ELASTIC N.V. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Management's Discussion and Analysis of Financial Condition and Results of Operations and audited consolidated financial statements included in our Annual Report on Form 10-K for the year endedApril 30, 2021 . As discussed in the section titled "Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such difference include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" under Part II, Item 1A in this Quarterly Report on Form 10-Q. Our fiscal year end isApril 30 , and our fiscal quarters end onJuly 31 ,October 31 ,January 31 , andApril 30 . Our fiscal year endedApril 30, 2021 is referred to as fiscal 2021 and our fiscal year endingApril 30, 2022 is referred to as fiscal 2022. Overview Elastic is a search company. We deliver technology that enables users to search through massive amounts of structured and unstructured data for a wide range of use cases. Our primary offering is the Elastic Stack, a powerful set of software products that ingest and store data from any source, and in any format, and perform search, analysis, and visualization in milliseconds or less. The Elastic Stack is designed for direct use by developers to power a variety of use cases. We also offer three software solutions - Enterprise Search, Observability, and Security - built on the Elastic Stack. Our solutions are designed to be deployed everywhere: in public or private clouds, in hybrid environments, or in traditional on-premises environments. Our products are used by individual developers and organizations of all sizes across a wide range of industries.Elasticsearch is the heart of the Elastic Stack. It is a distributed, real-time search and analytics engine and datastore for exploring all types of data including textual, numerical, geospatial, structured, and unstructured. The first public release ofElasticsearch was in 2010 by our co-founder Shay Banon as an open source project. The Company was formed in 2012. Since then, we have added new products, released new features, acquired companies, and created new solutions to expand the functionality of our products. Our business model is based on a combination of free and paid proprietary software. We market and distribute the Elastic Stack and our solutions using a free and open distribution strategy. Developers are able to download our software directly from our website. Some features of our software can be downloaded and used free of charge. Others are only available through paid subscriptions, which include access to specific proprietary features and also include support. These paid features can be unlocked without the need to re-deploy the software. There is no free subscription tier in our cloud offerings, where all subscriptions are paid. We believe that our free and open distribution strategy drives a number of benefits for our users, our customers, and our company. It facilitates rapid and efficient developer adoption, particularly by empowering individual developers to download and use our software without payment, registration, or the friction of a formal sales interaction. It fosters a vibrant developer community around our products and solutions, which drives adoption of our products and increased interaction among users. Further, this approach enables community review of our code and products, which allows us to improve the reliability and security of our software. During the three months endedOctober 31, 2021 , the Company acquired 100% of the share capital of Cmd and build.security for a total consideration of$77.8 million and$39.3 million , respectively. With these acquisitions, we will be able to extend cloud security protections for our customers from endpoint to cloud workload and provide our customers with cloud security protections from build-time, to deployment-time, to runtime. We generate revenue primarily from sales of subscriptions for our software. We offer various paid subscription tiers that provide different levels of rights to use proprietary features and access to support. We do not sell support separately. Our subscription agreements for self-managed and Elastic Cloud deployments typically have terms of one to three years and we usually bill for them annually in advance. Elastic Cloud customers may also purchase subscriptions on a month-to-month basis without a commitment, with usage billed at the end of each month. Subscriptions accounted for 92% and 93% of total revenue in the six months endedOctober 31, 2021 and 2020, respectively. We also generate revenue from consulting and training services. We had over 17,000 customers as ofOctober 31, 2021 compared to over 12,900 as ofOctober 31, 2020 . We define a customer as an entity that generated revenue in the quarter ending on the measurement date from an annual or month-to-month subscription. Affiliated entities are typically counted as a single customer. The annual contract value ("ACV") of a customer's commitments is calculated based on the terms of that customer's subscriptions, and represents the total committed annual subscription amount as of the measurement date. Month-to-month subscriptions are not included in the calculation of ACV. The 26 -------------------------------------------------------------------------------- Table of Contents number of customerswho represented greater than$100,000 in ACV was over 830 as ofOctober 31, 2021 compared to over 650 as ofOctober 31, 2020 . We engage in various sales and marketing efforts to extend our free and open distribution model. We employ multi-touch marketing campaigns to nurture our users and customers and keep them engaged after they download our software. Additionally, we maintain direct sales efforts focused on users and customerswho have adopted our software, as well as departmental decision-makers and senior executiveswho have broad purchasing power in their organizations. Our sales teams are primarily segmented by geographies and secondarily by the employee count of our customers. They focus on both initial conversion of users into customers and additional sales to existing customers. In addition to our direct sales efforts, we also maintain partnerships to further extend our reach and awareness of our products around the world. We continue to make substantial investments in developing the Elastic Stack and our solutions and expanding our global sales and marketing footprint. With a distributed team spanning over 35 countries, we are able to recruit, hire, and retain high-quality, experienced technical and sales personnel and operate at a rapid pace to drive product releases, fix bugs, and create and market new products. We had 2,626 employees as ofOctober 31, 2021 . InJuly 2021 , we issued$575.0 million aggregate principal amount of 4.125% Senior Notes dueJuly 15, 2029 (the "Senior Notes") in a private placement. We intend to use the net proceeds from the offering of the Senior Notes for general corporate purposes, which may include capital expenditures, investments and working capital. In addition, in the past we have considered, and may continue to consider, acquisitions and strategic transactions, and we may use the net proceeds of this offering for such purposes. COVID-19 InMarch 2020 , theWorld Health Organization declared COVID-19 a pandemic. Efforts to control its spread have significantly curtailed the movement of people, goods and services worldwide, including in most or all of the regions in which we sell our products and services and conduct our business operations, negatively impacting worldwide economic activity. The ongoing impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the virus, success of preventative measures to contain or mitigate the spread of the virus and emerging variants, effectiveness, distribution and acceptance of COVID-19 vaccines, impact on our customers and our sales cycles, impact on our customer, employee or industry events, effect on our vendors, and the uneven impact of the COVID-19 pandemic on certain industries, all of which continue to remain uncertain and cannot be predicted. The continuing COVID-19 pandemic has resulted in a global slowdown of economic activity and its impact has varied significantly across different industries with certain industries experiencing increased demand for their products and services, while others have struggled to maintain demand for their products and services consistent with historical levels. There have been delays in purchasing decisions from existing and prospective customers, longer sales cycles, delayed implementation of professional services, reduced renewals of subscriptions by existing customers, and changes in approaches to creating sales pipeline in the absence of in-person marketing events, resulting in headwinds for calculated billings and our Net Expansion Rate. Notwithstanding the potential and actual adverse impacts described above, as the pandemic has caused more of our customers to shift to a virtual workforce or accelerate their digital transformation efforts, we believe the value of our solutions has become even more evident. In addition, we have benefited from lower spending on travel by our employees due to COVID-19 travel restrictions and from holding events virtually, however we expect live events and travel costs to trend back higher in the near-term. In response to the COVID-19 pandemic and in an effort to focus on maintaining business continuity and preparing for the future and long-term success of our business, we have taken precautionary measures intended to help minimize the risk of the virus to our employees, customers, and the communities in which we operate, including modifying our business practices, such as suspending employee travel, adapting employee work locations, and holding events and trainings virtually. Further, we also temporarily reduced the pace of investments in our business in response to the COVID-19 pandemic in the first quarter of fiscal 2021 but began to gradually increase our investments in our business since then. We intend to continue to maintain a similar pace of investments in the business throughout the remainder of fiscal 2022. We continue to monitor the major impacts of the COVID-19 pandemic and make changes in our business as appropriate, in response to such impacts. See "Risk Factors" included in Part II, Item 1A of this Quarterly Report on Form 10-Q for a discussion of additional risks. Key Factors Affecting Our Performance We believe that the growth and future success of our business depends on many factors, including those described below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations. 27 -------------------------------------------------------------------------------- Table of Contents Growing the Elastic community. Our strategy consists of providing access to source available software, on both a free and paid basis, and fostering a community of users and developers. Our strategy is designed to pursue what we believe to be significant untapped potential for the use of our technology. After developers begin to use our software and start to participate in our developer community, they become more likely to apply our technology to additional use cases and evangelize our technology within their organizations. This reduces the time required for our sales force to educate potential leads on our solutions. In order to capitalize on our opportunity, we intend to make further investments to keep the Elastic Stack accessible and well known to software developers around the world. We intend to continue to invest in our products and support and engage our user base and developer community through content, events, and conferences in theU.S. and internationally. Our results of operations may fluctuate as we make these investments. Developing new features for the Elastic Stack. The Elastic Stack is applied to various use cases by customers, including through the solutions we offer. Our revenue is derived primarily from subscriptions of Enterprise Search, Observability and Security built into the Elastic Stack. We believe that releasing additional features of the Elastic Stack, including our solutions, drives usage of our products and ultimately drives our growth. To that end, we plan to continue to invest in building new features and solutions that expand the capabilities of the Elastic Stack. These investments may adversely affect our operating results prior to generating benefits, to the extent that they ultimately generate benefits at all. Growing our customer base by converting users of our software to paid subscribers. Our financial performance depends on growing our paid customer base by converting free users of our software into paid subscribers. Our distribution model has resulted in rapid adoption by developers around the world. We have invested, and expect to continue to invest, heavily in sales and marketing efforts to convert additional free users to paid subscribers. Our investment in sales and marketing is significant given our large and diverse user base. The investments are likely to occur in advance of the anticipated benefits resulting from such investments, such that they may adversely affect our operating results in the near term. Expanding within our current customer base. Our future growth and profitability depend on our ability to drive additional sales to existing customers. Customers often expand the use of our software within their organizations by increasing the number of developers using our products, increasing the utilization of our products for a particular use case, and expanding use of our products to additional use cases. We focus some of our direct sales efforts on encouraging these types of expansion within our customer base. We believe that a useful indication of how our customer relationships have expanded over time is through our Net Expansion Rate, which is based upon trends in the rate at which customers increase their spend with us. To calculate an expansion rate as of the end of a given month, we start with the annualized spend from all such customers as of twelve months prior to that month end, or Prior Period Value. A customer's annualized spend is measured as their ACV, or in the case of customers charged on usage-based arrangements, by annualizing the usage for that month. We then calculate the annualized spend from these same customers as of the given month end, or Current Period Value, which includes any growth in the value of their subscriptions or usage and is net of contraction or attrition over the prior twelve months. We then divide the Current Period Value by the Prior Period Value to arrive at an expansion rate. The Net Expansion Rate at the end of any period is the weighted average of the expansion rates as of the end of each of the trailing twelve months. The Net Expansion Rate includes the dollar-weighted value of our subscriptions or usage that expand, renew, contract, or attrit. For instance, if each customer had a one-year subscription and renewed its subscription for the exact same amount, then the Net Expansion Rate would be 100%. Customerswho reduced their annual subscription dollar value (contraction) or did not renew their annual subscription (attrition) would adversely affect the Net Expansion Rate. Our Net Expansion Rate was slightly below 130% for the three months endedOctober 31, 2021 . UntilApril 30, 2021 , Net Expansion Rate was based on ACV, regardless of customers' actual usage, and also did not include customers on month-to-month subscriptions. To better reflect actual customer behavior, we modified our Net Expansion Rate calculation to incorporate customers' actual spending patterns and include customers on month-to-month subscriptions. The impact of this change on prior reported periods is immaterial. As large organizations expand their use of the Elastic Stack across multiple use cases, projects, divisions and users, they often begin to require centralized provisioning, management and monitoring across multiple deployments. To satisfy these requirements, we offer the Elastic Enterprise subscription. We will continue to focus some of our direct sales efforts on driving adoption of our paid offerings. Increasing adoption of Elastic Cloud. Elastic Cloud, our family of hosted offerings that includes Elasticsearch Service and Site Search Service, is an important growth opportunity for our business. Organizations are increasingly looking for hosted deployment alternatives with reduced administrative burdens. In some cases, users of our source available software that have been self-managing deployments of the Elastic Stack subsequently become paying subscribers of Elastic Cloud. Elastic Cloud contributed 33% and 26% to our total revenue for the six months endedOctober 31, 2021 and 2020, respectively. We believe that offering a hosted deployment alternative is important for achieving our long-term growth potential, and we expect Elastic Cloud's contribution to our subscription revenue to increase over time. However, we expect that an increase in the relative contribution of Elastic Cloud to our business will have a modest adverse impact on our gross margin as a result of the associated third-party hosting costs. 28
--------------------------------------------------------------------------------
Table of Contents
Components of Results of OperationsRevenue
Subscription. Our revenue is primarily generated through the sale of
subscriptions to software, which is either self-managed by the user or hosted
and managed by us in the cloud. Subscriptions provide the right to use paid
proprietary software features and access to support for our paid and unpaid
software.
A portion of the revenue from self-managed subscriptions is generally recognized
up front at the point in time when the license is delivered. This revenue is
presented as License - self-managed in our consolidated statements of
operations. The remainder of revenue from self-managed subscriptions is
recognized ratably over the subscription term while revenue from subscriptions
that require access to the cloud or that are hosted and managed by us or by a
partner on our behalf in the cloud is recognized ratably over the subscription
term or on a usage basis; both are presented within Subscription - self-managed
and SaaS in our consolidated statements of operations.
Professional services. Professional services is composed of consulting services
as well as public and private training. Consulting services are generally
time-based arrangements. Revenue for professional services is recognized as
these services are performed.
Cost of Revenue
Subscription. Cost of license - self-managed consists of amortization of certain
intangible assets. Cost of subscription - self-managed and SaaS consists
primarily of personnel and related costs for employees associated with
supporting our subscription arrangements, certain third-party expenses, and
amortization of certain intangible and other assets. Personnel and related
costs, or personnel costs, comprise cash compensation, benefits and stock-based
compensation to employees, costs of third-party contractors, and allocated
overhead costs. Third-party expenses consist of cloud hosting costs and other
expenses directly associated with our customer support. We expect our cost of
subscription - self-managed and SaaS to increase in absolute dollars as our
subscription revenue increases.
Professional services. Cost of professional services revenue consists primarily
of personnel costs directly associated with delivery of training, implementation
and other professional services, costs of third-party contractors, facility
rental charges and allocated overhead costs. We expect our cost of professional
services revenue to increase in absolute dollars as we invest in our business
and as professional services revenue increases.
Gross profit and gross margin. Gross profit represents revenue less cost of
revenue. Gross margin, or gross profit as a percentage of revenue, has been and
will continue to be affected by a variety of factors, including the timing of
our acquisition of new customers and our renewals with existing customers, the
average sales price of our subscriptions and professional services, the amount
of our revenue represented by hosted services, the mix of subscriptions sold,
the mix of revenue between subscriptions and professional services, the mix of
professional services between consulting and training, transaction volume growth
and support case volume growth. We expect our gross margin to fluctuate over
time depending on the factors described above. We expect our revenue from
Elastic Cloud to continue to increase as a percentage of total revenue, which we
expect will adversely impact our gross margin as a result of the associated
hosting costs.
Operating Expenses
Research and development. Research and development expense mainly consists of
personnel costs and allocated overhead costs for employees and contractors. We
expect our research and development expense to increase in absolute dollars for
the foreseeable future as we continue to develop new technology and invest
further in our existing products.
Sales and marketing. Sales and marketing expense mainly consists of personnel
costs, commissions, allocated overhead costs and costs related to marketing
programs and user events. Marketing programs consist of advertising, events,
brand-building and customer acquisition and retention activities. We expect our
sales and marketing expense to increase in absolute dollars as we expand our
salesforce and increase our investments in marketing resources. We capitalize
sales commissions and associated payroll taxes paid to internal sales personnel
that are related to the acquisition of customer contracts. Sales commissions
costs are amortized over the expected benefit period.
General and administrative. General and administrative expense mainly consists
of personnel costs for our management, finance, legal, human resources, and
other administrative employees. Our general and administrative expense also
includes professional fees, accounting fees, audit fees, tax services and legal
fees, as well as insurance, allocated overhead costs, and other corporate
expenses. We expect our general and administrative expense to increase in
absolute dollars as we
29
--------------------------------------------------------------------------------
Table of Contents
increase the size of our general and administrative functions to support the
growth of our business. We also anticipate that we will continue to incur
additional costs for employees and third-party consulting services related to
operating as a public company.
Other Income (Expense), Net
Other income, net primarily consists of gains and losses from transactions
denominated in a currency other than the functional currency, interest income
and interest expense.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes related to the
Netherlands , U.S. federal, state and foreign jurisdictions in which we conduct
business. Our effective tax rate is affected by recurring items, such as tax
rates in jurisdictions outside the Netherlands and the relative amounts of
income we earn in those jurisdictions, and non-deductible stock-based
compensation.
Results of Operations
The period to period comparison of results is not necessarily indicative of
results for future periods. The following tables set forth our results of
operations for the periods presented in dollars:
Three Months Ended October 31, Six Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Revenue
License - self-managed$ 18,117
172,140 118,695 333,104 225,158
Total subscription revenue 190,257 134,209 367,442 255,551
Professional services 15,723 10,685 31,633 18,213
Total revenue 205,980 144,894 399,075 273,764
Cost of revenue (1)(2)(3)
Cost of license - self-managed 395 347 741 693
Cost of subscription - self-managed and SaaS 41,847 29,148 79,021 55,038
Total cost of revenue - subscription 42,242 29,495 79,762 55,731
Cost of professional services 11,642 8,953 23,784 17,548
Total cost of revenue 53,884 38,448 103,546 73,279
Gross profit 152,096 106,446 295,529 200,485
Operating expenses(1)(2)(3)(4)
Research and development 63,763 46,688 123,145 92,366
Sales and marketing 94,953 64,474 182,986 120,625
General and administrative 30,555 23,705 57,607 45,434
Total operating expenses 189,271 134,867 363,738 258,425
Operating loss (1)(2)(3)(4) (37,175) (28,421) (68,209) (57,940)
Other income (expense), net
Interest expense (6,332) (4) (8,152) (13)
Other income (expense), net (666) (80) 352 10,814
Loss before income taxes (44,173) (28,505) (76,009) (47,139)
Provision for income taxes 2,850 653 5,503 1,020
Net loss $ (47,023) $ (29,158) $ (81,512) $ (48,159)
30
--------------------------------------------------------------------------------
Table of Contents
(1) Includes stock-based compensation expense as follows:
Three Months Ended October 31, Six Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Cost of revenue
Cost of subscription - self managed and SaaS $ 2,064 $ 1,860 $ 4,198 $ 3,226
Cost of professional services 1,292 976 2,867 1,928
Research and development 13,658 7,663 25,755 14,793
Sales and marketing 8,403 7,955 18,253 14,147
General and administrative 4,565 3,033 9,087 5,984
Total stock-based compensation expense $ 29,982 $
21,487
(2) Includes employer payroll taxes on employee stock transactions as follows:
Three Months Ended October 31, Six Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Cost of revenue
Cost of subscription - self managed and SaaS $ 65
114 25 478 102
Research and development 655 465 2,253 1,459
Sales and marketing 1,671 614 3,362 1,771
General and administrative 87 462 571 1,199
Total employer payroll taxes on employee
stock-based transactions $ 2,592 (3) Includes amortization of acquired intangible assets as follows:
Three Months Ended October 31, Six Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Cost of revenue
Cost of license - self-managed $ 395 $
347 $ 741
2,103 1,762 3,769 3,525
Sales and marketing 1,428 1,433 2,857 2,874
Total amortization of acquired intangibles $ 3,926 $
3,542
(4) Includes acquisition-related expenses as follows:
Three Months Ended October 31, Six Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Research and development $ 982 $ - $ 982 $ -
General and administrative 1,060 - 1,286 -
Total acquisition-related expenses $ 2,042 $ -
31
--------------------------------------------------------------------------------
Table of Contents
The following table sets forth selected condensed consolidated statements of
operations data for each of the periods indicated as a percentage of total
revenue:
Three Months Ended October 31, Six Months Ended October 31,
2021 2020 2021 2020
Revenue
License - self-managed 9 % 11 % 9 % 11 %
Subscription - self-managed and SaaS 83 % 82 % 83 % 82 %
Total subscription revenue 92 % 93 % 92 % 93 %
Professional services 8 % 7 % 8 % 7 %
Total revenue 100 % 100 % 100 % 100 %
Cost of revenue (1)(2)(3)
Cost of license - self-managed 0 % 0 % 0 % 0 %
Cost of subscription - self-managed and SaaS 21 % 20 % 20 % 20 %
Total cost of revenue - subscription 21 % 20 % 20 % 20 %
Cost of professional services 5 % 7 % 6 % 7 %
Total cost of revenue 26 % 27 % 26 % 27 %
Gross profit 74 % 73 % 74 % 73 %
Operating expenses(1)(2)(3)(4)
Research and development 31 % 32 % 31 % 34 %
Sales and marketing 46 % 45 % 46 % 43 %
General and administrative 15 % 16 % 14 % 17 %
Total operating expenses 92 % 93 % 91 % 94 %
Operating loss (1)(2)(3)(4) (18) % (20) % (17) % (21) %
Other income (expense), net
Interest expense (3) % 0 % (2) % 0 %
Other income (expense), net 0 % 0 % 0 % 4 %
Loss before income taxes (21) % (20) % (19) % (17) %
Provision for income taxes 2 % 0 % 1 % 1 %
Net loss (23) % (20) % (20) % (18) %
(1) Includes stock-based compensation expense as follows:
Three Months Ended October 31, Six Months Ended October 31,
2021 2020 2021 2020
Cost of revenue
Cost of subscription - self managed and SaaS 1 % 1 % 1 % 1 %
Cost of professional services 1 % 1 % 1 % 1 %
Research and development 7 % 5 % 6 % 6 %
Sales and marketing 4 % 6 % 5 % 5 %
General and administrative 2 % 2 % 2 % 2 %
Total stock-based compensation expense 15 % 15 % 15 % 15 %
32--------------------------------------------------------------------------------
Table of Contents
(2) Includes employer payroll taxes on employee stock transactions as follows:
Three Months Ended October 31, Six Months Ended October 31,
2021 2020 2021 2020
Cost of revenue
Cost of subscription - self managed and SaaS 0 % 0 % 0 % 0 %
Cost of professional services 0 % 0 % 0 % 0 %
Research and development 0 % 0 % 1 % 1 %
Sales and marketing 1 % 1 % 1 % 1 %
General and administrative 0 % 0 % 0 % 0 %
Total employer payroll taxes on employee
stock-based transactions 1 % 1 % 2 % 2 %
(3) Includes amortization of acquired intangible assets as follows:
Three Months Ended October 31, Six Months Ended October 31,
2021 2020 2021 2020
Cost of revenue
Cost of license - self-managed 0 % 0 % 0 % 0 %
Cost of subscription - self-managed and SaaS 1 % 1 % 1 % 2 %
Sales and marketing 1 % 1 % 1 % 1 %
Total amortization of acquired intangibles 2 % 2 % 2 % 3 %
(4) Includes acquisition-related expenses as follows:
Three Months Ended October 31, Six Months Ended October 31,
2021 2020 2021 2020
Research and development 0 % 0 % 0 % 0 %
General and administrative 1 % 0 % 0 % 0 %
Total acquisition-related expenses 1 % 0 % 0 % 0 %
Comparison of Three Months Ended October 31, 2021 and 2020
Revenue
Three Months Ended October 31, Change
2021 2020 $ %
(dollars in thousands)
Revenue
License - self-managed $ 18,117 $ 15,514 $ 2,603 17 %
Subscription - self-managed and SaaS 172,140 118,695 53,445 45 %
Total subscription revenue 190,257 134,209 56,048 42 %
Professional services 15,723 10,685 5,038 47 %
Total revenue $ 205,980 $ 144,894 $ 61,086 42 %
Total revenue increased by $61.1 million , or 42%, in the three months ended
October 31, 2021 , compared to the same period of the prior year.
Total subscription revenue increased $56.0 million , or 42%, in the three months
ended October 31, 2021 compared to the same period of the prior year. The
increase in revenue was primarily caused by volume-driven increases from new
business, as existing customers purchased additional subscriptions, and we grew
our subscription customer base to over 17,000 customers compared to over 12,900
customers in the same period of the prior year.
Professional services revenue increased by $5.0 million , or 47%, in the three
months ended October 31, 2021 , compared to the same period of the prior year.
The increase in professional services revenue was attributable to increased
adoption of our professional services offerings.
33
--------------------------------------------------------------------------------
Table of Contents
Cost of Revenue and Gross Margin
Three Months Ended October 31, Change
2021 2020 $ %
(dollars in thousands)
Cost of revenue
Cost of license - self-managed $ 395 $ 347 $ 48 14 %
Cost of subscription - self-managed and SaaS 41,847 29,148 12,699 44 %
Total cost of revenue - subscription 42,242 29,495 12,747 43 %
Cost of professional services 11,642 8,953 2,689 30 %
Total cost of revenue $ 53,884 $ 38,448 $ 15,436 40 %
Gross profit $ 152,096 $ 106,446 $ 45,650 43 %
Gross margin:
License - self-managed 98 % 98 %
Subscriptions - self-managed and SaaS 76 % 75 %
Total subscription margin 78 % 78 %
Professional services 26 % 16 %
Total gross margin 74 % 73 %
Total cost of subscription revenue increased by $12.7 million , or 43%, in the
three months ended October 31, 2021 compared to the same period of the prior
year. This increase was primarily due to an increase of $9.5 million in cloud
hosting costs, an increase of $1.7 million in personnel and related costs, and
an increase of $0.6 million in partner fees. The increase in personnel and
related costs includes an increase of $1.4 million in salaries and related taxes
and $0.2 million in stock-based compensation.
Total subscription margin remained flat at 78% for the three months ended
October 31, 2021 compared to the three months ended October 31, 2020 .
Cost of professional services revenue increased by $2.7 million , or 30%, in the
three months ended October 31, 2021 compared to the same period of the prior
year. This increase was primarily due to an increase of $1.3 million in
personnel and related costs, mainly due to growth in headcount, and an increase
in subcontractor costs of $1.1 million .
Gross margin for professional services revenue was 26% in the three months ended
October 31, 2021 compared to 16% for the three months ended October 31, 2020 .
The increase in margin is primarily due to the increase in revenue, and a lower
than proportionate increase in cost of professional services revenue. We
continue to invest in headcount for our professional services organization that
we believe will be needed as we continue to grow and expect travel related costs
will increase in the future as COVID-19 risks and travel restrictions abate. Our
gross margin for professional services may fluctuate, decline or be negative in
the near-term as we seek to expand our professional services business.
Operating Expenses
Research and development
Three Months Ended October 31, Change
2021 2020 $ %
(dollars in thousands)
Research and development $ 63,763 $ 46,688 $ 17,075 37 %
Research and development expense increased by $17.1 million , or 37%, in the
three months ended October 31, 2021 compared to the same period of the prior
year as we continued to invest in the development of new and existing offerings.
Personnel and related costs increased by $15.4 million primarily as a result of
growth in headcount. Cloud hosting costs increased by $0.9 million and
consulting expense increased by $0.7 million . The increase in personnel and
related costs included an increase of $7.4 million in salaries and related
taxes, an increase of $6.0 million in stock-based compensation expense, an
increase of $1.0 million in acquisition-related compensation and an increase of
$0.6 million in benefits expense.
34
--------------------------------------------------------------------------------
Table of Contents
Sales and marketing
Three Months Ended October 31, Change
2021 2020 $ %
(dollars in thousands)
Sales and marketing $ 94,953 $ 64,474 $ 30,479 47 %
Sales and marketing expense increased by $30.5 million , or 47%, in the three
months ended October 31, 2021 compared to the same period of the prior year.
This increase was primarily due to an increase of $25.7 million in personnel and
related costs and a $0.9 million increase in software and equipment expense as
we continued to increase our sales and marketing headcount. In addition,
marketing expenses increased by $2.3 million and consulting expenses increased
by $1.1 million . The increase in personnel and related costs included an
increase of $16.4 million in salaries and related taxes, an increase of
$6.0 million commissions expense related to the amortization of contract
acquisition costs, an increase of $1.6 million in benefits expense and
$0.4 million in stock-based compensation expense.
General and administrative
Three Months Ended October 31, Change
2021 2020 $ %
(dollars in thousands)
General and administrative $ 30,555 $ 23,705 General and administrative expense increased by$6.9 million , or 29%, in the three months endedOctober 31, 2021 compared to the same period of the prior year. This increase was primarily due to an increase of$2.7 million in legal and professional expenses. Personnel and related costs also increased$2.5 million due to growth in headcount. Bad debt expense increased$1.0 million and consulting expense also increased$0.4 million . The increase in personnel and related costs included increases of$1.5 million in stock-based compensation and$1.4 million in salaries and related taxes which were partially offset by a decrease in other miscellaneous employee related expenses of$0.4 million . Other Expense, Net Three Months Ended October 31, Change 2021 2020 $ % (dollars in thousands) Other expense, net $ (6,998)$ (84) $ (6,914) 8,231 % Other expense, net was$7.0 million in the three months endedOctober 31, 2021 compared to$0.1 million in the same period of the prior year. This increase in other expense, net was primarily due to an increase of$6.4 million in interest expense due to issuance of long-term debt during the first quarter of the current fiscal year and an increase of$0.5 million in foreign currency loss relating to remeasurement of certain asset and liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. Provision for Income Taxes Three Months Ended October 31, Change 2021 2020 $ % (dollars in thousands) Provision for income taxes $ 2,850 $
653
The provision for income taxes increased by$2.2 million in the three months endedOctober 31, 2021 compared to the same period of the prior year. Our effective tax rate was (6)% and (2)% of our net loss before taxes for the three months endedOctober 31, 2021 and 2020, respectively. Our effective tax rate is affected by recurring items, such as tax rates in jurisdictions outsidethe Netherlands and the relative amounts of income we earn in those jurisdictions. The increase in tax expense is driven primarily by growth in foreign jurisdictions for which are not subject to valuation allowances or net operating losses. 35
--------------------------------------------------------------------------------
Table of Contents
Comparison of Six Months Ended October 31, 2021 and 2020
Revenue
Six Months Ended October 31, Change
2021 2020 $ %
(dollars in thousands)
Revenue
License - self-managed $ 34,338 $ 30,393 $ 3,945 13 %
Subscription - self-managed and SaaS 333,104 225,158 107,946 48 %
Total subscription revenue 367,442 255,551 111,891 44 %
Professional services 31,633 18,213 13,420 74 %
Total revenue $ 399,075 $ 273,764 $ 125,311 46 %
Total revenue increased by $125.3 million , or 46%, in the six months ended
October 31, 2021 , compared to the same period of the prior year.
Total subscription revenue increased $111.9 million , or 44%, in the six months
ended October 31, 2021 compared to the same period of the prior year. The
increase in revenue was primarily caused by volume-driven increases from new
business, as existing customers purchased additional subscriptions and we grew
our subscription customer base to over 17,000 customers compared to over 12,900
customers in the same period of the prior year.
Professional services revenue increased by $13.4 million , or 74%, in the six
months ended October 31, 2021 , compared to the same period of the prior year.
The increase in professional services revenue was attributable to increased
adoption of our professional services offerings.
Cost of Revenue and Gross Margin
Six Months Ended October 31, Change
2021 2020 $ %
(dollars in thousands)
Cost of revenue
Cost of license - self-managed $ 741 $ 693 $ 48 7 %
Cost of subscription - self-managed and SaaS 79,021 55,038 23,983 44 %
Total cost of revenue - subscription 79,762 55,731 24,031 43 %
Cost of professional services 23,784 17,548 6,236 36 %
Total cost of revenue $ 103,546 $ 73,279 $ 30,267 41 %
Gross profit $ 295,529 $ 200,485 $ 95,044 47 %
Gross margin:
License - self-managed 98 % 98 %
Subscriptions - self-managed and SaaS 76 % 76 %
Total subscription margin 78 % 78 %
Professional services 25 % 4 %
Total gross margin 74 % 73 %
Total cost of subscription revenue increased by $24.0 million , or 43%, in the
six months ended October 31, 2021 compared to the same period of the prior year.
This increase was primarily due to an increase of $17.0 million in cloud hosting
costs and an increase of $4.1 million in personnel and related costs due to
growth in headcount in our support organization. In addition, partner fees
expenses increased by $1.2 million and consulting costs increased
$0.5 million . The increase in personnel and related costs includes an increase
of $2.9 million in salaries and related taxes, an increase of $1.0 million in
stock-based compensation expense and a $0.2 million increase in employee
benefits expense.
Total subscription margin was flat at 78% for each of the six months ended
October 31, 2021 compared to the six months ended October 31, 2020 .
36
--------------------------------------------------------------------------------
Table of Contents
Cost of professional services revenue increased by $6.2 million , or 36%, in the
six months ended October 31, 2021 compared to the same period of the prior
year. This increase was primarily due to an increase of $3.5 million in
personnel and related costs, including increases of $2.6 million in salaries and
related taxes and $0.9 million in stock-based compensation. Subcontractor costs
also increased $2.2 million .
Gross margin for professional services revenue was 25% in the six months ended
October 31, 2021 compared to 4% in the six months ended October 31, 2020 . The
increase in margin is primarily due to the increase in revenue, and a lower than
proportionate increase in cost of professional services revenue. We continue to
invest in headcount for our professional services organization that we believe
will be needed as we continue to grow and expect travel related costs will
increase in the future as COVID-19 risks and travel restrictions abate. Our
gross margin for professional services may fluctuate, decline or be negative in
the near-term as we seek to expand our professional services business.
Operating Expenses
Research and development
Six Months Ended October 31, Change
2021 2020 $ %
(dollars in thousands)
Research and development $ 123,145 $ 92,366 $ 30,779 33 %
Research and development expense increased by $30.8 million , or 33%, in the six
months ended October 31, 2021 compared to the same period of the prior year as
we continued to invest in the development of new and existing offerings.
Personnel and related costs increased $27.6 million and software and equipment
expense increased $0.5 million primarily as a result of growth in
headcount. Cloud hosting costs also increased $1.3 million and consulting
expense increased $1.1 million . The increase in personnel and related costs
includes an increase of $13.9 million in salaries and related taxes, an increase
of $11.0 million in stock-based compensation expense, an increase of
$1.1 million in employee benefits expense and an increase of $1.0 million in
acquisition related compensation.
Sales and marketing
Six Months Ended October 31, Change
2021 2020 $ %
(dollars in thousands)
Sales and marketing $ 182,986 $ 120,625 $ 62,361 52 %
Sales and marketing expense increased by $62.4 million , or 52%, in the six
months ended October 31, 2021 compared to the same period of the prior year.
This increase was primarily due to an increase of $49.9 million in personnel
related costs and a $1.6 million increase in software and equipment charges as
we continued to increase our sales and marketing headcount. In addition,
marketing expenses increased $7.8 million , consulting expense increased
$1.7 million and travel expense increased $1.2 million . The increase in
personnel and related costs includes an increase of $29.1 million in salaries
and related taxes, an increase of $12.0 million in commission expense, an
increase of $4.1 million in stock-based compensation expense related to the
amortization of contract acquisition costs and an increase of $2.7 million in
employee benefits expense.
General and administrative
Six Months Ended October 31, Change
2021 2020 $ %
(dollars in thousands)
General and administrative $ 57,607 $ 45,434 $ 12,173 27 %
General and administrative expense increased by $12.2 million , or 27%, in the
six months ended October 31, 2021 compared to the same period of the prior year.
This increase was primarily due to an increase of $5.1 million in legal and
professional fees and a $4.2 million increase in personnel related costs. Bad
debt expense also increased $1.1 million related to expected credit losses on
accounts receivable and consulting expense increased $1.1 million . The increase
in personnel and related costs includes an increase of $3.1 million in
stock-based compensation expense and an increase of $1.8 million in salaries and
related taxes which were partially offset by a decrease in other miscellaneous
employee related expenses of $0.7 million .
37
--------------------------------------------------------------------------------
Table of Contents
Other Income (Expense), Net
Six Months Ended October 31, Change
2021 2020 $ %
(dollars in thousands)
Other income (expense), net $ (7,800) $ 10,801 $ (18,601) (172) %
Other expense, net was $7.8 million in the six months ended October 31, 2021
compared to net income of $10.8 million for the same period of the prior year.
This was due to a decrease in foreign currency gain of $10.3 million and an
increase of $8.3 million in interest expense due to issuance of long-term debt
during the first quarter of the current fiscal year.
Provision for Income Taxes
Six Months Ended October 31, Change
2021 2020 $ %
(dollars in thousands)
Provision for income taxes $ 5,503 $ 1,020 The provision for income taxes increased$4.5 million in the six months endedOctober 31, 2021 compared to the same period in the prior year. Our effective tax rate was (7)% and (2)% of our net loss before taxes for the six months endedOctober 31, 2021 and 2020, respectively. Our effective tax rate is affected by recurring items, such as tax rates in jurisdictions outsidethe Netherlands and the relative amounts of income we earn in those jurisdictions. The increase in tax expense from the prior year is due to increase in income in foreign jurisdictions and increase in withholding taxes. Liquidity and Capital Resources As ofOctober 31, 2021 , we had cash and cash equivalents and restricted cash of$876.1 million and$2.9 million , respectively, and working capital of$629.5 million . Our restricted cash consists primarily of cash on deposit with financial institutions in support of letters of credit in favor of landlords for non-cancelable lease agreements. We have generated significant operating losses from our operations as reflected in our accumulated deficit of$694.8 million as ofOctober 31, 2021 . We have historically incurred, and expect to continue to incur, operating losses and may generate negative cash flows from operations on an annual basis for the foreseeable future due to the investments we intend to make as described above, and as a result, we may require additional capital resources to execute on our strategic initiatives to grow our business. We believe that our existing cash and cash equivalents will be sufficient to fund our operating and capital needs for at least the next 12 months, despite the uncertainty in the changing market and economic conditions related to COVID-19. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary as a result of, and our future capital requirements, both near-term and long-term, will depend on, many factors, including our growth rate, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing activities, the timing of new introductions of solutions or features, and the continuing market acceptance of our solutions and services. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. InJuly 2021 , we issued long term debt of$575.0 million , and we may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results and financial condition would be adversely affected. The following table summarizes our cash flows for the periods presented: Six Months Ended October 31, 2021 2020 (in thousands) Net cash provided by operating activities $ 3,668$ 4,709 Net cash used in investing activities$ (111,568) $ (336) Net cash provided by financing activities$ 586,597
38
--------------------------------------------------------------------------------
Table of Contents
Net Cash Provided by Operating Activities
Net cash provided by operating activities during the six months ended
October 31, 2021 was $3.7 million , which resulted from a net loss of
$81.5 million and net cash outflow of $16.3 million from changes in operating
assets and liabilities, fully offset by non-cash charges of $101.5 million .
Non-cash charges primarily consisted of $59.6 million for stock-based
compensation expense, $28.6 million for amortization of deferred contract
acquisition costs, $9.3 million of depreciation and intangible asset
amortization expense, $3.8 million in non-cash operating lease costs,
amortization of debt issuance costs of $0.3 million expense and $0.1 million of
other expenses which were partially offset by an increase in deferred income
taxes of $0.2 million . The net cash outflow from changes in operating assets and
liabilities was the result of an increase in deferred contract acquisition costs
of $39.3 million as our sales commissions increased due to increased business
volume, an increase of $1.1 million in prepaid expenses and other assets, a
$4.0 million decrease in operating lease liabilities and a decrease of $3.5
million in deferred revenue. These outflows were partially offset by a net
increase of $31.0 million in accounts payable, accrued expenses, accrued
compensation and benefits and a decrease in accounts receivable of $0.5 million .
Net cash provided by operating activities during the six months ended October
31, 2020 was $4.7 million , which resulted from a net loss of $48.2 million
adjusted for non-cash charges of $59.0 million and net cash outflow of $6.2
million from changes in operating assets and liabilities. Non-cash charges
primarily consisted of $40.1 million for stock-based compensation expense, $18.2
million for amortization of deferred contract acquisition costs, $8.6 million of
depreciation and intangible asset amortization expense and $3.4 million in
non-cash operating lease costs which were partially offset by a foreign currency
transaction gain of $10.9 million and a decrease in deferred income taxes of
$0.3 million . The net cash outflow from changes in operating assets and
liabilities was the result of an increase in deferred contract acquisition costs
of $37.9 million as our sales commissions increased due to increased business
volume, a net decrease of $4.4 million in accounts payable, accrued expenses,
accrued compensation and benefits, and a $3.5 million decrease in operating
lease liabilities. These outflows were partially offset by a $34.4 million
increase in deferred revenue and a decrease of $5.1 million in prepaid expenses
and other assets.
Net Cash Used in Investing Activities
Net cash used in investing activities during the six months ended October 31,
2021 was $111.6 million due to cash used in the acquisitions of $108.1 million ,
capitalization of $2.7 million in internal-use software costs and $0.8 million
of capital expenditures.
Net cash used in investing activities during the six months ended October 31,
2020 was $0.3 million due to $1.7 million of capital expenditures which was
partially offset by cash provided by other investing activities of $1.3 million
during the period.
Net Cash Provided by Financing Activities
Net cash provided by financing activities during the six months ended
October 31, 2021 was $586.6 million due to the proceeds of $575.0 million from
debt issuance and $20.8 million of proceeds from option exercises during the
period which were partially offset by $9.2 million payments of debt issuance
costs.
Net cash provided by financing activities during the six months ended October
31, 2020 was $45.2 million due to proceeds from option exercises during the
period.
Off Balance Sheet Arrangements
We did not have during the periods presented and we do not currently have any
off balance sheet financing arrangements or any relationships with any
unconsolidated entities or financial partnerships, including entities referred
to as structured finance or special purpose entities, which were established for
the purpose of facilitating off balance sheet arrangements or other
contractually narrow or limited purposes.
Contractual Obligations and Commitments
Our principal commitments consist of obligations under our operating leases,
which are primarily for office space, and purchase commitments to our cloud
hosting providers. Except for those disclosed in Note 7 "Senior Notes" of our
accompanying Notes to Condensed Consolidated Financial Statements included
elsewhere in this Quarterly Report on Form 10-Q, there have been no material
changes to our contractual obligations and commitments discussed in our Annual
Report on Form 10-K for the year ended April 30, 2021 .
39--------------------------------------------------------------------------------
Table of Contents Recently Issued Accounting Pronouncements Refer to Note 2 of our accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements and new accounting pronouncements not yet adopted as of the date of this report.
© Edgar Online, source
