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, 2024, 2023, and 2022, and year-to-year comparisons between the years ended April 30, 2024 and 2023. A discussion of our financial condition and results of operations for the year ended April 30, 2022 and year-to-year comparisons between the years ended April 30, 2023 and 2022 that are 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, 2023, filed with the SEC on June 16, 2023. Overview Elastic, the Search AI Company, enables our customers to find the answers they need in real time, using all of their data, at scale. Our platform, combines the power of search with AI to help companies solve real-time business problems, unlock potential value, and achieve better outcomes. Our platform, available as both a hosted, managed service across public clouds as well as self-managed software, allows our customers to find insights and drive AI and machine learning use cases from large amounts of data. We offer three search-powered solutions – Search, Observability, and Security – that are built on 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 unified data store for all of our solutions and use cases. Our platform also includes the ESRE, which combines advanced AI with Elastic’s text search to give developers a full suite of sophisticated retrieval algorithms and the ability to integrate with large language models. The Elastic Stack can be used by developers and IT decision makers to power a variety of use cases. It is a distributed, real-time vector 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 across major cloud providers. Customers can also deploy our platform across hybrid clouds, public or private clouds, and multi-cloud environments. As digital transformation drives mission-critical business functions to the cloud, we believe that every company must incorporate search AI capabilities across IT and line-of-business organizations to find the answers that matter from all of its data in real-time and at scale. 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 varying levels of features across all solutions. In Elastic Cloud, our family of cloud-based offerings, 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 free of charge, 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 maintain 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-driven 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 range from one to three years and are usually billed annually in advance. Our subscription agreements are both term-based and consumption-based, with the vast majority of Elastic Cloud subscriptions being consumption-based. We sell subscriptions in various currencies, with the majority of our subscriptions contracted in U.S. dollars, and a smaller portion contracted in Euro, British Pound Sterling, and other currencies. 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% and 92% of total revenue for the years ended April 30, 2024 and 2023, respectively. We also generate revenue from consulting and training services. 52 Table of Contents 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 low-touch campaigns to keep users and customers engaged once they have begun using Elastic Cloud or have downloaded our software. As of April 30, 2024, we had approximately 21,000 customers compared to approximately 20,200 customers as of April 30, 2023. 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 on our products but can significantly increase their spending over time. 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 utilizing our products to address new use cases. The number of customers who represented greater than $100,000 in annual contract value (“ACV”) was over 1,330 and over 1,160 as of April 30, 2024 and 2023, 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 seeking to obtain new customers and on pursuing 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 $1.267 billion for the year ended April 30, 2024 from $1.069 billion for the year ended April 30, 2023 and $862.4 million for the year ended April 30, 2022, representing year-over-year growth of 19% for the year ended April 30, 2024 and 24% for the year ended April 30, 2023. For the years ended April 30, 2024, 2023 and 2022, revenue from outside the United States accounted for 42%, 41%, and 44% of our total revenue, respectively. We had net income of $61.7 million for the year ended April 30, 2024, while we incurred net losses of $236.2 million and $203.8 million for the years ended April 30, 2023 and 2022, respectively. Our net cash provided by operating activities was $148.8 million, $35.7 million, and $5.7 million for the years ended April 30, 2024, 2023 and 2022, respectively. We had an accumulated deficit of $991.6 million as of April 30, 2024 due to losses in all prior years. We may incur net losses in the future and there can be no assurance whether, or when, we may become profitable on a consistent basis. We continue to make substantial investments in developing the Elastic Stack and expanding our global sales and marketing footprint. With a distributed team spanning over 35 countries, we are able to recruit, hire, and retain high-quality, experienced technical and sales personnel and operate at a rapid pace to drive product releases, fix bugs, and create and market new products. We had 3,187 employees as of April 30, 2024. Current Economic Conditions Macroeconomic events, including continued inflation, slower economic growth, and political unrest, continue to evolve and negatively impact worldwide economic activity. Governmental and corporate responses to these factors, including rising interest rates, unpredictable and decreased spending, and layoffs, have added to the highly volatile macroeconomic landscape. We have experienced and, if economic conditions do not reflect a sustained recovery, we may continue to experience longer and more unpredictable sales cycles, increased scrutiny of deals, slowing consumption and overall customer expenditures, and the impacts of changing foreign exchange rates with a strengthening or weakening U.S. dollar. We continue to closely monitor the macroeconomic environment and its effects on our business and on global economic activity, including customer spending behavior. See “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K for a discussion of additional risks. Restructuring During the three months ended April 30, 2024, we initiated a plan to realign business and strategic priorities which resulted in a reduction of our workforce. In connection with this plan, we incurred a charge of $4.2 million primarily consisting of employee-related severance and termination benefits during the three months ended April 30, 2024. The execution of this plan is expected to be substantially completed during the first quarter of fiscal 2025. On November 30, 2022, we announced and began implementing a plan to align our investments more closely with our strategic priorities by reducing our workforce by approximately 13% and implementing certain facilities-related cost optimization actions. In connection with this restructuring plan, we recorded $0.8 million and $31.3 million of restructuring and other related charges during the years ended April 30, 2024 and 2023, respectively. The execution of this restructuring plan was completed during the first quarter of fiscal 2024. 53 Table of Contents See Note 16 “Restructuring and other related charges” in our accompanying Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information. See “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K for a discussion of 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, 2024 and 2023, Elastic Cloud contributed 43% and 40% 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 continue to increase over time. However, we expect that an increase in the relative contribution of Elastic Cloud to our business will continue to 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-of-charge 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 promote our technology within their organizations. This reduces the time required for our sales force to educate potential customers on our solutions. 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 United States 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 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. These investments are likely to occur before we realize the anticipated benefits of 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. 54 Table of Contents 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 its ACV, or in the case of customers charged on usage-based arrangements, by annualizing the usage for that month. We then calculate the annualized spend from these same customers as of the given month end, or Current Period Value, which includes any growth in the value of their subscriptions or usage and is net of contraction or attrition over the prior twelve months. We then divide the Current Period Value by the Prior Period Value to arrive at an expansion rate. The Net Expansion Rate at the end of any period is the weighted average of the expansion rates as of the end of each of the trailing twelve months. The Net Expansion Rate includes the dollar-weighted value of our subscriptions or usage that expand, renew, contract, or experience attrition. For instance, if each customer had a one-year subscription and renewed its subscription for the same amount, 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 approximately 110% as of April 30, 2024. 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. Our subscription agreements are either term-based or consumption-based, with the vast majority of Elastic Cloud subscriptions being consumption-based. A portion of the revenue from self-managed subscriptions is generally recognized up front at the point in time when the license is delivered and the remainder 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 revenue in our consolidated statements of operations. Services. Services is composed of implementation and other consulting services as well as public and private training. Revenue for services is recognized as these services are delivered. Cost of Revenue Subscription. Cost of subscription 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 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 to increase in absolute dollars as our subscription revenue increases. Services. Cost of services revenue consists primarily of personnel costs directly associated with delivery of training, implementation and other services, costs of third-party contractors, facility rental charges and allocated overhead costs. We expect our cost of services to increase in absolute dollars as we invest in our business and as 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 services, the amount of our revenue represented by hosted services, the mix of subscriptions sold, the mix of revenue between subscriptions and services, the mix of 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 continue to have a modest unfavorable impact on our gross margin as a result of the associated third-party hosting costs. 55 Table of Contents Operating Expenses Research and development. Research and development expense primarily consists of personnel and related costs and allocated overhead costs. 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 and related 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 sales force 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 certain customer contracts. Deferred contract acquisition costs are amortized over the expected benefit period. General and administrative. General and administrative expense primarily consists of personnel and related 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. Restructuring and other related charges. Restructuring and other related charges primarily consist of employee-related severance and other termination benefits as well as lease impairment and other facilities-related charges. Other Income (Expense), Net Interest expense. Interest expense primarily consists of interest on our Senior Notes. Other income (expense), net. Other income (expense), net primarily consists of interest income, gains and losses from transactions denominated in a currency other than the functional currency, and miscellaneous other non-operating gains and losses. (Benefit from) Provision for Income Taxes (Benefit from) provision for income taxes consists primarily of income taxes related to the Netherlands, U.S. federal and 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 one-time tax benefits or charges, including in fiscal 2024 an income tax benefit related to a release of the valuation allowance against U.S. federal and certain states’ deferred tax assets. 56 Table of Contents Results of Operations The following table sets forth our results of operations for the periods presented. Year Ended April 30, 2024 2023 2022 (in thousands) Revenue Subscription $ 1,176,606 $ 984,762 $ 798,770 Services 90,715 84,227 63,604 Total revenue 1,267,321 1,068,989 862,374 Cost of revenue (1)(2) Subscription 246,285 219,306 178,204 Services 83,794 77,320 53,990 Total cost of revenue 330,079 296,626 232,194 Gross profit 937,242 772,363 630,180 Operating expenses (1)(2)(3) Research and development 341,951 313,454 273,761 Sales and marketing 559,648 503,537 406,658 General and administrative 160,628 143,247 123,441 Restructuring and other related charges 4,917 31,297 — Total operating expenses 1,067,144 991,535 803,860 Operating loss (1)(2)(3) (129,902) (219,172) (173,680) Other income (expense), net Interest expense (26,132) (25,159) (20,716) Other income (expense), net 33,278 27,454 (3,393) Loss before income taxes (122,756) (216,877) (197,789) (Benefit from) provision for income taxes (184,476) 19,284 6,059 Net income (loss) $ 61,720 $ (236,161) $ (203,848) (1) Includes stock-based compensation expense and related employer taxes as follows: Year Ended April 30, 2024 2023 2022 (in thousands) Cost of revenue Subscription $ 9,378 $ 8,730 $ 9,049 Services 13,365 9,858 7,175 Research and development 98,174 82,628 63,227 Sales and marketing 82,023 71,363 50,085 General and administrative 47,519 38,593 21,619 Total stock-based compensation expense and related employer taxes $ 250,459 $ 211,172 $ 151,155 (2) Includes amortization of acquired intangible assets as follows: Year Ended April 30, 2024 2023 2022 (in thousands) Cost of revenue Subscription $ 12,353 $ 11,781 $ 10,503 Sales and marketing 2,143 4,887 5,280 Total amortization of acquired intangibles $ 14,496 $ 16,668 $ 15,783 57 Table of Contents (3) Includes acquisition-related expenses as follows: Year Ended April 30, 2024 2023 2022 (in thousands) Research and development $ 1,385 $ 5,875 $ 6,104 General and administrative 1,065 103 1,528 Total acquisition-related expenses $ 2,450 $ 5,978 $ 7,632 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, 2024 2023 2022 Revenue Subscription 93 % 92 % 93 % Services 7 % 8 % 7 % Total revenue 100 % 100 % 100 % Cost of revenue (1)(2) Subscription 19 % 21 % 21 % Services 7 % 7 % 6 % Total cost of revenue 26 % 28 % 27 % Gross profit 74 % 72 % 73 % Operating expenses (1)(2)(3) Research and development 27 % 29 % 32 % Sales and marketing 44 % 47 % 47 % General and administrative 13 % 14 % 14 % Restructuring and other related charges — % 3 % — % Total operating expenses 84 % 93 % 93 % Operating loss (1)(2)(3) (10) % (21) % (20) % Other income (expense), net Interest expense (2) % (2) % (3) % Other income (expense), net 3 % 2 % — % Loss before income taxes (9) % (21) % (23) % (Benefit from) provision for income taxes (14) % 1 % 1 % Net income (loss) 5 % (22) % (24) % (1) Includes stock-based compensation expense and related employer taxes as follows: Year Ended April 30, 2024 2023 2022 Cost of revenue Subscription 1 % 1 % 1 % Services 1 % 1 % 1 % Research and development 8 % 9 % 7 % Sales and marketing 6 % 6 % 6 % General and administrative 4 % 3 % 2 % Total stock-based compensation expense and related employer taxes 20 % 20 % 17 % 58 Table of Contents (2) Includes amortization of acquired intangible assets as follows: Year Ended April 30, 2024 2023 2022 Cost of revenue Subscription 1 % 1 % 1 % Sales and marketing — % 1 % 1 % Total amortization of acquired intangibles 1 % 2 % 2 % (3) Includes acquisition-related expenses as follows: Year Ended April 30, 2024 2023 2022 Research and development — % 1 % 1 % General and administrative — % — % — % Total acquisition-related expenses — % 1 % 1 % Comparison of Fiscal Years Ended April 30, 2024 and 2023 Revenue Year Ended April 30, Change 2024 2023 $ % (in thousands) Revenue Subscription $ 1,176,606 $ 984,762 $ 191,844 19 % Services 90,715 84,227 6,488 8 % Total revenue $ 1,267,321 $ 1,068,989 $ 198,332 19 % Subscription revenue increased by $191.8 million, or 19%, for the year ended April 30, 2024 compared to the prior year. This increase was primarily driven by continued adoption of Elastic Cloud, which grew 29% over the prior year and increased to 43% of total revenue for the year ended April 30, 2024 from 40% for the year ended April 30, 2023. Services revenue increased by $6.5 million, or 8%, for the year ended April 30, 2024 compared to the prior year. The increase in services revenue was attributable to increased adoption of our services offerings. Cost of Revenue and Gross Margin Year Ended April 30, Change 2024 2023 $ % (in thousands) Cost of revenue Subscription $ 246,285 $ 219,306 $ 26,979 12 % Services 83,794 77,320 6,474 8 % Total cost of revenue $ 330,079 $ 296,626 $ 33,453 11 % Gross profit $ 937,242 $ 772,363 $ 164,879 21 % Gross margin: Subscription 79 % 78 % Services 8 % 8 % Total gross margin 74 % 72 % 59 Table of Contents Cost of subscription revenue increased by $27.0 million, or 12%, for the year ended April 30, 2024 compared to the prior year. This increase was primarily due to an increase of $24.7 million in cloud infrastructure costs, $1.5 million in other third-party costs, $0.9 million in software and equipment expense, and $0.6 million in intangible assets amortization. These increases were partially offset by a $1.2 million decrease in third-party consulting costs. Total subscription gross margin improved to 79% for the year ended April 30, 2024 compared to 78% for the prior year, primarily due to efficiencies realized in managing our subscription costs relative to revenue growth. Cost of services revenue increased by $6.5 million, or 8%, for the year ended April 30, 2024 compared to the prior year. This increase was primarily due to an increase of $7.2 million in personnel and related costs. These costs were partially offset by decreases of $1.1 million in training and facility costs. The increase in personnel and related costs included increases of $4.0 million in salaries and related taxes and $3.1 million in stock-based compensation. Gross margin for services revenue was flat at 8% for the year ended April 30, 2024 compared to the prior year. We continue to make investments in our services organization that we believe will be needed to support our continued growth. Our gross margin for services may fluctuate or decline in the near-term as we seek to expand our services business. Operating Expenses Research and development Year Ended April 30, Change 2024 2023 $ % (in thousands) Research and development $ 341,951 $ 313,454 $ 28,497 9 % Research and development expense increased by $28.5 million, or 9%, for the year ended April 30, 2024 compared to the prior year as we continued to invest in the development of new and existing offerings. Personnel and related costs increased by $22.1 million for the current year, while cloud infrastructure costs related to our research and development activities increased by $4.4 million and travel costs increased by $1.4 million. The increase in personnel and related costs included increases of $13.4 million in stock-based compensation, $10.7 million in salaries and related taxes, and $2.0 million in employee benefits expense. These increases were offset in part by a decrease in acquisition-related compensation of $4.4 million. Sales and marketing Year Ended April 30, Change 2024 2023 $ % (in thousands) Sales and marketing $ 559,648 $ 503,537 $ 56,111 11 % Sales and marketing expense increased by $56.1 million, or 11%, for the year ended April 30, 2024 compared to the prior year. This increase was primarily due to increases of $34.8 million in personnel and related costs, $12.5 million in marketing expenses, and $9.3 million in travel costs. These increases were partially offset by a decrease of $2.7 million in intangible assets amortization. The increase in personnel and related costs included increases of $14.5 million in salaries and related taxes, $9.6 million in commissions expense, and $9.1 million in stock-based compensation. General and administrative Year Ended April 30, Change 2024 2023 $ % (in thousands) General and administrative $ 160,628 $ 143,247 $ 17,381 12 % General and administrative expense increased by $17.4 million, or 12%, for the year ended April 30, 2024 compared to the prior year. This increase was primarily due to increases of $13.8 million in personnel and related costs, $1.8 million in other miscellaneous non-income based taxes, $1.5 million in legal and professional fees, and $1.3 million in bad debt expense and allowance for credit losses. These increases were partially offset by a decrease of $1.5 million in insurance costs. The increase in personnel and related costs included increases of $9.0 million in stock-based compensation expense and $4.3 million in salaries and related taxes. 60 Table of Contents Restructuring and other related charges Year Ended April 30, Change 2024 2023 $ % (in thousands) Restructuring and other related charges $ 4,917 $ 31,297 $ (26,380) (84) % For the year ended April 30, 2024, we recorded restructuring and other related charges comprising employee-related severance and other termination benefits of approximately $4.9 million. For the year ended April 30, 2023, we recorded restructuring and other related charges comprising employee-related severance and other termination benefits of approximately $23.3 million, facilities-related charges of approximately $6.2 million, and $1.8 million of other restructuring-related charges. Other Income, Net Interest expense Year Ended April 30, Change 2024 2023 $ % (in thousands) Interest expense $ (26,132) $ (25,159) $ (973) 4 % Interest expense primarily related to interest on our Senior Notes and remained relatively flat for the year ended April 30, 2024 compared to the prior year. Other income, net Year Ended April 30, Change 2024 2023 $ % (in thousands) Other income, net $ 33,278 $ 27,454 $ 5,824 21 % Other income, net increased by $5.8 million to $33.3 million for the year ended April 30, 2024 from $27.5 million for the prior year. The increase was primarily due to an increase of $19.7 million in investment income due to new investments in marketable securities and higher interest earned on money market funds. The effects of these increases were partially offset by an increase in net foreign currency transaction losses of $3.7 million. Additionally, during the year ended April 30, 2023, a one-time favorable settlement of a legal claim increased other income by $10.2 million, further offsetting the year-over-year increase in investment income. (Benefit from) Provision for Income Taxes Year Ended April 30, Change 2024 2023 $ % (in thousands) (Benefit from) provision for income taxes $ (184,476) $ 19,284 $ (203,760) NM NM = Not Meaningful The benefit from income taxes was $184.5 million for the year ended April 30, 2024 compared to a provision for income taxes of $19.3 million for the prior year. Our effective tax rate was 150% and (9)% of our loss before income taxes for the years ended April 30, 2024 and 2023, respectively. 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 as well as one-time tax benefits or charges. The increase in tax benefit during the year ended April 30, 2024 was driven primarily by the release of a valuation allowance against U.S. federal and certain states’ deferred tax assets of $250.7 million, partially offset by tax expense in the current year resulting from growth in business operations in jurisdictions where we are subject to tax. 61 Table of Contents Liquidity and Capital Resources As of April 30, 2024, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $1.084 billion. Our cash, cash equivalents and marketable securities consist of highly liquid investment-grade fixed-income securities. We believe that the credit quality of the securities portfolio is strong and diversified among industries and individual issuers. We have generated significant operating losses from our operations as reflected in our accumulated deficit of $991.6 million as of April 30, 2024. We have historically incurred, and expect to continue to incur, operating losses and may generate negative cash flows from operations in the future due to the investments we intend to make 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, cash equivalents, and marketable securities and cash from our future operations 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 macroeconomic conditions. 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, represented by our Senior Notes, 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, 2024 2023 2022 (in thousands) Net cash provided by operating activities $ 148,762 $ 35,662 $ 5,672 Net cash used in investing activities $ (287,960) $ (272,952) $ (127,271) Net cash provided by financing activities $ 40,054 $ 17,471 $ 602,127 Net Cash Provided by Operating Activities Net cash provided by operating activities during the year ended April 30, 2024 was $148.8 million, which resulted from net income of $61.7 million and adjustments for non-cash charges of $123.7 million, partially offset by a net cash outflow of $36.6 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $239.1 million for stock-based compensation expense, $78.5 million for amortization of deferred contract acquisition costs, $18.0 million of depreciation and intangible asset amortization expense, $11.0 million in non-cash operating lease costs, $1.9 million from foreign currency transaction loss, and $1.1 million for amortization of debt issuance costs, the effects of which were partially offset by $217.2 million in deferred income taxes primarily related to the release of a valuation allowance, net and $8.8 million from amortization of premium and accretion of discount on marketable securities, net . The net cash outflow from changes in operating assets and liabilities resulted from an increase in deferred contract acquisition costs of $119.8 million as our sales commissions increased due to increased business volume, an increase of $63.5 million in accounts receivable, a decrease of $12.4 million in operating lease liabilities, and an increase of $1.0 million in prepaid expenses and other assets . These outflows were partially offset by inflows from a $134.6 million increase in deferred revenue and a net increase of $25.5 million in accounts payable, accrued expenses, and accrued compensation and benefits. 62 Table of Contents Net cash provided by operating activities during the year ended April 30, 2023 was $35.7 million, which resulted from adjustments for non-cash charges of $307.2 million, mostly offset by a net loss of $236.2 million and net cash outflow of $35.4 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $204.0 million for stock-based compensation expense, $68.9 million for amortization of deferred contract acquisition costs, $20.2 million of depreciation and intangible asset amortization expense, $10.9 million in non-cash operating lease costs, and $6.2 million of asset impairment charges. The net cash outflow from changes in operating assets and liabilities resulted from an increase in deferred contract acquisition costs of $102.0 million as our sales commissions increased due to increased business volume, an increase of $46.4 million in accounts receivable, and a decrease of $11.4 million in operating lease liabilities. These outflows were partially offset by inflows from a $95.6 million increase in deferred revenue, a net increase of $18.9 million in accounts payable, accrued expenses and accrued compensation and benefits, and a decrease of $9.8 million in prepaid expenses and other assets. Net Cash Used in Investing Activities Net cash used in investing activities of $288.0 million during the year ended April 30, 2024 was primarily due to the purchase of marketable securities of $536.8 million, business acquisitions, net of cash acquired, of $19.1 million, and capital expenditures of $3.5 million . These expenditures were offset by cash provided by maturities and redemptions of marketable securities of $271.4 million. Net cash used in investing activities of $273.0 million during the year ended April 30, 2023 was primarily due to the purchase of marketable securities of $270.3 million. In addition, we incurred $2.7 million of capital expenditures during the year. Net Cash Provided by Financing Activities Net cash provided by financing activities of $40.1 million during the year ended April 30, 2024 was due to the proceeds from stock option exercises and purchases under our employee stock purchase plan. Net cash provided by financing activities of $17.5 million during the year ended April 30, 2023 was due to the proceeds from stock option exercises. Contractual Obligations and Commitments Our principal commitments primarily consist of our purchase obligations under non-cancelable 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, 2024, we had purchase commitments of $424.6 million related to cloud hosting services, future minimum lease payment commitments of $26.7 million, and purchase commitments of $47.8 million related to other contracts. Subsequent to April 30, 2024, we executed an operating lease agreement for an office space with an expected commencement date in the third quarter of fiscal 2025. The lease term is approximately 11 years with undiscounted future minimum lease payments of approximately $12.4 million. 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 Senior Notes 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 for additional information about the Senior Notes. As of April 30, 2024, we had $2.3 million in letters of credit outstanding in favor of certain landlords for office space. These letters of credit renew annually and expire on various dates through 2025. 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. 63 Table of Contents 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 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. Due to current macroeconomic developments and conditions, 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. 64 Table of Contents 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 services are typically amortized in accordance with the associated revenue as the commissions paid on new and renewal services are commensurate with each other. Amortization of deferred contract acquisition costs is recognized in sales and marketing expense in the consolidated statements of operations. 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. Income Taxes Deferred income tax balances reflect the effects of temporary differences between the financial reporting and tax bases of our assets and liabilities using enacted tax rates expected to apply when taxes are actually paid or recovered. In addition, deferred tax assets are recorded for net operating loss and credit carryforwards. A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized based on all available positive and negative evidence. Such evidence, which requires management's judgment, includes, but is not limited to, recent cumulative earnings or losses, expectations of future taxable income by taxing jurisdiction, and the carry-forward periods available for the utilization of deferred tax assets. To the extent sufficient positive evidence becomes available, we may release all or a portion of our valuation allowance in one or more future periods. During the year ended April 30, 2024, we evaluated the realizability of our deferred tax assets, which resulted in releasing part of our valuation allowance for our U.S. federal and certain U.S. state deferred tax assets. Future releases of the remaining valuation allowance, if any, would result in the recognition of certain deferred tax assets which may include a material income tax benefit for the period in which such release is recorded. See Note 13, “Income Taxes” 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.