Elastic’s Optimism in the Cloud: $100M+ ARR, growing 100%+ YoY

Open Source Software

Building a business on top of open source has its unique set of challenges. By giving away most of the code for free, public cloud vendors like AWS, who are purpose-built custodians of infrastructure with essentially infinite cash, compute, and storage resources, can easily offer a managed version of any service on their platform.

And they are. Elastic’s stock fell sharply in March 2019 after AWS announced its offshoot community based on Elasticsearch, Elastic’s open source project. Since then, Elastic has doubled down on Elastic Cloud, its SaaS offering, to differentiate. And it seems to be working.

Elastic Cloud is now 25% of Elastic’s total subscription business, consistently up from 19% in April 2019. The timing (right after AWS’s announcement) is no coincidence.

Elastic Cloud’s performance is extraordinary. It is growing twice as fast as its healthy but decelerating self-managed offering. At $116M ARR and growing 110% year-over-year, Elastic Cloud is an incredibly unique asset (can you think of any other businesses over $100M ARR, growing over 100% YoY except Zoom?). And while the company doesn’t report more specific data, we’d bet the unit economics are stellar given the hosted model’s natural low-touch distribution focused on smaller customers.

Elastic’s management leaned on its SaaS product as a major growth driver during the most recent earnings call:

“Our rapid growth in SaaS reflects the success of our strategy to widen our competitive moat with proprietary features and to leverage our partnerships…with rapid innovation in our proprietary features over the past couple of years, we have significantly widened our competitive moat” — Janesh Moorjani, Elastic CFO

Elastic is building proprietary hosted features to create a better product that AWS cannot replicate from open source.

MongoDB, another public company monetizing open source, is similarly positioned and is slightly further along on its SaaS journey. Atlas, Mongo’s SaaS product, crossed $200M ARR this quarter and is growing 85% year-over-year. Atlas now makes up 43% of Mongo’s subscription revenue, up from 11% in January 2018. Its stock has been on a tear since Amazon’s announcement of a competitive solution.

Mongo’s management also highlighted Atlas’ positioning during the most recent earnings call:

“Frankly, when we are competing, we feel really, really good about our position. Those products are clones of MongoDB, and so when we expose the full feature set and all the capabilities available in MongoDB and through Atlas, it becomes a pretty easy decision” — Dev Ittacharya, MongoDB CEO

The hosted offering is an effective way to fortify the traditional open source business model. At their core, these companies have been successful because of product innovation. They will continue to win customers by focusing on these strengths and building better products than public cloud vendors. Managing between open source to quickly build a strong community and proprietary to maintain a competitive advantage is vital. Elastic and Mongo appear to have struck the right balance with their proprietary SaaS products distributed to their vibrant open source communities.