My thoughts on Elastic's Quarter

What’s driving the sell off?

To me the headline is calculated billings. As with ZS, ESTC’s growth here has slowed.

Jul 2018: 76%
Oct 2018: 73%
Jan 2019: 68%
Apr 2019: 57%
Jul 2019: 51%
Oct 2019: 42%

This is simply not good. That said, it’s somewhat inevitable for all businesses…so we need to take it in context. Here are a few mitigating factors:

  1. ESTC said they “experienced some delays in our federal government business as some deals moved out of the month of October.” That’s not great, but it could explain a dip here and set up a re-acceleration next quarter.

  2. As Darth explained, the monthly SaaS billing makes calculated billings lower because there’s less deferred revenue coming in.… Here’s what ESTC said: We saw continued strength in our Elastic Cloud offerings with particular strengthen in our monthly SaaS business, which now makes up almost 50% of our SaaS revenue or almost 10% of our total revenue.

side note, how much did Darth nail SaaS growth?…

  1. Another 50%+ guide for revenue growth next quarter. This is very interesting, and seems to indicate more of a blip than a slow down.

A skeptic might ask, “Why is slowing billings ok for ESTC and not ZS?” For one, ESTC trades at a much lower valuation than ZS any way you slice it. For another, ESTC’s billings haven’t slowed to 30-something percent, just 40-something. That matters. But mostly I think these 3 mitigating factors are meaningful.

Here are some other positives from the quarter

  1. Revenue growth was strong and steady. I was hoping for an acceleration, but staying at roughly 60% growth is plenty to keep this in the positive column.

  2. Gross Margin ticked up.

  3. OpEx was up 73% YoY which is too much, but at least it was less than the 78% last quarter.

  4. As Darth mentioned, Sales and Marketing weren’t the culprit for increase in OpEx. Most of it was a huge increase in G&A (12m in Oct 2018, 19m in Jul 2019, and 32m! in Oct 2019). ESTC said This includes costs associated with our global expansion and continuing to build the infrastructure to support our growth. I’d really like to see all OpEx stabilize…maybe this is a weak positive point, but I’m hoping Sales and Marketing expense is starting to stabilize.

  5. They also said We expect non-GAAP operating margin in the range of negative 23% to negative 22%, which as I mentioned earlier includes approximately 2% operating margin dilution from Endgame. This is better than the -24.5% to -22.5% they guided for the year when they reported 90 days ago. And that improvement even takes this 2% headwind into account.

  6. Great customer growth – over 50%, awesome.

  7. NER still 130%+, which is up there with the best in class (like AYX, DDOG, CRWD).

  8. The price is right! Under $67 premarket = a PS of 15!


I bought more. This isn’t a blowout quarter, but this already undervalued company is chugging along, at 60% growth, and I don’t see any red flags. Even the yellow flags have good explanations. I’m still on the ESTC bandwagon. It’s not AYX-level confidence, but I’m happy with a large position.


PS here’s the data I posted last quarter:…

…and here’s an update through this quarter

Quarter_________	Jan18	Apr18	Jul18	Oct18	Jan19	Apr19	Jul19	Oct19
Fiscal Q_________						FiscQ4	FiscQ1	FiscQ2
Calc Bill_________	47.5	73.3	59.2	88.5	79.8	115.4	89.4	125.3
YoY Ch%_________			76.2%	72.5%	68.0%	57.4%	51.0%	41.6%
Revenue_________	41,681	49,572	56,644	63,575	70,835	80,599	89,710	101,106
QoQ Ch%_________	12.5%	18.9%	14.3%	12.2%	11.4%	13.8%	11.3%	12.7%
YoY Ch%_________	80.2%	82.4%	79.0%	71.6%	69.9%	62.6%	58.4%	59.0%
Gross Prof_______	30,915	35,972	41,087	44,988	50,411	57,157	63,459	72,345
Gross Margin_____	74.17%	72.57%	72.54%	70.76%	71.17%	70.92%	70.74%	71.55%
OpEx____________	43,374	55,207	59,502	72,058	74,197	89,242	105,761	124,306
YoY Ch%_________	9.6%	76.3%	78.1%	104.7%	71.1%	61.6%	77.7%	72.5%
Op Loss_________	-12,459	-19,235	-18,415	-27,070	-23,786	-32,085	-41,371	-51,961
StockBasedComp__	3,554	4,164	5,665	11,239	11,111	11,927	12,771	14,416
Customer Count___			5,500	6,300	7,200	8,100	8,800	9,700
YoY Ch%_________	#DIV/0!	#DIV/0!	#DIV/0!	#DIV/0!	#DIV/0!	#DIV/0!	60.0%	54.0%
Cust w ACV > 100k			300	340	380	440	475	525
YoY Ch%_________	#DIV/0!	#DIV/0!	#DIV/0!	#DIV/0!	#DIV/0!	#DIV/0!	58.3%	54.4%
Net Expansion Rate	130%+	130%+	130%+	130%+	130%+	130%+	130%+	130%+
FY Guidance_____				258.0	267.0	403.0	412.0	417.0
YoY Ch%_________						48.4%	51.7%	53.5%
Q Guidance______				66.0	76.0	84.0	97.0	108.0
YoY Ch%_________				78.4%	82.3%	48.4%	52.5%	52.5%
Shares Outstanding						72.30	74.60	77.80
Share price_______						80.01	88.50	68.00
Cash (in mil)______						298.00	315.20	305.00
TTM Revenue_____						271.65	304.72	342.25
TTM Billings______						342.90	373.10	409.90
EV/S____________						20.20	20.63	14.57
EV/Billings________						16.00	16.85	12.16

I don’t invest in these stocks so my question isn’t coming from an investor perspective (in case anyone cares).

How large is the federal government’s interest in Elastic?

My experience with ELK was implementing it as a research network and not anything in production. I wasn’t a fan of Splunk’s pricing (seemed exorbitant to me) and I like messing with open source stuff. Splunk certainly was the easier path and many of the younger, and less skilled engineers, wanted to do everything with Splunk since they had a plug in for stuff and you didn’t have to do much work to get it working (and certainly did not have to write stuff like GROK filters).

At one point we met with some people from ELK (I guess Elastic would be the more correct term). I can’t say I was impressed. All they really wanted to do was sell us stuff (didn’t seem to be much cheaper than the proven Splunk path but I may be off base here) and were not very helpful. I found that curious because our group often greatly influenced other parts of the government (at least in the classified sector) based on our prototype systems.

Anyhow, the comment about “federal government business” caught my attention.

(For those techies that like to play with monitoring tools, the easiest and cheapest path for small networks is to use the Security Onion tool.)


P.S. I no longer work for the government.


Revenue growth was strong and steady.

Absolute revenue is growing! 4 quarters ago they were increasing $6M-$7M a quarter, the last few it’s been $8M to $11M. The % growth is down because large numbers, but the absolute sales number is still accelerating.

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