Elastic - An Open Source Powerhouse

Photo Credit: Michael Nagle/Bloomberg

After Pivotal’s IPO in April, Elastic ($ESTC) is the second developer-focused open source company that went public this year. Elastic initially aimed for a price between $26–29/share, raised it to $33–36/share days before its IPO and eventually settled on $37/share. Nevertheless, the stock doubled on its first day. Elastic’s success is another indicator of open source becoming the dominating model for infrastructure and developer-centric startups. The “old” days of monetizing open source through services and support are over. Most modern OSS companies follow an open-core approach, offering additional commercial/proprietary products on top of the core OSS project (look up OSS.cash by Joseph Jacks for more data).

Elastic’s Impressive Revenue Growth

As of July 2018, Elastic’s revenue was $185M, with more than 91% of it being subscription revenue (the other 9% were professional services). MongoDB, another open-core database company, went public with $124M in revenue last year (with the same 91% to 9% subscription/PS split). Another developer-focused company, New Relic, a proprietary APM provider, had $83M in revenue when it went public 4 years ago. Startups go public later nowadays, and with a higher revenue run rate than in the past. A New Relic IPO would likely look different today.

Elastic’s gross margin is 73% compared to MongoDB’s 78%. New Relic is doing better with 80% since its revenue is purely subscription-based. If we break out the subscription portion of the revenue, Elastic’s gross margin would also be at 80%. Ignoring the PS revenue, MongoDB’s gross margin would be slightly lower than Elastic’s at 78%.

What’s most impressive is how Elastic’s quarterly gross new revenue growth is accelerating. Particularly the last 2–3 quarters before the S-1 filings are outstanding. That’s both promising, as well as setting high expectations for the post-IPO results.

Professional Services Is a Great Way to Build B2B Companies

Many founders and investors (there are positive outliers) view PS as an unscalable way to bring a product to market that you should avoid. Elastic provides a counterexample and strategically leveraged services to grow the subscription revenue faster. Elastic lost money on PS the last 5 quarters before its IPO. MongoDB, by contrast, had positive gross margins on its services revenue which resulted in overall better margins (78% vs. 73%). I wouldn’t be surprised if Elastic achieves the same and generate positive PS gross margins over the next quarters.

Faster Growth Despite Lower Burn

Elastic is growing faster than its peers, on top of higher absolute numbers. The higher growth doesn’t come at the expense of a higher burn rate. Elastic had a better net income margin and raised less capital ($162M) than MongoDB ($311M) or New Relic ($215M).

Last but not least, Elastic is also making more revenue per employee, with comparable gross margins and a lower net income margin than MongoDB or New Relic. Another indicator of the great business the Elastic team built.

Same Audience - Difference Business Characteristics

Elastic MongoDB New Relic
Customers 5,500 4,300 10,590
Customers >$100K 300 296 *
Avg. Revenue/Customer $34K (growing) $29K (shrinking) $8K
Revenue $185M $124M $85M

New Relic didn’t disclose the >$100K customer number in its S-1 but had 400 seven quarters later.

Not surprisingly, Elastic’s ACV is growing. That’s a common theme for companies that move up-market and sell larger and larger contracts over time. Elastic’s fantastic 142% net expansion rate also contributed to it (negative churn is powerful).

MongoDB, in comparison, had a shrinking ACV. There are two reasons for it. First, and that’s negative, MongoDB’s net expansion rate was lower at 120%. Secondly, MongoDB’s smaller customer base grew faster compared to its >$100K customers. The latter points to MongoDB’s success with its high-velocity and low-ACV go-to-market model. It’s an unusual shift since most startups over time move up-market, not down-market.

All three companies are thriving. Looking beyond the IPO filings, MongoDB grew its revenue by nearly 100% since its IPO last year. It will be exciting to see how Elastic and MongoDB perform and compare over time. New Relic is one of the most successful independent, developer-focused companies and likely crossing $400M in revenue with their next earnings report.

Subscribe to receive future blog posts via email
Moritz Plassnig

Moritz Plassnig

Boulder, CO