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Item 7. Management’s Discussion and Analysis

2021-06-25 compared with 2020-06-26 · 133 added, 124 removed, 739 unchanged (26% of the section changed)

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.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

As discussed in the section titled “Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties.

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Our fiscal year end is April 30.

This section of our Annual Report on Form 10-K discusses our financial condition and results of operations for the years ended April 30, 2021 and 2020 and year-to-year comparisons between the years ended April 30, 2021 and 2020.

A discussion of our financial condition and results of operations for the year ended April 30, 2019 and year-to-year comparisons between years ended April 30, 2020 and 2019 that is not included in this Annual Report on Form 10-K can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended April 30, 2020, filed with the SEC on June 26, 2020, and is incorporated by reference herein.

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.

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.

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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.

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.

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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.

In February 2021, with the release of version 7.11 of the Elastic Stack, we changed the way we license Elasticsearch and Kibana, the visualization layer for data stored in Elasticsearch.

We moved the source code that had historically been licensed under the Apache License, Version 2.0 open source license (“Apache 2.0”), to be dual licensed under ELv2, our proprietary source available license, and SSPL, at the user’s election.

ELv2 is a permissive source available license, allowing free use, modification, creation of derivative works, and redistribution, while providing protection from cloud service providers who offer these products as a service without collaborating with us.

SSPL is a source available license that provides many of the freedoms of an open source license, but with certain restrictions.

This source code license change had no effect on our customers or the vast majority of our users.

We believe that our free and open distribution strategy drives a number of benefits for our users, our customers, and our company.

It facilitates rapid and efficient developer adoption, particularly by empowering individual developers to download and use our software without payment, registration, or the friction of a formal sales interaction.

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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 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 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.

Our subscription agreements for self-managed and Elastic Cloud deployments typically have terms of one to three years and we usually bill for them annually in advance.

Elastic Cloud customers may also purchase subscriptions on a month-to-month basis without a commitment, with usage billed at the end of each month.

Subscriptions accounted for 93%, 92% and 91% of total

revenue in the years ended April 30, 2021, 2020, and 2019, respectively.

We also generate revenue from consulting and training services.

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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.

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.

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We had 2,179 employees as of April 30, 2021.

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 $608.5 million in the year ended April 30, 2021 from $427.6 million in the year ended April 30, 2020 and $271.7 million in the year ended April 30, 2019, representing year-over-year growth of 42% for the year ended April 30, 2021 and 57% for the year ended April 30, 2020.

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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.

operations, the majority of our revenue and expenses are denominated in currencies such as the Euro and British pound.

No customer represented more than 10% of our total revenue in the years ended April 30, 2021, 2020, and 2019.

We have not been profitable to date.

In the years ended April 30, 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.

In the years ended April 30, 2021, 2020 and 2019, we incurred net losses of $129.4 million, $167.2 million and $102.3 million, respectively.

Our net cash provided by operating activities was $22.5 million in the year ended April 30, 2021 and cash used in operating activities in the years ended April 30, 2020 and 2019 was $30.6 million and $23.9 million, respectively.

We have experienced losses in each year since our incorporation and as of April 30, 2021, had an accumulated deficit of $613.3 million.

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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.

Efforts to control its spread have significantly curtailed the movement of people, goods and services worldwide, including in most or all of the regions in which we sell our products and services and conduct our business operations, negatively impacting worldwide economic activity.

The ongoing impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the virus, success of preventative measures to contain or mitigate the spread of the virus and emerging variants, effectiveness, distribution and acceptance of COVID-19 vaccines, impact on our customers and our sales cycles, impact on our customer, employee or industry events, effect on our vendors, and the uneven impact of the COVID-19 pandemic to certain industries, all of which continue to remain uncertain and cannot be predicted.

The continuing COVID-19 pandemic has resulted in a global slowdown of economic activity and its impact has varied significantly across different industries with certain industries experiencing increased demand for their products and services, while others have struggled to maintain demand for their products and services consistent with historical levels.

There have been delays in purchasing decisions from existing and prospective customers, longer sales cycles, delayed implementation of professional services, reduced renewals of subscriptions by existing customers, and changes in approaches to creating sales pipeline in the absence of in-person marketing events, resulting in headwinds for calculated billings and our Net Expansion Rate.

Notwithstanding the potential and actual adverse impacts described above, as the pandemic has caused more of our customers to shift to a virtual workforce or accelerate their digital transformation efforts, we believe the value of our solutions is becoming even more evident.

In addition, we have benefited from lower spending on travel due to COVID-19 travel restrictions and from holding events virtually, and we expect lower travel costs to continue in the near-term.

In response to the COVID-19 pandemic and in an effort to focus on maintaining business continuity and preparing for the future and long-term success of our business, we have taken precautionary measures intended to help minimize the risk of

the virus to our employees, our customers, and the communities in which we operate, including modifying our business practices, such as suspending employee travel, adapting employee work locations, and holding events and trainings virtually.

Further, we also temporarily reduced the pace of our investments in our business in response to the COVID-19 pandemic in the first quarter of fiscal 2021, but began to gradually increase our investments in our business since then.

We intend to continue to increase the pace of our investments in the business in fiscal 2022.

We continue to monitor the major impacts of the COVID-19 pandemic and make changes in our business as appropriate, in response to such impacts.

See “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K for a discussion of additional risks.

Key Factors Affecting Our Performance

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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 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.

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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.

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.

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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.

Our Net Expansion Rate was slightly below 130% at the end of fiscal 2021.

As large organizations expand their use of the Elastic Stack across multiple use cases, projects, divisions and users, they often begin to require centralized provisioning, management and monitoring across multiple deployments.

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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.

Elastic Cloud, our family of SaaS products that includes Elasticsearch Service and Site Search Service, is an important growth opportunity for our business.

Organizations are increasingly looking for SaaS deployment alternatives with reduced administrative burdens.

In some cases, open source users that have been self-managing deployments of the Elastic Stack subsequently become paying subscribers of Elastic Cloud.

In some cases, users of our source available software that have been self-managing deployments of the Elastic Stack subsequently become paying subscribers of Elastic Cloud.

In the years ended April 30, 2021, 2020 and 2019, Elastic Cloud contributed 27%, 22% and 17% of our total revenue, respectively.

We believe that offering a SaaS deployment alternative is important for achieving our long-term growth potential, and we expect Elastic Cloud’s contribution to our subscription revenue to increase over time.

However, an increase in the relative contribution of Elastic Cloud to our business could adversely impact our gross margin as a result of the associated hosting and managing costs.

However, an increase in the relative contribution of Elastic Cloud to our business could adversely impact our gross margin as a result of the associated hosting costs.

Non-GAAP Financial Measures

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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 is a non-GAAP financial measure that we define as net cash provided by (used in) operating activities less purchases of property and equipment and capitalized internal-use software costs.

Free cash flow margin is calculated as free cash flow divided by total revenue.

We believe that free cash flow and free cash flow margin are useful indicators of liquidity that provide information to management and investors about the amount of cash generated from our core operations that, after the purchases of property and equipment, can be used for strategic initiatives, including investing in our business and selectively pursuing acquisitions and strategic investments.

We further believe that historical and future trends in free cash flow and free cash flow margin, even if negative, provide useful information about the amount of cash generated (or consumed) by our operating activities that is available (or not available) to be used for strategic initiatives.

We further believe that historical and future trends in free cash flow and free cash flow margin, even if negative, provide useful information about the amount of net cash provided by (used in) operating activities that is available (or not available) to be used for strategic initiatives.

For example, if free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives.

One limitation of free cash flow and free cash flow margin is that

they do not reflect our future contractual commitments.

One limitation of free cash flow and free cash flow margin is that they do not reflect our future contractual commitments.

Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period.

The following table presents our cash flows for the periods presented and a reconciliation of free cash flow and free cash flow margin to net cash used in operating activities, the most directly comparable financial measure calculated in accordance with GAAP:

The following table presents our cash flows for the periods presented and a reconciliation of free cash flow and free cash flow margin to net cash provided by (used in) operating activities, the most directly comparable financial measure calculated in accordance with GAAP:

Year Ended April 30,

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(in thousands)

Net cash used in operating activities $ (30,564) $ (23,937) $ (20,819)

Net cash provided by (used in) operating activities $ 22,545 $ (30,564) $ (23,937)

Purchases of property and equipment (3,912) (5,063) (3,447)

Capitalization of internal-use software (317) — —

Free cash flow $ 18,316 $ (35,627) $ (27,384)

Net cash (used in) provided by investing activities $ (29,187) $ (8,283) $ 8,330

Net cash used in investing activities $ (1,518) $ (29,187) $ (8,283)

Net cash provided by financing activities $ 77,258 $ 58,539 $ 281,788

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(1) % (1) % (1) %

Capitalization of internal-use software (as a percentage of total revenue) — % — % — %

Free cash flow margin 3 % (8) % (10) %

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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.

Calculated billings exclude deferred revenue and unbilled accounts receivable acquired through acquisitions in the period of the acquisition.

We typically invoice our customers annually in advance, and to a lesser extent multi-year in advance, quarterly in advance, monthly in advance, monthly in arrears or upon delivery.

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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.

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 in the cloud is recognized ratably over the subscription term or on a usage basis;

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 comprises consulting services as well as public and private training.

Professional services is composed of consulting services as well as public and private training.

Consulting services are generally time-based arrangements.

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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.

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 primarily consists of personnel costs and allocated overhead costs for employees and contractors.

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 primarily consists of personnel costs, commissions, allocated overhead costs and costs related to marketing programs and user events.

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.

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.

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.

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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).

Other Income, Net

Other income, net primarily consists of gains and losses from transactions denominated in a currency other than the functional currency, interest income and interest expense.

Provision for (Benefit from) Income Taxes

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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

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.

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Total stock-based compensation expense $ 93,680 $ 60,007 $ 39,942

(2) Includes employer payroll taxes on employee stock transactions as follows (information for fiscal year 2018 is not meaningful):

(2) Includes employer payroll taxes on employee stock transactions as follows:

Year Ended April 30,

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Total revenue $ 608,489 $ 427,620 $ 180,869 42 %

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 $175.2 million, or 45%, in the year ended April 30, 2021 compared to the prior year.

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Professional services revenue increased by $5.7 million, or 16%, in the year ended April 30, 2021 compared to the prior year.

The increase in professional services revenue was attributable to increased adoption of our professional services offerings.

The increase in professional services revenue was attributable to increased adoption of our professional services consulting offerings.

Cost of Revenue and Gross Margin

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In addition, amortization of acquired intangible assets increased $1.2 million.

These increases were partially offset by a decrease of $1.7 million in travel expenses due to COVID-19 related travel restrictions.

The increase in personnel and related costs includes an increase of $4.3 million in salaries and related taxes and an increase of $3.0 million in stock-based compensation expense.

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Cost of professional services revenue increased by $1.6 million, or 4%, in the year ended April 30, 2021 compared to the prior year.

This increase was primarily due to an increase of $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.

This increase was primarily due to an increase of $5.9 million in personnel and related costs, including increases of $3.8 million in salaries and related taxes and $1.8 million in stock-based compensation driven by an increase in headcount in our consulting and training organizations.

In addition, subcontractor costs increased $0.5 million.

These increases were partially offset by a decrease of $3.4 million in travel expenses and a decrease of $1.3 million in training facility costs due to COVID-19 related restrictions.

Gross margin for professional services revenue was 6% in the year ended April 30, 2021 compared to (4)% for the prior year.

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.

The increase in margin is primarily due to the increase in revenue, and a lower than proportionate increase in cost of professional services.

The cost of professional services remained relatively flat due to a decrease in travel related costs as we shifted to virtual delivery of professional services in light of travel restrictions due to COVID-19.

In recent periods, we have invested in headcount for our professional services organization that we believe will be needed as we continue to grow and expect travel related costs will increase in the future once travel restrictions lift.

Our gross margin for professional services may fluctuate, decline or be negative in the near-term as we seek to expand our professional services business.

Operating Expenses

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In addition, cloud infrastructure costs related to our research and development activities increased $1.8 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.

These increases were partially offset by a decrease in travel expenses of $7.6 million due to COVID-19 travel restrictions and holding events virtually.

The increase in personnel and related costs includes an increase of $21.1 million in salaries and related taxes, an increase of $11.6 million in stock-based compensation expense and an increase of $2.4 million in employee benefits expense.

Sales and marketing

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Sales and marketing expense increased by $54.8 million, or 25%, in the year ended April 30, 2021 compared to the prior year.

This increase was primarily due to an increase of $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.

This increase was primarily due to an increase of $53.8 million in personnel related costs and a $1.1 million increase in software and equipment charges as we continued to increase our sales and marketing headcount.

In addition, marketing expenses increased by $7.6 million and amortization of intangible assets increased by $2.4 million.

These increases were partially offset by a decrease of $13.3 million in travel expenses due to COVID-19 travel restrictions and holding events virtually.

The increase in personnel and related costs includes an increase of $26.3 million in salaries and related taxes, an increase of $12.2 million in stock-based compensation expense, an increase of $11.6 million in commissions expense related to the amortization of contract acquisition costs and an increase of $3.3 million in employee benefits expense.

General and administrative

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General and administrative expense increased by $12.2 million, or 13%, in the year ended April 30, 2021 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

This increase was primarily due to an increase of $3.3 million in personnel related costs and a $0.6 million increase in software and equipment charges as we continued to increase our general and administrative headcount.

In addition, bad debt expense related to expected credit losses on accounts receivable and write-off of uncollectible balances increased by $4.2 million, consulting expense increased by $1.8 million and insurance, business taxes, and charitable donations increased by $2.6 million.

These increases were largely offset by a decrease of $1.6 million in travel expenses due to COVID-19 travel restrictions.

The increase in personnel and related costs includes an increase of $9.5 million in salaries and related taxes, an increase of $5.0 million in stock-based compensation expense, an increase of $0.7 million in employee benefits expense and an increase of $0.5 million in recruiting costs, which were partially offset by a decrease in acquisition related compensation of $12.5 million.

Other Income, Net

Year Ended April 30, Change

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(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.

Other income, net $ 7,764 $ 1,963 $ 5,801 296 %

Other income, net increased by $5.8 million, or 296%, in the year ended April 30, 2021 compared to the prior year.

This increase was due to a net increase in foreign currency gains of $9.9 million related primarily to remeasurement of certain asset and liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded.

The foreign currency gains were partially offset by a decrease of $4.0 million in interest income due to lower interest rates.

Provision for (Benefit from) Income Taxes

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Provision for (benefit from) income taxes $ 7,720 $ (1,968) $ 9,688 (492) %

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.

The provision for income taxes was $7.7 million in the year ended April 30, 2021 compared to a benefit from income taxes of $2.0 million in the prior year.

The additional tax expense is primarily due to an increase of $4.6 million in income taxes from foreign subsidiaries.

A tax benefit associated with stock-based compensation of $100.0 million was offset by the provision of a valuation allowance of $100.0 million for deferred tax assets in the United States, the Netherlands, and the United Kingdom.

Our effective tax rate was (6.3)% and 1.2% of our net loss before taxes for the years ended April 30, 2021 and 2020, respectively.

Quarterly Results of Operations

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$ 28,375 $ 25,227 $ 21,487 $ 18,591 $ 17,232 $ 15,588 $ 14,416 $ 12,771

(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):

(2) Includes employer payroll taxes on employee stock transactions as follows:

Three Months Ended

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16 % 16 % 15 % 14 % 14 % 14 % 14 % 15 %

(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):

(2) Includes employer payroll taxes on employee stock transactions as follows:

Three Months Ended

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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.

Our total gross margin increased in the year ended April 30, 2021 due to an increase in our professional services margin, which may fluctuate, decline or be negative in the near-term as we seek to expand our professional services business.

We expect our revenue from Elastic Cloud to continue to increase as a percentage of total revenue, which may adversely impact our gross margin as a result of the associated hosting costs.

Our operating expenses generally increased sequentially over the periods presented as we grew the associated headcount and other costs.

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.

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We have generated significant operating losses from our operations as reflected in our accumulated deficit of $613.3 million as of April 30, 2021.

We have historically incurred, and expect to continue to incur, operating losses and 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 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.

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(in thousands)

Net cash used in operating activities

Net cash provided by (used in) operating activities

$ 22,545 $ (30,564) $ (23,937)

Net cash provided by (used in) investing activities

Net cash used in investing activities

$ (1,518) $ (29,187) $ (8,283)

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$ 77,258 $ 58,539 $ 281,788

Net Cash Used in Operating Activities

Net Cash Provided By (Used in) Operating Activities

Net cash provided by operating activities during the year ended April 30, 2021 was $22.5 million, which resulted from a net loss of $129.4 million adjusted for non-cash charges of $150.2 million and net cash inflow of $1.8 million from changes in operating assets and liabilities.

Non-cash charges primarily consisted of $93.7 million for stock-based compensation expense, $41.0 million for amortization of deferred contract acquisition costs, $17.2 million of depreciation and intangible asset amortization expense and $7.9 million in non-cash operating lease costs, which were partially offset by net foreign currency transaction gains of $9.5 million and $0.1 million of other non-cash transactions.

The net cash inflow from changes in operating assets and liabilities was the result of a $115.9 million increase in deferred revenue due to higher billings and a net increase of $7.2 million in accounts payable, accrued expenses and accrued compensation and benefits due to growth in our business and higher headcount.

These inflows were partially offset by an increase of $24.0 million in accounts receivable due to higher billings and timing of collections from our customers, an increase in deferred contract acquisition costs of $81.1 million as our sales commissions increased due to the addition of new customers and expansion of our existing customer subscriptions, an increase of $8.3 million in prepaid and other assets and a decrease of $7.9 million in operating lease liabilities.

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.

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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.

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

These inflows were partially offset by a $46.8 million increase in accounts receivable due to higher billings and timing of collections from our customers, an increase in deferred contract acquisition costs of $46.2 million as our sales commissions increased due to the addition of new customers and expansion of our existing customer subscriptions and a $6.7 million decrease in operating lease liabilities relating to the adoption of the new lease accounting standard.

Net Cash Used in Investing Activities

Net cash used in investing activities of $1.5 million during the year ended April 30, 2021 was primarily due $3.9 million of capital expenditures and capitalization of $0.3 million in internal-use software costs during the period, partially offset by cash provided by other investing activities of $2.7 million .

Net cash used in investing activities of $29.2 million during the year ended April 30, 2020 was primarily due to $24.4 million cash used for the acquisition of Endgame and $5.1 million of capital expenditures during the period.

Net cash 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 $77.3 million during the year ended April 30, 2021 was due to proceeds from option exercises during the period.

Net cash provided by financing activities of $58.5 million during the year ended April 30, 2020 was due to $61.5 million proceeds from option exercises during the period, which was partially offset by payment of withholding taxes of $2.8 million for an acquisition-related expense that was settled in ordinary shares of the Company.

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

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Total $ 379,502 $ 65,327 $ 196,280 $ 117,895 $ —

(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.

(1) Primarily consists of our purchase obligations under non-cancellable agreements for cloud hosting, subscription software, and sales and marketing.

Actual payments under the cloud hosting capacity commitments may be higher than the total minimum depending on services used.

(2) Consists of future non-cancelable minimum rental payments under operating leases for our offices, excluding rent payments from our sub-tenants and variable operating expenses.

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, 2021, we had $2.1 million in letters of credit outstanding in favor of certain landlords for office space.

These letters of credit renew annually and expire on various dates through 2023.

The 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.

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Purchase orders issued in the ordinary course of business are not included in the table above, as our purchase orders represent authorizations to purchase rather than binding agreements.

We have also excluded unrecognized tax benefits from the contractual obligations table above.

A variety of factors could affect the timing of payments for the liabilities related to unrecognized tax benefits.

Therefore, we cannot reasonably estimate the timing of such payments.

We believe that these matters will likely not be resolved in the next 12 months and accordingly we have classified the estimated liability as non-current in the consolidated balance sheet.

For further information see Note 13 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Critical Accounting Policies

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We determine that we have a contract with a customer when the order form has been approved, each party’s rights regarding the products or services to be transferred can be identified, the payment terms for the services can be identified, we have determined the customer has the ability and intent to pay, and the contract has commercial substance.

We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical

payment experience or, in the case of a new customer, credit, reputation, and financial or other information pertaining to the customer.

We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit, reputation, and financial or other information pertaining to the customer.

At contract inception we evaluate whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract includes more than one performance obligation.

We have concluded that our contracts with customers do not contain warranties that give rise to a separate performance obligation.

(ii) determination of whether the promised goods or services are performance obligations;

(ii) identification of the performance obligations in the contract;

Performance obligations promised in a contract are identified based on the products and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the products or services either on their own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the products and services is separately identifiable from other promises in the contract.

Our self-managed subscriptions include both 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 self-managed subscriptions include both license providing the right to use proprietary features in our software, as well as an obligation to provide support (on both open source and proprietary features) and maintenance.

Our SaaS products provide access to hosted software as well as support, which we consider to be a single performance obligation.

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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.

(iii) determination of the transaction price;

The transaction price is the total amount of consideration we expect to be entitled to in exchange for the subscriptions and services in a contract.

Variable consideration is included in the transaction price if, in our judgment, it is probable that a

significant future reversal of cumulative revenue under the contract will not occur.

None of our contracts contain a significant financing component.

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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.

For contracts that contain multiple performance obligations, we allocate the transaction price to each performance obligation based on a relative standalone selling price (“SSP”).

The SSP is determined based on the prices at which we separately sell these products assuming the majority of these fall within a pricing range.

If one of the performance obligations is outside of the SSP range, we allocate the transaction price considering the midpoint of the SSP range.

We also consider if there are any additional material rights inherent in a contract, and if so, we allocate a portion of the transaction price to such rights based on a relative SSP.

(v) recognition of revenue when we satisfy each performance obligation.

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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.

Revenue from our SaaS products is recognized ratably over the contract period as we satisfy the performance obligation.

Professional services comprise consulting services as well as public and private training.

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For multi-year agreements, we generally invoice customers on an annual basis prior to each anniversary of the contract start date.

We record unbilled accounts receivable related to revenue

recognized in excess of amounts invoiced as we have an unconditional right to invoice and receive payment in the future related to those fulfilled obligations.

We record unbilled accounts receivable related to revenue recognized in excess of amounts invoiced as we have an unconditional right to invoice and receive payment in the future related to those fulfilled obligations.

Contract liabilities consist of deferred revenue which is recognized over the contractual period.

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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.

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.

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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.

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:

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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.

For the quantitative analysis, we compare the fair value of our reporting unit to its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.

Acquired intangible assets are amortized over their estimated useful lives.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis