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 our consolidated financial statements and related notes included in Part II, Item 8 of 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 in Part I, Item 1A of this Annual Report on Form 10-K. Our fiscal year end is April 30. This section of our Annual Report on Form 10-K discusses our financial condition and results of operations for the years ended April 30, 2022 and 2021 and year-to-year comparisons between the years ended April 30, 2022 and 2021. A discussion of our financial condition and results of operations for the year ended April 30, 2020 and year-to-year comparisons between years ended April 30, 2021 and 2020 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, 2021, filed with the SEC on June 25, 2021, and is incorporated by reference herein. Overview Elastic is a data analytics company built on the power of search. Our platform, which is available as both a hosted, managed service across public clouds as well as self-managed software, allows our customers to almost instantly find insights from large amounts of data and take action. We offer three search-powered solutions – Enterprise Search, Observability, and Security – that are built into the platform. We help organizations, their employees, and their customers find what they need faster, while keeping mission-critical applications running smoothly, and protecting against cyber threats. Our platform is built on the Elastic Stack, a powerful set of software products that ingest data from any source, in any format, and perform search, analysis, and visualization of that data. At the core of the Elastic Stack is Elasticsearch - a highly scalable document store and search engine, and the only data store for all of our solutions and use cases. The Elastic Stack can be used by developers to power a variety of use cases. It is a distributed, real-time search and analytics engine and data store for all types of data including textual, numerical, geospatial, structured, and unstructured. We make our platform available as a hosted, managed service. Customers can also deploy our platform across hybrid clouds, public or private clouds, and multi-cloud environments. As digital transformation and cloud adoption drive mission critical business functions online and to the cloud, we believe that every company will need to build around a search-based data analytics platform, one which brings speed, scale, and relevance to the vast volumes of data being generated. During the year ended April 30, 2022, we acquired 100% of the share capital of cmdWatch Security Inc. (“Cmd”), Build Security Ltd. (“build.security”) and Optimyze.cloud Inc. (“Optimyze”) for a combined total consideration of $135.0 million. With these acquisitions, we will be able to extend cloud security protections for our customers from endpoint to cloud workload and provide our customers with cloud security protections from build-time, to deployment-time, to runtime, and extend our Observability solution to enable “always on” continuous profiling for infrastructure, applications, and services. Our business model is based primarily on a combination of a paid Elastic-managed hosted service offering and paid and free proprietary self-managed software. Our paid offerings for our platform are sold via subscription through resource-based pricing, and all customers and users have access to all solutions. In Elastic Cloud, our family of cloud-based offerings under which we offer our software as a hosted, managed service, we offer various subscription tiers tied to different features. For users who download our software, we make some of the features of our software available for free, allowing us to engage with a broad community of developers and practitioners and introduce them to the value of the Elastic Stack. We believe in the importance of an open software development model, and we develop the majority of our software in public repositories as open code under a proprietary license. Unlike some companies, we do not build an enterprise version that is separate from our free distribution. We offer a single code base across both our self-managed software and Elastic-hosted services. All of these actions help us build a powerful commercial business model that we believe is optimized for product-led growth. We generate revenue primarily from sales of subscriptions to our platform. 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 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%, 93% and 92% of total revenue for the years ended April 30, 2022, 2021, and 2020, respectively. We also generate revenue from consulting and training services. We make it easy for users to begin using our products in order to drive rapid adoption. Users can either sign up for a free trial on Elastic Cloud or download our software directly from our website without any sales interaction, and immediately begin using the full set of features. Users can also sign up for Elastic Cloud through public cloud marketplaces. We conduct 53 T a b l e o f C o ntents low-touch campaigns to keep users and customers engaged once they have begun using Elastic Cloud or downloaded our software. As of April 30, 2022, we had over 18,600 customers compared to over 15,000 customers and over 11,300 customers as of April 30, 2021 and 2020, respectively. The majority of our new customers use Elastic Cloud. We define a customer as an entity that generated revenue in the quarter ending on the measurement date from an annual or month-to-month subscription. Affiliated entities are typically counted as a single customer. Many of these customers start with limited initial spending, but can significantly grow their spending. We drive high-touch engagement with qualified prospects and customers to drive further awareness, adoption, and expansion of our products with paid subscriptions. Expansion includes increasing the number of developers and practitioners using our products, increasing the utilization of our products for a particular use case, and applying our products to new use cases. The number of customers who represented greater than $100,000 in annual contract value (“ACV”) was over 960, over 730, and over 610 as of April 30, 2022, 2021 and 2020, respectively. The 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. Our sales teams are organized primarily by geography and secondarily by customer segments. They focus on both initial conversion of users into customers and additional sales to existing customers. In addition to our direct sales efforts, we also maintain partnerships to further extend our reach and awareness of our products around the world. We have experienced significant growth, with revenue increasing to $862.4 million for the year ended April 30, 2022 from $608.5 million for the year ended April 30, 2021 and $427.6 million for the year ended April 30, 2020, representing year-over-year growth of 42% for each of the years ended April 30, 2022 and 2021. For the year ended April 30, 2022, revenue from outside the United States accounted for 44% of our total revenue. For our non-U.S. operations, the majority of our revenue and expenses are denominated in currencies such as the Euro and British pound. No customer represented more than 10% of our total revenue for the years ended April 30, 2022, 2021, and 2020. We have not been profitable to date. For the years ended April 30, 2022, 2021 and 2020, we incurred net losses of $203.8 million, $129.4 million and $167.2 million, respectively. Our net cash provided by operating activities was $5.7 million and $22.5 million for the years ended April 30, 2022 and 2021, respectively and cash used in operating activities for the year ended April 30, 2020 was $30.6 million. We have experienced losses in each year since our incorporation and as of April 30, 2022, had an accumulated deficit of $817.2 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. 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 40 countries, we are able to recruit, hire, and retain high-quality, experienced technical and sales personnel and operate at a rapid pace to drive product releases, fix bugs, and create and market new products. We had 2,978 employees as of April 30, 2022. In July 2021, we issued $575.0 million aggregate principal amount of 4.125% Senior Notes due July 15, 2029 (the “Senior Notes”) in a private placement. We intend to continue to use the net proceeds from the offering of the Senior Notes for general corporate purposes, which may include capital expenditures, investments and working capital. In addition, in the past we have considered, and may continue to consider, acquisitions and strategic transactions, and we may use the net proceeds of this offering for such purposes. COVID-19 The ongoing COVID-19 pandemic continues to evolve and negatively impact worldwide economic activity. Efforts to control its spread have significantly curtailed the movement of people, goods and services worldwide, including in many of the regions in which we sell our products and services and conduct our business operations, negatively impacting worldwide economic activity. The impact of the COVID-19 pandemic 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. The ongoing impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the virus, success of preventative measures to contain or mitigate the spread of the virus and emerging variants, effectiveness, distribution and acceptance of COVID-19 vaccines, impact on our customers and our sales cycles, impact on our customer, employee or industry events, effect on our vendors, and the uneven impact of the COVID-19 pandemic on certain industries, all of which continue to remain uncertain and cannot be predicted. Notwithstanding the potential and actual adverse impacts described above, as the pandemic has caused more of our customers to shift to a virtual workforce or accelerate their digital transformation efforts, we believe the value of our solutions has become even more evident. In addition, we have benefited from lower spending on travel by our employees due to COVID-19 travel restrictions and from holding events virtually, however we expect live events and travel costs to trend back higher in the near-term. 54 T a b l e o f C o ntents In response to the COVID-19 pandemic and in an effort to focus on maintaining business continuity and preparing for the future and long-term success of our business, we have taken precautionary measures intended to help minimize the risk of the virus to our employees, customers, and the communities in which we operate, including modifying our business practices, such as suspending employee travel, adapting employee work locations, and holding events and trainings virtually. Further, we also temporarily reduced the pace of investments in our business in response to the COVID-19 pandemic in the first quarter of fiscal 2021, but began to gradually increase our investments in our business in subsequent quarters. We intend to continue to make additional investments in the business in fiscal 2023. We continue to monitor the major impacts of the COVID-19 pandemic and make changes in our business as appropriate, in response to such impacts. See “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K for a discussion of additional risks. Key Factors Affecting Our Performance We believe that the growth and future success of our business depends on many factors, including those described below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations. Increasing adoption of Elastic Cloud. Elastic Cloud, our family of cloud-based offerings is an important growth opportunity for our business. Organizations are increasingly looking for hosted deployment alternatives with reduced administrative burdens. In some cases, users of our source available software that have been self-managing deployments of the Elastic Stack subsequently become paying subscribers of Elastic Cloud. For the years ended April 30, 2022, 2021 and 2020, Elastic Cloud contributed 35%, 27% and 22% of our total revenue, respectively. We believe that offering Elastic Cloud is important for achieving our long-term growth potential, and we expect Elastic Cloud’s contribution to our subscription revenue to increase over time. However, we expect that an increase in the relative contribution of Elastic Cloud to our business will have a modest adverse impact on our gross margin as a result of the associated third-party hosting costs. Growing the Elastic community. Our strategy consists of providing access to source available software, on both a paid and free basis, and fostering a community of users and developers. Our strategy is designed to pursue what we believe to be significant untapped potential for the use of our technology. After developers begin to use our software and start to participate in our developer community, they become more likely to apply our technology to additional use cases and evangelize our technology within their organizations. This reduces the time required for our sales force to educate potential leads on our solutions. In order to capitalize on our opportunity, we intend to make further investments to keep the Elastic Stack accessible and well known to software developers around the world. We intend to continue to invest in our products and support and engage our user base and developer community through content, events, and conferences in the U.S. and internationally. Our results of operations may fluctuate as we make these investments. Developing new features for the Elastic Stack. The Elastic Stack is applied to various use cases by customers, including through the solutions we offer. Our revenue is derived primarily from subscriptions of Enterprise Search, Observability and Security built into the Elastic Stack. We believe that releasing additional features of the Elastic Stack, including our solutions, drives usage of our products and ultimately drives our growth. To that end, we plan to continue to invest in building new features and solutions that expand the capabilities of the Elastic Stack. These investments may adversely affect our operating results prior to generating benefits, to the extent that they ultimately generate benefits at all. Growing our customer base by converting users of our software to paid subscribers. Our financial performance depends on growing our paid customer base by converting free users of our software into paid subscribers. Our distribution model has resulted in rapid adoption by developers around the world. We have invested, and expect to continue to invest, heavily in sales and marketing efforts to convert additional free users to paid subscribers. Our investment in sales and marketing is significant given our large and diverse user base. The investments are likely to occur in advance of the anticipated benefits resulting from such investments, such that they may adversely affect our operating results in the near term. Expanding within our current customer base. Our future growth and profitability depend on our ability to drive additional sales to existing customers. Customers often expand the use of our software within their organizations by increasing the number of developers using our products, increasing the utilization of our products for a particular use case, and expanding use of our products to additional use cases. We focus some of our direct sales efforts on encouraging these types of expansion within our customer base. We believe that a useful indication of how our customer relationships have expanded over time is through our Net Expansion Rate, which is based upon trends in the rate at which customers increase their spend with us. To calculate an expansion rate as of the end of a given month, we start with the annualized spend from all such customers as of twelve months prior to that month end, or Prior Period Value. A customer’s annualized spend is measured as their ACV, or in the case of customers charged on usage-based arrangements, by annualizing the usage for that month. We then calculate the annualized spend from these same customers as of the given month end, or Current Period Value, which includes any growth in the value of their subscriptions or usage and is net of contraction or attrition over the prior twelve months. We then divide the Current 55 T a b l e o f C o ntents Period Value by the Prior Period Value to arrive at an expansion rate. The Net Expansion Rate at the end of any period is the weighted average of the expansion rates as of the end of each of the trailing twelve months. The Net Expansion Rate includes the dollar-weighted value of our subscriptions or usage that expand, renew, contract, or attrit. For instance, if each customer had a one-year subscription and renewed its subscription for the exact same amount, then the Net Expansion Rate would be 100%. Customers who reduced their annual subscription dollar value (contraction) or did not renew their annual subscription (attrition) would adversely affect the Net Expansion Rate. Our Net Expansion Rate was slightly below 130% for the year ended April 30, 2022. As large organizations expand their use of the Elastic Stack across multiple use cases, projects, divisions and users, they often begin to require centralized provisioning, management and monitoring across multiple deployments. To satisfy these requirements, our Enterprise subscription tier provides access to key orchestration and deployment management capabilities. We will continue to focus some of our direct sales efforts on driving adoption of our paid offerings. Components of Results of Operations Revenue Subscription. Our revenue is primarily generated through the sale of subscriptions to software, which is either self-managed by the user or hosted and managed by us in the cloud. Subscriptions provide the right to use paid proprietary software features and access to support for our paid and unpaid software. A portion of the revenue from self-managed subscriptions is generally recognized up front at the point in time when the license is delivered. This revenue is presented as License – self-managed in our consolidated statements of operations. The remainder of revenue from self-managed subscriptions is recognized ratably over the subscription term. Revenue from subscriptions that require access to the cloud or that are hosted and managed by us is recognized ratably over the subscription term or on a usage basis for consumption-based arrangements; both are presented within Subscription – self-managed and SaaS in our consolidated statements of operations. Professional services. Professional services is composed of consulting services as well as public and private training. Revenue for professional services is recognized as these services are delivered. Cost of Revenue Subscription. Cost of license – self-managed consists of amortization of certain intangible assets. Cost of subscription – self-managed and SaaS consists primarily of personnel and related costs for employees associated with supporting our subscription arrangements, certain third-party expenses, and amortization of certain intangible and other assets. Personnel and related costs, or personnel costs, comprise cash compensation, benefits and stock-based compensation to employees, costs of third-party contractors, and allocated overhead costs. Third-party expenses consist of cloud hosting costs and other expenses directly associated with our customer support. We expect our cost of subscription – self-managed and SaaS to increase in absolute dollars as our subscription revenue increases. Professional services. Cost of professional services revenue consists primarily of personnel costs directly associated with delivery of training, implementation and other professional services, costs of third-party contractors, facility rental charges and allocated overhead costs. We expect our cost of professional services revenue to increase in absolute dollars as we invest in our business and as professional services revenue increases. Gross profit and gross margin. Gross profit represents revenue less cost of revenue. Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the timing of our acquisition of new customers and our renewals with existing customers, the average sales price of our subscriptions and professional services, the amount of our revenue represented by hosted services, the mix of subscriptions sold, the mix of revenue between subscriptions and professional services, the mix of professional services between consulting and training, transaction volume growth and support case volume growth. We expect our gross margin to fluctuate over time depending on the factors described above. We expect our revenue from Elastic Cloud to continue to increase as a percentage of total revenue, which we expect will adversely impact our gross margin as a result of the associated hosting costs. Operating Expenses Research and development. Research and development expense mainly consists of personnel costs and allocated overhead costs for employees and contractors. We expect our research and development expense to increase in absolute dollars for the foreseeable future as we continue to develop new technology and invest further in our existing products. 56 T a b l e o f C o ntents Sales and marketing. Sales and marketing expense mainly consists of personnel costs, commissions, allocated overhead costs and costs related to marketing programs and user events. Marketing programs consist of advertising, events, brand-building and customer acquisition and retention activities. We expect our sales and marketing expense to increase in absolute dollars as we expand our salesforce and increase our investments in marketing resources. We capitalize sales commissions and associated payroll taxes paid to internal sales personnel that are related to the acquisition of customer contracts. Sales commissions costs are amortized over the expected benefit period. General and administrative. General and administrative expense mainly consists of personnel costs for our management, finance, legal, human resources, and other administrative employees. Our general and administrative expense also includes professional fees, accounting fees, audit fees, tax services and legal fees, as well as insurance, allocated overhead costs, and other corporate expenses. We expect our general and administrative expense to increase in absolute dollars as we increase the size of our general and administrative functions to support the growth of our business. Other Income (Expense), Net Other income (expense), net primarily consists of interest expense, gains and losses from transactions denominated in a currency other than the functional currency, and interest income. Provision for (Benefit from) Income Taxes Provision for (benefit from) income taxes consists primarily of income taxes related to the Netherlands, U.S. federal, state and foreign jurisdictions in which we conduct business. Our effective tax rate is affected by recurring items, such as tax rates in jurisdictions outside the Netherlands and the relative amounts of income we earn in those jurisdictions, and non-deductible stock-based compensation. 57 T a b l e o f C o ntents Results of Operations The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our total revenue. The period to period comparison of results is not necessarily indicative of results for future periods. Year Ended April 30, 2022 2021 2020 (in thousands) Revenue License - self-managed $ 76,964 $ 67,994 $ 53,536 Subscription - self-managed and SaaS 721,806 499,345 338,634 Total subscription revenue 798,770 567,339 392,170 Professional services 63,604 41,150 35,450 Total revenue 862,374 608,489 427,620 Cost of revenue (1)(2)(3) Cost of license - self-managed 1,548 1,386 948 Cost of subscription - self-managed and SaaS 176,656 121,127 84,819 Total cost of revenue - subscription 178,204 122,513 85,767 Cost of professional services 53,990 38,541 36,923 Total cost of revenue 232,194 161,054 122,690 Gross profit 630,180 447,435 304,930 Operating expenses (1)(2)(3)(4) Research and development 273,761 199,203 165,370 Sales and marketing 406,658 273,877 219,040 General and administrative 123,441 103,833 91,625 Total operating expenses 803,860 576,913 476,035 Operating loss (1)(2)(3)(4) (173,680) (129,478) (171,105) Other income (expense), net Interest expense (20,716) (185) — Other income (expense), net (3,393) 7,949 1,963 Loss before income taxes (197,789) (121,714) (169,142) Provision for (benefit from) income taxes 6,059 7,720 (1,968) Net loss $ (203,848) $ (129,434) $ (167,174) (1) Includes stock-based compensation expense as follows: Year Ended April 30, 2022 2021 2020 (in thousands) Cost of revenue Cost of subscription - self managed and SaaS $ 8,368 $ 7,105 $ 4,147 Cost of professional services 6,463 4,824 2,980 Research and development 59,911 35,267 23,621 Sales and marketing 45,798 31,581 19,334 General and administrative 20,654 14,903 9,925 Total stock-based compensation expense $ 141,194 $ 93,680 $ 60,007 58 T a b l e o f C o ntents (2) Includes employer payroll taxes on employee stock transactions as follows: Year Ended April 30, 2022 2021 2020 (in thousands) Cost of Revenue Cost of subscription - self managed and SaaS $ 681 $ 674 $ 349 Cost of professional services 712 661 178 Research and development 3,316 3,670 2,179 Sales and marketing 4,287 5,399 3,237 General and administrative 965 3,972 1,550 Total employer payroll tax on stock transactions $ 9,961 $ 14,376 $ 7,493 (3) Includes amortization of acquired intangible assets as follows: Year Ended April 30, 2022 2021 2020 (in thousands) Cost of Revenue Cost of license - self-managed $ 1,548 $ 1,386 $ 948 Cost of subscription - self-managed and SaaS 8,955 7,051 5,820 Sales and marketing 5,280 5,730 3,300 Total amortization of acquired intangibles $ 15,783 $ 14,167 $ 10,068 (4) Includes acquisition-related expenses as follows: Year Ended April 30, 2022 2021 2020 (in thousands) Research and development $ 6,104 $ — $ 34 Sales and marketing — — 522 General and administrative 1,528 — 17,418 Total acquisition-related expenses $ 7,632 $ — $ 17,974 59 T a b l e o f C o ntents 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, 2022 2021 2020 Revenue License - self-managed 9 % 11 % 13 % Subscription - self-managed and SaaS 84 % 82 % 79 % Total subscription revenue 93 % 93 % 92 % Professional services 7 % 7 % 8 % Total revenue 100 % 100 % 100 % Cost of revenue (1)(2)(3) Cost of license - self-managed 0 % 0 % 0 % Cost of subscription - self-managed and SaaS 21 % 20 % 20 % Total cost of revenue - subscription 21 % 20 % 20 % Cost of professional services 6 % 6 % 9 % Total cost of revenue 27 % 26 % 29 % Gross profit 73 % 74 % 71 % Operating expenses (1)(2)(3)(4) Research and development 32 % 33 % 39 % Sales and marketing 47 % 45 % 51 % General and administrative 14 % 17 % 21 % Total operating expenses 93 % 95 % 111 % Operating loss (1)(2)(3)(4) (20) % (21) % (40) % Other income (expense), net Interest expense (3) % 0 % 0 % Other income (expense), net 0 % 1 % 0 % Loss before income taxes (23) % (20) % (40) % Provision for (benefit from) income taxes 1 % 1 % (1) % Net loss (24) % (21) % (39) % (1) Includes stock-based compensation expense as follows: Year Ended April 30, 2022 2021 2020 (in thousands) Cost of revenue Cost of subscription - self managed and SaaS 1 % 1 % 1 % Cost of professional services 1 % 1 % — % Research and development 7 % 6 % 6 % Sales and marketing 5 % 5 % 5 % General and administrative 2 % 2 % 2 % Total stock-based compensation expense 16 % 15 % 14 % 60 T a b l e o f C o ntents (2) Includes employer payroll taxes on employee stock transactions as follows: Year Ended April 30, 2022 2021 2020 (in thousands) Cost of Revenue Cost of subscription - self managed and SaaS — % — % — % Cost of professional services — % — % — % Research and development — % — % 1 % Sales and marketing 1 % 1 % 1 % General and administrative — % 1 % — % Total employer payroll tax on stock transactions 1 % 2 % 2 % (3) Includes amortization of acquired intangible assets as follows: Year Ended April 30, 2022 2021 2020 (in thousands) Cost of Revenue Cost of license - self-managed — % — % — % Cost of subscription - self-managed and SaaS 1 % 1 % 1 % Sales and marketing 1 % 1 % 1 % Total amortization of acquired intangibles 2 % 2 % 2 % (4) Includes acquisition-related expenses as follows: Year Ended April 30, 2022 2021 2020 (in thousands) Research and development 1 % — % — % Sales and marketing — % — % — % General and administrative — % — % 4 % Total acquisition-related expenses 1 % — % 4 % Comparison of Fiscal Years Ended April 30, 2022 and 2021 Revenue Year Ended April 30, Change 2022 2021 $ % (in thousands) Revenue License - self-managed $ 76,964 $ 67,994 $ 8,970 13 % Subscription - self-managed and SaaS 721,806 499,345 222,461 45 % Total subscription revenue 798,770 567,339 231,431 41 % Professional services 63,604 41,150 22,454 55 % Total revenue $ 862,374 $ 608,489 $ 253,885 42 % Total subscription revenue increased by $231.4 million, or 41%, for the year ended April 30, 2022 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 18,600 customers for the year ended April 30, 2022 compared to over 15,000 customers in the prior year. 61 T a b l e o f C o ntents Professional services revenue increased by $22.5 million, or 55%, for the year ended April 30, 2022 compared to the prior year. The increase in professional services revenue was attributable to increased adoption of our professional services offerings. Cost of Revenue and Gross Margin Year Ended April 30, Change 2022 2021 $ % (in thousands) Cost of revenue Cost of license - self-managed $ 1,548 $ 1,386 $ 162 12 % Cost of subscription - self-managed and SaaS 176,656 121,127 55,529 46 % Total cost of revenue - subscription 178,204 122,513 55,691 45 % Cost of professional services 53,990 38,541 15,449 40 % Total cost of revenue $ 232,194 $ 161,054 $ 71,140 44 % Gross profit $ 630,180 $ 447,435 $ 182,745 41 % Gross margin: License - self-managed 98 % 98 % Subscriptions - self-managed and SaaS 76 % 76 % Total subscription margin 78 % 78 % Professional services 15 % 6 % Total gross margin 73 % 74 % Total cost of subscription revenue increased by $55.7 million, or 45%, for the year ended April 30, 2022 compared to the prior year. This increase was primarily due to an increase of $42.1 million in cloud infrastructure costs and an increase of $6.8 million in personnel and related charges. In addition, third-party consulting and partner costs increased by $2.9 million and amortization of acquired intangible assets increased by $1.9 million. The increase in personnel and related costs includes an increase of $4.9 million in salaries and related taxes and an increase of $1.3 million in stock-based compensation expense. Total subscription margin remained flat at 78% for the year ended April 30, 2022 compared to the prior year. Cost of professional services revenue increased by $15.4 million, or 40%, for the year ended April 30, 2022 compared to the prior year. This increase was primarily due to an increase of $7.6 million in personnel and related costs, including increases of $5.2 million in salaries and related taxes and $1.6 million in stock-based compensation driven by an increase in headcount in our professional services organization. In addition, subcontractor costs increased by $6.4 million and travel costs increased by $0.6 million. Gross margin for professional services revenue was 15% for the year ended April 30, 2022 compared to 6% for the prior year. The increase in margin is primarily due to the increase in revenue, and a lower than proportionate increase in cost of professional services revenue. We continue to invest in headcount for our professional services organization that we believe will be needed as we continue to grow and expect travel related costs will increase in the future as COVID-19 risks and travel restrictions abate. Our gross margin for professional services may fluctuate, decline or be negative in the near-term as we seek to expand our professional services business. Operating Expenses Research and development Year Ended April 30, Change 2022 2021 $ % (in thousands) Research and development $ 273,761 $ 199,203 $ 74,558 37 % Research and development expense increased by $74.6 million, or 37%, for the year ended April 30, 2022 compared to the prior year as we continued to invest in the development of new and existing offerings. Personnel and related costs increased by $64.9 million as a result of growth in headcount. In addition, cloud infrastructure costs related to our research and development activities increased by $3.1 million, consulting costs increased by $3.1 million, and travel costs increased by $2.6 million. The increase in personnel and related costs includes an increase of $29.7 million in salaries and related taxes, an 62 T a b l e o f C o ntents increase of $24.6 million in stock-based compensation expense, an increase of $6.1 million in acquisition related compensation, and an increase of $2.8 million in employee benefits expense. Sales and marketing Year Ended April 30, Change 2022 2021 $ % (in thousands) Sales and marketing $ 406,658 $ 273,877 $ 132,781 48 % Sales and marketing expense increased by $132.8 million, or 48%, for the year ended April 30, 2022 compared to the prior year. This increase was primarily due to an increase of $110.2 million in personnel related costs and a $4.1 million increase in software and equipment charges due to growth in headcount. In addition, marketing expenses increased by $9.3 million and travel costs increased by $7.4 million. The increase in personnel and related costs includes an increase of $60.1 million in salaries and related taxes, an increase of $23.8 million in commission expense, an increase of $14.2 million in stock-based compensation expense and an increase of $7.4 million in employee benefits expense. General and administrative Year Ended April 30, Change 2022 2021 $ % (in thousands) General and administrative $ 123,441 $ 103,833 $ 19,608 19 % General and administrative expense increased by $19.6 million, or 19%, for the year ended April 30, 2022 compared to the prior year. This increase was primarily due to an increase of $10.3 million in personnel related costs and a $1.1 million increase in software and equipment charges due to headcount growth. In addition, legal and professional fees increased by $7.0 million, consulting expense increased by $1.2 million and travel costs increased by $1.1 million. These increases were partially offset by a $2.2 million decrease in bad debt expense related to expected credit losses on accounts receivable and write-off of uncollectible balances. The increase in personnel and related costs includes an increase of $5.8 million in stock-based compensation expense, an increase of $4.3 million in salaries and related taxes, an increase of $1.1 million in employee benefits expense which were partially offset by a decrease of $1.4 million in recruiting costs. Other Income, Net Year Ended April 30, Change 2022 2021 $ % (in thousands) Other income (expense), net $ (24,109) $ 7,764 $ (31,873) (411) % Other expense was $24.1 million for the year ended April 30, 2022 compared to other income of $7.8 million in the prior year. This was primarily due to a net increase in interest expense of $20.6 million related to the issuance of our Senior Notes during the current fiscal year. In addition, we recognized a foreign currency transaction loss of $3.6 million in the current fiscal year compared to a foreign currency transaction gain of $7.7 million in the prior year. Provision for Income Taxes Year Ended April 30, Change 2022 2021 $ % (in thousands) Provision for income taxes $ 6,059 $ 7,720 $ (1,661) (22) % The provision for income taxes decreased $1.7 million, or 22%, for the year ended April 30, 2022 compared to the prior year. The decrease in tax expense is primarily due to a decrease in income taxes from foreign subsidiaries. The tax benefit for stock-based compensation was 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 (3.1)% and (6.3)% of our net loss before taxes for the years ended April 30, 2022 and 2021, respectively. 63 T a b l e o f C o ntents Liquidity and Capital Resources As of April 30, 2022, we had cash and cash equivalents and restricted cash of $860.9 million and $2.7 million, respectively, and working capital of $570.4 million. Our restricted cash consists primarily of 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 $817.2 million as of April 30, 2022. We have historically incurred, and expect to continue to incur, operating losses and may generate negative cash flows from operations on an annual basis for the foreseeable future due to the investments we intend to make as described above, and as a result, we may require additional capital resources to execute on our strategic initiatives to grow our business. We believe that our existing cash and cash equivalents will be sufficient to fund our operating and capital needs for at least the next 12 months, despite the uncertainty in the changing market and economic conditions related to COVID-19. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary as a result of, and our future capital requirements, both near-term and long-term, will depend on, many factors, including our growth rate, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing activities, the timing of new introductions of solutions or features, and the continuing market acceptance of our solutions and services. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. In July 2021, we issued long-term debt of $575.0 million, and we may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results and financial condition would be adversely affected. The following table summarizes our cash flows for the periods presented: Year Ended April 30, 2022 2021 2020 (in thousands) Net cash provided by (used in) operating activities $ 5,672 $ 22,545 $ (30,564) Net cash used in investing activities $ (127,271) $ (1,518) $ (29,187) Net cash provided by financing activities $ 602,127 $ 77,258 $ 58,539 Net Cash Provided By Operating Activities Net cash provided by operating activities during the year ended April 30, 2022 was $5.7 million, which resulted from a net loss of $203.8 million adjusted for non-cash charges of $230.2 million and net cash outflow of $20.6 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $140.6 million for stock-based compensation expense, $60.7 million for amortization of deferred contract acquisition costs, $19.7 million of depreciation and intangible asset amortization expense, $8.6 million in non-cash operating lease costs, net foreign currency transaction loss of $2.0 million, amortization of debt issuance costs of $0.8 million, and $0.1 million of other expenses which were partially offset by an increase of $2.4 million in deferred tax assets. The net cash outflow from changes in operating assets and liabilities was the result of an increase of $62.2 million in accounts receivable due to higher billings and timing of collections from our customers, an increase in deferred contract acquisition costs of $96.8 million as our sales commissions increased due to increased business volume, a decrease of $8.9 million in operating lease liabilities, and an increase of $2.6 million in prepaid and other assets. These outflows were partially offset by an $83.8 million increase in deferred revenue due to higher billings and a net increase of $66.0 million in accounts payable, accrued expenses and accrued compensation and benefits due to growth in our business and higher headcount. 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 64 T a b l e o f C o ntents 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 Investing Activities Net cash used in investing activities of $127.3 million during the year ended April 30, 2022 was primarily due to cash used in acquisitions of $119.9 million, capitalization of $4.9 million in internal-use software costs, and $2.5 million of capital expenditures during the period. Net cash used in investing activities of $1.5 million during the year ended April 30, 2021 was primarily due to $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 Provided by Financing Activities Net cash provided by financing activities of $602.1 million during the year ended April 30, 2022 was due to the proceeds of $575.0 million from the issuance of our Senior Notes and $36.4 million of proceeds from stock option exercises, partially offset by $9.3 million payments of debt issuance costs. 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. Off Balance Sheet Arrangements We did not have, during the periods presented, nor do we currently have any off balance sheet financing arrangements or any relationships with any unconsolidated entities or financial partnerships, including entities referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off balance sheet arrangements or other contractually narrow or limited purposes. Contractual Obligations and Commitments Our principal commitments consist of our purchase obligations under non-cancellable agreements for cloud hosting, subscription software, and sales and marketing, future non-cancelable minimum rental payments under operating leases for our offices, and interest payments due on our Senior Notes. As of April 30, 2022, we had purchase commitments of $415.7 million related to cloud hosting services, future minimum lease payment commitments of $29.8 million, and purchase commitments of $36.2 million related to other contracts. See Note 8 “Commitments and contingencies” and Note 9 “Leases” of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional discussion of our cloud hosting obligations and future non-cancelable minimum rental payments, respectively. In July 2021, we issued $575.0 million aggregate principal amount of 4.125% Senior Notes due July 15, 2029 in a private placement. Interest on the Senior Notes is payable semi-annually in arrears on January 15 and July 15 of each year. See Note 7 “Senior Notes” of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. Additionally, as of April 30, 2022, we had $2.5 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. Our contractual commitment amounts are associated with agreements that are enforceable and legally binding and do not include obligations under contracts that we can cancel without a significant penalty. Purchase orders issued in the ordinary course of business are also excluded, as our purchase orders represent authorizations to purchase rather than binding agreements. We have also excluded unrecognized tax benefits from the contractual obligations. 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 “Income taxes” of our accompanying Notes to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. Critical Accounting Policies and Estimates In preparing our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we are required to make estimates, assumptions and judgments that affect the amounts reported on our financial statements and the accompanying disclosures. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. We base our estimates, assumptions 65 T a b l e o f C o ntents and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. These estimates may change in future periods and will be recognized in the consolidated financial statements as new events occur and additional information becomes known. Actual results could differ from those estimates and any such differences may be material to our financial statements. We believe that the critical accounting policies and estimates set forth below involve a higher degree of judgment and complexity in their application than our other significant accounting policies. Accounting policies that have a significant impact on our results are described in Note 2 “Summary of Significant Accounting Policies” to our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. The accounting policies discussed in this section are those that we consider to involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. As the impact of the COVID-19 pandemic continues to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require increased judgment. These estimates and assumptions may change in future periods and will be recognized in the consolidated financial statements as new events occur and additional information becomes known. To the extent our actual results differ materially from those estimates and assumptions, our future financial statements could be affected. Revenue Recognition Our contracts with customers include varying terms and conditions, and identifying and evaluating the impact of these terms and conditions on revenue recognition requires significant judgment. 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 generally do not contain warranties that give rise to a separate performance obligation. Our contracts often contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. We apply significant judgment in identifying and accounting for each performance obligation, as a result of evaluating the terms and conditions in contracts. The transaction price is allocated to the separate performance obligations on a relative standalone selling price (“SSP”) basis. We determine the SSP based on the prices at which we separately sell these products assuming the majority of these fall within a pricing range. In instances where SSP is not directly observable, such as when we do not sell the software license separately, we derive the SSP using information that may include market conditions and other observable and unobservable inputs which can require significant judgment. There is typically more than one SSP for individual products and services due to the stratification of those products and services by quantity, term of the subscription, sales channel and other circumstances. If one of the performance obligations is outside of the SSP range, we allocate the transaction price considering the midpoint of the SSP range. We also consider if there are any additional material rights inherent in a contract, and if so, we allocate a portion of the transaction price to such rights based on a relative SSP. 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. Our sales commissions plan incorporates different commission rates for contracts with new customers and incremental sales to existing customers, and for subsequent subscription renewals. Sales commissions for renewal of a subscription contract are not considered commensurate with the commissions paid for contracts with new customers and incremental sales to existing customers given the substantive difference in commission rates in proportion to their respective contract values. Commissions paid for contracts with new customers and incremental sales to existing customers are amortized over an estimated period of benefit of five years while commissions paid for renewal contracts are amortized based on the pattern of the associated revenue recognition over the related contractual renewal period for the pool of renewal contracts. We determine the period of benefit for commissions paid for contracts with new customers and incremental sales to existing customers by taking into consideration its initial estimated customer life and the technological life of its software and related significant features. Commissions paid on professional services are typically amortized in accordance with the associated revenue as the commissions paid on new and renewal professional services are commensurate with each other. Amortization of deferred contract acquisition costs is recognized in sales and marketing expense in the consolidated statement of operations. 66 T a b l e o f C o ntents Acquired Intangible Assets We apply significant judgment in determining the fair value of the intangible assets acquired, which involves the use of significant estimates and assumptions. These estimates can include, but are not limited to, future expected cash flows from acquired customers and acquired technology from a market participant perspective, costs to rebuild developed technology, useful lives and discount rates. While we use our best estimates and judgments, our estimates are inherently uncertain.