Elastic Earnings: Elastic Stretches Its Dollars as Improved Profitability Drives a Strong Period

We are raising our fair value estimate to $67 from $62 for narrow-moat Elastic ESTC after the firm kicked off fiscal 2024 with financial results and guidance ahead of our prior estimates. While macroeconomic pressures persist, management’s commentary indicated a stabilizing demand landscape as customers ease their budget optimization plans. This trend is consistent with customer demand trends seen by other security vendors under our coverage and we believe that the worst of budget optimization impacts are in the rearview mirror for vendors like Elastic. At the same time, despite being gradually improving, macro conditions remain tight and continue to weigh on the firm’s financials including its top-line growth.

While near-term challenges remain, we were encouraged to see Elastic’s focus on operational discipline and strategy after the firm ran into execution challenges in prior quarters. With shares trading up sharply after the earnings report, we view Elastic as fairly valued.

First-quarter sales clocked in at $294 million, up 17% year over year. Elastic Cloud continued to spearhead the top line with an impressive 24% year-over-year expansion and it now constitutes 41% of Elastic’s top line. The firm saw an 18% year-over-year increase in the number of customers with an annual contract value of greater than $100,000, a marked deceleration from prior quarters. We attribute this slowdown in growth to macro conditions that continue to affect Elastic’s sales motion with customers scrutinizing IT spending. Similarly, customers’ expansion rates also dipped with net retention down to 113%, down 400 basis points sequentially.

Elastic reported strong profitability for the quarter with first-quarter adjusted operating margin coming in at 10%, up from negative 2% a year ago. We attribute this increase to an increased focus on operational discipline, with the firm laying off 13% of its staff toward the end of 2022.