Elastic N.V. 10-K

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 the section titled “Selected Consolidated Financial Data” and 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. 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 consumer and enterprise applications. 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 open source and 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 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 access to proprietary features and support. We do not sell support separately. Our subscription agreements for self-managed deployments typically have terms of one to three years and we usually bill for them annually in advance. Elastic Cloud customers may purchase subscriptions either on a month-to-month basis or on a committed contract of at least one year in duration. Subscriptions accounted for 92%, 91% and 93% of total revenue in the years ended April 30, 2020, 2019 and 2018, respectively. We also generate revenue from consulting and training services. We had over 11,300 customers, over 8,100 customers and over 5,000 customers as of April 30, 2020, 2019, and 2018, 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. All 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 610, over 440, and over 275 as of April 30, 2020, 2019 and 2018, 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. 46 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 1,936 employees as of April 30, 2020. On October 8, 2019, the Company acquired all outstanding shares of Endgame, a security company offering endpoint protection technology, for a total acquisition price of $234.0 million. Elastic paid the purchase price through (i) the issuance of 2,218,694 ordinary shares in respect of Endgame’s outstanding capital stock, warrants, convertible notes, and certain retention awards, (ii) the cash repayment of Endgame’s outstanding indebtedness of $20.4 million, (iii) the assumption of Endgame’s outstanding options, (iv) a $0.4 million cash deposit to an expense fund for the fees and expenses of the representative and agent of Endgame securityholders, (v) the cash payment of Endgame’s transaction expenses of $5.9 million, and (vi) the cash payment of withholding taxes related to acquisition expense settled in shares of $2.8 million. Approximately 11% of the ordinary shares issued, or 235,031 shares, are being held in an indemnity escrow fund for 18 months after the acquisition close date. Refer to Note 5, Acquisitions in the notes to consolidated financial statements for further discussion of the acquisition. We have experienced significant growth, with revenue increasing to $427.6 million in the year ended April 30, 2020 from $271.7 million in the year ended April 30, 2019 and $159.9 million in the year ended April 30, 2018, representing year-over-year growth of 57% for the year ended April 30, 2020 and 70% for the year ended April 30, 2019. In the year ended April 30, 2020, revenue from outside the United States accounted for 43% 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 Sterling. No customer represented more than 10% of our revenue in the years ended April 30, 2020, 2019 or 2018. We have not been profitable to date. In the years ended April 30, 2020, 2019 and 2018, we incurred net losses of $167.2 million, $102.3 million and $52.7 million, respectively, and our net cash used in operating activities was $30.6 million, $23.9 million and $20.8 million, respectively. We have experienced losses in each year since our incorporation and as of April 30, 2020, had an accumulated deficit of $484.3 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. The full extent of the 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, impact on our customers and our sales cycles, impact on our customer, employee or industry events, and effect on our vendors, all of which are uncertain and cannot be predicted. Due to our subscription-based business model, the effect of COVID-19 may not be fully reflected in our results of operations until future periods, if at all. In the near to intermediate term, we may experience an increase in delayed purchasing decisions from prospective customers and longer sales cycles, which we have experienced, which in turn, could result in delays in deals closing, creating near-term headwinds for calculated billings, as well as potential future impacts on revenue growth and other key metrics. 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 a combination of open source, free proprietary and paid proprietary software 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 to expand the use cases to which the Elastic Stack can be applied. The Elastic Stack is applied to various use cases both directly by developers and through the solutions we offer. Our revenue is derived primarily from subscriptions of Enterprise Search, Observability and Security built on the Elastic Stack. We believe that releasing additional features of the Elastic Stack and additional features for our solutions on top of the Elastic Stack 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 our solutions and the Elastic Stack and make it easier to apply to additional use cases. These investments may adversely affect our operating results prior to generating benefits, to the extent that they ultimately generate benefits at all. 47 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 continued to be over 130% for each quarter during fiscal 2020. As large organizations expand their use of the Elastic Stack across multiple use cases, projects, divisions and users, they often begin to require centralized provisioning, management and monitoring across multiple deployments. To satisfy these requirements, we offer the Elastic Enterprise subscription. We will continue to focus some of our direct sales efforts on driving adoption of our paid offerings. Increasing adoption of Elastic Cloud . Elastic Cloud, our family of SaaS products that includes Elasticsearch Service, Site Search Service, and App 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, open source users that have been self-managing deployments of the Elastic Stack subsequently become paying subscribers of Elastic Cloud. In the years ended April 30, 2020, 2019 and 2018, Elastic Cloud contributed 22%, 17% and 16% 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 and managing 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. 48 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, 2020 2019 2018 (in thousands) Gross profit $ 304,930 $ 193,643 $ 119,195 Stock-based compensation expense 7,127 4,591 1,028 Employer payroll taxes on employee stock transactions 527 38 — Amortization of acquired intangibles 6,768 2,808 1,908 Non-GAAP gross profit $ 319,352 $ 201,080 $ 122,131 Gross margin 71 % 71 % 75 % Non-GAAP gross margin (non-GAAP gross profit as a percentage of revenue) 75 % 74 % 76 % 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. Year Ended April 30, 2020 2019 2018 (in thousands) Operating loss $ (171,105) $ (101,356) $ (47,994) Stock-based compensation expense 60,007 39,942 12,742 Employer payroll taxes on employee stock transactions 7,493 1,814 — Amortization of acquired intangibles 10,068 2,956 2,027 Acquisition-related expenses 17,974 948 1,263 Non-GAAP loss from operations $ (75,563) $ (55,696) $ (31,962) Operating margin (40) % (37) % (30) % Non-GAAP operating margin (non-GAAP loss from operations as a percentage of revenue) (18) % (21) % (20) % Free Cash Flow and Free Cash Flow Margin Free cash flow is a non-GAAP financial measure that we define as net cash (used in) provided by operating activities less purchases of property and equipment. 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 cash generated (or consumed) by our 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 49 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 used in operating activities, the most directly comparable financial measure calculated in accordance with GAAP: Year Ended April 30, 2020 2019 2018 (in thousands) Net cash used in operating activities $ (30,564) $ (23,937) $ (20,819) Less: Purchases of property and equipment (5,063) (3,447) (2,968) Free cash flow $ (35,627) $ (27,384) $ (23,787) Net cash (used in) provided by investing activities $ (29,187) $ (8,283) $ 8,330 Net cash provided by financing activities $ 58,539 $ 281,788 $ 3,427 Net cash used in operating activities (as a percentage of total revenue) (7) % (9) % (13) % Less: Purchases of property and equipment (as a percentage of total revenue) (1) % (1) % (2) % Free cash flow margin (8) % (10) % (15) % 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 the effects of deferred revenue and unbilled accounts receivable acquired through acquisitions. 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: Year Ended April 30, 2020 2019 2018 (in thousands) Total revenue $ 427,620 $ 271,653 $ 159,935 Add: Increase in total deferred revenue 85,670 71,876 45,814 Less: Increase in unbilled accounts receivable (592) (571) (25) Calculated billings $ 512,698 $ 342,958 $ 205,724 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 access to 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 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 comprises 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. 50 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 increase as a percentage of total revenue, which we expect will adversely impact our gross margin as a result of the associated hosting and managing costs. Operating Expenses Research and development. Research and development expense primarily 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 primarily 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 primarily 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 (Expense), Net Other income (expense), net primarily consists of gains and losses from transactions denominated in a currency other than the functional currency and interest income (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, non-deductible stock-based compensation and changes in our valuation allowance. 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 Company has elected to omit a discussion and analysis of the financial condition and results of operations of certain items from fiscal year ended April 30, 2018 and year to year comparison between fiscal year ended April 30, 2019 and April 30, 2018. Such discussion and analysis can be found in “Management’s Discussion and Analysis of Financial Condition 51 and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2019, filed with the SEC on June 28, 2019 and is incorporated by reference herein. The period to period comparison of results is not necessarily indicative of results for future periods. Year Ended April 30, 2020 2019 2018 (in thousands) Revenue License - self-managed $ 53,536 $ 39,474 $ 25,759 Subscription - self-managed and SaaS 338,634 208,780 123,623 Total subscription revenue 392,170 248,254 149,382 Professional services 35,450 23,399 10,553 Total revenue 427,620 271,653 159,935 Cost of revenue (1)(2)(3) Cost of license - self-managed 948 387 387 Cost of subscription - self-managed and SaaS 84,819 53,560 27,920 Total cost of revenue - subscription 85,767 53,947 28,307 Cost of professional services 36,923 24,063 12,433 Total cost of revenue 122,690 78,010 40,740 Gross profit 304,930 193,643 119,195 Operating expenses (1)(2)(3)(4) Research and development 165,370 101,167 55,641 Sales and marketing 219,040 147,296 82,606 General and administrative 91,625 46,536 28,942 Total operating expenses 476,035 294,999 167,189 Operating loss (1)(2)(3)(4) (171,105) (101,356) (47,994) Other income (expense), net 1,963 3,441 (1,357) Loss before income taxes (169,142) (97,915) (49,351) Provision for (benefit from) income taxes (1,968) 4,388 3,376 Net loss $ (167,174) $ (102,303) $ (52,727) (1) Includes stock-based compensation expense as follows: Year Ended April 30, 2020 2019 2018 (in thousands) Cost of Revenue Cost of subscription - self managed and SaaS $ 4,147 $ 3,383 $ 699 Cost of professional services 2,980 1,208 329 Research and development 23,621 16,100 5,045 Sales and marketing 19,334 11,996 3,560 General and administrative 9,925 7,255 3,109 Total stock-based compensation expense $ 60,007 $ 39,942 $ 12,742 52 (2) Includes employer payroll taxes on employee stock transactions as follows (information for fiscal year 2018 is not meaningful): Year Ended April 30, 2020 2019 2018 (in thousands) Cost of Revenue Cost of subscription - self managed and SaaS $ 349 $ 28 $ — Cost of professional services 178 10 — Research and development 2,179 939 — Sales and marketing 3,237 747 — General and administrative 1,550 90 — Total employer payroll tax on stock transactions $ 7,493 $ 1,814 $ — (3) Includes amortization of acquired intangibles as follows: Year Ended April 30, 2020 2019 2018 (in thousands) Cost of Revenue Cost of license - self-managed $ 948 $ 387 $ 387 Cost of subscription - self-managed and SaaS 5,820 2,421 1,521 Sales and marketing 3,300 148 119 Total amortization of acquired intangibles $ 10,068 $ 2,956 $ 2,027 (4) Includes acquisition-related expenses as follows: Year Ended April 30, 2020 2019 2018 (in thousands) Research and development $ 34 $ 689 $ 655 Sales and marketing 522 — — General and administrative 17,418 259 608 Total acquisition-related expenses $ 17,974 $ 948 $ 1,263 53 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, 2020 2019 2018 Revenue License - self-managed 13 % 14 % 16 % Subscription - self-managed and SaaS 79 % 77 % 77 % Total subscription revenue 92 % 91 % 93 % Professional services 8 % 9 % 7 % Total revenue 100 % 100 % 100 % Cost of revenue Cost of license - self-managed 0 % 0 % 0 % Cost of subscription - self-managed and SaaS 20 % 20 % 17 % Total cost of revenue - subscription 20 % 20 % 17 % Cost of professional services 9 % 9 % 8 % Total cost of revenue 29 % 29 % 25 % Gross profit 71 % 71 % 75 % Operating expenses Research and development 39 % 37 % 35 % Sales and marketing 51 % 54 % 52 % General and administrative 21 % 17 % 18 % Total operating expenses 111 % 108 % 105 % Operating loss (40) % (37) % (30) % Other income (expense), net 0 % 1 % (1) % Loss before income taxes (40) % (36) % (31) % Provision for (benefit from) income taxes (1) % 2 % 2 % Net loss (39) % (38) % (33) % Comparison of Fiscal Years Ended April 30, 2020 and 2019 Revenue Year Ended April 30, Change 2020 2019 $ % (in thousands) Revenue License - self-managed $ 53,536 $ 39,474 $ 14,062 36 % Subscription - self-managed and SaaS 338,634 208,780 129,854 62 % Total subscription revenue 392,170 248,254 143,916 58 % Professional services 35,450 23,399 12,051 52 % Total revenue $ 427,620 $ 271,653 $ 155,967 57 % Total revenue increased by $156.0 million, or 57%, in the year ended April 30, 2020 compared to the prior year. Total subscription revenue increased $143.9 million, or 58%, in the year ended April 30, 2020 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 11,300 customers in the year ended April 30, 2020 compared to over 8,100 customers in the prior year. Professional services revenue increased by $12.1 million, or 52%, in the year ended April 30, 2020 compared to the prior year. The increase in professional services revenue was attributable to increased adoption of our professional services offerings. 54 Cost of Revenue and Gross Margin Year Ended April 30, Change 2020 2019 $ % (in thousands) Cost of revenue Cost of license - self-managed $ 948 $ 387 $ 561 145 % Cost of subscription - self-managed and SaaS 84,819 53,560 31,259 58 % Total cost of revenue - subscription 85,767 53,947 31,820 59 % Cost of professional services 36,923 24,063 12,860 53 % Total cost of revenue $ 122,690 $ 78,010 $ 44,680 57 % Gross profit $ 304,930 $ 193,643 $ 111,287 57 % Gross margin: License - self-managed 98 % 99 % Subscriptions - self-managed and SaaS 75 % 74 % Total subscription margin 78 % 78 % Professional services (4) % (3) % Total gross margin 71 % 71 % Total cost of subscription revenue increased by $31.8 million, or 59%, in the year ended April 30, 2020 compared to the prior year. This increase was primarily due to an increase of $20.6 million in cloud infrastructure costs and an increase of $5.2 million in personnel and related charges from growth in headcount in our support organization. In addition, amortization of acquired intangible assets increased $3.3 million. The increase in personnel and related costs includes an increase of $3.8 million in salaries and related taxes and an increase of $0.8 million in stock-based compensation expense. Total subscription margin remained flat at 78% in the year ended April 30, 2020 compared to the prior year. Cost of professional services revenue increased by $12.9 million, or 53%, in the year ended April 30, 2020 compared to the prior year. This increase was primarily due to an increase of $12.1 million in personnel and related costs and increases of $0.7 million in software and equipment expense and rent of $0.7 million driven by an increase in headcount in our consulting and training organizations. These increases were partially offset by a decrease of $1.7 million in subcontractor costs. The increase in personnel and related costs includes an increase of $8.3 million in salaries and related taxes and an increase of $1.8 million in stock-based compensation expense. Gross margin for professional services revenue was (4)% in the year ended April 30, 2020 compared to (3)% for the prior year. Historically, our professional services offerings have primarily consisted of training, however, we have recently experienced increased demand for consulting services. In the year ended April 30, 2020, we have invested in headcount for our professional services organization that we believe will be needed as we continue to grow. Our gross margin for professional services may fluctuate or decline in the near-term as we seek to expand our professional services business. Operating Expenses Research and development Year Ended April 30, Change 2020 2019 $ % (in thousands) Research and development $ 165,370 $ 101,167 $ 64,203 63 % Research and development expense increased by $64.2 million, or 63%, in the year ended April 30, 2020 compared to the prior year as we continued to invest in the development of new and existing offerings. Personnel and related costs increased by $51.3 million and software and equipment expense increased by $3.4 million, primarily as a result of growth in headcount. In addition, cloud infrastructure costs related to our research and development activities increased $3.4 million. The increase in personnel and related costs includes an increase of $38.2 million in salaries and related taxes and an increase of $7.5 million in stock-based compensation expense. 55 Sales and marketing Year Ended April 30, Change 2020 2019 $ % (in thousands) Sales and marketing $ 219,040 $ 147,296 $ 71,744 49 % Sales and marketing expense increased by $71.7 million, or 49%, in the year ended April 30, 2020 compared to the prior year. This increase was primarily due to an increase of $55.1 million in personnel and related costs and an increase of $3.0 million in software and equipment expense, as we continue to increase our sales and marketing headcount. In addition, marketing expenses increased $5.2 million as we increased the reach of our global marketing campaigns and amortization of acquired intangible assets increased by $3.2 million. The increase in personnel and related costs includes an increase of $33.9 million in salaries and related taxes, an increase of $6.4 million in commissions expense related to the amortization of contract acquisition costs and an increase of $7.3 million in stock-based compensation expense. General and administrative Year Ended April 30, Change 2020 2019 $ % (in thousands) General and administrative $ 91,625 $ 46,536 $ 45,089 97 % General and administrative expense increased by $45.1 million, or 97%, in the year ended April 30, 2020 compared to the prior year. As a result of our continued investment in headcount, personnel and related costs increased by $37.3 million. Legal and professional advisory expenses increased by $8.1 million due primarily to expenses incurred in connection with the acquisition of Endgame and international expansion. The increase in personnel and related costs includes an increase of $17.6 million in salaries and related taxes, an increase in acquisition-related compensation of $12.5 million and an increase of $2.7 million in stock-based compensation expense. Other Income (Expense), Net Year Ended April 30, Change 2020 2019 $ % (in thousands) Other income (expense), net $ 1,963 $ 3,441 $ (1,478) (43) % Other income was $2.0 million for the year ended April 30, 2020 compared to $3.4 million in the prior year. This decrease was primarily due to a higher negative impact of foreign currency fluctuations of $2.0 million and a decrease of $0.5 million in other income which were partiall y offset by an increase of $0.9 million in interest income. Provision for (Benefit from) Income Taxes Year Ended April 30, Change 2020 2019 $ % (in thousands) Provision for (benefit from) income taxes $ (1,968) $ 4,388 $ (6,356) (145) % The benefit from income taxes was $2.0 million compared to a provision for $4.4 million in the prior year. The additional tax benefit is primarily due to the increase in the pretax loss, benefit from net operating loss carryback due to the Coronavirus Aid, Relief, and Economic Security Act, tax benefit for stock-based compensation which were partially offset by a valuation allowance for deferred tax assets in the United States, the Netherlands, and the United Kingdom. Our effective tax rate was 1.2% and (4.5)% of our net loss before taxes for the year ended April 30, 2020 and 2019, respectively. 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. 56 Three Months Ended April 30, 2020 January 31, 2020 October 31, 2019 July 31, 2019 April 30, 2019 January 31, 2018 October 31, 2018 July 31, 2018 Revenue License - self-managed $ 16,862 $ 14,495 $ 12,272 $ 9,907 $ 12,624 $ 9,406 $ 10,204 $ 7,240 Subscription - self-managed and SaaS 97,041 89,703 79,407 72,483 60,999 55,180 48,232 44,369 Total subscription revenue 113,903 104,198 91,679 82,390 73,623 64,586 58,436 51,609 Professional services 9,720 8,983 9,427 7,320 6,976 6,249 5,139 5,035 Total revenue 123,623 113,181 101,106 89,710 80,599 70,835 63,575 56,644 Cost of revenue (1)(2)(3) Cost of license - self- managed 346 347 158 97 97 96 97 97 Cost of subscription - self- managed and SaaS 23,987 23,196 19,741 17,895 16,548 13,941 12,870 10,201 Total cost of revenue - subscription 24,333 23,543 19,899 17,992 16,645 14,037 12,967 10,298 Cost of professional services 9,940 9,862 8,862 8,259 6,797 6,387 5,620 5,259 Total cost of revenue 34,273 33,405 28,761 26,251 23,442 20,424 18,587 15,557 Gross profit 89,350 79,776 72,345 63,459 57,157 50,411 44,988 41,087 Operating expenses (1)(2)(3)(4) Research and development 45,591 46,119 38,478 35,182 31,004 25,850 25,332 18,981 Sales and marketing 58,180 54,829 54,020 52,011 45,044 37,196 34,634 30,422 General and administrative 20,153 21,096 31,808 18,568 13,194 11,151 12,092 10,099 Total operating expenses 123,924 122,044 124,306 105,761 89,242 74,197 72,058 59,502 Operating loss (1)(2)(3)(4) (34,574) (42,268) (51,961) (42,302) (32,085) (23,786) (27,070) (18,415) Other income (expense), net 687 (1,339) 1,684 931 704 1,877 264 596 Loss before income taxes (33,887) (43,607) (50,277) (41,371) (31,381) (21,909) (26,806) (17,819) Provision for (benefit from) income taxes (2,736) 674 (304) 398 3,454 (558) 733 759 Net loss $ (31,151) $ (44,281) $ (49,973) $ (41,769) $ (34,835) $ (21,351) $ (27,539) $ (18,578) Net loss per share attributable to ordinary shareholders, basic and diluted $ (0.38) $ (0.55) $ (0.64) $ (0.56) $ (0.48) $ (0.30) $ (0.63) $ (0.56) Weighted-average shares used to compute net loss per share attributable to ordinary shareholders, basic and diluted 82,123,381 80,737,237 77,772,406 74,643,782 72,307,990 70,725,336 43,978,770 32,978,163 (1) Includes stock-based compensation expense as follows: Three Months Ended April 30, 2020 January 31, 2020 October 31, 2019 July 31, 2019 April 30, 2019 January 31, 2018 October 31, 2018 July 31, 2018 Cost of Revenue Cost of subscription - self managed and SaaS $ 1,278 $ 1,008 $ 946 $ 915 $ 1,195 $ 1,095 $ 680 $ 413 Cost of professional services 902 879 638 561 440 364 227 177 Research and development 6,534 6,256 5,870 4,961 4,714 4,604 4,685 2,097 Sales and marketing 5,828 4,540 4,658 4,308 3,911 3,471 2,762 1,852 General and administrative 2,690 2,905 2,304 2,026 1,667 1,577 2,885 1,126 Total stock-based compensation expense $ 17,232 $ 15,588 $ 14,416 $ 12,771 $ 11,927 $ 11,111 $ 11,239 $ 5,665 57 (2) Includes employer payroll taxes on employee stock transactions as follows (information for periods prior to three months ended April 30, 2019 is not meaningful): Three Months Ended April 30, 2020 January 31, 2020 October 31, 2019 July 31, 2019 April 30, 2019 January 31, 2018 October 31, 2018 July 31, 2018 Cost of Revenue Cost of subscription - self managed and SaaS $ 28 $ 21 $ 166 $ 134 $ 28 $ — $ — $ — Cost of professional services 42 16 86 34 10 — — — Research and development 293 238 888 760 939 — — — Sales and marketing 421 335 1,887 594 747 — — — General and administrative 61 129 753 607 90 — — — Total stock-based compensation expense $ 845 $ 739 $ 3,780 $ 2,129 $ 1,814 $ — $ — $ — (3) Includes amortization of acquired intangibles as follows: Three Months Ended April 30, 2020 January 31, 2020 October 31, 2019 July 31, 2019 April 30, 2019 January 31, 2018 October 31, 2018 July 31, 2018 Cost of Revenue Cost of license - self managed $ 346 $ 347 $ 158 $ 97 $ 97 $ 96 $ 97 $ 97 Cost of subscription - self managed and SaaS 1,763 2,660 861 536 570 638 637 576 Sales and marketing 1,441 1,451 379 29 33 38 40 37 Total amortization of acquired intangibles $ 3,550 $ 4,458 $ 1,398 $ 662 $ 700 $ 772 $ 774 $ 710 (4) Includes acquisition-related expenses as follows: Three Months Ended April 30, 2020 January 31, 2020 October 31, 2019 July 31, 2019 April 30, 2019 January 31, 2018 October 31, 2018 July 31, 2018 Research and development $ — $ — $ — $ 34 $ 168 $ 173 $ 174 $ 174 Sales and marketing 14 395 113 — — — — — General and administrative 198 933 13,849 2,438 — — 53 206 Total acquisition-related expenses $ 212 $ 1,328 $ 13,962 $ 2,472 $ 168 $ 173 $ 227 $ 380 58 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 April 30, 2020 January 31, 2020 October 31, 2019 July 31, 2019 April 30, 2019 January 31, 2018 October 31, 2018 July 31, 2018 Revenue License - self-managed 14 % 13 % 12 % 11 % 15 % 13 % 16 % 13 % Subscription - self-managed and SaaS 78 % 79 % 79 % 81 % 76 % 78 % 76 % 78 % Total subscription revenue 92 % 92 % 91 % 92 % 91 % 91 % 92 % 91 % Professional services 8 % 8 % 9 % 8 % 9 % 9 % 8 % 9 % Total revenue 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % Cost of revenue (1)(2)(3) Cost of license - self-managed 0 % 0 % 0 % 0 % 0 % 0 % 0 % 0 % Cost of subscription - self- managed and SaaS 20 % 21 % 20 % 20 % 21 % 20 % 20 % 18 % Total cost of revenue - subscription 20 % 21 % 20 % 20 % 21 % 20 % 20 % 18 % Cost of professional services 8 % 9 % 8 % 9 % 8 % 9 % 9 % 9 % Total cost of revenue 28 % 30 % 28 % 29 % 29 % 29 % 29 % 27 % Gross profit 72 % 70 % 72 % 71 % 71 % 71 % 71 % 73 % Operating expenses (1)(2)(3)(4) Research and development 37 % 41 % 38 % 39 % 39 % 36 % 40 % 34 % Sales and marketing 47 % 48 % 53 % 58 % 56 % 52 % 54 % 54 % General and administrative 16 % 18 % 31 % 21 % 16 % 16 % 19 % 18 % Total operating expenses 100 % 107 % 122 % 118 % 111 % 104 % 113 % 106 % Operating loss (1)(2)(3)(4) (28) % (37) % (50) % (47) % (40) % (33) % (42) % (33) % Other income (expense), net 1 % (2) % 0 % 1 % 1 % 2 % 0 % 1 % Loss before income taxes (27) % (39) % (50) % (46) % (39) % (31) % (42) % (32) % Provision for (benefit from) income taxes (2) % 0 % (1) % 1 % 4 % (1) % 1 % 1 % Net loss (25) % (39) % (49) % (47) % (43) % (30) % (43) % (33) % (1) Includes stock-based compensation expense as follows: Three Months Ended April 30, 2020 January 31, 2020 October 31, 2019 July 31, 2019 April 30, 2019 January 31, 2018 October 31, 2018 July 31, 2018 Cost of Revenue Cost of subscription - self managed and SaaS 1 % 1 % 1 % 1 % 1 % 2 % 1 % 1 % Cost of professional services 1 % 1 % 0 % 1 % 1 % 0 % 0 % 0 % Research and development 5 % 5 % 6 % 6 % 6 % 7 % 8 % 4 % Sales and marketing 5 % 4 % 5 % 5 % 5 % 5 % 4 % 3 % General and administrative 2 % 3 % 2 % 2 % 2 % 2 % 5 % 2 % Total stock-based compensation expense 14 % 14 % 14 % 15 % 15 % 16 % 18 % 10 % 59 (2) Includes employer payroll taxes on employee stock transactions as follows (information for periods prior to three months ended April 30, 2019 is not meaningful): Three Months Ended April 30, 2020 January 31, 2020 October 31, 2019 July 31, 2019 April 30, 2019 January 31, 2018 October 31, 2018 July 31, 2018 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 0 % 0 % 1 % 1 % 1 % 0 % 0 % 0 % Sales and marketing 1 % 1 % 2 % 1 % 1 % 0 % 0 % 0 % General and administrative 0 % 0 % 1 % 1 % 0 % 0 % 0 % 0 % Total stock-based compensation expense 1 % 1 % 4 % 3 % 2 % 0 % 0 % 0 % (3) Includes amortization of acquired intangibles as follows: Three Months Ended April 30, 2020 January 31, 2020 October 31, 2019 July 31, 2019 April 30, 2019 January 31, 2018 October 31, 2018 July 31, 2018 Cost of Revenue Cost of license - self- managed 0 % 0 % 0 % 0 % 0 % 0 % 0 % 0 % Cost of subscription - self- managed and SaaS 2 % 3 % 1 % 1 % 1 % 1 % 1 % 1 % Sales and marketing 1 % 1 % 0 % 0 % 0 % 0 % 0 % 0 % Total amortization of acquired intangibles 3 % 4 % 1 % 1 % 1 % 1 % 1 % 1 % (4) Includes acquisition-related expenses as follows: Three Months Ended April 30, 2020 January 31, 2020 October 31, 2019 July 31, 2019 April 30, 2019 January 31, 2018 October 31, 2018 July 31, 2018 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 % 1 % 14 % 3 % 0 % 0 % 0 % 1 % Total acquisition-related expenses 0 % 1 % 14 % 3 % 0 % 0 % 0 % 1 % 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 has remained relatively flat. 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. 60 Our operating expenses generally increased sequentially over the periods presented as we grew the associated headcount and other costs. General and administrative costs increased in the second quarter of the year ended April 30, 2020 due primarily to the costs associated with closing the Endgame acquisition. 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, 2020, we had cash and cash equivalents and restricted cash of $297.1 million and $2.3 million, respectively, and working capital of $158.8 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 $484.3 million as of April 30, 2020. We have historically incurred, and expect to continue to incur, operating losses and 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, 2020 2019 2018 (in thousands) Net cash used in operating activities $ (30,564) $ (23,937) $ (20,819) Net cash provided by (used in) investing activities $ (29,187) $ (8,283) $ 8,330 Net cash provided by financing activities $ 58,539 $ 281,788 $ 3,427 Net Cash Used in Operating Activities 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 increase in operating lease liabilities relating to the adoption of the new lease accounting standard. 61 Net cash used in operating activities during the year ended April 30, 2019 was $23.9 million, which resulted from a net loss of $102.3 million adjusted for non-cash charges of $70.7 million and net cash inflow of $7.7 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $39.9 million for stock-based compensation expense, $21.4 million for amortization of deferred contract acquisition costs, $5.7 million of depreciation and intangible asset amortization expense and a $3.6 million decrease in deferred income taxes. The net cash inflow from changes in operating assets and liabilities was the result of a $71.9 million increase in deferred revenue due to higher billings and a net increase of $16.9 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 in deferred contract acquisition costs of $30.0 million as our sales commissions increased due to the addition of new customers and expansion of our existing customer subscriptions, a $29.8 million increase in accounts receivable due to higher billings and timing of collections from our customers and a $21.3 million increase in prepaid expenses and other assets primarily related to an increase in prepaid hosting costs and prepaid software subscription costs driven by the growth in our business. Net cash used in operating activities during the year ended April 30, 2018 was $20.8 million, which resulted from a net loss of $52.7 million adjusted for non-cash charges of $30.2 million and net cash inflow of $1.7 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $12.7 million for stock-based compensation expense, $12.7 million for amortization of deferred contract acquisition costs, $5.1 million of depreciation and intangible asset amortization expense which were partially offset by a $0.3 million increase in deferred income taxes. The net cash inflow from changes in operating assets and liabilities was the result of a $45.8 million increase in deferred revenue due to higher billings and a net increase of $13.4 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 a $21.6 million increase in accounts receivable due to higher billings and timing of collections from our customers, an increase in deferred contract acquisition costs of $20.5 million as our sales commissions increased due to the addition of new customers and expansion of our existing customer subscriptions, and a $15.4 million increase in prepaid expenses and other assets primarily related to an increase in prepaid hosting costs and prepaid software subscription costs driven by the growth in our business. Net Cash (Used in) Provided by Investing Activities 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 used in investing activities of $8.3 million during the year ended April 30, 2019 was due to cash used for capital expenditures of $3.4 million, other investing activities of $2.9 million and business acquisitions, net of cash acquired, of $2.0 million. Net cash provided by investing activities of $8.3 million during the year ended April 30, 2018 was due to the maturity of short-term investments of $15.0 million, which was partially offset by cash used for business acquisitions, net of cash acquired, of $3.7 million and capital expenditures of $3.0 million. Net Cash Provided by Financing Activities 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. Net cash provided by financing activities of $281.8 million during the year ended April 30, 2019 was due to net proceeds to us of $269.5 million, after deducting underwriting discounts and commissions of $20.3 million as a result of our IPO and $18.6 million in proceeds from the exercise of stock options. These were partially offset by $5.7 million of payment of offering costs, a repurchase of unvested early exercised options and $0.6 million of other financing payments. Net cash provided by financing activities of $3.4 million during the year ended April 30, 2018 was due to $3.8 million of proceeds from the exercise of stock options, which was partially offset by $0.4 million of other financing payments. 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. 62 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, 2020: Total Less than 1 year 1-3 years 3-5 years More than 5 years (in thousands) Purchase obligations (1) $ 133,902 $ 33,403 $ 72,166 $ 28,333 $ — Operating lease commitments (2) 40,594 8,636 16,187 12,968 2,803 Total $ 174,496 $ 42,039 $ 88,353 $ 41,301 $ 2,803 (1) Consists of our purchase obligations under non-cancellable agreements for cloud hosting commitments with various vendors. The table above reflects these commitments on an annualized basis, however, the timing for payments may vary depending on services used. Furthermore, actual payments under these 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. Non-cancelable rent payments from our sub-tenants as of April 30, 2020 are expected to be an aggregate of $1.5 million over the next five years. In addition to the contractual obligations set forth above, as of April 30, 2020, we had $2.3 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 table above does not reflect obligations pursuant to cash-settled restricted stock units issued to certain employees. Refer to Note 11 Equity Incentive Plans to our consolidated financial statements elsewhere in this Annual Report on Form 10-K. 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. 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. 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 63 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) determination of whether the promised goods or services are performance obligations; 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 an obligation to provide access to 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) measurement of the transaction price; We measure the transaction price with reference to the standalone selling price (“SSP”), of the various performance obligations inherent within a contract. 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 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. Variable consideration is included in the transaction price if, in our judgment, it is probable that a 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 SSP. If one of the performance obligations is outside of the SSP range, we allocate SSP considering the midpoint of the 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 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 when 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 64 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. Effective May 1, 2019, 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. We did not recognize any impairment of deferred contract acquisition costs during the years ended April 30, 2020, 2019 and 2018. 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. 65 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, 2020 2019 2018 Expected term (in years) 2.00 - 7.27 6.02 - 6.08 6.02 - 6.08 Expected stock price volatility 54.8% 40.5% - 46.7% 40.7% - 44.1% Risk-free interest rate 1.4% - 2.0% 2.4% - 3.1% 1.8% - 2.6% 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 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. 66 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. 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. 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 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. 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. 67 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.