Expanding portfolio to help Elastic (ESTC) strengthen foothold in SaaS market

Elastic N.V. (NYSE: ESTC), the company that pioneered enterprise search technology, has been thriving on the growing adoption of its products while innovating the portfolio. A steady improvement in revenue and margin performance has helped the Netherland-based tech firm strengthen its position in the highly-competitive SaaS market.

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Despite the ongoing market slowdown, the company witnessed a rise in renewals and new subscriptions in the early weeks of the pandemic. The uptrend, together with an estimated moderation in expenses, should help in improving operating profit in the current fiscal year.

Liquidity Intact

Elastic has been able to maintain healthy liquidity by controlling cash burn and managing Capex effectively, though it continues to invest in the three main product categories of Enterprise Search, Observability, and Security. Interestingly, it is yet to seek external funding to support the operations.

The positive momentum is likely to continue due to the shift to digital workplaces and cloud migration, supported by the open distribution model. Demand conditions remain favorable and the company continues to expand into new geographical regions, in part leveraging the endpoint security capability that was added to the platform recently. The open-source model and free product updates give it an edge over rivals.

The open distribution strategy allows users to download the software directly from the Elastic website. But the main features are available through paid subscription only, which needs to be accessed through license updates.

Stress on Core Segment

Going ahead, the focus area will continue to be the enterprise search business, which got a boost a few months ago when the company released the new version of its popular search tool Elastic Stack. The enterprise search market is forecast to witness a three-fold expansion in the next three years.

“We drop major features in minor releases. With our latest release of 7.7, we reached a significant milestone. Our proprietary Elastic Workplace Search product became generally available. It’s a completely new set of find for the enterprise. Our out-of-the-box connectors and flexible APIs cover a lot of ground, and there’s more to come. And with resource-based pricing, we keep things simple and flexible. Customers pay for the resources their search consumes,” said Elastic CEO Shay Banon in his opening statement at the fourth-quarter earnings conference call.

Outlook

The management’s 25% growth target for the current year looks moderate, considering the rapid growth the cloud computing space is witnessing. A key factor that makes Elastic appealing to customers is flexibility – in all aspects of the business including pricing and integration. Moreover, the platform has the potential to act as a one-stop destination for multiple IT-related solutions.

The long-term goals include product innovation through the expansion of the community, growing the user base through new additions and larger deployments, and extension of the portfolio through continued investment in technology.

Meanwhile, shareholders will be keeping a tab on the company’s future performance, anticipating the favorable environment to translate into a turnaround that is long overdue. Market watchers are quite optimistic about the growth prospects and overwhelmingly recommend buying the stock, with a target price that signals further growth. Most investors will find the stock attractive as the current uptrend is expected to continue at least until the next earnings, though it is best-suited for long-term investment.

Mixed Q4

Billing revenues more than doubled in the final months of fiscal 2020, driving total revenues up by 53%. The company ended the April-quarter with total subscription customers of about 11,300 and a net expansion rate of more than 130%. Meanwhile, net loss narrowed to $0.38 per share from $0.48 per share last year.

Elastic’s market value more than doubled since falling to a record low in mid-March and the stock price is once again hovering near the $100-mark. The shares, which peaked almost a year ago, grew 36% since the beginning of the year.  

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