Elastic (NYSE:ESTC) is a search company, but not in the traditional sense. Its software platform brings search functionality to a wide range of business use cases, allowing clients to ingest and analyze data. For instance, Elastic makes it possible to sift through corporate resources to find a particular document or file. The platform also logs billions of events each day, which helps IT and security teams troubleshoot application performance issues and remediate cyberattacks.

In this Backstage Pass video, which aired on Aug. 26, 2021, Motley Fool contributors Trevor Jennewine and Brian Withers discuss Elastic's Q1 earnings.

Trevor Jennewine: Elastic is a search company, not in the Google-type way. But they provide search tools too. You can think of it as an internal workplace search engine. Their platform allows you to log an index data, and then go back through and search the data, analyze it, visualize it. Search is a tool they put at the center of these various use cases.

Just to give a couple of examples on how it's used, you can use the Elastic search to put a search box in an application or a website. Shopify, the help documentation on the Shopify website is powered by Elastic. MercadoLibre's seller listings are powered by Elastic. When they want to go in and update a price or find all their listings that they have on the platform, that's powered by Elasticsearch.

[And] because their logging and indexing data, that also has applications for observing network performance and application performance or just generalized infrastructure performance. IT teams can use that to identify problems, resolve them, security analyst can do the same to identify threats and then remediate them. But the big thing is Elastic is a search company, and they use that functionality for a lot of different use cases.

I'm going to share my screen one more time here. We're going to look at their most recent results. This first slide, I'm trying to make it a little bit bigger. This is the first quarter of fiscal 2022. Revenue growth came in at 50%. That number was $193 million up 50% from the prior year. But one of the company's growth strategies is to expand usage of Elastic Cloud and this is its software as a service product, and lots of industry, lots of enterprises are shifting resources to the Cloud, and so management thinks is a great opportunity for them to grow this product. That product they actually grew 89% with Elastic Cloud. This product is growing faster than the overall business, which is a good sign; it shows that the management has a good feel for their growth strategy and they're executing on it.

One of the things that investors should pay attention to of this company is its ability to grow customers, and its ability to grow its customer base and expand within its customer base, are two more big pillars of management's growth strategy. With that in mind, they reach 16,000 subscription customers during the most recent quarter, and not all of those customers are actually using Elastic Cloud. They generate subscription revenue from onsite deployments too, and onsite deployments represent the majority of the way the customers are consuming Elastic right now. To put the Elastic Cloud number in perspective, revenue from Elastic Cloud was about $62 million in the first quarter. That's about 32% of total revenue. But they are making progress. Last year that number was 27%, and the year before it was 22%, and the year before that it was 17%. They are moving up the curve there.

Then the last thing I'll note is that they are gaining traction with some of these bigger customers. They have 780 customers with an annual contract value of over $100,000 now and that number is up 24% over the prior year. One other thing, at the end of fiscal 2021, the end of the last quarter, they actually had 75 customers that are having an annual contract value of over $1 million, and that was up from 50 [customers in the prior year]. They're adding new customers, but they're also growing with these bigger customers, which is a good sign.

Then down here, management notes that their net expansion rate was slightly below 130 %, and this is the way they phrased it in the previous quarter as well. Coming into 2020, they would note in their SEC filings that their expansion rate was over 130% than it had been for the previous three years. Then last year, it gets below 130% and that's where it stayed during this quarter, but that's still strong expansion. Customers are still spending more each year. The business is gaining traction.

Let's see here. One positive note in terms of profitability, they generated positive free cash flow for the first time last year and they maintain that into the first quarter of this year with $12.4 million of free cash flow. They also have a strong net cash position. They have just under $1 billion dollars in cash and equivalents on their balance sheet and that's compared to about $566 million in debt. So net cash position there.

Let's see. During the earnings call, management mentioned that they expect revenue to reach $1 billion dollars, annualized revenue to reach $1 billion dollars by fiscal 2023. That's not this year, but the following year. That's not incredible growth, but it is strong growth over that period. Let's see. Over the trailing-12-months, they've generated somewhere in the $670 million range. Over the next two years, they expect that to jump up to over a billion. They're optimistic about the future prospects of the business. It looks we have a few more seconds here.

One other thing I wanted to throw in real quick is management is going pretty hard at the cybersecurity or the security solutions provided through the Elastic. They did make two acquisitions very recently. They acquired CMD and Build.Security. These play into what they call their limitless extended detection and response platform that they just released. This platform, it unifies security information event management, and it has endpoint protection and now it's pulling Cloud security with these two recent acquisitions in it. Management sees that as a big growth driver. Cybersecurity is a pretty hot topic right now. I like the way they're thinking about that.

Brian Withers: Yeah, Trevor, I noticed as I went through the Elastic presentations and the earnings call and they talk about being a search company. But some of those, as you pointed out, some of the use cases for search company are helping figure out bugs and track down issues in their IT system because their software is basically set up to peer into all of the applications that you have across your enterprise. They seem to be doing a little bit of competing with Datadog as well.

Trevor Jennewine: Right. I think they're very similar. I think Datadog has a more robust solution on the application performance monitoring side of things, but that's exactly right. Elastic, they're very good at logging and indexing this information and then allowing the search through it for various purposes. One final anecdote. There's a site, DB-Engines, that ranks various databases which you can actually go into the workplace search engine and Elastic is the leader by a good margin. Splunk could take second place there. Elastic is the most popular workplace search engine according to DB-Engine.

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