Search software company Elastic (NYSE:ESTC) reported Q3 CY2024 results beating Wall Street’s revenue expectations, with sales up 17.6% year on year to $365.4 million. The company expects next quarter’s revenue to be around $368 million, close to analysts’ estimates. Its non-GAAP profit of $0.59 per share was 54.7% above analysts’ consensus estimates.
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Elastic (ESTC) Q3 CY2024 Highlights:
- Revenue: $365.4 million vs analyst estimates of $354.3 million (17.6% year-on-year growth, 3.1% beat)
- Adjusted EPS: $0.59 vs analyst estimates of $0.38 (54.7% beat)
- Adjusted Operating Income: $64.28 million vs analyst estimates of $46.03 million (17.6% margin, 39.6% beat)
- The company slightly lifted its revenue guidance for the full year to $1.45 billion at the midpoint from $1.44 billion
- Management raised its full-year Adjusted EPS guidance to $1.70 at the midpoint, a 10.4% increase
- Operating Margin: -1.2%, up from -6.9% in the same quarter last year
- Free Cash Flow Margin: 10.3%, down from 15% in the previous quarter
- Customers: 21,300, up from 21,200 in the previous quarter
- Net Revenue Retention Rate: 112%, in line with the previous quarter
- Billings: $383.2 million at quarter end, up 20.6% year on year
- Market Capitalization: $9.10 billion
“Elastic delivered a strong second quarter supported by solid sales execution, exceeding our guidance across all revenue and profitability metrics,” said Ash Kulkarni, Chief Executive Officer, Elastic.
Company Overview
Started by Shay Banon as a search engine for his wife's growing list of recipes at Le Cordon Bleu cooking school in Paris, Elastic (NYSE:ESTC) helps companies integrate search into their products and monitor their cloud infrastructure.
Data Infrastructure
Generating insights from system level data is an increasing priority for most businesses, but to do so requires connecting and analyzing piles of data stored and siloed in separate databases. This is the demand driver for cloud based data infrastructure software providers, who can more readily integrate, distribute and process information vs. legacy on-premise software providers.
Sales Growth
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one sustains growth for years. Luckily, Elastic’s sales grew at a decent 23.3% compounded annual growth rate over the last three years. Its growth was slightly above the average software company and shows its offerings resonate with customers.
This quarter, Elastic reported year-on-year revenue growth of 17.6%, and its $365.4 million of revenue exceeded Wall Street’s estimates by 3.1%. Company management is currently guiding for a 12.2% year-on-year increase in sales next quarter.
Looking further ahead, sell-side analysts expect revenue to grow 11.5% over the next 12 months, a deceleration versus the last three years. This projection is still above average for the sector and implies the market sees some success for its newer products and services.
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Billings
In addition to revenue, billings is a non-GAAP metric that sheds additional light on Elastic’s business quality. Billings is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Elastic’s billings punched in at $383.2 million in the latest quarter, and over the last four quarters, its growth was solid as it averaged 17.3% year-on-year increases. This performance was in line with its total sales growth, indicating robust customer demand. The cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth. 
Customer Retention
One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.
Elastic’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 111% in Q3. This means Elastic would’ve grown its revenue by 10.8% even if it didn’t win any new customers over the last 12 months.
Elastic has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great to see.
Key Takeaways from Elastic’s Q3 Results
We were impressed by how significantly Elastic blew past analysts’ billings and EPS expectations this quarter. We were also glad it raised its revenue and EPS guidance. Overall, we think this was a solid "beat-and-raise" quarter with some key areas of upside. The stock traded up 18.8% to $112 immediately after reporting.
Elastic put up rock-solid earnings, but one quarter doesn’t necessarily make the stock a buy. Let’s see if this is a good investment. The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.
