Elastic IPO | S-1 Breakdown

Elastic, the leading provider of open source software (OSS) for search, filed for a $100M IPO, with the amount as a placeholder. The company plans to trade on the New York Stock Exchange under the ticker “ESTC” and Goldman Sachs is leading the offering. Elastic created and commercialized the Elastic Stack (previously known as the ELK Stack), which is a set of software products that ingest and store data from any source, in any format, and perform search, analysis, and visualization in milliseconds or less. The company calls out examples such as hailing an Uber (Elastic helps power the systems that locate nearby riders and drivers) or shopping at Walgreens (Elastic helps power finding the right products to add to your cart). Developers can also build on top of the Elastic Stack to apply search to business problems and data. Given Elastic’s open source distribution strategy, where developers download the software directly from their website, their growth has been incredibly efficient and Elastic has created a large community. Since January of 2013 their products have been downloaded over 350,000,000 times and as of July 31, 2018, their community included over 100,000 Meetup members across almost 50 countries. Elastic leverages a distributed workforce and has 994 full-time employees across 35 countries, but their largest office is in Mountain View, CA. The company was founded in the Netherlands in 2012.

Company Timeline

  • 2010: First public Elasticsearch release, version 0.4, by co-founder Shay Banon as an open source project
  • 2012: Elastic is founded by Shay Banon, Steven Schuurman, Uri Boness, and Simon Willnauer in Amsterdam
  • 2013: New visualization capabilities added with Kibana
  • 2013: New collection and enrichment capabilities added with Logstash
  • 2014: Elasticsearch 1.0 released
  • 2015: Security features for the Elastic Stack launched, representing Elastic’s first significant paid proprietary features
  • 2015: Found (an Elasticsearch SaaS offering) acquired; Elastic Cloud launched
  • 2015: New lightweight data collection capabilities added with Packetbeat; Beats product line launched
  • 2016: Prelert, a machine learning company, acquired
  • 2016: Elastic Stack 5.0 released to unify versions and release schedules of all products
  • 2017: Elastic partners with Google; Google Cloud Platform added as a deployment option on Elastic Cloud
  • 2017: Elastic Cloud Enterprise, a proprietary product, released for provisioning, managing, and monitoring multiple Elastic Stack deployments
  • 2017: Opbeat, an APM company, acquired
  • 2017: Elastic partners with Alibaba; Alibaba Elasticsearch Cloud with Elastic’s paid proprietary features released in the China market
  • 2017: Swiftype acquired; Elastic adds new SaaS product into Elastic Cloud offering with Site Search
  • 2017: Elastic Stack 6.0 released
  • 2018: Elastic APM released
  • 2018: Elastic App Search Service released on Elastic Cloud
  • 2018: Elastic Stack 6.3 released; Elastic opens the code for its free and paid proprietary features
  • 2018: Lambda Lab Corp., makers of Insight.io, a code search product, acquired

Summary Metrics and GTM

Elastic is growing extremely quickly while being highly efficient — the company credits their open source / developer-led go-to-market strategy. The company did $159.9M of revenue in FY’18 (ending April 30) and grew 81% YoY. In the 3 months ending July 31, 2018, they did $56.6M in revenue and grew 79% YoY. 90%+ of their revenue is subscription-based or recurring, and they’re at $206.4M of implied ARR (quarterly subscription/recurring revenue * 4), growing 76% YoY. While Elastic still has operating losses, (21)% non-GAAP operating margin last quarter, their free cash flow margin was 8% last quarter. With regard to implied ARR, Elastic is the fastest-growing SaaS/cloud IPO this year at 76% YoY growth. They’re also the most efficient — I benchmarked them against other 2018 SaaS/cloud IPOs (chart later in post). Below are a few other stats about the business from their S-1;

  • Elastic’s business model is based on a combination of open source and proprietary software. Developers are able to download their software directly from their website. Many features of Elastic’s software can be used free of charge and some are only available through paid subscriptions, which include access to specific proprietary features and also includes support.
  • The company had over 5,500 customers, over 5,000 customers, and over 2,800 customers as of July 31, 2018, April 30, 2018, and April 30, 2017, respectively. Their customers represented 32% of the Fortune 500 and 21% of the Forbes Global 2000 as of July 31, 2018.
  • The number of customers who represented greater than $100,000 in ACV was over 300, over 275, and over 150 as of July 31, 2018, April 30, 2018, and April 30, 2017, respectively.
  • The average ACV (ARR / total customers) was $37,534 last quarter.
  • Their engineering organization is spread over 25 countries.
  • Elastic’s Net Expansion Rate was 142% as of July 31, 2018, and was over 130% at the end of each of the last seven fiscal quarters.
  • No customer represented more than 10% of revenue in fiscal 2018 or fiscal 2017 or the three months ended July 31, 2018 and 2017.
  • In fiscal 2018, revenue from outside the United States accounted for 39% of total revenue.
  • As of April 30, 2018, the company had 5 issued U.S. patents and 19 pending U.S. patent applications.
  • Elastic builds their products for developers, architects, DevOps personnel, IT professionals, and security analysts.
  • The company was incorporated in the Netherlands on February 9, 2012 as Searchworkings Global B.V. On June 19, 2012 they changed their name to Elasticsearch global B.V., on December 11, 2013 they changed their name to Elasticsearch Global B.V., and on May 29, 2018, changed their name to Elastic B.V.
  • Unlike some companies, Elastic maintains full control over the source code of their products and solutions and only Elastic employees are able to commit changes to the codebase. Elastic also does not build separate enterprise editions of their enterprise edition and maintains a single codebase.

Elastic leverages an open source distribution strategy and when a user wants to upgrade, paid features can be unlocked with just a license update. Developers don’t need to speak with salespeople. Elastic offers support for their products only as a part of their subscriptions. In many cases, Elastic enters an organization through a single developer in a small team for an initial use case or application, and expands. Given potential customers are often already using the software, the company performs low-touch marketing towards users and also higher-touch campaigns for qualified prospects. Elastic also has partner relationships with some of the cloud providers (Google Cloud Platform, Alibaba, Microsoft, and IBM). Elastic calls out that their “Elasticsearch Service is a different offering than Amazon Elasticsearch Service. We do not partner with Amazon, provide support for Amazon Elasticsearch Service, or provide Amazon or customers of Amazon Elasticsearch Service with access to any of our free or paid proprietary features.” Additionally, Elastic has other systems integrators, OEM and MSP partners, and technology partners. Subscriptions for self-managed deployments typically range from one to three years, and many of their Elastic Cloud customers purchase subscriptions either on a month-to-month basis or on a committed contract of at least one year.

Product Offerings

Elastic brings the power of search to a broad range of business and consumer use cases, and their products enable their users and customers to instantly find relevant information and insights. The Elastic Stack is designed to run on premise, in public or private clouds, or in hybrid environments. Deployment is offered in 2 categories, self-managed, where customers/users deploy the solutions on their own infrastructure, and Elastic Cloud, which refers to the SaaS products that Elastic hosts and manages (18% of revenue last quarter). Additionally, they offer Elastic Cloud Enterprise, (ECE), a paid proprietary product to deliver centralized provisioning, management, and monitoring across multiple deployments. The source code of all free and paid features in the Elastic Stack is visible to the public in the form of “open code.”

The Elastic Stack is comprised of 4 main products;

  • Elasticsearch: Elasticsearch is the heart of the Elastic Stack. It is a distributed, real-time search and analytics engine and datastore for all types of data, including textual, numerical, geospatial, structured, and unstructured.
  • Kibana: Kibana is the user interface for the Elastic Stack. It is the visualization layer for data stored in Elasticsearch. It is also the management and configuration interface for all parts of the Elastic Stack.
  • Beats: Beats is the family of lightweight, single-purpose data shippers for sending data from edge machines to Elasticsearch or Logstash.
  • Logstash: Logstash is the dynamic data processing pipeline for ingesting data into Elasticsearch or other storage systems from a multitude of sources simultaneously.

Given the wide applicability of the Elastic Stack, Elastic has built a range of solutions on top of the Elastic Stack platform to address a variety of solutions including app search, site search, enterprise search, logging, metrics, APM, business analytics, and security analytics.

Elastic has also acquired companies over the years to bolster their product offerings. Since inception, they have acquired the technology underlying their Site Search Service and App Search Service (formerly Swiftype), their APM solution (formerly Opbeat), their machine learning feature (formerly Prelert), their Beats product (formerly Packetbeat), their Elastic Cloud SaaS offering (formerly Found) and their Kibana and Logstash products through strategic transactions. The company plans to continue with this strategy.

Source: Company S-1

Market Opportunity

Elastic believes their market opportunity is quite large at $45B in 2018, according to IDC. The drivers of their market include digital transformation, availability of data, demand for predictive and prescriptive analytics, cloud infrastructure adoption, and increases in software and security-related spending. When the company was founded, their products were primarily used in search, content analytics, and cognitive/AI use cases. According to IDC that represented a market opportunity of $3B in 2012, and since then their market has grown to $45B based on the following segments; 1) Search, content analytics, and cognitive/AI software, an $8B market in 2018 2) IT Operations management, a $9B market in 2018 3) Big data and analytics software, a $23B market in 2018 and 4) Security analytics, a $5B market in 2018, all according to IDC. Below is a market sizing output from the S-1.

Source: Company S-1

Competition

Given the broad range of use-cases and solution the company offers, Elastic’s market is highly competitive. For their app, site and enterprise search solutions they compete with Solr, various Google search products, Endeca (acquired by Oracle), FAST (acquired by Microsoft), and Autonomoy (acquired by HP). For logging and security analytics, they reference Splunk and ArcSight. The company also calls out certain cloud infrastructure providers, such as Amazon Web Services (AWS), that offers SaaS products based on Elastic’s open source components. AWS’s product is even called “Amazon Elasticsearch Service”. It is not supported by Elastic. Moreover, the company references they compete with APM and business analytics solutions, and while they don’t call out competitors by name, they could include companies like New Relic and LightStep.

Investors and Ownership

According to Pitchbook and from their S-1, the company has raised $162M to date from investors including NEA, Benchmark, Index, Sierra Ventures, SV Angel, and Data Collective. 5%+ pre-offering VC shareholders include Benchmark (17.8%), Index (10.5%), and NEA (10.2%). CEO, Chairman, and co-founder, Shay Banon, is at a 15.0% pre-offering stake. Their last round, a series D led by NEA in July 2016, was around ~$1B valuation.

Financials and Other Metrics Outputs

Elastic is growing ARR almost 80% YoY and in the last quarter were free cash flow positive, a rare feat for a company of their scale and growth. Elastic’s GTM is highly efficient with much of that due to their open source model as well as the high net dollar expansion in the business. Last quarter, the company’s net dollar expansion rate was 142% and above 130% for the past seven quarters. At 142%, $1 turns in $1.42 within a year. More recent customer cohorts are growing faster too. Elastic is getting more efficient as they grow, and over the past 9 quarters their ARR has grown by 3.5x while sales and marketing grew by only 2.6x. They don’t release their customers by quarter so I can’t derive CAC, but it’s obvious the business has significant operating leverage. They have $53.4M in cash.

Before going into Elastic’s other metrics, the chart below puts their efficiency in the context of other SaaS/cloud IPOs this year. The output below has the 2018 IPOs and their implied median months to payback for their quarterly disclosure period using a CAC ratio (implied net new ARR * gross margin / sales and marketing spend of prior quarter). Elastic is the most efficient company from this group, even more so than Dropbox which has a freemium and viral, consumer-like GTM.

2018 SaaS/Cloud IPOs Months to Payback***

Source: Company S-1's

Not only does Elastic have the best sales efficiency of the 2018 group of SaaS/cloud IPOs, they are growing the fastest. See the output below which charts the IPO quarter ARR year-over-year growth rate.

2018 SaaS/Cloud IPOs % YoY ARR Growth

Source: Company S-1's

Outputs of other Elastic financials and metrics are below.

Historical P&L & Metrics (000's)

Source: Company S-1

Quarterly Subscription Revenue ($M)

Source: Company S-1

Implied Ending ARR ($M)

Elastic has added $21.7M of net new implied ARR last quarter and $88.9M over the past year.

Source: Company S-1

Revenue Mix Percentage

90%+ of Elastic’s revenue is subscription and/or recurring in nature.

Source: Company S-1

GAAP Operating Expenses as a % of Revenue

Source: Company S-1

% Gross Margin Mix

Source: Company S-1

GAAP and Non-GAAP Operating Margins

Source: Company S-1

CAC (Customer Acquisition Cost) and Payback Periods

Elastic is a highly efficient business. The below output charts their months to pay back using a CAC ratio. The median over the past 8 quarters has been 15 months. Medians for other SaaS companies are here.

Source: Company S-1

Cohorts

The output below represents the total ACV from each cohort over the company’s history. As you can see, the more recent cohorts are growing faster and Elastic calls out the FY’16 cohort, which has increased its ACV from $20.6M as of April 2016 to $37.7M as of April 2018, representing a 1.8x increase over 2 years. Their net expansion is also quite high at 142% last quarter and consistently above 130%.

Source: Company S-1

Annual Cash Flows (000's)

Source: Company S-1

Quarterly P&L / Metrics (000's)

Source: Company S-1

Downloads

This output shows Elastic’s downloads since 2013. Since January 1, 2013, their products have been downloaded over 350 million times. These downloads include both free and paid products.

Source: Company S-1

Valuation

Elastic will most likely be valued on a multiple of forward revenue given their high growth and negative profit margins. The output below uses NTM (next-twelve-months) revenue as a proxy based on an illustrative range of growth rates. Below that is an ARR multiple range based on other high-growth public SaaS companies as a frame of reference. Given Elastic’s growth, efficiency, and scale, they are likely to get a premium valuation and it’s possible the company could trade like other high-growth SaaS companies like Okta, MongoDB, Zscaler, Coupa, and Atlassian. To the right, you can see how much Elastic would be worth based on those multiples. They will likely trade significantly above their last private round valuation of ~$1B in July of 2016.

Note: Enterprise value ranges and growth rates are illustrative. Public multiples priced as of 12-Sep-2018.

Elastic is one of the most impressive OSS companies to file publicly to date. Given their highly efficient GTM, growth, cohorts and expansion, large and loyal community, Elastic is bound to have a very successful IPO. Congrats to the team and looking forward to seeing them trade as a public company.

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*** Note that under ASC 606, the new accounting standards, some company’s sales efficiency could be overstated due the timing of revenue recognition. See page 96 of the S-1 for further detail.