Elastic NV

Update - Elastic stock jumped 7% on the news they were changing their open-source software licensing. As a reminder, Elastic provides software tools that allow companies to utilise their internal data. Their primary product, ElasticSearch, allows companies to better query their data for search results. Elastic pride themselves on being an open-source company, which has meant their software is available for free on a self-managed basis. Whilst great for developer uptake, it can be concerning for investors. Essentially, the new license better protects against competition. It follows a similar move made by MongoDB in 2018, who have a similar business model and have been very successful after making the switch. This open-source licensing was previously seen as a business risk, so this move makes sense as part of the company growing-up and building a moat. CEO Shay Banon commented: “The community has come to appreciate that open-source companies need to better protect their software in order to maintain a high level of investment and innovation.”

This also followed an impressive quarterly announcement. Elastic grew revenues 43% YoY with their Saas revenues up 81%. They also announced 650 customers with annual contract value of over $100,000, up from 525 the previous year.

Thesis - Elastic is a software company providing tools for enterprise search. The core product is Elasticsearch, which allows companies to feed in structured or unstructured data and query it for the best result. It powers the search behind Uber (finding the right driver) and Tinder (finding the right match). Outside of enterprise search they have grown more use cases around observability (e.g. logging metrics) and security. The technology is open-source and therefore free for a self-managed basic version, but Elastic monetise paid subscriptions with additional features and support. They’ve also developed a cloud offering (Elastic Cloud) which works on a Saas business model. As digital companies continue to grow, Elastic has become a favourite tool to power their search experiences.

Financials & Performance - Elastic has over 11,300 customers. Since its IPO in Oct 2018, it’s revenue growth has slowed down from 80% to 44% (Q1 2021). It’s gross margin profile is attractive, averaging at around 71%. Other large name customers include Shopify, Twilio, Adobe and Facebook. Importantly, its net dollar-retention is consistently over 130%, so it grows from existing customers, reflecting is ability to increase usage and broaden its use-cases with an existing customer.

Risks - Elastic is still not profitable, although its losses have been shrinking. It’s cost of acquiring customers has also been steadily increasing, which means revenue grows but at a greater cost. Finally, the open source nature of the business provides an interesting dynamic. On the one hand, it allows developers to easily adopt the product, but it also means competitors like Amazon can host a version of their technology on their own platform, AWS.

Credit Howard Chen for his Q1 review.