ELASTIC N.V. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Management's Discussion and Analysis of Financial Condition and Results of Operations and audited consolidated financial statements included in our Annual Report on Form 10-K for the year endedApril 30, 2021 . As discussed in the section titled "Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such difference include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" under Part II, Item 1A in this Quarterly Report on Form 10-Q. Our fiscal year end isApril 30 , and our fiscal quarters end onJuly 31 ,October 31 ,January 31 , andApril 30 . Our fiscal year endedApril 30, 2021 is referred to as fiscal 2021, and our fiscal year endingApril 30, 2022 is referred to as fiscal 2022. Overview Elastic is a search company. We deliver technology that enables users to search through massive amounts of structured and unstructured data for a wide range of use cases. Our primary offering is the Elastic Stack, a powerful set of software products that ingest and store data from any source, and in any format, and perform search, analysis, and visualization in milliseconds or less. The Elastic Stack is designed for direct use by developers to power a variety of use cases. We also offer three software solutions - Enterprise Search, Observability, and Security - built on the Elastic Stack. Our solutions are designed to be deployed everywhere: in public or private clouds, in hybrid environments, or in traditional on-premises environments. Our products are used by individual developers and organizations of all sizes across a wide range of industries.Elasticsearch is the heart of the Elastic Stack. It is a distributed, real-time search and analytics engine and datastore for exploring all types of data including textual, numerical, geospatial, structured, and unstructured. The first public release ofElasticsearch was in 2010 by our co-founder Shay Banon as an open source project. The Company was formed in 2012. Since then, we have added new products, released new features, acquired companies, and created new solutions to expand the functionality of our products. Our business model is based on a combination of free and paid proprietary software. We market and distribute the Elastic Stack and our solutions using a free and open distribution strategy. Developers are able to download our software directly from our website. Some features of our software can be downloaded and used free of charge. Others are only available through paid subscriptions, which include access to specific proprietary features and also include support. These paid features can be unlocked without the need to re-deploy the software. There is no free subscription tier in our cloud offerings, where all subscriptions are paid. We believe that our free and open distribution strategy drives a number of benefits for our users, our customers, and our company. It facilitates rapid and efficient developer adoption, particularly by empowering individual developers to download and use our software without payment, registration, or the friction of a formal sales interaction. It fosters a vibrant developer community around our products and solutions, which drives adoption of our products and increased interaction among users. Further, this approach enables community review of our code and products, which allows us to improve the reliability and security of our software. During the nine months endedJanuary 31, 2022 , we acquired 100% of the share capital of Cmd, build.security and Optimyze for a combined total consideration of$134.9 million . With these acquisitions, we will be able to extend cloud security protections for our customers from endpoint to cloud workload and provide our customers with cloud security protections from build-time, to deployment-time, to runtime, and extend our Observability solution to enable "always on" continuous profiling for infrastructure, applications, and services. 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% of total revenue in each of the nine months endedJanuary 31, 2022 and 2021. We also generate revenue from consulting and training services. We had over 17,900 customers as ofJanuary 31, 2022 compared to over 13,800 as ofJanuary 31, 2021 . We define a customer as an entity that generated revenue in the quarter ending on the measurement date from an annual or month-to-month subscription. Affiliated entities are typically counted as a single customer. The annual contract value ("ACV") of a customer's commitments is calculated based on the terms of that customer's subscriptions, and represents the total committed annual subscription amount as of the measurement date. Month-to-month subscriptions are not included in the calculation of ACV. The 26
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number of customers who represented greater than
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 2,888 employees as ofJanuary 31, 2022 . InJuly 2021 , we issued$575.0 million aggregate principal amount of 4.125% Senior Notes dueJuly 15, 2029 (the "Senior Notes") in a private placement. We intend to use the net proceeds from the offering of the Senior Notes for general corporate purposes, which may include capital expenditures, investments and working capital. In addition, in the past we have considered, and may continue to consider, acquisitions and strategic transactions, and we may use the net proceeds of this offering for such purposes.
COVID-19
The ongoing COVID-19 pandemic continues to evolve and negatively impact
worldwide economic activity. Efforts to control its spread have significantly
curtailed the movement of people, goods and services worldwide, including in
many of the regions in which we sell our products and services and conduct our
business operations, negatively impacting worldwide economic activity. The
ongoing impact of the COVID-19 pandemic on our operational and financial
performance will depend on certain developments, including the duration and
spread of the virus, success of preventative measures to contain or mitigate the
spread of the virus and emerging variants, effectiveness, distribution, and
acceptance of COVID-19 vaccines, impact on our customers and our sales cycles,
impact on our customer, employee or industry events, effect on our vendors, and
the uneven impact of the COVID-19 pandemic on certain industries, all of which
continue to remain uncertain and cannot be predicted.
The continuing COVID-19 pandemic has resulted in a global slowdown of economic
activity and its impact has varied significantly across different industries
with certain industries experiencing increased demand for their products and
services, while others have struggled to maintain demand for their products and
services consistent with historical levels. There have been delays in purchasing
decisions from existing and prospective customers, longer sales cycles, delayed
implementation of professional services, reduced renewals of subscriptions by
existing customers, and changes in approaches to creating sales pipeline in the
absence of in-person marketing events, resulting in headwinds for calculated
billings and our Net Expansion Rate.
Notwithstanding the potential and actual adverse impacts described above, as the
pandemic has caused more of our customers to shift to a virtual workforce or
accelerate their digital transformation efforts, we believe the value of our
solutions has become even more evident. In addition, we have benefited from
lower spending on travel by our employees due to COVID-19 travel restrictions
and from holding events virtually, however we expect live events and travel
costs to trend back higher in the near-term.
In response to the COVID-19 pandemic and in an effort to focus on maintaining
business continuity and preparing for the future and long-term success of our
business, we have taken precautionary measures intended to help minimize the
risk of the virus to our employees, customers, and the communities in which we
operate, including modifying our business practices, such as suspending employee
travel, adapting employee work locations, and holding events and trainings
virtually. Further, we also temporarily reduced the pace of investments in our
business in response to the COVID-19 pandemic in the first quarter of fiscal
2021 but began to gradually increase our investments in our business since then.
We intend to continue to maintain a similar pace of investments in the business
throughout the remainder of fiscal 2022. We continue to monitor the major
impacts of the COVID-19 pandemic and make changes in our business as
appropriate, in response to such impacts. See "Risk Factors" included in Part
II, Item 1A of this Quarterly Report on Form 10-Q for a discussion of additional
risks.
Key Factors Affecting Our Performance
We believe that the growth and future success of our business depends on many
factors, including those described below. While each of these factors presents
significant opportunities for our business, they also pose important challenges
that we must successfully address in order to sustain our growth and improve our
results of operations.
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Growing the Elastic community. Our strategy consists of providing access to source available software, on both a free and paid basis, and fostering a community of users and developers. Our strategy is designed to pursue what we believe to be significant untapped potential for the use of our technology. After developers begin to use our software and start to participate in our developer community, they become more likely to apply our technology to additional use cases and evangelize our technology within their organizations. This reduces the time required for our sales force to educate potential leads on our solutions. In order to capitalize on our opportunity, we intend to make further investments to keep the Elastic Stack accessible and well known to software developers around the world. We intend to continue to invest in our products and support and engage our user base and developer community through content, events, and conferences in theU.S. and internationally. Our results of operations may fluctuate as we make these investments. Developing new features for the Elastic Stack. The Elastic Stack is applied to various use cases by customers, including through the solutions we offer. Our revenue is derived primarily from subscriptions of Enterprise Search, Observability and Security built into the Elastic Stack. We believe that releasing additional features of the Elastic Stack, including our solutions, drives usage of our products and ultimately drives our growth. To that end, we plan to continue to invest in building new features and solutions that expand the capabilities of the Elastic Stack. These investments may adversely affect our operating results prior to generating benefits, to the extent that they ultimately generate benefits at all. Growing our customer base by converting users of our software to paid subscribers. Our financial performance depends on growing our paid customer base by converting free users of our software into paid subscribers. Our distribution model has resulted in rapid adoption by developers around the world. We have invested, and expect to continue to invest, heavily in sales and marketing efforts to convert additional free users to paid subscribers. Our investment in sales and marketing is significant given our large and diverse user base. The investments are likely to occur in advance of the anticipated benefits resulting from such investments, such that they may adversely affect our operating results in the near term. Expanding within our current customer base. Our future growth and profitability depend on our ability to drive additional sales to existing customers. Customers often expand the use of our software within their organizations by increasing the number of developers using our products, increasing the utilization of our products for a particular use case, and expanding use of our products to additional use cases. We focus some of our direct sales efforts on encouraging these types of expansion within our customer base. We believe that a useful indication of how our customer relationships have expanded over time is through our Net Expansion Rate, which is based upon trends in the rate at which customers increase their spend with us. To calculate an expansion rate as of the end of a given month, we start with the annualized spend from all such customers as of twelve months prior to that month end, or Prior Period Value. A customer's annualized spend is measured as their ACV, or in the case of customers charged on usage-based arrangements, by annualizing the usage for that month. We then calculate the annualized spend from these same customers as of the given month end, or Current Period Value, which includes any growth in the value of their subscriptions or usage and is net of contraction or attrition over the prior twelve months. We then divide the Current Period Value by the Prior Period Value to arrive at an expansion rate. The Net Expansion Rate at the end of any period is the weighted average of the expansion rates as of the end of each of the trailing twelve months. The Net Expansion Rate includes the dollar-weighted value of our subscriptions or usage that expand, renew, contract, or attrit. For instance, if each customer had a one-year subscription and renewed its subscription for the exact same amount, then the Net Expansion Rate would be 100%. 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% for the three months endedJanuary 31, 2022 . UntilApril 30, 2021 , Net Expansion Rate was based on ACV, regardless of customers' actual usage, and also did not include customers on month-to-month subscriptions. To better reflect actual customer behavior, we modified our Net Expansion Rate calculation to incorporate customers' actual spending patterns and include customers on month-to-month subscriptions. The impact of this change on prior reported periods is immaterial. As large organizations expand their use of the Elastic Stack across multiple use cases, projects, divisions and users, they often begin to require centralized provisioning, management and monitoring across multiple deployments. To satisfy these requirements, our Enterprise subscription tier provides access to key orchestration and deployment management capabilities. We will continue to focus some of our direct sales efforts on driving adoption of our paid offerings. Increasing adoption of Elastic Cloud. Elastic Cloud, our family of hosted offerings that includes Elasticsearch Service and Site Search Service, is an important growth opportunity for our business. Organizations are increasingly looking for hosted deployment alternatives with reduced administrative burdens. In some cases, users of our source available software that have been self-managing deployments of the Elastic Stack subsequently become paying subscribers of Elastic Cloud. Elastic Cloud contributed 34% and 27% to our total revenue for the nine months endedJanuary 31, 2022 and 2021, respectively. We believe that offering a hosted deployment alternative is important for achieving our long-term growth potential, and we expect Elastic Cloud's contribution to our subscription revenue to increase over time. However, we expect that an increase in the relative contribution of Elastic Cloud to our business will have a modest adverse impact on our gross margin as a result of the associated third-party hosting costs. 28
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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 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
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increase the size of our general and administrative functions to support the growth of our business. We also anticipate that we will continue to incur additional costs for employees and third-party consulting services related to operating as a public company.
Other Income (Expense), Net
Other income, net primarily consists of gains and losses from transactions denominated in a currency other than the functional currency, interest income and interest expense.
Provision for Income Taxes Provision for income taxes consists primarily of income taxes related tothe 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 outsidethe Netherlands and the relative amounts of income we earn in those jurisdictions, and non-deductible stock-based compensation.
Results of Operations
The period to period comparison of results is not necessarily indicative of results for future periods. The following tables set forth our results of operations for the periods presented in dollars:
Three Months Ended January 31, Nine Months Ended January 31,
2022 2021 2022 2021
(in thousands)
Revenue
License - self-managed$ 20,119
189,495 131,969 522,599 357,127
Total subscription revenue 209,614 147,249 577,056 402,800
Professional services 14,330 9,866 45,963 28,079
Total revenue 223,944 157,115 623,019 430,879
Cost of revenue (1)(2)(3)
Cost of license - self-managed 501 346 1,242 1,039
Cost of subscription - self-managed and SaaS 47,076 31,426 126,097 86,464
Total cost of revenue - subscription 47,577 31,772 127,339 87,503
Cost of professional services 13,707 10,196 37,491 27,744
Total cost of revenue 61,284 41,968 164,830 115,247
Gross profit 162,660 115,147 458,189 315,632
Operating expenses(1)(2)(3)(4)
Research and development 71,749 51,400 194,894 143,766
Sales and marketing 105,069 71,087 288,055 191,712
General and administrative 31,691 27,121 89,298 72,555
Total operating expenses 208,509 149,608 572,247 408,033
Operating loss (1)(2)(3)(4) (45,849) (34,461) (114,058) (92,401)
Other income (expense), net
Interest expense (6,175) (65) (14,327) (78)
Other income (expense), net (861) (2,312) (509) 8,502
Loss before income taxes (52,885) (36,838) (128,894) (83,977)
Provision for income taxes 3,841 1,136 9,344 2,156
Net loss $ (56,726) $ (37,974) $ (138,238) $ (86,133)
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(1) Includes stock-based compensation expense as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2022 2021 2022 2021
(in thousands)
Cost of revenue
Cost of subscription - self managed and SaaS $ 2,064 $ 1,839 $ 6,262 $ 5,065
Cost of professional services 1,726 1,359 4,593 3,287
Research and development 16,029 9,516 41,784 24,309
Sales and marketing 12,545 8,372 30,798 22,519
General and administrative 5,029 4,141 14,116 10,125
Total stock-based compensation expense $ 37,393 $
25,227
(2) Includes employer payroll taxes on employee stock transactions as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2022 2021 2022 2021
(in thousands)
Cost of revenue
Cost of subscription - self managed and SaaS $ 147
113 322 591 424
Research and development 663 1,243 2,916 2,702
Sales and marketing 512 1,723 3,874 3,494
General and administrative 208 2,130 779 3,329
Total employer payroll taxes on employee
stock-based transactions $ 1,643 (3) Includes amortization of acquired intangible assets as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2022 2021 2022 2021
(in thousands)
Cost of revenue
Cost of license - self-managed $ 501 $
346 $ 1,242
2,545 1,764 6,314 5,289
Sales and marketing 1,231 1,428 4,088 4,302
Total amortization of acquired intangibles $ 4,277 $
3,538
(4) Includes acquisition-related expenses as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2022 2021 2022 2021
(in thousands)
Research and development $ 2,713 $ -
18 - 1,304 -
Total acquisition-related expenses $ 2,731 $ -
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The following table sets forth selected condensed consolidated statements of
operations data for each of the periods indicated as a percentage of total
revenue:
Three Months Ended January 31, Nine Months Ended January 31,
2022 2021 2022 2021
Revenue
License - self-managed 9 % 10 % 9 % 10 %
Subscription - self-managed and SaaS 85 % 84 % 84 % 83 %
Total subscription revenue 94 % 94 % 93 % 93 %
Professional services 6 % 6 % 7 % 7 %
Total revenue 100 % 100 % 100 % 100 %
Cost of revenue (1)(2)(3)
Cost of license - self-managed 0 % 0 % 0 % 0 %
Cost of subscription - self-managed and SaaS 21 % 20 % 20 % 20 %
Total cost of revenue - subscription 21 % 20 % 20 % 20 %
Cost of professional services 6 % 7 % 6 % 7 %
Total cost of revenue 27 % 27 % 26 % 27 %
Gross profit 73 % 73 % 74 % 73 %
Operating expenses(1)(2)(3)(4)
Research and development 32 % 33 % 31 % 33 %
Sales and marketing 47 % 45 % 46 % 45 %
General and administrative 14 % 17 % 15 % 17 %
Total operating expenses 93 % 95 % 92 % 95 %
Operating loss (1)(2)(3)(4) (20) % (22) % (18) % (22) %
Other income (expense), net
Interest expense (3) % 0 % (2) % 0 %
Other income (expense), net 0 % (1) % 0 % 3 %
Loss before income taxes (23) % (23) % (20) % (19) %
Provision for income taxes 2 % 1 % 2 % 1 %
Net loss (25) % (24) % (22) % (20) %
(1) Includes stock-based compensation expense as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2022 2021 2022 2021
Cost of revenue
Cost of subscription - self managed and SaaS 1 % 1 % 1 % 1 %
Cost of professional services 1 % 1 % 1 % 1 %
Research and development 7 % 6 % 7 % 6 %
Sales and marketing 6 % 5 % 5 % 5 %
General and administrative 2 % 3 % 2 % 2 %
Total stock-based compensation expense 17 % 16 % 16 % 15 %
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(2) Includes employer payroll taxes on employee stock transactions as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2022 2021 2022 2021
Cost of revenue
Cost of subscription - self managed and SaaS 0 % 0 % 0 % 0 %
Cost of professional services 0 % 0 % 0 % 0 %
Research and development 1 % 1 % 0 % 0 %
Sales and marketing 0 % 1 % 1 % 1 %
General and administrative 0 % 2 % 0 % 1 %
Total employer payroll taxes on employee
stock-based transactions 1 % 4 % 1 % 2 %
(3) Includes amortization of acquired intangible assets as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2022 2021 2022 2021
Cost of revenue
Cost of license - self-managed 0 % 0 % 0 % 0 %
Cost of subscription - self-managed and SaaS 1 % 1 % 1 % 1 %
Sales and marketing 1 % 1 % 1 % 1 %
Total amortization of acquired intangibles 2 % 2 % 2 % 2 %
(4) Includes acquisition-related expenses as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2022 2021 2022 2021
Research and development 1 % 0 % 1 % 0 %
General and administrative 0 % 0 % 0 % 0 %
Total acquisition-related expenses 1 % 0 % 1 % 0 %
Comparison of Three Months Ended January 31, 2022 and 2021
Revenue
Three Months Ended January 31, Change
2022 2021 $ %
(dollars in thousands)
Revenue
License - self-managed $ 20,119 $ 15,280 $ 4,839 32 %
Subscription - self-managed and SaaS 189,495 131,969 57,526 44 %
Total subscription revenue 209,614 147,249 62,365 42 %
Professional services 14,330 9,866 4,464 45 %
Total revenue $ 223,944 $ 157,115 $ 66,829 43 %
Total revenue increased by
Total subscription revenue increased$62.4 million , or 42%, in the three months endedJanuary 31, 2022 compared to the same period of the prior year. The increase in revenue was primarily caused by volume-driven increases from new business, as existing customers purchased additional subscriptions, and we grew our subscription customer base to over 17,900 customers compared to over 13,800 customers in the same period of the prior year. Professional services revenue increased by$4.5 million , or 45%, in the three months endedJanuary 31, 2022 , compared to the same period of the prior year. The increase in professional services revenue was attributable to increased adoption of our professional services offerings. 33
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Cost of Revenue and Gross Margin
Three Months Ended January 31, Change
2022 2021 $ %
(dollars in thousands)
Cost of revenue
Cost of license - self-managed $ 501 $ 346 $ 155 45 %
Cost of subscription - self-managed and SaaS 47,076 31,426 15,650 50 %
Total cost of revenue - subscription 47,577 31,772 15,805 50 %
Cost of professional services 13,707 10,196 3,511 34 %
Total cost of revenue $ 61,284 $ 41,968 $ 19,316 46 %
Gross profit $ 162,660 $ 115,147 $ 47,513 41 %
Gross margin:
License - self-managed 98 % 98 %
Subscriptions - self-managed and SaaS 75 % 76 %
Total subscription margin 77 % 78 %
Professional services 4 % (3) %
Total gross margin 73 % 73 %
Total cost of subscription revenue increased by $15.8 million , or 50%, in the
three months ended January 31, 2022 compared to the same period of the prior
year. This increase was primarily due to an increase of $12.7 million in cloud
hosting costs, an increase of $1.2 million in personnel and related costs and an
increase of $0.8 million in intangible asset amortization. The increase in
personnel and related costs includes an increase of $1.0 million in salaries and
related taxes and an increase of $0.2 million in stock-based compensation.
Total subscription margin decreased slightly to 77% for the three months ended
Cost of professional services revenue increased by$3.5 million , or 34%, in the three months endedJanuary 31, 2022 compared to the same period of the prior year. This increase was primarily due to an increase of$1.8 million in subcontractor costs and an increase in personnel and related costs of$1.3 million mainly due to growth in headcount. Gross margin for professional services revenue was 4% in the three months endedJanuary 31, 2022 compared to (3)% for the three months endedJanuary 31, 2021 . The increase in margin is primarily due to the increase in revenue, and a lower than proportionate increase in cost of professional services revenue. We continue to invest in headcount for our professional services organization that we believe will be needed as we continue to grow and expect travel related costs will increase in the future as COVID-19 risks and travel restrictions abate. Our gross margin for professional services may fluctuate, decline or be negative in the near-term as we seek to expand our professional services business. Operating Expenses Research and development Three Months Ended January 31, Change 2022 2021 $ % (dollars in thousands) Research and development $ 71,749$ 51,400 $ 20,349 40 % Research and development expense increased by$20.3 million , or 40%, in the three months endedJanuary 31, 2022 compared to the same period of the prior year as we continued to invest in the development of new and existing offerings. Personnel and related costs increased by$17.8 million primarily as a result of growth in headcount. Consulting expense increased by$0.8 million and cloud hosting costs increased by$0.8 million . The increase in personnel and related costs includes an increase of$7.6 million in salaries and related taxes, an increase of$6.5 million in stock-based compensation expense, an increase of$2.7 million in acquisition-related compensation, and an increase of$0.5 million in employee benefits expense. 34
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Sales and marketing
Three Months Ended January 31, Change
2022 2021 $ %
(dollars in thousands)
Sales and marketing $ 105,069 $ 71,087 $ 33,982 48 %
Sales and marketing expense increased by $34.0 million , or 48%, in the three
months ended January 31, 2022 compared to the same period of the prior year.
This increase was primarily due to an increase of $28.2 million in personnel and
related costs and a $1.3 million increase in software and equipment expense as
we continued to increase our sales and marketing headcount. In addition,
marketing expenses increased by $2.3 million and travel costs increased by
$1.7 million . The increase in personnel and related costs includes an increase
of $14.9 million in salaries and related taxes, an increase of $6.0 million
commissions expense related to the amortization of contract acquisition costs,
an increase of $4.2 million in stock-based compensation expense, and an increase
of $1.9 million in employee benefits expense.
General and administrative
Three Months Ended January 31, Change
2022 2021 $ %
(dollars in thousands)
General and administrative $ 31,691 $ 27,121 General and administrative expense increased by$4.6 million , or 17%, in the three months endedJanuary 31, 2022 compared to the same period of the prior year. This increase was primarily due to an increase of$3.1 million in legal and professional expenses. Personnel and related costs also increased$1.7 million and software and equipment expense increased$0.3 million due to growth in headcount. In addition, insurance and related taxes increased by$0.4 million and travel cost increased by$0.2 million . These increases were partially offset by a decrease of$1.9 million in bad debt expense. The increase in personnel and related costs includes an increase of$0.9 million in stock-based compensation, an increase of$0.4 million in salaries and related taxes, and an increase of$0.3 million in employee benefits expense. Other Expense, Net Three Months Ended January 31, Change 2022 2021 $ % (dollars in thousands) Other expense, net $ (7,036)$ (2,377) $ (4,659) 196 % Other expense, net was$7.0 million in the three months endedJanuary 31, 2022 compared to$2.4 million in the same period of the prior year. This increase in other expense, net was primarily due to an increase of$6.1 million in interest expense due to issuance of long-term debt during the first quarter of the current fiscal year. This increase was partially offset by a decrease of$1.4 million in foreign currency remeasurement loss. Provision for Income Taxes Three Months Ended January 31, Change 2022 2021 $ % (dollars in thousands) Provision for income taxes $ 3,841$ 1,136 $ 2,705 238 % The provision for income taxes increased by$2.7 million in the three months endedJanuary 31, 2022 compared to the same period of the prior year. Our effective tax rate was (7)% and (3)% of our net loss before taxes for the three months endedJanuary 31, 2022 and 2021, respectively. Our effective tax rate is affected by recurring items, such as tax rates in jurisdictions outsidethe Netherlands and the relative amounts of income we earn in those jurisdictions. The increase in tax expense is driven primarily by growth in income in foreign jurisdictions for which we are not subject to valuation allowances or net operating losses. 35
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Comparison of Nine Months Ended January 31, 2022 and 2021
Revenue
Nine Months Ended January 31, Change
2022 2021 $ %
(dollars in thousands)
Revenue
License - self-managed $ 54,457 $ 45,673 $ 8,784 19 %
Subscription - self-managed and SaaS 522,599 357,127 165,472 46 %
Total subscription revenue 577,056 402,800 174,256 43 %
Professional services 45,963 28,079 17,884 64 %
Total revenue $ 623,019 $ 430,879 $ 192,140 45 %
Total revenue increased by
Total subscription revenue increased$174.3 million , or 43%, in the nine months endedJanuary 31, 2022 compared to the same period of the prior year. The increase in revenue was primarily caused by volume-driven increases from new business, as existing customers purchased additional subscriptions and we grew our subscription customer base to over 17,900 customers compared to over 13,800 customers in the same period of the prior year. Professional services revenue increased by$17.9 million , or 64%, in the nine months endedJanuary 31, 2022 , compared to the same period of the prior year. The increase in professional services revenue was attributable to increased adoption of our professional services offerings.
Cost of Revenue and Gross Margin
Nine Months Ended January 31, Change
2022 2021 $ %
(dollars in thousands)
Cost of revenue
Cost of license - self-managed $ 1,242 $ 1,039 $ 203 20 %
Cost of subscription - self-managed and SaaS 126,097 86,464 39,633 46 %
Total cost of revenue - subscription 127,339 87,503 39,836 46 %
Cost of professional services 37,491 27,744 9,747 35 %
Total cost of revenue $ 164,830 $ 115,247 $ 49,583 43 %
Gross profit $ 458,189 $ 315,632 $ 142,557 45 %
Gross margin:
License - self-managed 98 % 98 %
Subscriptions - self-managed and SaaS 76 % 76 %
Total subscription margin 78 % 78 %
Professional services 18 % 1 %
Total gross margin 74 % 73 %
Total cost of subscription revenue increased by $39.8 million , or 46%, in the
nine months ended January 31, 2022 compared to the same period of the prior
year. This increase was primarily due to an increase of $29.7 million in cloud
hosting costs and an increase of $5.3 million in personnel and related costs due
to growth in headcount in our support organization. In addition, partner fees
expenses increased by $1.5 million , intangible asset amortization increased by
$1.0 million , and consulting costs increased by $0.8 million . The increase in
personnel and related costs includes an increase of $3.8 million in salaries and
related taxes, an increase of $1.2 million in stock-based compensation expense,
and an increase of $0.3 million in employee benefits expense.
Total subscription margin was flat at 78% for each of the nine months ended
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Cost of professional services revenue increased by$9.7 million , or 35%, in the nine months endedJanuary 31, 2022 compared to the same period of the prior year. This increase was primarily due to an increase of$4.9 million in personnel and related costs, including an increase of$3.4 million in salaries and related taxes, and an increase of$1.3 million in stock-based compensation. In addition, subcontractor costs also increased by$4.0 million . Gross margin for professional services revenue was 18% in the nine months endedJanuary 31, 2022 compared to 1% in the nine months endedJanuary 31, 2021 . The increase in margin is primarily due to the increase in revenue, and a lower than proportionate increase in cost of professional services revenue. We continue to invest in headcount for our professional services organization that we believe will be needed as we continue to grow and expect travel related costs will increase in the future as COVID-19 risks and travel restrictions abate. Our gross margin for professional services may fluctuate, decline or be negative in the near-term as we seek to expand our professional services business. Operating Expenses Research and development Nine Months Ended January 31, Change 2022 2021 $ % (dollars in thousands) Research and development$ 194,894 $ 143,766 $ 51,128 36 % Research and development expense increased by$51.1 million , or 36%, in the nine months endedJanuary 31, 2022 compared to the same period of the prior year as we continued to invest in the development of new and existing offerings. Personnel and related costs increased by$45.4 million and software and equipment expense increased by$1.0 million primarily as a result of growth in headcount. Cloud hosting costs also increased by$2.1 million and consulting expense increased by$1.9 million . The increase in personnel and related costs includes an increase of$21.5 million in salaries and related taxes, an increase of$17.5 million in stock-based compensation expense, an increase of$3.7 million in acquisition related compensation, and an increase of$1.6 million in employee benefits expense. Sales and marketing Nine Months Ended January 31, Change 2022 2021 $ % (dollars in thousands) Sales and marketing$ 288,055 $ 191,712 $ 96,343 50 % Sales and marketing expense increased by$96.3 million , or 50%, in the nine months endedJanuary 31, 2022 compared to the same period of the prior year. This increase was primarily due to an increase of$78.1 million in personnel related costs and an increase of$2.9 million in software and equipment charges due to growth in headcount. In addition, marketing expenses increased$10.1 million , travel costs increased by$2.9 million and consulting expense increased by$2.0 million . The increase in personnel and related costs includes an increase of$44.0 million in salaries and related taxes, an increase of$18.0 million in commission expense related to the amortization of contract acquisition costs, an increase of$8.3 million in stock-based compensation expense and, an increase of$4.6 million in employee benefits expense.
General and administrative
Nine Months Ended January 31, Change
2022 2021 $ %
(dollars in thousands)
General and administrative $ 89,298 $ 72,555 General and administrative expense increased by$16.7 million , or 23%, in the nine months endedJanuary 31, 2022 compared to the same period of the prior year. This increase was primarily due to an increase of$8.3 million in legal and professional fees. In addition, personnel and related costs increased by$5.9 million and software and equipment expense increased by$0.9 million due to headcount growth. Consulting costs also increased by$1.2 million . The increase in personnel and related costs includes an increase of$4.0 million in stock-based compensation expense, an increase of$2.2 million in salaries and related taxes, and an increase of$0.6 million in employee benefits expense which were partially offset by a decrease in other miscellaneous employee related expenses of$0.9 million . 37
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Other Income (Expense), Net
Nine Months Ended January 31, Change
2022 2021 $ %
(dollars in thousands)
Other income (expense), net $ (14,836) $ 8,424 $ (23,260) (276) %
Other expense, net was $14.8 million in the nine months ended January 31, 2022
compared to other income, net of $8.4 million for the same period of the prior
year. This was due to a decrease in foreign currency gain of $8.9 million and an
increase of $14.4 million in interest expense due to issuance of long-term debt
during the first quarter of the current fiscal year.
Provision for Income Taxes
Nine Months Ended January 31, Change
2022 2021 $ %
(dollars in thousands)
Provision for income taxes $ 9,344 $ 2,156 The provision for income taxes increased$7.2 million in the nine months endedJanuary 31, 2022 compared to the same period in the prior year. Our effective tax rate was (7)% and (3)% of our net loss before taxes for the nine months endedJanuary 31, 2022 and 2021, respectively. Our effective tax rate is affected by recurring items, such as tax rates in jurisdictions outsidethe Netherlands and the relative amounts of income we earn in those jurisdictions. The increase in tax expense from the prior year is due to an increase in income in foreign jurisdictions for which we are not subject to valuation allowances or net operating losses and an increase in withholding tax expense. Liquidity and Capital Resources As ofJanuary 31, 2022 , we had cash and cash equivalents and restricted cash of$864.4 million and$3.9 million , respectively, and working capital of$601.5 million . Our restricted cash consists primarily of cash on deposit with financial institutions in support of letters of credit in favor of landlords for non-cancelable lease agreements. We have generated significant operating losses from our operations as reflected in our accumulated deficit of$751.6 million as ofJanuary 31, 2022 . We have historically incurred, and expect to continue to incur, operating losses and may generate negative cash flows from operations on an annual basis for the foreseeable future due to the investments we intend to make as described above, and as a result, we may require additional capital resources to execute on our strategic initiatives to grow our business. We believe that our existing cash and cash equivalents will be sufficient to fund our operating and capital needs for at least the next 12 months, despite the uncertainty in the changing market and economic conditions related to COVID-19. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary as a result of, and our future capital requirements, both near-term and long-term, will depend on, many factors, including our growth rate, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing activities, the timing of new introductions of solutions or features, and the continuing market acceptance of our solutions and services. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. InJuly 2021 , we issued long-term debt of$575.0 million , and we may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results and financial condition would be adversely affected.
The following table summarizes our cash flows for the periods presented:
Nine Months Ended January 31,
2022 2021
(in thousands)
Net cash provided by operating activities $ 8,722 $ 24,110
Net cash used in investing activities $ (125,068) $ (1,412)
Net cash provided by financing activities $ 593,257
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Net Cash Provided by Operating Activities
Net cash provided by operating activities during the nine months endedJanuary 31, 2022 was$8.7 million , which resulted from a net loss of$138.2 million and net cash outflow of$16.3 million from changes in operating assets and liabilities, offset by non-cash charges of$163.3 million . Non-cash charges primarily consisted of$97.0 million for stock-based compensation expense,$43.4 million for amortization of deferred contract acquisition costs,$14.6 million of depreciation and intangible asset amortization expense,$6.3 million in non-cash operating lease costs,$1.7 million of foreign currency transaction losses,$0.6 million of amortization of debt issuance costs, and$0.1 million of other expenses which were partially offset by an increase in deferred income taxes of$0.2 million . The net cash outflow from changes in operating assets and liabilities was the result of an increase in deferred contract acquisition costs of$61.2 million as our sales commissions increased due to increased business volume, a decrease of$6.4 million in operating lease liabilities, and an increase of$3.5 million in prepaid expenses and other assets. These outflows were partially offset by a net increase of$36.7 million in accounts payable, accrued expenses, accrued compensation and benefits and a decrease of$9.8 million in accounts receivable, and an increase of$8.3 million in deferred revenue. Net cash provided by operating activities during the nine months endedJanuary 31, 2021 was$24.1 million , which resulted from a net loss of$86.1 million adjusted for non-cash charges of$102.1 million and net cash inflow of$8.1 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$65.3 million for stock-based compensation expense,$28.5 million for amortization of deferred contract acquisition costs,$12.9 million of depreciation and intangible asset amortization expense, and$5.3 million in non-cash operating lease costs which were partially offset by a foreign currency transaction gain of$9.5 million and an increase in deferred income taxes of$0.3 million . The net cash inflow from changes in operating assets and liabilities was the result of an increase of$53.3 million in deferred revenue, a decrease in accounts receivable of$15.2 million , and a decrease of$10.1 million in prepaid expenses and other assets. These inflows were partially offset by an increase in deferred contract acquisition costs of$54.6 million as our sales commissions increased due to the addition of new customers and expansion of our existing customer subscriptions, a net decrease of$10.5 million in accounts payable, accrued expenses, accrued compensation and benefits, and a$5.4 million decrease in operating lease liabilities.
Net cash used in investing activities during the nine months endedJanuary 31, 2022 was$125.1 million due to cash used in the acquisitions of$119.9 million , capitalization of$4.2 million in internal-use software costs and$1.0 million of capital expenditures. Net cash used in investing activities during the nine months endedJanuary 31, 2021 was$1.4 million due to$2.7 million of capital expenditures, offset by cash provided by other investing activities of$1.3 million .
Net Cash Provided by Financing Activities
Net cash provided by financing activities during the nine months ended
Net cash provided by financing activities during the nine months endedJanuary 31, 2021 was$67.6 million due to proceeds from stock option exercises during the period.
Off Balance Sheet Arrangements
We did not have during the periods presented and we do not currently have any off balance sheet financing arrangements or any relationships with any unconsolidated entities or financial partnerships, including entities referred to as structured finance or special purpose entities, which were established for the purpose of facilitating off balance sheet arrangements or other contractually narrow or limited purposes.
Contractual Obligations and Commitments
Our principal commitments consist of obligations under our operating leases, which are primarily for office space, and purchase commitments to our cloud hosting providers. Except for those disclosed in Note 7 "Senior Notes" of our accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q, there have been no material changes to our contractual obligations and commitments discussed in our Annual Report on Form 10-K for the year endedApril 30, 2021 . 39
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Recently Issued Accounting Pronouncements
Refer to Note 2 of our accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements and new accounting pronouncements not yet adopted as of the date of this report.
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