Elastic: Potential Spring Back Is Getting Very Large (NYSE:ESTC)

Why consider Elastic shares now?

It has been more than a year now since high growth IT shares reached their recent peak. Since that time, valuations have crashed, and growth expectations have moderated…but long term growth estimates really haven’t changed and the cadence of free cash flow improvement has accelerated noticeably. So, there is plenty of what looks like road kill but is really a function of investor perceptions of risk and investor aversion to what they perceive to be risk.

This is an article recommending the purchase of Elastic shares at this time, and at this price. I last wrote about Elastic (NYSE:ESTC) on SA more than 2 years ago. Since that time, like many other IT companies, the shares spiked, reaching $182 in November 2021, before falling by 70% to the current level. Unfortunately, a 70% decline peak to trough has been all too common for high growth IT shares. There will be many readers, perhaps most, who believe that ESTC shares should never have reached $182 based on the then current valuation metrics. I am not trying to argue that point. The issue isn’t past valuation, or the precipitous decline since that time; the issue is the investment case for Elastic shares at their current valuation.

In the wake of Elastic’s last earnings report, I have been asked by one of my Ticker Target subscribers to review the quarter and the outlook for the company, and try to figure out what is going on with the share price. I wish I could say I have a facile answer to that last question-I don’t. I had thought that a plan to reach 10% non-GAAP operating margin with a commensurate level of free cash flow generation sooner than planned might have enticed investors. I have been wrong, of course. I might have thought that the ability of the company to sustain growth at rates in the mid-20% range during this current period in which there has been a curtailment of IT spending growth might have seemed encouraging to investors. That hasn’t been the case. At this point, I didn’t think a typical beat would have a positive influence on the shares; it takes the results from a company with heavily shorted shares and a quarterly result far above expectations to get rewarded in terms of share price appreciation. MongoDB (MDB), shares have spiked notably, and yet those shares, despite a 33% spike, are just 10% higher than their level in mid-October.

As mentioned, Elastic shares are down by about 70% from their recent peak set in November 2021. The percentage decline by itself is not the reason to buy the shares. The case to buy the shares is: 1) that expectations are exceptionally low because of concerns with regards to the company’s consumption based revenue model, 2) the company is now actively managing to a strong level of cash generation above levels accounted for by the current valuation of the shares and 3) the company’s unique technology allows it to participate in 3 high growth IT areas; enterprise search, observability and security from a single platform.

I will note that Elastic does use SBC. The company’s ratio of SBC/revenue has most recently been at 18%, a level that is in-line for high growth software companies. SBC was flat sequentially but up by 80% year on year due to the vagaries of the Black Scholes calculation. As the company pivots to pursuing profits rather than maximizing growth, with hiring slowing in that pursuit, the SBC ratio is likely to decline. But SBC for Elastic will not disappear. I account for SBC by looking at the growth of outstanding shares which rose by 0.35% sequentially. Thus my valuations presented here are based on 98.5 million shares, compared to the 95.3 million shares reported at the end of the latest quarter. Elastic is not a likely investment for those readers who focus on SBC.

Finally, I have to add that this is an article about Elastic. It is not about the most recent inflation print, or the statement of the Fed chairman. Obviously most of the valuation change in Elastic shares relates to macro issues. I do have my belief as to the trajectory of inflation. I personally put less reliance on what the Fed Chairman has recently said on the subject, particularly considering his historical track record in terms of economic forecasts and the track record of the Fed when it comes to forecasting rates or economic activity. Presumably, if inflation continues its slow decline, and the labor market deteriorates, there will be a pivot regardless of the latest discussion by the Fed chairman. I am all too aware that it will take a Fed pivot, or high expectations of one, for Elastic shares to reflect the changing circumstances of the company as opposed to reflecting macro headwinds.

I am making a long term call to buy the shares of Elastic at the current valuation, which, in light of the latest forecast by the company is trading at about 4.3X EV/S based on revenues for the next 12 months of a bit less than $1.2 billion.

So why look at the shares at this point? Before discussing that question, it is important to note that I doubt that Elastic shares can provide differentiated share price appreciation until the market leaves the current risk-off phase. Elastic shares are amongst a group of high growth IT shares whose valuation seems inextricably intertwined with macro concerns. While a good earnings report does get rewarded-usually, the relative rewards fade over time.

Even though almost all readers recognize that a recession is either here or is coming, and that price pressures are starting to abate, investors react in almost knee jerk reaction to inflation prints and Fed statements. I am, of course, delighted to see a relatively benign inflation report, and expect there will be more to follow, but the case for Elastic shares relates to its technology which I believe to be underappreciated, to its market opportunity because of that technology, and to its pivot to an emphasis on operating margins and cash flow. For now, I expect the shares will trade in line with other high growth IT shares; rising when investors believe that the Fed is going to pivot or that inflation is less of an issue, while falling when the reverse is true. It is thus an investment in which patience, significant patience, is likely to be required, and thus not for all readers.

I believe that at some juncture, ESTC shares will be valued on their own merits. Until then, they are on sale. I am never going to suggest a share price is “unjustified.” But when I look at the net present value of Elastic shares using the company’s new free cashflow forecast, the derived price, which I calculate at almost 80% above the current level, suggests a massive disconnect between expectations for free cash flow growth and the current valuation.

The case to look at the shares now rests on several pillars. I don’t like to say that something is “de-risked.” There is no such thing as an investment without risk or a business forecast without risk. In the wake of the cyber security companies all reporting that their customer were scrutinizing deals more carefully and pushing out commitments, the idea that any IT vendor doesn’t have risk to their expectations can’t realistically be defended. I confess that of all of the many surprises, most of them unpleasant, that 2022 has brought, I think that one was the most notable. That said, at least according to company executives, Elastic’s security business has not seen any loss of momentum in the market place, and its platform based sales strategy to promote that offering is resonating with some users.

But that said, expectations for Elastic are low…really low. The current forecast for revenue growth for the next two quarters is just around 20%. Expectations, at least as they are published by 1st Call indicate the company is expected to achieve revenue growth next year, i.e. fiscal 2024 of less than 25%. About the only financial metrics that are forecast to show substantial gains are those relating to earnings and to free cash flow. Obviously the improved expectations for those metrics are currently not being reflected in valuations at this point. As mentioned, after adjusting my data inputs to reflect the company’s revised forecast for free cash flow margins, the NPV of the shares is about 80% greater than the current share price. I will return to additional valuation metrics and assumptions at the end of this article.

Another part of my current consideration of Elastic shares has to do with consumption, i.e. the actual usage that the company’s customers make of the solutions they have procured and run on the company’s platform. Just how the company prices usage is shown in this link. One reason for Elastic’s current forecast is management’s concerns about forecasting historical levels of consumption growth. Not terribly surprising. But with the strong growth in consumption reported the other day by Mongo, and some comments about consumption growth from Datadog (DDOG) and from Snowflake (SNOW) that do not suggest a disastrous decline in consumption growth, while acknowledging seasonality and macro concerns, my though has been that perhaps the concerns with regards to consumption for Elastic may have been overdone.

I don’t want to suggest that the analogy between Mongo consumption and Elastic consumption is precise. But the bear case on Mongo, and the bear case on Elastic as well as other companies is certainly focused on concerns about consumption, and the results of Mongo do seem to suggest that those concerns are overdone.

Elastic, for the most part, generates its revenues based on consumption, basically the ingestion of data. These days, many investors view consumption based revenue models as existentially risky. And it is hard to deny that the can be. But slowing data ingestion is difficult for most enterprises to orchestrate-the use cases don’t produce the required results when they aren’t enabled with data. Most of Elastic’s set of use cases do not readily allow for data ingestion to slow-that is particularly true with regards to security and observability.

As mentioned, other day, MongoDB reported its quarterly results. Mongo has a bit of a complicated revenue model and some of the above consensus growth and earnings came because of revenues that are recognized upfront due to the ASC 606 requirement. But that said, most of MDB’s revenues do come from its Atlas data base, and Atlas revenues are based on consumption. Mongo’s over attainment, which led to the valuation spike was basically due to consumption growth coming in more strongly than the company had previously forecast. Overall, Atlas revenues rose by 61%. Both Elastic and Atlas go-to-market models are focused on developers, so I was encouraged to see that consumption on the part of developers hasn’t shown a precipitous decline.

Consumption is very hard to forecast; there isn’t enough history of consumption during recessions to make forecasts from companies-or from anyone else-likely to be terribly accurate. Most companies, as they should, have tended to err on the side of conservatism-Snowflake and Datadog are conspicuous examples in that regard. It is certainly possible that the consumption Elastic is forecasting is a minimum, and that its consumption forecast will be exceeded, despite the recession.

Finally, I believe now, and have believed for some time, that Elastic shares have never been appropriately valued, at least on a relative basis, because of the novelty and complexity of its solutions. It can be hard to figure out just what Elastic is. It is obviously a highly enabled search engine, and that has been its core business. But it is also an observability solution and a security solution. The fact is that the technology Elastic uses, which is based on an open source project called Lucene and the ElasticSearch project built on that foundation, offers many benefits from performance to a multi-tenant capability that enable many different use cases from a single platform.

Currently, there is an industry trend to vendor consolidation. That has happened before during recessionary times. Elastic could benefit from that trend as it offers search, observability and security on a single platform, something competitors cannot offer. While vendor consolidation is a trend, my observation is that so far Elastic hasn’t really been able to craft a terribly effective marketing message around its platform capability, although it certainly has made such efforts. It is a potential opportunity that is not incorporated in any numbers and which has been less of a factor in the company’s growth than some-including this writer-might have anticipated.

Will investors soon appreciate the pillars of Elastic’s growth? Will they appreciate its competitive advantages? Those are difficult questions to answer. Some analysts do appreciate the value of the company’s platform; hence its rating by the Citi analyst as his best single pick. Over time, consistent execution is likely to focus investor attention on the value of the technology for users more than is currently the case.

What did Elastic report and how did the company guide?

Similar to the results of most enterprise software companies that were recently reported, Elastic’s fiscal Q2 quarter that was reported on 11/30 exceeded expectations on most sales and earning metrics compared to its prior forecast and the 1st Call consensus. The company had forecast revenues would be $262 million; they were actually $264 million, after absorbing an additional $5 million in FX headwinds. Non-GAAP operating income was a profit of $5 million or 2% of revenues compared to the company’s forecast of an operating loss of 0.5%, while non-GAAP EPS was at break-even compared to the forecast loss of $.10. The company reported a free cash flow margin of 4%, considerably better than had been expected, although that metric is not specifically guided. The company’s non-GAAP gross margin contracted a bit more than 200 bps year on year; this is quite consistent with the experience of other software companies. In the quarter, the company saw its SMB users lower consumption. That is the part of the business with the highest gross margins, and as a higher proportion of business came from large enterprises, gross margins were pressured a bit, although they did tick up from the prior quarter.

The shares did fall by about 15% in the four days following earnings. The issue, as has so often has been the case lately, was guidance. The company’s headline guidance for fiscal Q3 revenue was for growth of 22%; or 26% in constant currency. The actual decrease in the forecast compared to the prior consensus was 200 bps, half from an increased FX headwind, and half because of macro headwinds. Management called out changes in the behavior of SMBs and lengthening sales cycles on the part of enterprise customers in Europe as the factors causing it to moderate its growth forecast. For the full fiscal year, the company reduced its revenue forecast by about $10 million, half because of FX headwinds and half because of macro headwinds. Basically, its current forecast now is for sequential growth of less than 4% for both this quarter and for fiscal Q4, or for 5% in constant currency.

The company also announced a workforce reduction of 13%. At least some of this reduction will have an immediate impact on revenues; the company is moving to a self-service sales model for its SMB customers and reinvesting some of the funds made available from that change into augmenting its enterprise sales effort. Presumably the potential impact of laying off telesales people focused on the SMB space has been factored into Elastic’s constrained revenue guide. Ultimately, in my opinion, increasing sales and marketing investment for enterprise customers is likely to accelerate Elastic’s revenue growth, but that is probably a phenomenon more likely to be seen in 2H FY ’24.

Elastic’s non-GAAP sales and marketing expense ratio in the latest quarter was about 42% which compares to 40% in the prior year and to 43% the prior quarter. I imagine that a focus on non-GAAP sales and marketing expense ratio will be a principal factor in driving operating margins both in the next two quarters and in fiscal 2024. There is plenty of room for that expense ratio to fall and enable the company to achieve its margin goal for the next year.

As mentioned previously, the company is now projecting sustained profitability both in the final 2 quarters of the fiscal year, and through fiscal 2024. The company is now projecting non-GAAP operating margins this quarter of about 4.5% compared to prior consensus expectations for a loss. The company is now projecting a non-GAAP operating margin in FY 2024. of 10%. With a tax provision of about $15 million, and revenues of around $1.3 billion, that level of operating margins would yield full diluted non-GAAP EPS for next year of about $1.10-$1.15. Forecasting cash flows can be a bit tricky due to changes in assets and liabilities, the likelihood that SBC will decline, and uncertainties regarding the growth of deferred revenues. But typically, free cash flow will probably be 110% of non-GAAP earnings, or about $120-$125 million. At least to me, this sharp rise in free cash flow margins, heretofore running below breakeven, is one reason that makes the shares quite attractive. There really was nothing in malignant or threatening in either the earnings release or the company guidance that should have led to the decline of the shares, and I believe that decline is a buying opportunity.

Elastic’s Competitive Positioning: How one technology enables multiple solutions

As mentioned, Elastic’s technology is based on its implementation of the Lucene library. Elastic Search itself is an open-source technology, and some versions of it are available from the hyperscalers such as Amazon (AMZN) and Microsoft Azure (MSFT). What Elastic has done is to adapt this technology so that it can be readily used by developers who create applications based on the availability of a high-performance search engine. Further, the company has taken this technology and made it the animating factor in two end-user applications, observability and cyber-security. As is typical in the IT space, there are alternatives to Elastic Search such as Kibana and ZincSearch. Elastic the company offers a service called Elastic Stack, which includes Elasticsearch, the open-source technology, Logstash, Kibana and what are called beats.

Elastic Stack has some very prominent users such as Netflix (NFLX), Facebook/Meta (META), LinkedIn. T-Mobile (TMUS), Walmart (WMT) and Audi amongst others. One reason for Elastic pivoting its sales motion to the enterprise is simply the size of the opportunity. Enterprise search with the performance of what can be achieved with Stack really has a TAM whose dimensions are still evolving. This article would be even longer than it is were the author to list all of the applications that use search as their core technology.

Some years ago, Elastic entered the market for observability. Functionality includes Logs, Metrics, APM, and Uptime/Synthetic Monitoring-basically the set of functionality offered by the other larger vendors in this space. It has 100’s of out of the box integrations. Some of the comparative analysis suggests its pricing is flexible and more of a value than offered by competitors. Other analysis do not mention this. Observability is a rapidly growing market, and that has remained the case even as the economy has deteriorated. There are numerous high-profile competitors in the observability space; probably, Datadog and Splunk (SPLK) are best known to investors. I looked through the on-line reviews of all three companies. There really isn’t much to distinguish one from another. I would be pressing the point to say that in terms of functionality, one of these offerings was better than the other. I have linked with one review that compares Datadog to Elastic. It really doesn’t provide enough in the way of conclusions to suggest a market share winner. That said, Datadog has grown its revenues far more rapidly than Elastic, and it is far more profitable at this point. It also has a far higher valuation. My conclusion is that Elastic has an unexploited market opportunity that perhaps its re-prioritization of sales expense to the enterprise can exploit.

A couple of years ago, Elastic incorporated its technology into a security solution. It is a comprehensive offering that includes SIEM, Cloud Security, Threat intelligence and XDR, In other words, pretty much a soup to nuts menu of capabilities in the cyber-security space. It is somewhat unique in offering a wide variety of security solutions on a single platform. It is the speed of its search engine that enables the solution to offer a multiplicity of solutions that have typically been procured separately. Penetrating the security market is a difficult undertaking; the cost of breaches is so significant that it is difficult for new companies such as Elastic to gain a foothold. Elastic presents a variety of 3rd party evaluations of its security technology, including its ranking by MITRE.

It can be difficult to evaluate the competitive positioning Elastic in the security space because it has so many capabilities. After reviewing the third-party analysis, I decided not to link any of them because there just weren’t any conclusions regarding comparative capabilities in their evaluations. This isn’t like comparing NetApp (NTAP) to Dell (DELL) to Pure (PSTG).

Security is still a nascent business for Elastic. While the Elastic solution is often looked at as incorporating XDR functionality, or in other words, endpoint security, it is probably obvious, simply based on growth rates, that Elastic is not taking share from either Microsoft (MSFT), CrowdStrike (CRWD) or SentinelOne (S), the leaders in the space. It isn’t functionality or performance, but the difficulty a company with a unique technology has in penetrating the market.

At one point, Elastic was viewed as a competitor of the hyperscalers, and indeed Elastic and Amazon had been involved in a legal battle for some time. Those days are in the past; Elastic partners with all of the hyperscalers. Revenue from the hyperscalers marketplaces doubled last quarter, and Elastic was actually a launch partner with a new Azure service and expanded its GCP (GOOG) partnership as well.

One strategy that Elastic is trying to use is that of vendor consolidation. Users can find solutions for many problems using Elastic. And its search technology is quite pervasive at this point. But getting users to commit to search, observability and security from a single vendor is a heavy lift sell. Still, in this current environment of constrained IT budgets, the cost savings from vendor consolidation can be a useful sales tool for Elastic.

Elastic has the requisite technology to compete in the 3 sectors in which its solutions are offered. And it has had noticeable success in selling to both marque users and to thousands of smaller users with a variety of use cases. While Elastic has been successful in growing the company rapidly, and pivoting to the cloud, my belief is that with more emphasis on larger enterprises, its outlook can improve from the level of its current and projected results.

Is demand for Elastic sustainable?

These days that question is top-of-mind for investors in the IT space. It is a very rare company, by now, that hasn’t reduced its forecast for percentage growth. My guess is that before the impending, or in-process recession runs its course, even those companies who haven’t seen elongating sales cycles, shorter duration contracts, and a slowdown in new customer acquisition will do so.

As mentioned earlier in this article, Elastic’s CEO acknowledged the slowdown in demand during the latest conference call and the company reduced its expectations for growth. The real question, which is hard to answer, is whether that reduction was sufficient to account for the macro headwinds, and the impact of a sales motion pivot to the enterprise. The company called out the slowing growth in SMB consumption as well as some issues with regards to international business.

I would like to present some kind of dispositive answer about how Elastic’s growth might fare during a recession. That really isn’t possible. It is tempting to suggest that there is some kind of knowable correlation between the cadence of economic activity and growth in the software space. The problem isn’t that the correlation isn’t real but it isn’t perfect and is less perfect for companies such as Elastic whose set of solutions and use cases basically did not exist the last time the economy was in recession.

I think the other companies with consumption-based models, i.e. Datadog, Mongo and Snowflake in particular, suggest that consumption growth is likely to hold up reasonably, although not entirely during a recession. It is inevitable, I think, that replacing a direct touch sales motion with what is now exclusively self-service, will slow the number of new customers that Elastic can acquire. Last quarter, the customer count grew by 400, or by just a little more than 2% sequentially, compared to 700, or nearly 4% the prior quarter. My guess is that even if new customer additions trend downward, it will not significantly impact growth.

The other component of growth for Elastic is its cloud offerings. Cloud is now 39% of total revenue and grew by 52% in constant currency last quarter, and reached 43% of subscription revenue. Given the relatively modest growth rate the company has forecast, and the consensus outlook for fiscal 2024, I think that the company has probably accounted for macro headwinds and that it should be able to maintain mid-20% growth-a result that will stand out to a degree during a recession.

Elastic’s Valuation and business model.

Elastic is in the process of changing its business model noticeably over the course of the next few quarters, and while its layoff announcement and its new margin target was released as part of the latest earnings release, the strategy actually has been underway for some time. I called out the change in the sales and marketing expense ratio earlier in this article because I believe that is where the change will be most noticeable. But every expense category is going to see remediation even including the cost of support.

Elastic’s non-GAAP research and development expense ratio last quarter was 21% down from 24% a year ago. Research and development expense actually fell marginally on a sequential comparison, and it only grew by 13% year on year. In order to further constrain research and development expense growth, the company is likely to carefully prioritize projects, delaying some and eliminating others. That can, ultimately, constrain future percentage sales growth but will have no short-term impact on what the company will be able to achieve in that regard. Most technology companies, at least in my own experience, would be far better off with a sharper focus in terms of how a particular product actually fits into a sales strategy. Trying to do too much at the same time is often a recipe for doing fewer things well, and delaying projects overall.

Non-GAAP General and administrative expense was about 10% last quarter. General and administrative expense was up around 4% sequentially and was up by just 7% year on year. Based on the CFO’s presentation during the conference call, general and administrative expenses should be declining from current levels.

The company had a free cash flow margin of about 4% last quarter compared to a loss in the year earlier period. Just to reiterate, Elastic uses stock-based comp. and stock-based comp is counted in free cash flow because…well, it is a non-cash expense the same as depreciation or contract acquisition costs. I strongly suggest that readers who are focused on SBC look at a different space than software, which has its unique set of specific costs and revenue recognition that is unlike many other business segments.

Like many software companies, Elastic’s free cash flow is battling shorter duration contracts that act to reduce the increase in deferred revenue. That said, last quarter the company’s increase in deferred revenue was higher than in the year earlier period.

I have read many comments on the part of contributors to SA, as well as brokerage analysts, to the effect that investors have to be prepared for negative surprises during the course of the next several quarters as the recession takes hold and crimps growth. The focus of these articles and research is that valuations are still too high because investors haven’t completely reset their expectations.

I am not going to try to argue the point, overall. But in the case of Elastic specifically, it seems, at least to me, that the compression of valuations already reflects, and more than reflects macro headwinds. Most stocks that fall 70% are certainly reflecting a fair level of uncertainty and macro risk. The company has recognized that demand headwinds are blowing strongly, and it has taken action by reducing its staff by 13%, and it is already managing opex carefully and prioritizing expenditures. A year ago this time, the company was forecasting revenue growth of 37% for its full fiscal year, and it wound up growing by 42%. Now it is forecasting full year revenue growth of 24% and the consensus is not forecasting a recovery in percentage sales growth in the following fiscal year. I think the question longer-term investors might better consider is not Elastic’s growth during a recession, but its potential growth in a recovery that will come when the Fed finally reacts to deteriorating business conditions and pivots to a less restrictive policy.

On one of the subjects discussed by Jay Powell the other day, I find myself agreeing, i.e., it isn’t really feasible to forecast the length or severity of the recession that the Fed has orchestrated. The end of the recession will come after the Fed pivots. But it seems to me that Elastic’s management is certainly well aware of macro trends and has baked those into its latest forecast. While it isn’t yet possible to justify the Elastic share price based on a P/E ratio, that time is on the horizon. The path to 10% non-GAAP operating margins is in full view-and my expectation is that margins continue to rise from that point during a cyclical recovery, as growth rates recover from current constrained levels.

Wrapping up

Elastic’s share price history looks like that of many erstwhile high growth IT companies. The shares further imploded in the wake of the latest earnings release at the end of November. The company, acknowledging macro headwinds, reduced guidance through the end of its fiscal year (ends 4/30). Part of the cautious outlook relates to the Elastic revenue model, which is mostly based on consumption. Analysts and investors, and the company as well, have been concerned about how a recession might impact historic consumption growth patterns. Recently, other companies whose revenue models are based on consumption including Mongo, Datadog and even Snowflake have reported results that suggest that consumption/data ingestion, is not falling off a cliff. That was part of my motivation to write in some depth about Elastic at this point.

The Elastic technology engine, based on the open-source project Lucene, as well as Elasticsearch which is built on top of Lucene, offers users significant advantages in terms of performance and ease of use. In turn, offering that technology in a form that is easy to use has attracted some marquee users including BMW, Jaguar, Zurich Insurance, Walmart, T-Mobile (TMUS), Adobe (ADBE) and many more. Elastic has taken its technology, packaged as Elastic Stack, and provided functionality that enables the offering to be used in both the market for observability and for cyber-security requirements. A key part of the company’s selling motion is to attempt to persuade users of its search capability to extend their usage of Elastic to observability and cybersecurity functionality. That is happening, but probably at a cadence that is slower than some observers, and probably this writer would like to see. The company’s cloud offering continues to grow at a significant rate, and its partnerships with the major hyperscalers are driving an increasing proportion of revenue.

The company, as part of its earnings release, announced a fairly substantial layoff of 13% of its employees. As part of the announcement, it announced a significant pivot in that it is eliminating high-touch sales efforts in the SMB space, and reinvesting part of that savings in augmenting its enterprise sales teams. While the layoff announcement is dramatic and difficult for those affected, the company has started to focus far more on profitability, and that focus showed up in the results in the latest reported quarter. Encompassing the impacts of the layoff, and the focus on enterprise sales, the company is now expecting to reach 10% non-GAAP operating margins in its FY ’24 year. While that would not quite get it to a Rule of 40 metric, it seems likely that the company will achieve that kind of performance by the end of the fiscal year.

With profitability improving, an enterprise sales focus, and a competitive offering in 3 of the strongest growing markets in the technology space, coupled with an extremely compressed valuation, I think there is a strong investment case for the shares, while acknowledging that it will take a significant reversal of the current risk-off environment before they can achieve differentiated positive performance.