Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. 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” included elsewhere in this Annual Report on Form 10-K. Our fiscal year end is April 30.
This section of our Annual Report on Form 10-K discusses our financial condition and results of operations for the years ended April 30, 2021 and 2020 and year-to-year comparisons between the years ended April 30, 2021 and 2020. A discussion of our financial condition and results of operations for the year ended April 30, 2019 and year-to-year comparisons between years ended April 30, 2020 and 2019 that is not included in this Annual Report on Form 10-K can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended April 30, 2020, filed with the SEC on June 26, 2020, and is incorporated by reference herein.
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 of Elasticsearch 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.
In February 2021, with the release of version 7.11 of the Elastic Stack, we changed the way we license Elasticsearch and Kibana, the visualization layer for data stored in Elasticsearch. We moved the source code that had historically been licensed under the Apache License, Version 2.0 open source license (“Apache 2.0”), to be dual licensed under ELv2, our proprietary source available license, and SSPL, at the user’s election. ELv2 is a permissive source available license, allowing free use, modification, creation of derivative works, and redistribution, while providing protection from cloud service providers who offer these products as a service without collaborating with us. SSPL is a source available license that provides many of the freedoms of an open source license, but with certain restrictions. This source code license change had no effect on our customers or the vast majority of our users.
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.
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 93%, 92% and 91% of total
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revenue in the years ended April 30, 2021, 2020, and 2019, respectively. We also generate revenue from consulting and training services.
We had over 15,000 customers, over 11,300 customers and over 8,100 customers as of April 30, 2021, 2020, and 2019, respectively. 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 number of customers who represented greater than $100,000 in ACV was over 730, over 610, and over 440 as of April 30, 2021, 2020 and 2019, respectively.
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 customers who have adopted our software, as well as departmental decision-makers and senior executives who 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 2,179 employees as of April 30, 2021.
We have experienced significant growth, with revenue increasing to $608.5 million in the year ended April 30, 2021 from $427.6 million in the year ended April 30, 2020 and $271.7 million in the year ended April 30, 2019, representing year-over-year growth of 42% for the year ended April 30, 2021 and 57% for the year ended April 30, 2020. In the year ended April 30, 2021, revenue from outside the United States accounted for 45% of our total revenue. For our non-U.S. operations, the majority of our revenue and expenses are denominated in currencies such as the Euro and British pound. No customer represented more than 10% of our total revenue in the years ended April 30, 2021, 2020, and 2019. We have not been profitable to date. In the years ended April 30, 2021, 2020 and 2019, we incurred net losses of $129.4 million, $167.2 million and $102.3 million, respectively. Our net cash provided by operating activities was $22.5 million in the year ended April 30, 2021 and cash used in operating activities in the years ended April 30, 2020 and 2019 was $30.6 million and $23.9 million, respectively. We have experienced losses in each year since our incorporation and as of April 30, 2021, had an accumulated deficit of $613.3 million. We expect we will continue to incur net losses for the foreseeable future. There can be no assurance as to when we may become profitable.
COVID-19
In March 2020, the World 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 to 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 is becoming even more evident. In addition, we have benefited from lower spending on travel due to COVID-19 travel restrictions and from holding events virtually, and we expect lower travel costs to continue 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
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the virus to our employees, our 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 our 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 increase the pace of our investments in the business in 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 I, Item 1A of this Annual Report on Form 10-K 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.
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 the U.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.
An indication of how our customer relationships have expanded over time is through our Net Expansion Rate, which is based upon trends in the ACV of customers that have entered into annual subscription agreements. To calculate an expansion rate as of the end of a given month, we start with the ACV from all such customers as of twelve months prior to that month end, or Prior Period Value. We then calculate the ACV from these same customers as of the given month end, or Current Period Value, which includes any growth in the value of their subscriptions 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. We believe that our Net Expansion Rate provides useful information about the evolution of our business’ existing customers. The Net Expansion Rate includes the dollar-weighted value of our subscriptions 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%. Customers who 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% at the end of fiscal 2021.
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.
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Increasing adoption of Elastic Cloud. Elastic Cloud, our family of SaaS products that includes Elasticsearch Service and Site Search Service, is an important growth opportunity for our business. Organizations are increasingly looking for SaaS 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. In the years ended April 30, 2021, 2020 and 2019, Elastic Cloud contributed 27%, 22% and 17% of our total revenue, respectively. We believe that offering a SaaS 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, an increase in the relative contribution of Elastic Cloud to our business could adversely impact our gross margin as a result of the associated hosting costs.
Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. In particular, free cash flow is not a substitute for cash used in operating activities. Additionally, the utility of free cash flow as a measure of our financial performance and liquidity is further limited as it does not represent the total increase or decrease in our cash balance for a given period. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with U.S. GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.
We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, operating results or future outlook.
Non-GAAP Gross Profit and Non-GAAP Gross Margin
We define non-GAAP gross profit and non-GAAP gross margin as GAAP gross profit and GAAP gross margin, respectively, excluding stock-based compensation expense, employer payroll taxes on employee stock transactions, and amortization of acquired intangible assets. We believe non-GAAP gross profit and non-GAAP gross margin provide our management and investors consistency and comparability with our past financial performance and facilitate period-to-period comparisons of operations, as these metrics generally eliminate the effects of certain variables from period to period for reasons unrelated to overall operating performance.
Year Ended April 30,
(in thousands)
Employer payroll taxes on employee stock transactions 1,335 527 38
Non-GAAP Operating Loss and Non-GAAP Operating Margin
We define non-GAAP operating loss and non-GAAP operating margin as GAAP operating loss and GAAP operating margin, respectively, excluding stock-based compensation expense, employer payroll taxes on employee stock transactions, amortization of acquired intangible assets, and acquisition-related expenses. We believe non-GAAP operating loss and non-GAAP operating margin provide our management and investors consistency and comparability with our past financial performance and facilitate period-to-period comparisons of operations, as these metrics generally eliminate the effects of certain variables from period to period for reasons unrelated to overall operating performance.
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Year Ended April 30,
(in thousands)
Employer payroll taxes on employee stock transactions 14,376 7,493 1,814
Acquisition-related expenses — 17,974 948
Operating margin (21) % (40) % (37) %
Free Cash Flow and Free Cash Flow Margin
Free cash flow is a non-GAAP financial measure that we define as net cash provided by (used in) operating activities less purchases of property and equipment and capitalized internal-use software costs. Free cash flow margin is calculated as free cash flow divided by total revenue. We believe that free cash flow and free cash flow margin are useful indicators of liquidity that provide information to management and investors about the amount of cash generated from our core operations that, after the purchases of property and equipment, can be used for strategic initiatives, including investing in our business and selectively pursuing acquisitions and strategic investments. We further believe that historical and future trends in free cash flow and free cash flow margin, even if negative, provide useful information about the amount of net cash provided by (used in) operating activities that is available (or not available) to be used for strategic initiatives. For example, if free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives. One limitation of free cash flow and free cash flow margin is that they do not reflect our future contractual commitments. Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period.
The following table presents our cash flows for the periods presented and a reconciliation of free cash flow and free cash flow margin to net cash provided by (used in) operating activities, the most directly comparable financial measure calculated in accordance with GAAP:
Year Ended April 30,
(in thousands)
Less: Purchases of property and equipment (3,912) (5,063) (3,447)
Less: Capitalization of internal-use software (317) — —
Net cash used in investing activities $ (1,518) $ (29,187) $ (8,283)
Free cash flow margin 3 % (8) % (10) %
Calculated Billings
We define calculated billings as total revenue plus the increase in total deferred revenue as presented on or derived from our consolidated statements of cash flows less the (increase) decrease in total unbilled accounts receivable in a given period. Calculated billings exclude deferred revenue and unbilled accounts receivable acquired through acquisitions in the period of the acquisition. We typically invoice our customers annually in advance, and to a lesser extent multi-year in advance, quarterly in advance, monthly in advance, monthly in arrears or upon delivery. Our management uses calculated billings to understand and evaluate our near-term cash flows and operating results. The following table presents our calculated billings for the periods presented and a reconciliation of calculated billings to total revenue, the most directly comparable financial measure calculated in accordance with GAAP:
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Year Ended April 30,
(in thousands)
Less: Increase in unbilled accounts receivable (2,582) (592) (571)
Components of Results of Operations
Revenue
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
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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 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, 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 (Benefit from) Income Taxes
Provision for (benefit from) 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 following tables set forth our results of operations for the periods presented in dollars and as a percentage of our total revenue. The period to period comparison of results is not necessarily indicative of results for future periods.
Year Ended April 30,
(in thousands)
Revenue
Cost of revenue (1)(2)(3)
Operating expenses (1)(2)(3)(4)
Provision for (benefit from) income taxes 7,720 (1,968) 4,388
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(1) Includes stock-based compensation expense as follows:
Year Ended April 30,
(in thousands)
Cost of Revenue
Cost of subscription - self managed and SaaS $ 7,105 $ 4,147 $ 3,383
(2) Includes employer payroll taxes on employee stock transactions as follows:
Year Ended April 30,
(in thousands)
Cost of Revenue
Cost of subscription - self managed and SaaS $ 674 $ 349 $ 28
Total employer payroll tax on stock transactions $ 14,376 $ 7,493 $ 1,814
(3) Includes amortization of acquired intangibles as follows:
Year Ended April 30,
(in thousands)
Cost of Revenue
Cost of subscription - self-managed and SaaS 7,051 5,820 2,421
(4) Includes acquisition-related expenses as follows:
Year Ended April 30,
(in thousands)
Research and development $ — $ 34 $ 689
Sales and marketing — 522 —
Total acquisition-related expenses $ — $ 17,974 $ 948
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The following table sets forth selected consolidated statements of operations data for each of the periods indicated as a percentage of total revenue:
Year Ended April 30,
Revenue
License - self-managed 11 % 13 % 14 %
Subscription - self-managed and SaaS 82 % 79 % 77 %
Total subscription revenue 93 % 92 % 91 %
Professional services 7 % 8 % 9 %
Cost of revenue
Cost of license - self-managed 0 % 0 % 0 %
Cost of subscription - self-managed and SaaS 20 % 20 % 20 %
Total cost of revenue - subscription 20 % 20 % 20 %
Cost of professional services 6 % 9 % 9 %
Total cost of revenue 26 % 29 % 29 %
Operating expenses
Research and development 33 % 39 % 37 %
Sales and marketing 45 % 51 % 54 %
General and administrative 17 % 21 % 17 %
Total operating expenses 95 % 111 % 108 %
Operating loss (21) % (40) % (37) %
Other income (expense), net 1 % 0 % 1 %
Loss before income taxes (20) % (40) % (36) %
Provision for (benefit from) income taxes 1 % (1) % 2 %
Comparison of Fiscal Years Ended April 30, 2021 and 2020
Revenue
Year Ended April 30, Change
(in thousands)
Revenue
Total subscription revenue increased $175.2 million, or 45%, in the year ended April 30, 2021 compared to 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 15,000 customers in the year ended April 30, 2021 compared to over 11,300 customers in the prior year.
Professional services revenue increased by $5.7 million, or 16%, in the year ended April 30, 2021 compared to the prior year. The increase in professional services revenue was attributable to increased adoption of our professional services consulting offerings.
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Cost of Revenue and Gross Margin
Year Ended April 30, Change
(in thousands)
Cost of revenue
Gross margin:
License - self-managed 98 % 98 %
Subscriptions - self-managed and SaaS 76 % 75 %
Total subscription margin 78 % 78 %
Professional services 6 % (4) %
Total gross margin 74 % 71 %
Total cost of subscription revenue increased by $36.7 million, or 43%, in the year ended April 30, 2021 compared to the prior year. This increase was primarily due to an increase of $26.2 million in cloud infrastructure costs and an increase of $8.1 million in personnel and related charges from growth in headcount in our support organization. In addition, amortization of acquired intangible assets increased $1.2 million. These increases were partially offset by a decrease of $1.7 million in travel expenses due to COVID-19 related travel restrictions. The increase in personnel and related costs includes an increase of $4.3 million in salaries and related taxes and an increase of $3.0 million in stock-based compensation expense. Total subscription margin remained flat at 78% in the year ended April 30, 2021 compared to the prior year.
Cost of professional services revenue increased by $1.6 million, or 4%, in the year ended April 30, 2021 compared to the prior year. This increase was primarily due to an increase of $5.9 million in personnel and related costs, including increases of $3.8 million in salaries and related taxes and $1.8 million in stock-based compensation driven by an increase in headcount in our consulting and training organizations. In addition, subcontractor costs increased $0.5 million. These increases were partially offset by a decrease of $3.4 million in travel expenses and a decrease of $1.3 million in training facility costs due to COVID-19 related restrictions.
Gross margin for professional services revenue was 6% in the year ended April 30, 2021 compared to (4)% for the prior year. The increase in margin is primarily due to the increase in revenue, and a lower than proportionate increase in cost of professional services. The cost of professional services remained relatively flat due to a decrease in travel related costs as we shifted to virtual delivery of professional services in light of travel restrictions due to COVID-19. In recent periods, we have invested 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 once travel restrictions lift. 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
Year Ended April 30, Change
(in thousands)
Research and development expense increased by $33.8 million, or 20%, in the year ended April 30, 2021 compared to the prior year as we continued to invest in the development of new and existing offerings. Personnel and related costs increased by $35.0 million, and software and equipment expense increased by $2.9 million, primarily as a result of growth in headcount. In addition, cloud infrastructure costs related to our research and development activities increased $1.8 million. These increases were partially offset by a decrease in travel expenses of $7.6 million due to COVID-19 travel restrictions and holding events virtually. The increase in personnel and related costs includes an increase of $21.1 million in salaries and related taxes, an increase of $11.6 million in stock-based compensation expense and an increase of $2.4 million in employee benefits expense.
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Sales and marketing
Year Ended April 30, Change
(in thousands)
Sales and marketing expense increased by $54.8 million, or 25%, in the year ended April 30, 2021 compared to the prior year. This increase was primarily due to an increase of $53.8 million in personnel related costs and a $1.1 million increase in software and equipment charges as we continued to increase our sales and marketing headcount. In addition, marketing expenses increased by $7.6 million and amortization of intangible assets increased by $2.4 million. These increases were partially offset by a decrease of $13.3 million in travel expenses due to COVID-19 travel restrictions and holding events virtually. The increase in personnel and related costs includes an increase of $26.3 million in salaries and related taxes, an increase of $12.2 million in stock-based compensation expense, an increase of $11.6 million in commissions expense related to the amortization of contract acquisition costs and an increase of $3.3 million in employee benefits expense.
General and administrative
Year Ended April 30, Change
(in thousands)
General and administrative expense increased by $12.2 million, or 13%, in the year ended April 30, 2021 compared to the prior year. This increase was primarily due to an increase of $3.3 million in personnel related costs and a $0.6 million increase in software and equipment charges as we continued to increase our general and administrative headcount. In addition, bad debt expense related to expected credit losses on accounts receivable and write-off of uncollectible balances increased by $4.2 million, consulting expense increased by $1.8 million and insurance, business taxes, and charitable donations increased by $2.6 million. These increases were largely offset by a decrease of $1.6 million in travel expenses due to COVID-19 travel restrictions. The increase in personnel and related costs includes an increase of $9.5 million in salaries and related taxes, an increase of $5.0 million in stock-based compensation expense, an increase of $0.7 million in employee benefits expense and an increase of $0.5 million in recruiting costs, which were partially offset by a decrease in acquisition related compensation of $12.5 million.
Other Income, Net
Year Ended April 30, Change
(in thousands)
Other income, net increased by $5.8 million, or 296%, in the year ended April 30, 2021 compared to the prior year. This increase was due to a net increase in foreign currency gains of $9.9 million related primarily 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. The foreign currency gains were partially offset by a decrease of $4.0 million in interest income due to lower interest rates.
Provision for (Benefit from) Income Taxes
Year Ended April 30, Change
(in thousands)
The provision for income taxes was $7.7 million in the year ended April 30, 2021 compared to a benefit from income taxes of $2.0 million in the prior year. The additional tax expense is primarily due to an increase of $4.6 million in income taxes from foreign subsidiaries. A tax benefit associated with stock-based compensation of $100.0 million was offset by the provision of a valuation allowance of $100.0 million for deferred tax assets in the United States, the Netherlands, and the United Kingdom. Our effective tax rate was (6.3)% and 1.2% of our net loss before taxes for the years ended April 30, 2021 and 2020, respectively.
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Quarterly Results of Operations
The following tables set forth our unaudited quarterly consolidated statements of operations data for each of the quarters indicated, as well as the percentage that each line item represents of our total revenue for each quarter presented. The information for each quarter has been prepared on a basis consistent with our audited consolidated financial statements included in this Annual Report on Form 10-K, and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the financial information contained in those financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following quarterly financial data should be read in conjunction with our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Three Months Ended
Revenue
Cost of revenue (1)(2)(3)
Operating expenses (1)(2)(3)(4)
(1) Includes stock-based compensation expense as follows:
Three Months Ended
Cost of Revenue
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(2) Includes employer payroll taxes on employee stock transactions as follows:
Three Months Ended
Cost of Revenue
(3) Includes amortization of acquired intangibles as follows:
Three Months Ended
Cost of Revenue
(4) Includes acquisition-related expenses as follows:
Three Months Ended
Research and development $ — $ — $ — $ — $ — $ — $ — $ 34
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The following table sets forth selected consolidated statements of operations data for each of the periods indicated as a percentage of total revenue:
Three Months Ended
Revenue
Professional services 7 % 6 % 7 % 6 % 8 % 8 % 9 % 8 %
Cost of revenue (1)(2)(3)
Cost of license - self-managed 0 % 0 % 0 % 0 % 0 % 0 % 0 % 0 %
Cost of professional services 6 % 7 % 7 % 7 % 8 % 9 % 8 % 9 %
Operating expenses (1)(2)(3)(4)
Other income (expense), net — % (1) % 0 % 9 % 1 % (2) % 0 % 1 %
Provision for (benefit from) income taxes 3 % 1 % 0 % 1 % (2) % 0 % (1) % 1 %
(1) Includes stock-based compensation expense as follows:
Three Months Ended
Cost of Revenue
Cost of subscription - self managed and SaaS 1 % 1 % 1 % 1 % 1 % 1 % 1 % 1 %
Cost of professional services 1 % 1 % 1 % 1 % 1 % 1 % 0 % 1 %
Research and development 6 % 6 % 5 % 5 % 5 % 5 % 6 % 6 %
Sales and marketing 5 % 5 % 6 % 5 % 5 % 4 % 5 % 5 %
General and administrative 3 % 3 % 2 % 2 % 2 % 3 % 2 % 2 %
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(2) Includes employer payroll taxes on employee stock transactions as follows:
Three Months Ended
Cost of Revenue
Cost of subscription - self managed and SaaS 0 % 0 % 0 % 0 % 0 % 0 % 0 % 0 %
Cost of professional services 0 % 0 % 0 % 0 % 0 % 0 % 0 % 0 %
Research and development 1 % 1 % 0 % 1 % 0 % 0 % 1 % 1 %
Sales and marketing 1 % 1 % 1 % 1 % 1 % 1 % 2 % 1 %
General and administrative 0 % 2 % 0 % 0 % 0 % 0 % 1 % 1 %
Total stock-based compensation expense 2 % 4 % 1 % 2 % 1 % 1 % 4 % 3 %
(3) Includes amortization of acquired intangibles as follows:
Three Months Ended
Cost of Revenue
Cost of license - self- managed 0 % 0 % 0 % 0 % 0 % 0 % 0 % 0 %
Cost of subscription - self- managed and SaaS 1 % 1 % 1 % 2 % 2 % 3 % 1 % 1 %
Sales and marketing 1 % 1 % 1 % 1 % 1 % 1 % 0 % 0 %
Total amortization of acquired intangibles 2 % 2 % 2 % 3 % 3 % 4 % 1 % 1 %
(4) Includes acquisition-related expenses as follows:
Three Months Ended
Research and development 0 % 0 % 0 % 0 % 0 % 0 % 0 % 0 %
Sales and marketing 0 % 0 % 0 % 0 % 0 % 0 % 0 % 0 %
General and administrative 0 % 0 % 0 % 0 % 0 % 1 % 14 % 3 %
Total acquisition-related expenses 0 % 0 % 0 % 0 % 0 % 1 % 14 % 3 %
Quarterly Trends in Revenue and Expense
Our quarterly total subscription revenue increased sequentially in each of the periods presented due to the expansion of our existing customer subscription footprint and an increase in the number of new customers. Historically, we have experienced quarterly fluctuations and seasonality based on the timing of entering into new agreements with customers, the timing of renewals, and the mix between annual and monthly contracts entered in each reporting period. Revenue trends are impacted by seasonality in our sales cycle which generally reflects a trend to greater revenue in our second and fourth quarters and lower revenue in our first and third quarters, though we believe this trend has been somewhat masked by our overall revenue growth. Because we generally invoice annually in advance for subscription agreements at least one year in duration, but we recognize the majority of the revenue ratably over the term of those agreements, a substantial portion of the revenue that we report in each period is attributable to the recognition of deferred revenue relating to subscriptions invoiced during previous periods. Consequently, increases or decreases in subscriptions in any one period typically will not be fully reflected in our revenue for that period and will positively or negatively affect our revenue in future periods. Accordingly, the effect of downturns in sales and market acceptance of our products may not be fully reflected in our results of operations until future periods. We may also experience greater variability and reduced comparability of our quarterly revenue and results with respect to timing and size of our monthly SaaS subscription contracts, particularly for smaller customers. The increase in professional services revenue was a result of an increase in standalone consulting and training services due to increased adoption of our offerings.
Our cost of revenue increased sequentially in each of the quarters presented, primarily driven by expanded adoption of Elastic Cloud by existing and new customers, which resulted in increased hosting costs, as well as growth in personnel costs as we grew our support and professional services teams.
Our total gross margin increased in the year ended April 30, 2021 due to an increase in our professional services margin, which may fluctuate, decline or be negative in the near-term as we seek to expand our professional services business.
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We expect our revenue from Elastic Cloud to continue to increase as a percentage of total revenue, which may adversely impact our gross margin as a result of the associated hosting costs.
Our operating expenses generally increased sequentially over the periods presented as we grew the associated headcount and other costs.
We are subject to income taxes in the Netherlands, the United States, and numerous other jurisdictions. Our tax expense fluctuates between quarters primarily as a result of seasonally higher earnings in the second and fourth quarters and due to the impact of tax rates in foreign jurisdictions, and the relative amounts of income we earn in those jurisdictions.
Liquidity and Capital Resources
As of April 30, 2021, we had cash and cash equivalents and restricted cash of $400.8 million and $2.9 million, respectively, and working capital of $187.2 million. Our restricted cash constitutes cash deposits 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 $613.3 million as of April 30, 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. 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:
Year Ended April 30,
(in thousands)
Net cash used in investing activities $ (1,518) $ (29,187) $ (8,283)
Net Cash Provided By (Used in) Operating Activities
Net cash provided by operating activities during the year ended April 30, 2021 was $22.5 million, which resulted from a net loss of $129.4 million adjusted for non-cash charges of $150.2 million and net cash inflow of $1.8 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $93.7 million for stock-based compensation expense, $41.0 million for amortization of deferred contract acquisition costs, $17.2 million of depreciation and intangible asset amortization expense and $7.9 million in non-cash operating lease costs, which were partially offset by net foreign currency transaction gains of $9.5 millionand $0.1 million of other non-cash transactions. The net cash inflow from changes in operating assets and liabilities was the result of a $115.9 million increase in deferred revenue due to higher billings and a net increase of $7.2 million in accounts payable, accrued expenses and accrued compensation and benefits due to growth in our business and higher headcount. These inflows were partially offset by an increase of $24.0 million in accounts receivable due to higher billings and timing of collections from our customers, an increase in deferred contract acquisition costs of $81.1 million as our sales commissions increased due to the addition of new customers and expansion of our existing customer subscriptions, an increase of $8.3 million in prepaid and other assets and a decrease of $7.9 million in operating lease liabilities.
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Net cash used in operating activities during the year ended April 30, 2020 was $30.6 million, which resulted from a net loss of $167.2 million adjusted for non-cash charges of $117.0 million and net cash inflow of $19.6 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $60.0 million for stock-based compensation expense, $28.3 million for amortization of deferred contract acquisition costs, $12.9 million of depreciation and intangible asset amortization expense, $8.8 million of non-cash acquisition expense, $7.4 million in non-cash operating lease costs and $1.1 million of other non-cash transactions which were partially offset by a $1.5 million increase in deferred income taxes. The net cash inflow from changes in operating assets and liabilities was the result of a $85.7 million increase in deferred revenue due to higher billings and a net increase of $30.9 million in accounts payable, accrued expenses and accrued compensation and benefits due to growth in our business and higher headcount, and a decrease of $2.7 million in prepaid and other assets. These inflows were partially offset by a $46.8 million increase in accounts receivable due to higher billings and timing of collections from our customers, an increase in deferred contract acquisition costs of $46.2 million as our sales commissions increased due to the addition of new customers and expansion of our existing customer subscriptions and a $6.7 million decrease in operating lease liabilities relating to the adoption of the new lease accounting standard.
Net Cash Used in Investing Activities
Net cash used in investing activities of $1.5 millionduring the year ended April 30, 2021 was primarily due $3.9 million of capital expenditures and capitalization of $0.3 million in internal-use software costs during the period, partially offset by cash provided by other investing activities of $2.7 million.
Net cash used in investing activities of $29.2 million during the year ended April 30, 2020 was primarily due to $24.4 million cash used for the acquisition of Endgame and $5.1 million of capital expenditures during the period.
Net Cash Provided by Financing Activities
Net cash provided by financing activities of $77.3 million during the year ended April 30, 2021 was due to proceeds from option exercises during the period.
Net cash provided by financing activities of $58.5 million during the year ended April 30, 2020 was due to $61.5 million proceeds from option exercises during the period, which was partially offset by payment of withholding taxes of $2.8 million for an acquisition-related expense that was settled in ordinary shares of the Company.
Off Balance Sheet Arrangements
We did not have, during the periods presented, nor do we 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, that 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 operating leases for office space and purchase obligations. The following table summarizes our contractual obligations as of April 30, 2021:
Total Less than1 year 1-3 years 3-5 years More than5 years
(in thousands)
(1)Primarily consists of our purchase obligations under non-cancellable agreements for cloud hosting, subscription software, and sales and marketing. Actual payments under the cloud hosting capacity commitments may be higher than the total minimum depending on services used.
(2)Consists of future non-cancelable minimum rental payments under operating leases for our offices, excluding rent payments from our sub-tenants and variable operating expenses.
In addition to the contractual obligations set forth above, as of April 30, 2021, we had $2.1 million in letters of credit outstanding in favor of certain landlords for office space. These letters of credit renew annually and expire on various dates through 2023.
The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
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Purchase orders issued in the ordinary course of business are not included in the table above, as our purchase orders represent authorizations to purchase rather than binding agreements.
We have also excluded unrecognized tax benefits from the contractual obligations table above. A variety of factors could affect the timing of payments for the liabilities related to unrecognized tax benefits. Therefore, we cannot reasonably estimate the timing of such payments. We believe that these matters will likely not be resolved in the next 12 months and accordingly we have classified the estimated liability as non-current in the consolidated balance sheet. For further information see Note 13 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Critical Accounting Policies
We prepare our financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”). The preparation of financial statements in accordance with GAAP requires certain estimates, assumptions and judgments to be made that may affect our consolidated financial statements. Accounting policies that have a significant impact on our results are described in Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The accounting policies discussed in this section are those that we consider to be the most critical. We consider an accounting policy to be critical if the policy is subject to a material level of judgment and if changes in those judgments are reasonably likely to materially impact our results.
Revenue Recognition
We generate our revenue primarily from the sale of self-managed subscriptions (which include licenses for proprietary features, support, and maintenance) and SaaS subscriptions. We also generate revenue from professional services, which consist of consulting and training.
Under ASC Topic 606, Revenue from Contracts with Customers, we recognize revenue when our customer obtains control of promised products or services in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. Our contracts include varying terms and conditions, and identifying and evaluating the impact of these terms and conditions on revenue recognition requires significant judgment. In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements, we perform the following steps:
(i) identification of the contract with a customer;
We contract with customers through order forms, which in some cases are governed by master sales agreements. We determine that we have a contract with a customer when the order form has been approved, each party’s rights regarding the products or services to be transferred can be identified, the payment terms for the services can be identified, we have determined the customer has the ability and intent to pay, and the contract has commercial substance. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit, reputation, and financial or other information pertaining to the customer. At contract inception we evaluate whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract includes more than one performance obligation. We have concluded that our contracts with customers do not contain warranties that give rise to a separate performance obligation.
(ii) identification of the performance obligations in the contract;
Performance obligations promised in a contract are identified based on the products and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the products or services either on their own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the products and services is separately identifiable from other promises in the contract.
Our self-managed subscriptions include both license providing the right to use proprietary features in our software, as well as an obligation to provide support (on both open source and proprietary features) and maintenance. Our SaaS products provide access to hosted software as well as support, which we consider to be a single performance obligation.
Services-related performance obligations relate to the provision of consulting and training services. These services are distinct from subscriptions and do not result in significant customization of the software.
(iii) determination of the transaction price;
The transaction price is the total amount of consideration we expect to be entitled to in exchange for the subscriptions and services in a contract. Variable consideration is included in the transaction price if, in our judgment, it is probable that a
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significant future reversal of cumulative revenue under the contract will not occur. None of our contracts contain a significant financing component.
(iv) allocation of the transaction price to the performance obligations; and
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. For contracts that contain multiple performance obligations, we allocate the transaction price to each performance obligation based on a relative standalone selling price (“SSP”). The SSP is determined based on the prices at which we separately sell these products assuming the majority of these fall within a pricing range. In instances where SSP is not directly observable, such as when we do not sell the software license separately, we derive the SSP using information that may include market conditions and other observable and unobservable inputs which can require significant judgment. There is typically more than one SSP for individual products and services due to the stratification of those products and services by quantity, term of the subscription, sales channel and other circumstances. If one of the performance obligations is outside of the SSP range, we allocate the transaction price considering the midpoint of the SSP range. We also consider if there are any additional material rights inherent in a contract, and if so, we allocate a portion of the transaction price to such rights based on a relative SSP.
(v) recognition of revenue when we satisfy each performance obligation.
Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised product or service to the customer. Our self-managed subscriptions include both upfront revenue recognition when the license is delivered, as well as revenue recognized ratably over the contract period for support and maintenance based on the stand-ready nature of these subscription elements. Revenue from our SaaS products is recognized ratably over the contract period as we satisfy the performance obligation.
Professional services comprise consulting services as well as public and private training. Consulting services are generally time-based arrangements. Revenue from professional services is recognized as these services are performed.
We generate sales directly through our sales team and through our channel partners. Sales to channel partners are made at a discount and revenues are recorded at this discounted price once all the revenue recognition criteria above are met. To the extent that we offer rebates, incentives, or joint marketing funds to such channel partners, recorded revenues are reduced by this amount. Channel partners generally receive an order from an end-customer prior to placing an order with us. Payment from channel partners is not contingent on the partner’s collection from end-customers.
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers. For annual contracts, we typically invoice customers at the time of entering into the contract. For multi-year agreements, we generally invoice customers on an annual basis prior to each anniversary of the contract start date. We record unbilled accounts receivable related to revenue recognized in excess of amounts invoiced as we have an unconditional right to invoice and receive payment in the future related to those fulfilled obligations. Contract liabilities consist of deferred revenue which is recognized over the contractual period.
Deferred Contract Acquisition Costs
Deferred contract acquisition costs represent costs that are incremental to the acquisition of customer contracts, which consist mainly of sales commissions and associated payroll taxes. We determine whether costs should be deferred based on sales compensation plans, if the commissions are in fact incremental and would not have occurred absent the customer contract.
Effective May 1, 2019, we updated our sales commissions plan by incorporating different commission rates for contracts with new customers and incremental sales to existing customers, and for subsequent subscription renewals. Subsequent to this change, sales commissions for renewal of a subscription contract are not considered commensurate with the commissions paid for contracts with new customers and incremental sales to existing customers given the substantive difference in commission rates in proportion to their respective contract values. Commissions paid for contracts with new customers and incremental sales to existing customers are amortized over an estimated period of benefit of five years while commissions paid for renewal contracts are amortized based on the pattern of the associated revenue recognition over the related contractual renewal period for the pool of renewal contracts. We determine the period of benefit for commissions paid for contracts with new customers and incremental sales to existing customers by taking into consideration its initial estimated customer life and the technological life of its software and related significant features. Commissions paid on professional services are typically amortized in accordance with the associated revenue as the commissions paid on new and renewal professional services are commensurate with each other. Amortization of deferred contract acquisition costs is recognized in sales and marketing expense in the consolidated statement of operations.
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We did not recognize any impairment of deferred contract acquisition costs during the years ended April 30, 2021, 2020 and 2019.
Stock-Based Compensation Expense
Compensation expense related to stock-based awards granted to employees is calculated based on the fair value of such awards on the date of grant. We determine the grant date fair value of the awards using the Black-Scholes option-pricing model. The related stock-based compensation expense is recognized on a straight-line basis over the period in which an employee is required to provide service in exchange for the stock-based award, which is generally four years.
Our use of the Black-Scholes option pricing model requires the input of highly subjective assumptions, including the fair value of the underlying ordinary shares, the expected term of the option, the expected volatility of the price of our ordinary shares, risk-free interest rates and the expected dividend yield of our ordinary shares. The assumptions used to determine the fair value of the awards represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment.
These assumptions and estimates are as follows:
•Fair value of ordinary shares. See “Ordinary Share Valuations” below.
•Expected term. The expected term represents the period that our stock-based awards are expected to be outstanding. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options. For option grants that are considered “plain vanilla,” the expected term was estimated using the simplified method. The simplified method calculates the expected term as the midpoint between the vesting date and the contractual expiration date of the award.
•Expected volatility. Since we have a limited trading history of our ordinary shares, the expected volatility is derived from the average historical stock volatilities of several unrelated public companies within our industry that we consider to be comparable to its own business over a period equivalent to the option’s expected term.
•Risk-free interest rate. We base the risk-free interest rate used in the Black-Scholes option pricing model on the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equivalent to that of the options for each expected term.
•Dividend yield. The expected dividend assumption is based on our current expectations about our anticipated dividend policy. As we have no history of paying any dividends, we used an expected dividend yield of zero.
The following table summarizes the assumptions used in the Black-Scholes option pricing model to determine the fair value of our stock options granted and assumed:
Year Ended April 30,
Dividend yield 0% 0% 0%
We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our ordinary shares, we may refine our estimation process, which could materially impact our future stock-based compensation expense.
Prior to our IPO, we also assessed the need to record stock-based compensation expense when certain of our affiliated shareholders purchased shares from our employees and founders in excess of fair value of such shares. We recognized any such excess value as stock-based compensation expense in our consolidated statements of operations.
Ordinary Share Valuations
For valuations after the completion of the IPO, our compensation committee determines the fair value of the ordinary shares underlying equity awards based on the closing price of our ordinary shares as reported on the date of the grant. Our ordinary shares are publicly traded and are therefore subject to potentially significant fluctuations in the market price. Increases and decreases in the market price of our ordinary shares will also increase and decrease the fair value of our stock-based awards granted in future periods.
Prior to the completion of our IPO, the fair value of the ordinary shares underlying our equity awards was determined by our board of directors, after considering contemporaneous third-party valuations and input from management. The
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valuations of our ordinary shares were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our ordinary shares as of the date of each option grant, including the following factors:
•contemporaneous valuations performed at periodic intervals by unrelated third-party valuation firms;
•the prices, rights, preferences and privileges of our redeemable convertible preference shares relative to those of our ordinary shares;
•the lack of marketability of our ordinary shares;
•our actual and expected operating and financial performance;
•current business conditions and projections;
•our hiring of key personnel and the experience of our management;
•our history and the timing of the introduction of new products;
•our stage of development;
•the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our business given prevailing market conditions;
•the illiquidity of stock-based awards involving securities in a private company;
•the market performance of comparable publicly traded companies;
•secondary stock transactions, including a secondary stock purchase transaction that included certain of our employees, founders and certain of our affiliated shareholders; and
•U.S. and global capital markets conditions.
In valuing our ordinary shares, the fair value of our business, or enterprise value, was determined using both the income approach and market approach. The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate based on the capital rates of return for venture-backed early stage companies and is adjusted to reflect the risks inherent in our cash flows. The market approach estimates value based on a comparison of the company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple is determined and then applied to the company’s financial results to estimate the value of the subject company.
The resulting equity value was then allocated to each class of stock using an option pricing methodology and Probability Weighted Expected Return Method or PWERM. The option pricing method is based on a binomial lattice model, which allows for the identification for a range of possible future outcomes, each with an associated probability. The option pricing method is appropriate to use when the range of possible future outcomes is difficult to predict and thus creates highly speculative forecasts. PWERM involves a forward-looking analysis of the possible future outcomes of the enterprise. This method is particularly useful when discrete future outcomes can be predicted at a relatively high confidence level with a probability distribution. Discrete future outcomes considered under the PWERM include an IPO, as well as non-IPO market based outcomes. Determining the fair value of the enterprise using the PWERM requires us to develop assumptions and estimates for both the probability of an IPO liquidity event and stay private outcomes, as well as the values we expect those outcomes could yield. We apply significant judgment in developing these assumptions and estimates, primarily based upon the enterprise value we determined using the income approach and market approach, our knowledge of the business and our reasonable expectations of discrete outcomes occurring. After the equity value is determined and allocated to the various classes of shares, a discount for lack of marketability, or DLOM, is applied to arrive at the fair value of ordinary shares. A DLOM is applied based on the theory that as an owner of a private company stock, the stockholder has limited opportunities to sell this stock and any such sale would involve significant transaction costs, thereby reducing overall fair market value.
Our assessments of the fair value of ordinary shares for grant dates between the dates of the valuations were based in part on the current available financial and operational information and the ordinary share value provided in the most recent valuation as compared to the timing of each grant. For financial reporting purposes, we considered the amount of time between the valuation date and the grant date to determine whether to use the latest ordinary share valuation. This determination included an evaluation of whether the subsequent valuation indicated that any significant change in valuation had occurred between the previous valuation and the grant date.
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Acquisitions, Goodwill and Intangible Assets
We allocate the fair value of purchase consideration in a business combination to tangible assets, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is allocated to goodwill. The allocation of the purchase consideration requires management to make significant estimates and assumptions, especially with respect to intangible assets. These estimates can include, but are not limited to, future expected cash flows from acquired customers and acquired technology from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable, and, as a result, actual results may differ from estimates. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
We assess goodwill for impairment at least annually, in the fourth quarter, and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. For the purposes of impairment testing, we have determined that we have one reporting unit. Our test of goodwill impairment starts with a qualitative assessment to determine whether it is necessary to perform a quantitative goodwill impairment test. If qualitative factors indicate that the fair value of the reporting unit is more likely than not less than its carrying amount, then a quantitative goodwill impairment test is performed. For the quantitative analysis, we compare the fair value of our reporting unit to its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.
Acquired intangible assets are amortized over their estimated useful lives. We evaluate the recoverability of our intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the intangible assets are expected to generate. If such review indicates that the carrying amount of our intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value.
Income Taxes
We are subject to income taxes in the Netherlands and numerous other jurisdictions including federal, state, and local jurisdictions in the United States and all other tax jurisdictions or countries in which we conduct business. Earnings from our non-Dutch activities are subject to local country income tax.
We follow the asset and liability method of accounting for income taxes. This method requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. We assess whether it is more likely than not that some portion or all of the deferred tax assets will be realized. We record a valuation allowance to our deferred tax assets to the extent we believe they are not more likely than not to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income.
We recognize the tax benefit from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that is more likely than not of being realized upon ultimate settlement. We adjust reserves for our uncertain tax positions due to changing facts and circumstances. We recognize interest and penalties due to taxing authorities as a component of provision for income taxes.
We make estimates and judgments about our future taxable income based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from estimates, the amount of valuation allowance could be materially impacted. Any adjustment to the deferred tax asset valuation allowance would be recorded in the consolidated statement of operations for the periods in which the adjustment is determined to be required.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We have operations both within the United States and internationally, and we are exposed to market risk in the ordinary course of our business.
Interest Rate Risk
We had cash, cash equivalents, and restricted cash of $403.7 million as of April 30, 2021. Our cash, cash equivalents, and restricted cash are held in cash deposits and money market funds. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these instruments, we do not believe that
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an immediate 10% increase or decrease in interest rates would have a material effect on the fair market value of our investment portfolio. Declines in interest rates, however, would reduce our future interest income.
Foreign Currency Risk
Our revenue and expenses are primarily denominated in U.S. dollars. To date, we have not had a formal hedging program with respect to foreign currency, but we may do so in the future if our exposure to foreign currency should become more significant. For business conducted outside of the United States, we may have both revenue and costs incurred in the local currency of the subsidiary, creating a partial natural hedge. Changes to exchange rates therefore have not had a significant impact on our operating results to date; however, we will continue to reassess our foreign exchange exposure as we continue to grow our business globally.
We have experienced and will continue to experience fluctuations in net loss as a result of transaction gains or losses related 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. An immediate 10% increase or decrease in the relative value of the U.S. dollar to other currencies could have a material effect on our net loss. As a component of other income, net, we recognized a foreign currency transaction gain of $7.7 million and a foreign currency transaction loss of $2.2 million in the years ended April 30, 2021 and April 30, 2020, respectively.
As of April 30, 2021, our cash, cash equivalents, and restricted cash were primarily denominated in U.S. dollars, Euros, and British pounds. A 10% increase or decrease in current exchange rates would have an impact of approximately $11.0 million on our cash, cash equivalents, and restricted cash balances.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations.
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Item 8. Financial Statements and Supplementary Data.
The supplementary financial information required by this Item 8, is included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the caption “Quarterly Results of Operations Data,” which is incorporated herein by reference.
The following financial statements are filed as part of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm 74
Financial Statements:
Consolidated Balance Sheets 76
Consolidated Statements of Operations 77
Consolidated Statements of Comprehensive Loss 78
Consolidated Statements of Cash Flows 80
Notes to Consolidated Financial Statements 81
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Elastic N.V.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Elastic N.V. and its subsidiaries (the “Company”) as of April 30, 2021 and 2020, and the related consolidated statements of operations, of comprehensive loss, of redeemable convertible preference shares and shareholders’ equity (deficit), and of cash flows for each of the three years in the period ended April 30, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of April 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of April 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition – Identification and Evaluation of Terms and Conditions in Contracts
As described in Note 2 to the consolidated financial statements, management applies the following steps in their determination of revenue to be recognized: (i) identification of the contract with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when the Company satisfies each performance obligation. The Company’s contracts include varying terms and conditions, and identifying and evaluating the impact of these terms and conditions on revenue recognition requires significant judgment. For the fiscal year ended April 30, 2021, the Company’s revenue was $608.5 million.
The principal considerations for our determination that performing procedures relating to revenue recognition, specifically the identification and evaluation of terms and conditions in contracts, is a critical audit matter are the significant judgment by management in identifying and evaluating terms and conditions in contracts that impact revenue recognition. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating the audit evidence to determine whether terms and conditions in contracts were appropriately identified and evaluated by management.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls related to the identification and evaluation of terms and conditions in contracts that impact revenue recognition. These procedures also included (i) testing the completeness and accuracy of management’s identification and evaluation of the specific terms with customers by examining revenue contracts on a sample basis and (ii) assessing the terms and conditions of the contract including their impact on revenue recognition.
/s/ PricewaterhouseCoopers LLP
San Jose, California
June 25, 2021
We have served as the Company’s auditor since 2018.
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Elastic N.V.
Consolidated Balance Sheets
(in thousands, except share and per share data)
As of April 30,
Assets
Current assets:
Prepaid expenses and other current assets 37,002 32,623
Deferred contract acquisition costs, non-current 50,263 24,012
Liabilities and Shareholders’ Equity
Current liabilities:
Accrued expenses and other liabilities 28,909 22,210
Operating lease liabilities, non-current 19,649 27,827
Commitments and contingencies (Note 7 and 9)
Shareholders’ equity:
Accumulated other comprehensive loss (8,105) (1,377)
Total liabilities and shareholders’ equity $ 973,172 $ 803,911
The accompanying notes are an integral part of these consolidated financial statements.
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Elastic N.V.
Consolidated Statements of Operations
(in thousands, except share and per share data)
Year Ended April 30,
Revenue
Cost of revenue
Operating expenses
Provision for (benefit from) income taxes 7,720 (1,968) 4,388
The accompanying notes are an integral part of these consolidated financial statements.
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Elastic N.V.
Consolidated Statements of Comprehensive Loss
(in thousands)
Year Ended April 30,
Other comprehensive loss:
Foreign currency translation adjustments (6,728) 54 (470)
Other comprehensive income (loss) (6,728) 54 (470)
The accompanying notes are an integral part of these consolidated financial statements.
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Elastic N.V.
Consolidated Statements of Redeemable Convertible Preference Shares
and Shareholders’ Equity (Deficit)
(in thousands, except share data)
Shares Amount Shares Amount
Change in par value upon conversion from B.V. to N.V. — — — 303 — (303) — — —
Vesting of early exercised stock options — — — — — 1,019 — — 1,019
Vesting of ordinary shares subject to repurchase — — — — — 449 — — 449
Repurchase of early exercised stock options — — (43,630) — — — — — —
Stock-based compensation — — — — — 34,531 — — 34,531
Foreign currency translation — — — — — — (470) — (470)
Repurchase of unvested RSAs — — (4,585) — — — — — —
Vesting of ordinary shares subject to repurchase — — — — — 2,730 — — 2,730
Stock-based compensation — — — — — 57,088 — — 57,088
Foreign currency translation — — — — — — 54 — 54
Cumulative-effect adjustment from adoption of ASU 2016-13 — — — — — — — 367 367
Stock-based compensation — — — — — 93,018 — — 93,018
Reclassification of liability-classified awards — — — — — 2,703 — — 2,703
Foreign currency translation — — — — — — (6,728) — (6,728)
The accompanying notes are an integral part of these consolidated financial statements.
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Elastic N.V.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended April 30,
Cash flows from operating activities
Adjustments to reconcile net loss to cash used in operating activities:
Non-cash operating lease cost 7,927 7,422 —
Non-cash acquisition expense settled with shares — 8,834 —
Foreign currency transaction gain (9,507) — —
Prepaid expenses and other current assets (4,192) (2,950) (18,049)
Operating lease liabilities (7,914) (6,661) —
Net cash provided by (used in) operating activities 22,545 (30,564) (23,937)
Cash flows from investing activities
Business acquisitions, net of cash acquired — (24,373) (1,986)
Capitalization of internal-use software (317) — —
Cash flows from financing activities
Repurchase of early exercised options — — (500)
Repayment of notes payable — (90) (106)
Payment of deferred offering costs — — (5,672)
Supplemental disclosures of cash flow information
Cash paid (refunds) for income taxes, net $ (423) $ 3,497 $ 3,067
Cash paid for operating lease liabilities $ 8,957 $ 7,371 $ —
Supplemental disclosures of non-cash investing and financing information
Vesting of early exercised stock options $ — $ — $ 1,019
Vesting of shares subject to repurchase $ — $ 2,730 $ 449
Issuance of ordinary shares for business acquisition $ — $ 178,329 $ —
The accompanying notes are an integral part of these consolidated financial statements.
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Elastic N.V.
Notes to Condensed Consolidated Financial Statements
Note Page
1. Organization and Description of Business 82
2. Summary of Significant Accounting Policies 82
3. Revenue and Performance Obligations 92
4. Fair Value Measurements 93
5. Acquisitions 93
6. Balance Sheet Components 96
7. Commitments and Contingencies 100
8. Redeemable Convertible Preference Shares 100
11. Equity Incentive Plans 102
12. Net Loss Per Share Attributable to Ordinary Shareholders 105
14 Employee Benefit Plans 109
15. Segment Information 109
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1. Organization and Description of Business
Elastic N.V. (“Elastic” or the “Company”) was incorporated under the laws of the Netherlands in 2012. Elastic is a search company. It created 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. Developers build on top of the Elastic Stack to apply the power of search to their data and solve business problems. The Company also offers software solutions built on the Elastic Stack: Enterprise Search, Observability, and Security. The Elastic Stack and the Company’s solutions are designed to run in public or private clouds, in hybrid environments, or in traditional on-premises environments.
Initial Public Offering
In October 2018, the Company completed its initial public offering (“IPO”) in which it issued and sold 8,050,000 ordinary shares at an offering price of $36.00 per share, including 1,050,000 ordinary shares pursuant to the exercise in full of the underwriters’ option to purchase additional shares. The Company received net proceeds of $263.8 million, after deducting underwriting discounts and commissions of $20.3 million and offering expenses of $5.7 million. Immediately prior to the completion of the IPO, all 28,939,466 shares of the Company’s then-outstanding redeemable convertible preference shares automatically converted into 28,939,466 ordinary shares at their respective conversion ratios and the Company reclassified $200.6 million from temporary equity to additional paid-in capital and $0.3 million to ordinary shares on its consolidated balance sheet.
The Company’s articles of association designated and authorized the Company to issue 72 million ordinary shares with a par value of €0.001 per share up until immediately prior to the completion of the IPO at which time the authorized ordinary shares increased to 165 million. In addition, the par value of ordinary shares was changed from €0.001 per share to €0.01 per share as required by Dutch law at the time of the Company’s conversion into a Dutch public company with limited liability (naamloze vennootschap).
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the financial statements of the Company and its wholly owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.
Fiscal Year
The Company’s fiscal year ends on April 30. References to fiscal 2021, for example, refer to the fiscal year ended April 30, 2021.
Use of Estimates and Judgments
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Such estimates include, but are not limited to, allocation of revenue between recognized and deferred amounts, deferred contract acquisition costs, allowance for credit losses, valuation of stock-based compensation, fair value of ordinary shares in periods prior to the Company’s initial public offering, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment, whether an arrangement is or contains a lease, the discount rate used for operating leases and valuation allowance for deferred income taxes. The Company bases these estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events.
In March 2020, the World Health Organization declared the 2019 novel Coronavirus Disease (“COVID-19”) a pandemic. The pandemic is expected to result in a global slowdown of economic activity that is likely to decrease demand for a broad variety of goods and services, including from the Company’s customers, while also disrupting sales channels and marketing activities for an unknown period of time. The full extent to which COVID-19 may impact the Company’s financial condition or results of operations is uncertain.
Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, judgments or revise the carrying value of the Company’s assets or liabilities. These estimates may change, as new events occur and additional information is obtained,
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and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s financial statements.
Foreign Currency
The reporting currency of the Company is the U.S. dollar. The Company determines the functional currency of each subsidiary in accordance with ASC 830, Foreign Currency Matters, based on the currency of the primary economic environment in which each subsidiary operates. Items included in the financial statements of such subsidiaries are measured using that functional currency. The Company periodically re-assesses its operations to determine if previous conclusions are still valid. Changes in functional currencies are applied prospectively if the operations encounter a significant and permanent change.
For the subsidiaries where the U.S. dollar is the functional currency, foreign currency denominated monetary assets and liabilities are re-measured into U.S. dollars at current exchange rates and foreign currency denominated nonmonetary assets and liabilities are re-measured into U.S. dollars at historical exchange rates. Gains or losses from foreign currency re-measurement and settlements are included in other income (expense), net in the consolidated statement of operations. For the years ended April 30, 2021, 2020 and 2019, the Company recognized a re-measurement gain of $7.7 million, and re-measurement loss of $2.2 million and $0.2 million, respectively.
For subsidiaries where the functional currency is other than the U.S. dollar, the Company uses the period-end exchange rates to translate assets and liabilities, the average monthly exchange rates to translate revenue and expenses, and historical exchange rates to translate shareholders’ equity (deficit), into U.S. dollars. The Company records translation gains and losses in accumulated other comprehensive loss as a component of shareholders’ equity in the consolidated balance sheet.
Comprehensive Loss
The Company’s comprehensive loss includes net loss and unrealized gains and losses on foreign currency translation adjustments.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments, including money market funds with an original maturity of three months or less at the date of purchase, to be cash equivalents. The carrying amount of the Company’s cash equivalents approximates fair value, due to the short maturities of these instruments. Restricted cash represents cash on deposit with financial institutions in support of letters of credit in favor of certain landlords for non-cancelable lease agreements.
Cash, cash equivalents, and restricted cash as reported in the Company’s consolidated statements of cash flows includes the aggregate amounts of cash and cash equivalents and the restricted cash as shown on the consolidated balance sheet. Cash, cash equivalents, and restricted cash as reported in the Company’s consolidated statements of cash flows consists of the following (in thousands):
As of April 30,
Cash, cash equivalents and restricted cash $ 403,708 $ 299,389
Short-Term Investments
Investments with an original maturity of three months or less at the date of purchase are considered cash equivalents, while all other investments are classified as short-term or long-term based on the nature of the investments, their maturities, and their availability for use in current operations. The Company determines the appropriate classification of its investments at the time of purchase and reevaluates such designation at each balance sheet date. Bank deposits with original maturities greater than three months but less than twelve months and are classified as short-term investments within current assets in the consolidated balance sheet. The Company had no short-term investments as of April 30, 2021 and April 30, 2020.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash equivalents, accounts receivable, accounts payable, and accrued liabilities. Cash equivalents are stated at amortized cost, which approximates fair value at the balance sheet dates, due to the
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short period of time to maturity. Accounts receivable, accounts payable and accrued liabilities are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date.
Assets and liabilities recorded at fair value on a recurring basis in the consolidated balance sheet consisting primarily of cash equivalents are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The Company measures its financial assets and liabilities at fair value at each reporting period using a fair value hierarchy which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value:
•Level 1: Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.
•Level 2: Observable inputs, other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying values of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values due to the short period of time to maturity, receipt or payment.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents, restricted cash, short-term investments, and accounts receivable. The primary focus of the Company’s investment strategy is to preserve capital and meet liquidity requirements. The Company maintains its cash accounts with financial institutions where, at times, deposits exceed federal insurance limits. The Company invests its excess cash in highly-rated money market funds and in short-term investments. The Company extends credit to customers in the normal course of business. The Company performs credit analyses and monitors the financial health of its customers to reduce credit risk. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Management performs ongoing credit evaluations of customers and maintains allowances for potential credit losses on customers’ accounts when deemed necessary.
No customer represented 10% or more of net accounts receivable as of April 30, 2021, and one customer represented 10% of net accounts receivable as of April 30, 2020. No customer accounted for more than 10% of the Company’s total revenue for the years ended April 30, 2021, 2020 and 2019.
Accounts Receivable, Unbilled Accounts Receivable and Allowance for Credit Losses
Accounts receivable primarily consists of amounts billed currently due from customers. The Company’s accounts receivable are subject to collection risk. Gross accounts receivable are reduced for this risk by an allowance for credit losses. This allowance is for estimated losses resulting from the inability of the Company’s customers to make required payments. The Company determines the need for an allowance for credit losses based upon various factors, including past collection experience, credit quality of the customer, age of the receivable balance, and current economic conditions, as well as specific circumstances arising with individual customers. Accounts receivables are written off against the allowance when management determines a balance is uncollectible and the Company no longer actively pursues collection of the receivable.
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The Company does not typically offer right of refund in its contracts. The allowance for credit losses reflects the Company’s best estimate of probable losses inherent in the Company’s receivables portfolio. As of April 30, 2021 and 2020, the allowance for credit losses was $2.3 million and $1.2 million, respectively. Activity related to the Company’s allowance for credit losses was as follows (in thousands):
Year ended April 30,
Cumulative-effect adjustment from adoption of ASU 2016-13 (367) — —
Unbilled accounts receivable represents amounts for which the Company has recognized revenue, pursuant to the Company’s revenue recognition policy, for fulfilled obligations, but not yet billed. The unbilled accounts receivable balance was $5.2 million and $2.6 million as of April 30, 2021 and 2020, respectively.
Capitalized Software Development and Implementation Costs
Software development costs for software to be sold, leased, or otherwise marketed are expensed as incurred until the establishment of technological feasibility, at which time those costs are capitalized until the product is available for general release to customers and amortized over the estimated life of the product. Technological feasibility is established upon the completion of a working prototype that has been certified as having no critical bugs and is a release candidate. To date, costs to develop software that is marketed externally have not been capitalized as the current software development process is essentially completed concurrently with the establishment of technological feasibility. As such, all related software development costs are expensed as incurred and included in research and development expense in the consolidated statement of operations.
Costs related to software acquired, developed, or modified solely to meet the Company’s internal requirements, with no substantive plans to market such software at the time of development and costs related to the development of web-based product are capitalized during the application development stage. Costs incurred during the preliminary planning and evaluation stage of the project and during the post implementation operational stage are expensed as incurred. Costs incurred during the application development stage of the project are capitalized. No costs were capitalized during the years ended April 30, 2021 and 2020.
The Company also capitalizes qualifying implementation costs incurred in a hosting arrangement that is a service contract based on the existing guidance for internally developed software. In accordance with the guidance, (i) capitalized implementation costs are classified in the same balance sheet line item as the amounts prepaid for the related hosting arrangement; (ii) amortization of capitalized implementation costs are presented in the same income statement line item as the service fees for the related hosting arrangement; and (iii) cash flows related to capitalized implementation costs are presented within the same category of cash flow activity as the cash flows for the related hosting arrangement (i.e. operating activity). The Company tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
The Company amortizes capitalized implementation costs over the expected life of the service contract. The Company capitalized $0.3 million in implementation costs for software hosting arrangements during the fiscal year ended April 30, 2021. No such costs were capitalized during the fiscal year ended April 30, 2020. No amortization expense related to capitalized implementation costs was recorded during the fiscal years ended April 30, 2021, 2020 and 2019, respectively as the underlying implementation activities were not complete.
Property and Equipment
Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the financial statements and any resulting gain or loss is reflected within the consolidated statement of operations. There was no material gain or loss incurred as a result of retirement or sale in the periods presented. Repair and maintenance costs are expensed as incurred.
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Leases
Leases arise from contractual obligations that convey the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company determines whether an arrangement is or contains a lease at inception, based on whether there is an identified asset and whether the Company controls the use of the identified asset throughout the period of use. At the lease commencement date, the Company determines the lease classification between finance and operating and recognizes a right-of-use asset and corresponding lease liability for each lease component. A right-of-use asset represents the Company’s right to use an underlying asset and a lease liability represents the Company’s obligation to make payments during the lease term. The operating lease right-of-use asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company accounts for lease components and non-lease components as a single lease component.
The lease liability is initially measured as the present value of the remaining lease payments over the lease term. The discount rate used to determine the present value is the Company’s incremental borrowing rate unless the interest rate implicit in the lease is readily determinable. The Company estimates its incremental borrowing rate based on the information available at lease commencement date for borrowings with a similar term. The right-of-use asset is initially measured as the present value of the lease payments, adjusted for initial direct costs, prepaid lease payments to lessors and lease incentives.
Acquisitions
The Company has completed a number of acquisitions of other businesses in the past and may acquire additional businesses or technologies in the future. The results of businesses acquired in a business combination are included in the Company’s consolidated financial statements from the date of acquisition. The Company allocates the purchase price, which is the sum of the consideration provided and may consist of cash, equity or a combination of the two, in a business combination to the identifiable assets and liabilities of the acquired business at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies.
When the Company issues stock-based or cash awards to an acquired company’s shareholders, the Company evaluates whether the awards are consideration or compensation for post-acquisition services. The evaluation includes, among other things, whether the vesting of the awards is contingent on the continued employment of the acquired company’s shareholders beyond the acquisition date. If continued employment is required for vesting, the awards are treated as compensation for post- acquisition services and recognized as expense over the requisite service period.
To date, the assets acquired and liabilities assumed in the Company’s business combinations have primarily consisted of goodwill and finite-lived intangible assets, consisting primarily of developed technologies, in-process research & development, customer relationships and trade names. The estimated fair values and useful lives of identifiable intangible assets are based on many factors, including estimates and assumptions of future operating performance and cash flows of the acquired business, the nature of the business acquired, and the specific characteristics of the identified intangible assets. The estimates and assumptions used to determine the fair values and useful lives of identified intangible assets could change due to numerous factors, including market conditions, technological developments, economic conditions and competition. In connection with determination of fair values, the Company may engage independent appraisal firms to assist with the valuation of intangible and certain tangible assets acquired and certain assumed obligations.
Acquisition-related transaction costs incurred by the Company are not included as a component of consideration transferred, but are accounted for as an operating expense in the period in which the costs are incurred.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for using the acquisition method for accounting and is not amortized. The Company tests goodwill for impairment at least annually, in the fourth quarter of each year, or more frequently if events or changes in circumstances indicate that this asset may be impaired. For the purposes of impairment testing, the Company has determined that it has one operating segment and one reporting unit. The Company’s test of goodwill impairment starts with a qualitative assessment to determine whether it is necessary to perform a quantitative goodwill impairment test. If qualitative factors indicate that the fair value of the reporting unit is more likely than not less than its carrying amount, then a quantitative goodwill impairment test is performed. For the quantitative analysis, the Company compares the fair value of its reporting unit to its carrying value. If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. However, if the fair value
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of the reporting unit is less than book value, then under the second step the carrying amount of the goodwill is compared to its implied fair value. There was no impairment of goodwill recorded for the years ended April 30, 2021, 2020 and 2019.
Acquired Intangible Assets
Acquired amortizable intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets.
Useful life(in years)
Developed technology 4-5
Customer relationships 4
Trade names 4
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets, including property and equipment and amortizable acquired intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. Such events and changes may include: significant changes in performance relative to expected operating results, significant changes in asset use, significant negative industry or economic trends, and changes in the Company’s business strategy. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. The Company determined that there were no events or changes in circumstances that indicated that its long-lived assets were impaired during the years ended April 30, 2021, 2020 and 2019.
In addition to the recoverability assessment, the Company periodically reviews the remaining estimated useful lives of property and equipment and amortizable intangible assets. If the estimated useful life assumption for any asset is changed, the remaining unamortized balance would be depreciated or amortized over the revised estimated useful life, on a prospective basis.
Deferred Offering Costs
Deferred offering costs were capitalized and consisted of fees and expenses incurred in connection with the sale of the Company’s ordinary shares in its IPO, including the legal, accounting, printing and other IPO-related costs. Upon consummation of the IPO in October 2018, $0.2 million of previously deferred offering costs along with additional offering costs of $5.5 million were reclassified to shareholders’ equity and recorded against the proceeds from the offering.
Revenue Recognition
The Company generates revenue primarily from the sale of self-managed subscriptions (which include licenses for proprietary features, support, and maintenance) and from the sale of SaaS subscriptions. The Company also generates revenue from professional services, which consist of consulting and training.
Under ASC Topic 606, Revenue from Contracts with Customers, the Company recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company’s contracts include varying terms and conditions, and identifying and evaluating the impact of these terms and conditions on revenue recognition requires significant judgment. In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, the Company performs the following steps:
(i) identification of the contract with a customer;
The Company contracts with its customers through order forms, which in some cases are governed by master sales agreements. The Company determines that it has a contract with a customer when the order form has been approved, each party’s rights regarding the products or services to be transferred can be identified, the payment terms for the services can be identified, the Company has determined the customer has the ability and intent to pay and the contract has commercial substance. The Company applies judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit, reputation and financial or other information pertaining to the customer. At contract inception the Company evaluates whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract includes more than one performance obligation. The Company has concluded that its contracts with customers do not contain warranties that give rise to a separate performance obligation.
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(ii) identification of the performance obligations in the contract;
Performance obligations promised in a contract are identified based on the products and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the products or services either on their own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the products and services is separately identifiable from other promises in the contract.
The Company’s self-managed subscriptions include both license providing the right to use proprietary features in its software, as well as an obligation to provide support (on both open source and proprietary features) and maintenance. The Company’s SaaS products provide access to hosted software as well as support, which the Company considers to be a single performance obligation.
Services-related performance obligations relate to the provision of consulting and training services. These services are distinct from subscriptions and do not result in significant customization of the software.
(iii) determination of the transaction price;
The transaction price is the total amount of consideration we expect to be entitled to in exchange for the subscriptions and services in a contract. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company’s contracts contain a significant financing component.
(iv) allocation of the transaction price to the performance obligations; and
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. For contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation based on a relative standalone selling price (‘SSP”). The SSP is determined based on the prices at which we separately sell these products assuming the majority of these fall within a pricing range. In instances where SSP is not directly observable, such as when we do not sell the software license separately, we derive the SSP using information that may include market conditions and other observable and unobservable inputs which can require significant judgment. There is typically more than one SSP for individual products and services due to the stratification of those products and services by quantity, term of the subscription, sales channel and other circumstances. If one of the performance obligations is outside of the SSP range, the Company allocates the transaction price considering the midpoint of the SSP range. The Company also considers if there are any additional material rights inherent in a contract, and if so, the Company allocates a portion of the transaction price to such rights based on a relative SSP.
(v) recognition of revenue when the Company satisfies each performance obligation;
Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised product or service to the customer. The Company’s self-managed subscriptions include both upfront revenue recognition when the license is delivered as well as revenue recognized ratably over the contract period for support and maintenance based on the stand-ready nature of these subscription elements. Revenue on the Company’s SaaS products is recognized ratably over the contract period as the Company satisfies the performance obligation.
Professional services comprise consulting services as well as public and private training. Consulting services are generally time-based arrangements. Revenue from professional services is recognized as these services are performed.