Is Elastic as good as other holdings here

Investment Analysis Clubs Saul’s Investing Discussions
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Hi,

I am trying to figure out if Elastic is worth investing right now. I see that Bear, Darth, muji, Retirementdough and perhaps Rob are very favourable on ESTC while Saul is not.

Bear from his latest update (BTW thanks for that):
“MDB, ESTC, and AYX are now my largest positions at around 11% or 12% each.”

Other reason Bear is +ve is he looks at the market cap and considers a company below 10B favourably. ESTC is around 6.5B.
“You’ll notice I keep mentioning market cap. I think it’s worth considering. It’s no crystal ball, of course. Crossing the $10 billion or even $20 billion mark didn’t slow down SHOP or SQ (although since crossing the $30 billion level, SQ has been up and down for over a year now). But a lot of hyper-growth SaaS companies have grown significantly slower after reaching a certain size.. I think this would be worth studying…but for now I’m just using it as a sort of rough rule of thumb.”

Retirementdough from his latest update:
“ESTC-Cooled off quite a bit from last month. Look forward to earnings report coming up. I believe it has the potential to make the most gains from here till end of year.”

Darth is excited about the synergies that can be brought with Endgame and the Elastic search stack. In particular Endpoint security and Beats.
“I’m excited about the endpoint market and our Endgame opportunity.”

“It appears the roadmap is to develop a more concrete combined SEIM/endpoint security platform for the entire digital stack.”

“Remember that Elasticsearch has Beats. Beats is the platform for single-purpose data shippers. They send data from hundreds or thousands of machines and systems to Logstash or Elasticsearch.”

Muji is also up beat for the same reasons:
“This is a highly unique circumstance they find themselves in; I’m not sure I’ve seen this combination before, and it is direction that MDB can’t really enter. They are not only a database provider and cloud hosting service, but ESTC is now wrapping up and spinning off enterprise-focused SaaS services built on their system. It started with Search-as-a-Service but is now taking a sharp turn into Security-as-a-Service offerings.”

"[SEIM = Security Event Information Management, a system for tracking and correlating disparate events from network, system and device logs to generate real-time alerts.]

So with Endgame, they are gaining an endpoint protection product that is sold as a SaaS service to enterprises for network security – but gave us a glimpse that that is just the beginning. It seems that endpoint protection will be just a piece of the ultimate platform they plan on releasing as a SEIM SECaaS service.

I expect this foray into enterprise SaaS services to continue, and with these move into SECaaS, possibly with other services may be acquired, all rolled up into a SEIM service."

All these make me think that ESTC should be reporting pretty good results going forward. Perhaps from this quarter or may be next. However, the numbers so far (pre Endgame aquisition) speak a slightly different story.

YoY Revenue has been going down:
2018 81.38%
2019 69.85%
2020 47.0% (projected)


Adj. gross profit Quarterly YoY has been going down:
YOY %	71.56%	63.06%	65.15%	60.82%

Adjusted Op. Profit and Net profit also are -ve:

Adj Operating Profit (millions USD)						
	Q1	Q2	Q3	Q4	Year	YOY
2018	-6,159	-3,544	-8,043	-14,216	-31,962	
2019	-11,660	-14,830	-11,730	-17,476	-55,696	74.26%

Adj Net Profit (millions USD)						
	Q1	Q2	Q3	Q4	Year	YOY
2018	-7,854	-5,265	-8,694	-17,515	-39,328	
2019	-12,494	-16,910	-11,151	-20,472	-61,027	55.17%

On the other hand the number of customers and the ones paying more than $100K has been rising and dollar based net expansion has been consistently > 130%.


Total customers						
	Q1	Q2	Q3	Q4	YOY	
2017				2,800		
2018				5,000	78.57%	
2019	5,500	6,300	7,200	8,100	62.00%							
						
Customers (ACV > $100k)						
	Q1	Q2	Q3	Q4	YOY	
2019		340	380	440			
												
Dollar-based net expansion rate						
	Q1	Q2	Q3	Q4		
2017			>130%	>130%		
2018	>130%	>130%	>130%	>130%		
2019	142%	>130%	>130%	>130%

So is it that they are a few quarters away from showing a robust growth again or given that Endgames Endpoint security platform was based on Elastic search to begin with and they would have been able integrate Endgames features quickly in the product and will show some great numbers in the coming earnings report?

thanks
foolChandra

38 Likes
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Endgame not relevant for a few Q’s. Was only a $20m biz to begin with…it is a long-term acq, not a short-term pop in rev.

I will never get how people get down on 65%+ growth when over $200-300 runrate.
Throw out their forecast…Saul looks at zero forecasts because most beat-and-raise.

This growth is higher than AYX, and they have about same revenue runrate…no one complains about AYX growth rate. Same with MDB, once you weed out mLab and look at organic growth.

Which means ESTC likely finishes this current fiscal year (which just started) closer to $425m or so, in the neighborhood of 55-60% y/y growth.

They are subscription software for data, in areas of search, security, and bus productivity. Checks all the boxes for me. This is a ground-up play, or via developers, very similar to approach of MDB or Atlassian (TEAM).

They are still newer as public company, so less ERs to go by, but been solid so far. Next ER sets the stage for rest of year, and is on 8/28. If good/great, they should be an awesome stock to hold. If “meh” or bad ER somehow, then I change my tune.

Dreamer

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As you point out, they’re losing more money YOY, but the sign on the % doesn’t show it correctly. -56K over -32K is a negative 74% growth, not a positive 74% growth. They LOST 74% more money in a year.

Which is a (the?) problem. If everything you do loses you money, doing more of that thing is not a viable business model.

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Dreamer, I understand your point about the possibility of ESTC being a takeover target. If I wanted to hold a company as a takeover prospect I want to make sure it is financially healthy.

For fast growing and unprofitable companies like ESTC I have used the “Rule of 40” as a health indicator. Using growth rate which is approximately 70% (TTM) and gross profit margin, -38% (TTM), it appears that ESTC has a score of 32. Well below the rule of 40 threshold.

Have you considered this and if so, how do you think it impacts price for the next 6 months to a year?

I think MDB has a rule of 40 score in the mid 50’s.

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Elastic expenses are:

R & D: 38% of revenue
Sales & Marketing: 56% of revenue
Admin: 16% of revenue

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Elastic are investing heavily to maximise market share and increase TAM at the expense of short term profitability. Current Elastic expenditure is:

R & D: 38% of revenue
Sales & Marketing: 56% of revenue
Admin: 16% of revenue

As the business scales, by 2022 I want to see these expenses fall to:

R & D: 27% of revenue
Sales & Marketing: 41% of revenue
Admin: 12% of revenue.

I expect S & M spend will become more effecive over time, as Elastic learn where they get the most bang for their S & M buck. I have seen this a number of times recently when CAC falls off a cliff as the business learns how to spend sales/marketing dollars more effectively.

Although, with $300 M in the bank, and cash burn at around $20M per quarter, there is amble funding in the piggy bank to reach cashflow breakeven by 2022.

Regards,

Sean

Disc. - I hold

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Hi Hyde,
This is what I have on ESTC.

Gross Profit Margin

Q418 Q119 Q219 Q319 Q419
73% 73% 71% 71% 71%

Sales=Revenue

```

Q418    Q119    Q219    Q319     Q419
82%      79%     72%     70%      63%

Andy

2 Likes
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Hi Hyde!

Your rule of 40 calculation for ESTC is not correct.

ESTC gross profit last year was 71.2%, similar to MDB at 72.4%. Remarkably, in dollar terms, their gross profits were virtually identical at $193M+.

While i don’t use the Rule of 40 as a guide, i fully agree that it is smart strategy for the strongest emerging SAAS companies to trade off profit to accelerate growth.

Interestingly, the Rule of 40 believers don’t seem to agree on which number to use for “profit.” EBITA, free cash flow, Operating margin, net income, GAAP, non GAAP?

Gross profit is too generous if the rule is 40. That method would assign 140+ score to ESTC.

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I think most of them use EBITDA. Since most of these companies don’t have much interest or depreciation it should be earnings before taxes. Which puts ESTC’s rule of 40?around 30. Depending on the timeframe.

The whole point of Rule of 40 I think is if you’re spending a lot of money and running large losses, you darn well better be growing revenue fast.

And smaller companies tend to spend disproportionately on s&m and operations and scale into itvso should see an improvement on their rule of 40 as they grow. So the direction of their rule of 40 is just as important if not more so than the number itself

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thanks 12x. I used the figures from page 57 of ESTC 2019 10K. They calculated &0% Rev growth and an operating loss/profit of -37% and a net loss/gain of -38%. for a rule of 40 score of approx. 32 to 33.

I think this should be the end of this thread, Dreamer chose not to give an opinion. certainly his right.

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I think this should be the end of this thread, Dreamer chose not to give an opinion. certainly his right.

I am not responsible to read every post here nor will I try…so not sure what this refers to.

Read their ER CC and come to your own conclusions on their bus model compared to others.

Elastic N.V. (ESTC) CEO Shay Banon on Q4 2019 Results - Earnings Call Transcript https://seekingalpha.com/article/4268606?source=ansh $ESTC

"At the end of Q4, the mix of short-term deferred revenue was 93% of total deferred revenue, remaining performance obligations totaled approximately $352 million, up 66% year-over-year.

Of this, we expect to recognize 88% as revenue over the next 24 months. We were pleased with our overall momentum this quarter and the underlying demand that is driving our business. The strong growth in Q4 was driven by a broad array of growth vectors, including new customer additions, new use cases at existing customers and larger deployments of project expansions. As of the end of Q4 we had over 8,100 paying subscription customers compared to over 7,200 such customers at the end of Q3.

We saw similar strength in new customer additions in Q4 as we have in prior quarters. We also ended the quarter with more than 440 customers with an annual contract value above $100,000 compared to more than 380 such customers at the end of Q3. Our existing customers continue to expand their relationships with us reflecting increasing spend for existing use cases and adoption of new use cases.

In Q4, our net expansion rate remained over 130% for the 10th consecutive quarter.

Turning now to operating expenses. We remain focused on investing to drive top line growth. In Q4, I was proud of our execution related to the pace of hiring and overall scaling of the business. Sales and marketing expense for Q4 was $40.4 million, up 51% year-over-year representing 50% of total revenue. Our overall approach here remains unchanged. 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 the business.

R&D expense in Q4 was $25.2 million, up 60% year-over-year representing 31% of total revenue. R&D remains a major investment area as we expand our innovation advantages. Shay earlier provided a number of examples that we continue to invest heavily in both existing and new products and features. This will be a theme for fiscal 2020 as well, and I’ll talk about that in a minute.

G&A expense was $11.4 million, up 32% year-over-year representing 14% of total revenue. This includes costs associated with our global expansion and continuing to build the infrastructure to scale for the future. Our operating loss in the quarter was $70.5 million with an operating margin of negative 22%, which was better than expected given the strong revenue performance in the quarter. The FX impact on operating margin was insignificant. Since we’ve natural hedges as we incur expenses globally as a distributed company. Net loss per share in Q4 was $0.28 using 72.3 million basic and diluted shares outstanding. This compares to a net loss per share in Q4 of last year of $0.54.

Turning to free cash flow. Free cash flow was negative $20.9 million in Q4 compared to a negative $25 million in the same period a year-ago. We look at free cash flow and free cash flow margin, primarily on an annual basis. Since there are both seasonal and timing effects in any quarter. They can also be some lumpiness to inflows and outflows. Full-year fiscal 2019 free cash flow margin improved five percentage points year-over-year to negative 10%. We’ve demonstrated free cash flow margin improvement of a few percentage points each year for a couple of years now indicating the leverage in our business model as we scale.

We ended the fourth quarter with approximately $298 million in cash and cash equivalents. We remain comfortable with our cash position from an operating perspective.

In closing, Q4 was a strong finish to a terrific year. We delivered revenue growth of 70% for the full fiscal year with non-GAAP operating margin of negative 21%. We continue to show improvement in free cash flow margin. We’re executing well and delivering growth while investing to address the rich market opportunity ahead of us in so many different use cases. "

Dreamer

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