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September 14, 2018

Searching Elastic’s IPO Filing

Elastic filed paperwork last week to make an initial public offering (IPO) of stock to trade on the New York Stock Exchange under the ticker symbol ESTC, making it the latest software firm with big data roots to test the public markets. The move was not unexpected, but it does invite greater scrutiny of the Mountain View, California software company, starting with its S-1 filing.

Elastic‘s search engine, called Elasticsearch, is one of the go-to components that developers turn to when they’re creating modern applications. While search engines have been around since the earliest days of the World Wide Web, they remain incredibly useful mechanisms for accessing information today, thanks in part to the simplicity of the search experience (not to mention our ever-growing horde of data).

Elasticsearch is used widely in modern applications. According to the S-1 filed with the Securities and Exchange Commission, Elastic’s software is used every time you hail a ride from Uber, look for a product at Walgreens, search for a date on Tinder, or peruse fonts in Adobe’s vast collection.

The Elastic Stack (Source: Elastic’s S-1)

Elasticsearch, which Elastic CEO Shay Banon created in 2004 under the original name Compass, is the number-one ranked search engine in the world, according to, with a popularity score nearly twice that of Splunk. Its main open source competitor is Solr, which, like Elasticsearch, is based on Apache Lucene. Solr has lost popularity over the last few years, according to DB-Engines, while Splunk has gained ground in the standings.

But Elastic does far more than search. The Elastic Stack is composed of Elasticsearch, as well as Logstash (log data collection), Kibana (data visualization), and Beats (edge data shipment). The company also offers an add-on called X-Pack that adds to the Elastic Stack enterprise features like security, monitoring, and alerting. All of those capabilities are free, but users have to pay for premium features like reporting, a graph database, and machine learning.

Elastic has grown like a weed. At the company’s user conference earlier this year, the company boasted a total of 225 million downloads, which was up more than 100 million from 2017. In its S-1, Elastic said it has now been downloaded more than 350 million times. It should easily hit half a billion downloads by 2020, which would put Elastic in the upper realms of the most popular open source products.

Elastic’s steep growth (Source: Elastic’s S-1)

The key for Elastic will be transforming the popularity of its open source software into paid subscriptions. The company, which keeps most of the development of the open source software in-house, says it had more than 5,500 paying customers as of July 31, which was an increase of 500 customers in three months. Over the past 15 months, since April 30 2017, when it had 2,800 customers, the number of companies paying Elastic has almost doubled.

The company’s revenue for its fiscal 2018 was $159.9 million, an 81% increase from fiscal 2017. Subscriptions accounted for 91% of the company’s revenue for the three months ended July 31. Most of that revenue comes from companies within the United States, while 39% came from outside of it. Elastic incurred a net loss of $52.7 million in fiscal 2018, up slightly from the prior year, according to the S-1. Banon’s compensation, including stock options, totaled $8.2 million for fiscal 2018.

Elastic CEO and co-founder Shay Banon is a 2017 Datanami Person to Watch

Elastic cited its rapid growth as a potential risk to the company. A failure to maintain the company’s culture could harm its prospects. A number of other risks were also mentioned in the S-1. But the biggest threat arguably is that customers no longer feel they’re getting value from the proprietary add-ons that the company develops to enhance its core stack, which is the main source of its subscription revenue.

We’re not sure what Elastic’s valuation currently is, but there is speculation that it’s around $1 billion. That’s still just a fraction of the total market opportunity that Elastic spells out in the S-1, which it says is worth a total $45 billion for 2018. Those figures, which it got from IDC, incorporate expected spending across four main market areas, including:

  • Search, content analytics, and cognitive/AI software ($8 billion per IDC);
  • IT operations management ($9 billion per IDC);
  • Big data and analytics ($23 billion per IDC);
  • Security analytics ($5 billion per IDC).

It’s been a wild ride for Elastic since Banon, Steven Schuurman, Uri Boness, and Simon Willnauer founded Elastic in Amsterdam in 2012. Under Banon’s leadership, the company now is getting ready to take the next step in journey.

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