The News: Elastic, the company behind Elasticsearch and the Elastic Stack, announced financial results for its fourth quarter and full fiscal year ended April 30, 2023. For the full details, click here.
Elastic Reports Fourth Quarter and Fiscal 2023 Financial Results
Analyst Take: As generative AI captures the headlines and public market zeitgeist, industry watchers are starting to look beyond the big names such as Google, Microsoft, and NVIDIA and are starting to focus on the “picks and shovels’” vendors that will provide the key technologies that will underpin widespread adoption of generative AI, especially related to applications for enterprise data. One of the key enabling technology vendors is Elastic, the company behind Elasticsearch and Elastic Stack, which has also expanded into observability and security to diversify revenue and provide cross-sell and upsell opportunities.
By The Numbers
Q4 Fiscal 2023 Financial Highlights:
- Revenue was $280 million, an increase of 17% YoY, or 19% on a constant currency basis
- Elastic Cloud revenue was $112 million, an increase of 28% YoY
- GAAP operating loss was $40 million; GAAP operating margin was -14%
- Non-GAAP operating income was $24 million; non-GAAP operating margin was 9%
- GAAP net loss per share was $0.48; non-GAAP diluted earnings per share (EPS) was $0.22
- Operating cash flow was $28 million with adjusted free cash flow (FCF) of $26 million
- Cash, cash equivalents, and marketable securities were $915 million as of April 30, 2023
Full Fiscal 2023 Financial Highlights:
- Total revenue was $1.069 billion, an increase of 24% YoY, or 28% on a constant currency basis
- Elastic Cloud revenue was $42 million, an increase of 42% YoY, or 44% on a constant currency basis
- GAAP operating loss was $219 million; GAAP operating margin was -21%
- Non-GAAP operating income was $46 million; non-GAAP operating margin was 4%
- GAAP net loss per share was $2.47; non-GAAP diluted EPS was $0.25
- Operating cash flow was $36 million with adjusted FCF of $57 million
Who Is Elastic?
While the ELK stack is well known in developer circles following the combination of Elastic, Logstash, and Kibana, the company is not well known among enterprise C-suite buyers. However, I expect this to change going forward, especially given the company’s focus on AI. Elastic’s platform provides a number of key capabilities that are essential for generative AI, including:
- High-performance search. Elasticsearch is one of the most popular and powerful search engines available, and it can be used to index and search large amounts of data quickly and efficiently. This is essential for generative AI applications, which often require access to large datasets.
- Machine learning. Elastic offers a number of machine learning (ML) capabilities, including natural language processing (NLP), text analysis, and anomaly detection. These capabilities can be used to improve the accuracy and performance of generative AI applications.
- Security. Elastic offers a number of security features, including data encryption, role-based access control, and intrusion detection. These features can help to protect generative AI applications from security threats.
In our assessment, Elastic’s platform is well-positioned to help organizations adopt generative AI. The company’s focus on innovation and its commitment to open source makes it a trusted partner for organizations of all sizes.
While the Elasticsearch platform is a crucial revenue stream for the company, Elastic is not a single-solution vendor. The company also has an observability solution and a security offering. A simple way to think of these solutions is comparable to the domain in which Splunk and the likes of Dynatrace operate. While Splunk and Dynatrace have more widespread enterprise adoption and deeper penetration with enterprise buyers, I see a lot of upside for Elastic as they continue to mature and build an enterprise-focused sales go-to-market (GTM) engine.
Guidance
Elastic is providing the following guidance for the first quarter of fiscal 2024 and fiscal 2024 as a whole:
For the first quarter of fiscal 2024, Elastic expects total revenue to be between $283 million and $286 million, representing 14% YoY growth at the midpoint. Non-GAAP operating margin is expected to be between 5.6% and 6.0%. Non-GAAP earnings per share is expected to be between $0.10 and $0.12, assuming between 100.5 million and 101.5 million diluted weighted average ordinary shares outstanding.
For fiscal 2024, Elastic expects total revenue to be between $1.238 billion and $1.250 billion, representing 16% YoY growth at the midpoint. Non-GAAP operating margin is expected to be between 9.7% and 10.3%. Non-GAAP EPS is expected to be between $0.94 and $1.06, assuming between 102.0 million and 104.0 million diluted weighted average ordinary shares outstanding.
Elastic’s guidance for the first quarter and fiscal 2024 is indicative of the company’s strong growth momentum. Elastic is well-positioned to continue to grow its business and capitalize on the growing demand for generative AI. The company will need to pivot to making a profit in 2024 as the market has no patience for loss-making enterprises right now, but Elastic is making good moves on this front and has significant cash reserves, so I foresee no issues.
Looking Ahead
Search is going to be disrupted in the next 18 months, as generative AI will change how the user interacts with search. Google’s dominance in consumer search is under threat as ChatGPT and Bing become viable alternatives. This battle for who will lead the next generation of consumer-focused search will be bloody and public. While this dynamic may be fun to watch play out, it is largely irrelevant to how search will be deployed within the enterprise. Enterprises will be tightly focused on leveraging tools that can focus on their corpus of enterprise data and streamline relevance, and ultimately power business outcomes. Elastic is well placed to leverage its mass appeal with developers and a strong solution set to be a key player in enterprise AI deployments.
When you couple the disruption of enterprise search to underpin generative AI with observability and security, Elastic is well positioned to benefit from the tailwinds that will be present for the next couple of years and beyond.
Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.
Other insights from The Futurum Group:
Splunk Announces Q1 2024 Earnings
Cisco Unveils New OpenTelemetry-based Integration to Accelerate Full-Stack Observability
Splunk Security and Observability Platforms Get Enhancements
Image Credit: Elastic
Author Information
Steven is Vice President and Practice Leader at The Futurum Group, responsible for the Hybrid Cloud, Infrastructure and Operations Practice. Operating at the crossroads of technology and disruption, Steven engages with the world’s largest technology brands exploring new operating models and how they drive innovation and competitive edge for the enterprise.
With experience in Open Source, Hybrid Cloud, Mission Critical Infrastructure, Cryptocurrencies, Blockchain, and FinTech innovation, Steven makes the connections between the C-Suite executives, end users, and tech practitioners that are required for companies to drive maximum advantage from their technology deployments.
Steven is an alumnus of industry titans such as HPE and IBM and has led multi-hundred-million-dollar global sales teams Steven was a founding board member, former Chairperson, and now Board Advisor for the Open Mainframe Project, a Linux Foundation Project promoting Open Source on the mainframe.
As a Birmingham, UK native, his speaking engagements take him around the world each year enabling him to share his insights on the role of technology and how it can transform our lives going forward.
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Elastic Announces New Functionality and Solutions
The Futurum Group’s Steven Dickens offers his take on the latest announcements from Elastic. Elastic, the company built on the open-source Elastic code base, is focusing on foundational efforts to harness the potential of AI. Elastic recently released new semantic search capabilities and a growing catalog of open code database and storage connectors to enhance search experiences quickly. They emphasized AI/ML-powered relevance to unify search across various data sources and provide web and search analytics visualization. They aim to be a foundational technology in the enterprise AI space by providing the building blocks for AI adoption against in-house datasets.
