UPDATED 22:19 EDT / FEBRUARY 29 2024


Despite a strong earnings and revenue beat, Elastic’s stock plunges 14%

Enterprise search technology company Elastic N.V. must be wondering what it did wrong today, since despite delivering a strong earnings and revenue beat and guidance in-line with analysts’ expectations, its stock plunged in extended trading.

The company reported fiscal third-quarter earnings before certain costs such as stock compensation of 36 cents per share, ahead of the analysts’ target of 32 cents. Revenue for the period rose 19% from a year earlier, to $328 million, well ahead of the Street’s $320.8 million forecast. Net profit came to $176.1 million, up from a loss of $72.5 million one year earlier.

Chief Executive Ash Kulkarni (pictured) hailed what he said was a “strong quarter” and said he was pleased with the company’s momentum and execution.

Elastic, which was created by Shay Banon as a simple search engine for his wife’s growing list of recipes at Le Cordon Bleu cooking school in Paris, has grown to become one of the most widely used enterprise search platforms. The open-source Elasticsearch software it develops is used by enterprises to store, search and analyze enormous volumes of both structured and unstructured information in close to real time. It has become essential to many enterprises, and sits at the heart of millions of applications globally that require complex search capabilities.

In more recent years, Elastic has expanded the scope of its business into areas such as threat detection and application observability, with tools that can be used to visualize corporate networks and monitor their performance.

Elastic believes it’s poised to benefit from the rising interest in artificial intelligence technologies, especially generative AI. That’s because the large language models that power applications like ChatGPT can benefit from the company’s comprehensive search capabilities to provide more accurate, reliable and up-to-date responses by quickly searching for answers in the latest data.

“Customer interest in generative AI, platform consolidation and stability in cloud consumption patterns continued to drive momentum in our business in Q3,” Kulkarni said. “This reinforces our confidence in the business, and in our future growth as more companies choose our search analytics platform as a core part of their IT infrastructure stack for building gen AI applications.”

However, investors may feel that Elastic is not growing as fast as it should be. The company’s net revenue retention rate, which is a metric that shows how much the company’s revenue would have grown if it didn’t add any new customers, stayed flat at 109%. In addition, Elastic said it had 20,800 paying customers at the end of the quarter, an increase of just 100 from the previous quarter. Considering that Elastic added more than 200 new customers in the prior quarter, investors may be concerned that its customer acquisition momentum is slowing down.

Holger Mueller, an analyst with Constellation Research Inc., said Elastic is moving in the right direction but still has a long way to go to satisfy investors. “It’s now tracking at 50% of operating loss towards the last full-year’s quarterly and nine-months comparison, but it was only profitable because it didn’t have to pay any income taxes this time around, meaning it’s a one-time thing,” Mueller said. “Elastic Cloud revenue still hasn’t reached 50% of the company’s total revenue, even though it grew by 30%. Elastic needs to crack the 50% mark by the end of the next quarter to keep investors happy.”

Looking to the current quarter, the company said it’s expecting revenue of $329 million at the midpoint of its guidance range, which is in-line with the Street’s forecast.

Elastic’s stock was down 13% in after-hours trading, erasing a gain of 3% during the regular trading session.

Photo: Elastic

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