ESTC is a search engine, data storage, and analytics company built for enterprises. Its open source software takes in vast amounts of data from any source, in any format, with the capability to then perform search, analysis, and visualization in a matter of milliseconds. Simply put, its software allows users and customers to instantly find relevant information inside large amounts of data.
As an example, when a customer is shopping online, its software suggests products to add to the shopping cart, helping drive sales for that retailer. Or, when someone is looking for a ride on Uber, its software helps power the systems that locate nearby drivers. In these examples, the IT developers at the retailer and at Uber would build on top of Elastic to apply their own data, enabling search capabilities.
Its core product is "Elastic Stack", formerly known as ELK Stack. At the heart of the Elastic Stack suite is Elasticsearch, which is a distributed, real-time search and analytics engine and data storage for all types of data, including textual, numerical, geo-spacial, structured, and unstructured.
Now with a better understanding of its business, let's take a look at what's expected for tonight's earnings report. Analysts are forecasting the company to post a loss per share of ($0.47) on revenue of $56.5 mln, representing year/year growth of 53%. Interestingly, that would be roughly flat with 1Q19's revenue of $56.6 mln. Going back to the quarter ended July 31, 2019, ESTC has achieved sequential revenue growth in every quarter -- in many cases, sharp revenue growth. So, it seems reasonable/probable that the Street has taken a rather conservative approach with its estimates. That is not uncommon, though, as analysts typically set an easier bar to hurdle for a company's first earnings report out of the chute.
Outside of the main headline numbers, the metric most traders will be homing in on will be billings. Billings is often viewed as the most important demand-oriented metric for cloud software companies since it measures sales generated only in the current period. Therefore, it is a more up-to-date view of the demand situation, as compared to revenue.
On that note, calculated billings jumped by 76% last quarter to $59.2 mln. Moving forward, as its billings continue to grow in absolute terms, it expects its growth rate to trend lower over time.
Other key metrics to keep an eye on include Non-GAAP gross margin and free cash flow. In 1Q19, Non-GAAP gross margin did slip to 75% from 78%. The reason for the drop was related to its subscription margin dipping to 80% from 83%, due to the growth of its SaaS products, which incur higher costs related to cloud infrastructure, and higher costs associated with scaling our support organization. For this quarter, analysts are expecting ESTC to report GAAP gross margin of 72.2%.
While ESTC is not profitable on an EPS or operating income basis, it did generate positive free cash flow of $4.8 mln in 1Q19, up significantly from the $456K in free cash flow in 1Q18. For this quarter, though, analysts are expecting a free cash flow burn of ($9.6) mln.
To conclude, ESTC has been on quite a roll heading into its first earnings report tonight. Expectations are certainly high, which also raises the risk profile for the stock. Without question, ESTC will need to deliver upside Q2 results with upside guidance, in order to keep this momentum going. As we alluded to above, it does seem like estimates are conservative as analysts are forecasting no sequential top-line growth. So, the company may indeed be poised to outperform expectations. The question, though, will be whether the upside results are already baked into the stock price.