, with an operating margin of negative 18% which was better than expected, primarily due to the strong revenue performance in the quarter and to a lesser extent timing as some anticipated expenses shifted from Q2 to Q3.”

That “lesser extent” shift has led to a operating margin guide of -26% to -24% next quarter, which puts them right back at the same unprofitable levels they’ve been all along. Even a beat here might not be better than the -17% comp from 3Q19. Given ESTC’s seeming indifference to any kind of foreseeable path to profits, I’m not surprised at all by the after hours drop (even if I do think the sell off was overdone).

I’m still parsing through exactly what I’m going to do. Hopefully, the shares rebound a bit as I’m working through it.

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In Terms of profitability and financial stabilty the RPO metric should be looked at as well. 410 Mio, 53% yoy. Most of it will turn into revenue in the next 2 years.

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In the QA Janesh addressed the billings growth rate as primarily due to a federal contract moving into the next Q and partly because of the monthly SAAS. This seems like a reasonable explanation.

In another section of the QA Shay says

“We are still being adopted primarily for the logging use case, and we’re doing our best to try to bring to our users as quickly as possible and educating them to make sure that they know that they can actually use us for metrics and APM and they can actually have a much bigger story about this.”

This does not sound link confident talk. ESTC continues to be my #2 stock allocation wise. But it seems like companies like DDOG’s product sells itself lot easier unlike ESTC where its capabilities need to be explained which perhaps contributes to the lower margins.

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it seems like companies like DDOG’s product sells itself lot easier unlike ESTC where its capabilities need to be explained which perhaps contributes to the lower margins.

Hi Texmex,

I think this is a classic example of the fundamental difference between a product play vs. an infrastructure play. And I’m now kicking myself for not recognizing it sooner!

People on this board have endlessly compared the numbers between ESTC and MDB. And no one has really pinpointed why there is such a discrepancy between the two. Your comparison of DDOG however, hit me like a brick.

Infrastructure plays always sound like fantastic ideas, but seem to never really take off as one expects. This is a lesson I thought I learned a long time ago, and yet, got sucked into ANET which was the same thing. And now, once again, I find myself holding ESTC as well.

So, what is an “infrastructure” play, vs. a “product” play? Simply put, the infrastructure is the thing required to build a product. Thinking back to the “Internet Boom” of the late '90s/early 2000s, there were all sorts of companies promising to light this world up by laying fiber optics. They all imploded. They laid so much capacity that we still, 20 years later* haven’t lit up all the dark fiber they laid down! They were “infrastructure”.

ANET - infrastructure. Just as the fiber was required to build high-speed internet capabilities, ANET’s infrastructure is required to build cloud capabilities.

ESTC - infrastructure. They’re picks and shovels are required to build monitoring and logging applications. They are a means to many different ends. Just like fiber, just like ANET’s switches and routers.

Compare those things to a “product” play:

NFLX - Pure product with every human being as a potential customer. They rely very heavily on that laid fiber. And they rely on AWS (which uses ANET’s switches/routers). And they rely on ESTC for a lot of their logging/monitoring, etc.

Amazon - (somewhat of a hybrid infrastructure/product) - Amazon.com relies on AWS to provide it’s online shopping services just as it relies on UPS for delivery. (UPS is an infrastructure play).

DDOG - Product - Relies on high-speed internet provided by fiber, the cloud, and things like ESTC among others.

TTD - Product - Relies on all the same infrastructure as everyone else to deliver their services.

MDB - hybrid, but mostly product - Provides infrastructure to some extent, but really they are providing the service of that infrastructure in the form of things like Atlas. But even with out Atlas, they rely on a tremendous amount of infrastructure to pre-exist before their database can be useful.

OKTA - product - relies entirely on infrastructure to exist and sell it’s services.

ZS - I’m thinking infrastructure (which means I might need to get out now!)
TWLO - I’m beginning to think infrastructure as well…

The last two are interesting. If ZS weren’t cloud-based, and sold an actual widget, it would be unquestionably infrastructure. But they’re leveraging the cloud, so maybe it’s a hybrid…

TWLO too, they provide the things that others use to create great products and services.

If it’s not clear, my point is, infrastructure never wins big, but is required for those products and services which everyone benefits from. I don’t benefit from lots of fiber any more than I did from a PC in the pre-internet generation. What I benefited from was the software (Microsoft, Adobe, etc.) that ran on the infrastructure created by the PC manufacturers. I don’t benefit from fiber optics. I benefit from Netflix for streaming and shopping at Amazon, which are only possible because of the infrastructure provided by the fiber and the ISPs who provide access to it.

I don’t benefit from ESTC’s ELK stack. In fact, I suffer because I need it. I need to understand it all, build it up, configure it, manage it, etc.

But I DO benefit from DDOG’s service, which is built in part on ELK. THEY manage it, configure it, deploy it, worry about it, etc. I merely pay them for an amazingly easy to use product that does what I need!

I think TWLO is a lot more like ESTC now that I think about it. I’ll have to do more research on ZS, but my gut is telling me that they’re more like ANET and therefore infrastructure, than they are like NFLX or DDOG…

MDB, like I said, kind of a hybrid, but ATLAS moves them more toward product/service…

Anyway, my $.02. I think I need to get out of ESTC, TWLO, and ZS. I don’t like infrastructure as an investment, they tend to be races to the bottom (e.g. every fiber optic company, every PC manufacture, etc.).

–
Paul

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If it’s not clear, my point is, infrastructure never wins big, but is required for those products and services which everyone benefits from. I don’t benefit from lots of fiber any more than I did from a PC in the pre-internet generation. What I benefited from was the software (Microsoft, Adobe, etc.) that ran on the infrastructure created by the PC manufacturers. I don’t benefit from fiber optics. I benefit from Netflix for streaming and shopping at Amazon, which are only possible because of the infrastructure provided by the fiber and the ISPs who provide access to it.

I don’t know if product play vs. infrastructure play is the correct terminology, but I get your point. You’re basically saying that companies that provide “back-end” products/services aren’t going to be as valuable as companies that provide the “front-end” products/services that large numbers of people see, touch, and experience. It’s the same thing as asking who is getting the most value out of the World’s coffee craze? The coffee bean farmers in Latin America, or the coffee chains like Starbucks?

Fortunately, ESTC and TWLO have both already realized your epiphany and are trying to move up the value chain so-to-speak. That is exactly why ESTC acquired Endgame and is making moves into APM/monitoring against SPLK and others. At the same time, TWLO decided to build Flex using their communications infrastructure platform before someone else did it.

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I don’t like infrastructure as an investment, they tend to be races to the bottom (e.g. every fiber optic company, every PC manufacture, etc.).

I think there’s something to your point but I don’t totally agree with this statement.

I can think of two major “infrastructure” plays right off the bat.

Look at CSCO. Sure, it wasn’t a good investment at the height of the internet bubble and for a few years thereafter due to the overbuild. But overall, it’s been a fabulous investment once you take out the effects of the fairly unusual internet bubble.

Look at INTC. Again, it has been a fabulous investment except for the height of internet bubble.

And ANET has been a great investment despite its current pullback and many expect it will resume its ascent.

Dave

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I can think of two major “infrastructure” plays right off the bat.

I would think the distinction was the degree to which the company had control of the kind of infrastructure it was providing. INTC, for example, has had a highly dominant position in the processor market. Whereas, providing fiber or something is a commodity.

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I would think the distinction was the degree to which the company had control of the kind of infrastructure it was providing. INTC, for example, has had a highly dominant position in the processor market. Whereas, providing fiber or something is a commodity.

It seems to me, that is what this is actually all about. Unique product with pricing power, or commoditization. Every PC uses a Microsoft license to build a computer. You don’t buy a Microsoft license unless you build a computer. so Microsoft Windows is going to have the same demand as hard drivers. Yet, Intel and Microsoft were the only two non-commodity items that went into a computer because they didn’t have a direct replacement, therefore did not commoditize like memory and hard drives.

Fiber optic is a commodity. steel is a commodity. Steel makers are pumping out steel which is a commodity. It doesn’t mean if I buy a storage container made of steel, from the “infrastructure” manufacturer, I am buying a “product” with pricing power. A storage container is a storage container, for the most part.

When it comes to software, the goal is to find software that does not have easily substituted product. “anti-virus” is a product according to these definitions, but it is a competitive, commoditized industry. Aside from CRWD because they are the first to bring a cloud-native solution to the marketplace, offering them differentiation.

Data centers and components that go into the data centers are subject to overbuilding, yes, just like railroads were, or internet infrastructure. That’s why my main concern is to not rely on investments that require companies to migrate to the cloud (such as NTNX). Or data centers to be built, such as Arista.

If you think about it, ORCL is “infrastructure”, but it has been one of the biggest winning stocks of all time until the market matured.

Pager Duty is a “product” because that’s visible and what people see by these definitions in this thread, but they are getting squeezed big time because this type of product is getting commoditized.

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I don’t know if product play vs. infrastructure play is the correct terminology, but I get your point.

Well, no analogy is perfect, it was the best I could think of at the time :slight_smile:

You’re basically saying that companies that provide “back-end” products/services aren’t going to be as valuable as companies that provide the “front-end” products/services that large numbers of people see, touch, and experience. It’s the same thing as asking who is getting the most value out of the World’s coffee craze? The coffee bean farmers in Latin America, or the coffee chains like Starbucks?

Precisely! And, as someone else pointed out, it’s the commoditized “back-end” that’s not the best investment. Which explains CSCO being both an infrastructure/back-end solution, as well as a great investment over time! They monopolized the data base solution for the back-end! Therefore, IF you can find a back-end/infrastructure play that has monopolized its niche, you’ll probably have a winner. But not so with a commodity!

Fortunately, ESTC and TWLO have both already realized your epiphany and are trying to move up the value chain so-to-speak. That is exactly why ESTC acquired Endgame and is making moves into APM/monitoring against SPLK and others. At the same time, TWLO decided to build Flex using their communications infrastructure platform before someone else did it.

The thing with TWLO that I keep coming back to is that they have monopolized their niche. No one else seems to do what they do, never mind all that they do. I’m a little concerned that having them move up the value chain might distract them. But it’s certainly not a big concern, more of a “keep an eye on things” level.

ESTC I’m concerned about. I think they have a wonderful set of building blocks, but I’m concerned it might be too late to take on the likes of Splunk, maybe even DDOG. Splunk is old-school these days, and DDOG is built on top of ESTC’s offerings. Most people avoid splunk because of their ridiculously expensive licensing fees. And they’re not a cloud-native solution like DDOG is. Will ESTC be able to compete in the cloud-native space with DDOG, is the real question.

I think so. But I’m actually not sure at this point. I’m mostly just keeping an eye on them right now. Both are less than 2% of my portfolio right now, and I’m hesitant to add more based on recent performance. And the last TWLO earnings didn’t fill me with a lot of confidence for all the reasons Saul and others have already explained.

–
Paul

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