ELASTIC N.V. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Management's Discussion and Analysis of Financial Condition and Results of Operations and audited consolidated financial statements included in our Annual Report on Form 10-K for the year endedApril 30, 2021 . As discussed in the section titled "Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such difference include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" under Part II, Item 1A in this Quarterly Report on Form 10-Q. Our fiscal year end isApril 30 , and our fiscal quarters end onJuly 31 ,October 31 ,January 31 , andApril 30 . Our fiscal year endedApril 30, 2021 is referred to as fiscal 2021 and our fiscal year endingApril 30, 2022 is referred to as fiscal 2022. Overview Elastic is a search company. We deliver technology that enables users to search through massive amounts of structured and unstructured data for a wide range of use cases. Our primary offering is the Elastic Stack, a powerful set of software products that ingest and store data from any source, and in any format, and perform search, analysis, and visualization in milliseconds or less. The Elastic Stack is designed for direct use by developers to power a variety of use cases. We also offer three software solutions - Enterprise Search, Observability, and Security - built on the Elastic Stack. Our solutions are designed to be deployed everywhere: in public or private clouds, in hybrid environments, or in traditional on-premises environments. Our products are used by individual developers and organizations of all sizes across a wide range of industries.Elasticsearch is the heart of the Elastic Stack. It is a distributed, real-time search and analytics engine and datastore for exploring all types of data including textual, numerical, geospatial, structured, and unstructured. The first public release ofElasticsearch was in 2010 by our co-founder Shay Banon as an open source project. The Company was formed in 2012. Since then, we have added new products, released new features, acquired companies, and created new solutions to expand the functionality of our products. Our business model is based on a combination of free and paid proprietary software. We market and distribute the Elastic Stack and our solutions using a free and open distribution strategy. Developers are able to download our software directly from our website. Some features of our software can be downloaded and used free of charge. Others are only available through paid subscriptions, which include access to specific proprietary features and also include support. These paid features can be unlocked without the need to re-deploy the software. There is no free subscription tier in our cloud offerings, where all subscriptions are paid. InFebruary 2021 , with the release of version 7.11 of the Elastic Stack, we changed the way we licenseElasticsearch and Kibana, the visualization layer for data stored inElasticsearch . We moved the source code ofElasticsearch and Kibana that had historically been licensed under the Apache License, Version 2.0 open source license ("Apache 2.0"), to be dual licensed under the Elastic License 2.0 ("ELv2"), our proprietary source available license, and the Server Side Public License Version 1.0 ("SSPL"), at the user's election. ELv2 is a permissive source available license, allowing free use, modification, creation of derivative works, and redistribution, while providing protection from cloud service providerswho offer these products as a service without collaborating with us. SSPL is a source available license that provides many of the freedoms of an open source license, but with certain restrictions. This source code license change had no effect on our customers or the vast majority of our users. We believe that our free and open distribution strategy drives a number of benefits for our users, our customers, and our company. It facilitates rapid and efficient developer adoption, particularly by empowering individual developers to download and use our software without payment, registration, or the friction of a formal sales interaction. It fosters a vibrant developer community around our products and solutions, which drives adoption of our products and increased interaction among users. Further, this approach enables community review of our code and products, which allows us to improve the reliability and security of our software. We generate revenue primarily from sales of subscriptions for our software. We offer various paid subscription tiers that provide different levels of rights to use proprietary features and access to support. We do not sell support separately. Our subscription agreements for self-managed and Elastic Cloud deployments typically have terms of one to three years and we usually bill for them annually in advance. Elastic Cloud customers may also purchase subscriptions on a month-to-month basis without a commitment, with usage billed at the end of each month. Subscriptions accounted for 92% and 94% of total revenue in the three months endedJuly 31, 2021 and 2020, respectively. We also generate revenue from consulting and training services. 23 -------------------------------------------------------------------------------- Table of Contents We had over 16,000 customers as ofJuly 31, 2021 compared to over 12,100 as ofJuly 31, 2020 . We define a customer as an entity that generated revenue in the quarter ending on the measurement date from an annual or month-to-month subscription. Affiliated entities are typically counted as a single customer. The annual contract value ("ACV") of a customer's commitments is calculated based on the terms of that customer's subscriptions, and represents the total committed annual subscription amount as of the measurement date. Month-to-month subscriptions are not included in the calculation of ACV. The number of customerswho represented greater than$100,000 in ACV was over 780 as ofJuly 31, 2021 compared to over 630 as ofJuly 31, 2020 . We engage in various sales and marketing efforts to extend our free and open distribution model. We employ multi-touch marketing campaigns to nurture our users and customers and keep them engaged after they download our software. Additionally, we maintain direct sales efforts focused on users and customerswho have adopted our software, as well as departmental decision-makers and senior executiveswho have broad purchasing power in their organizations. Our sales teams are primarily segmented by geographies and secondarily by the employee count of our customers. They focus on both initial conversion of users into customers and additional sales to existing customers. In addition to our direct sales efforts, we also maintain partnerships to further extend our reach and awareness of our products around the world. We continue to make substantial investments in developing the Elastic Stack and our solutions and expanding our global sales and marketing footprint. With a distributed team spanning over 35 countries, we are able to recruit, hire, and retain high-quality, experienced technical and sales personnel and operate at a rapid pace to drive product releases, fix bugs, and create and market new products. We had 2,285 employees as ofJuly 31, 2021 . InJuly 2021 , we issued$575.0 million aggregate principal amount of 4.125% Senior Notes dueJuly 15, 2029 (the "Senior Notes") in a private placement. We intend to use the net proceeds from the offering of the Senior Notes for general corporate purposes, which may include capital expenditures, investments and working capital. In addition, in the past we have considered, and may continue to consider, acquisitions and strategic transactions, and we may use the net proceeds of this offering for such purposes. COVID-19 InMarch 2020 , theWorld Health Organization declared COVID-19 a pandemic. Efforts to control its spread have significantly curtailed the movement of people, goods and services worldwide, including in most or all of the regions in which we sell our products and services and conduct our business operations, negatively impacting worldwide economic activity. The ongoing impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the virus, success of preventative measures to contain or mitigate the spread of the virus and emerging variants, effectiveness, distribution and acceptance of COVID-19 vaccines, impact on our customers and our sales cycles, impact on our customer, employee or industry events, effect on our vendors, and the uneven impact of the COVID-19 pandemic to certain industries, all of which continue to remain uncertain and cannot be predicted. The continuing COVID-19 pandemic has resulted in a global slowdown of economic activity and its impact has varied significantly across different industries with certain industries experiencing increased demand for their products and services, while others have struggled to maintain demand for their products and services consistent with historical levels. There have been delays in purchasing decisions from existing and prospective customers, longer sales cycles, delayed implementation of professional services, reduced renewals of subscriptions by existing customers, and changes in approaches to creating sales pipeline in the absence of in-person marketing events, resulting in headwinds for calculated billings and our Net Expansion Rate. Notwithstanding the potential and actual adverse impacts described above, as the pandemic has caused more of our customers to shift to a virtual workforce or accelerate their digital transformation efforts, we believe the value of our solutions is becoming even more evident. In addition, we have benefited from lower spending on travel due to COVID-19 travel restrictions and from holding events virtually, and we expect lower travel costs to continue in the near-term. In response to the COVID-19 pandemic and in an effort to focus on maintaining business continuity and preparing for the future and long-term success of our business, we have taken precautionary measures intended to help minimize the risk of the virus to our employees, our customers, and the communities in which we operate, including modifying our business practices, such as suspending employee travel, adapting employee work locations, and holding events and trainings virtually. Further, we also temporarily reduced the pace of our investments in our business in response to the COVID-19 pandemic in the first quarter of fiscal 2021, but began to gradually increase our investments in our business since then. We intend to continue to increase the pace of our investments in the business throughout the remainder of fiscal 2022. We continue to monitor the major impacts of the COVID-19 pandemic and make changes in our business as appropriate, in response to such impacts. See "Risk Factors" included in Part II, Item 1A of this Quarterly Report on Form 10-Q for a discussion of additional risks. 24
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Key Factors Affecting Our Performance
We believe that the growth and future success of our business depends on many
factors, including those described below. While each of these factors presents
significant opportunities for our business, they also pose important challenges
that we must successfully address in order to sustain our growth and improve our
results of operations.
Growing the Elastic community. Our strategy consists of providing access to
source available software, on both a free and paid basis, and fostering a
community of users and developers. Our strategy is designed to pursue what we
believe to be significant untapped potential for the use of our technology.
After developers begin to use our software and start to participate in our
developer community, they become more likely to apply our technology to
additional use cases and evangelize our technology within their organizations.
This reduces the time required for our sales force to educate potential leads on
our solutions. In order to capitalize on our opportunity, we intend to make
further investments to keep the Elastic Stack accessible and well known to
software developers around the world. We intend to continue to invest in our
products and support and engage our user base and developer community through
content, events, and conferences in 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 Period Value
by the Prior Period Value to arrive at an expansion rate. The Net Expansion Rate
at the end of any period is the weighted average of the expansion rates as of
the end of each of the trailing twelve months. The Net Expansion Rate includes
the dollar-weighted value of our subscriptions or usage that expand, renew,
contract, or attrit. For instance, if each customer had a one-year subscription
and renewed its subscription for the exact same amount, then the Net Expansion
Rate would be 100%. Customers who reduced their annual subscription dollar value
(contraction) or did not renew their annual subscription (attrition) would
adversely affect the Net Expansion Rate. Our Net Expansion Rate was slightly
below 130% for the three months ended July 31, 2021 . Until April 30, 2021 , Net
Expansion Rate was based on ACV, regardless of customers' actual usage, and also
did not include customers on month-to-month subscriptions. To better reflect
actual customer behavior, we modified our Net Expansion Rate calculation to
incorporate customers' actual spending patterns and include customers on
month-to-month subscriptions. The impact of this change on prior reported
periods is immaterial.
As large organizations expand their use of the Elastic Stack across multiple use
cases, projects, divisions and users, they often begin to require centralized
provisioning, management and monitoring across multiple deployments. To satisfy
these requirements, we offer the Elastic Enterprise subscription. We will
continue to focus some of our direct sales efforts on driving adoption of our
paid offerings.
Increasing adoption of Elastic Cloud. Elastic Cloud, our family of hosted
offerings that includes Elasticsearch Service and Site Search Service, is an
important growth opportunity for our business. Organizations are increasingly
looking for hosted deployment alternatives with reduced administrative burdens.
In some cases, users of our source available software that have been
self-managing deployments of the Elastic Stack subsequently become paying
subscribers of Elastic Cloud. Elastic
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Cloud contributed 32% and 25% to our total revenue for the three months ended
July 31, 2021 and 2020, respectively. We believe that offering a hosted
deployment alternative is important for achieving our long-term growth
potential, and we expect Elastic Cloud's contribution to our subscription
revenue to increase over time. However, an increase in the relative contribution
of Elastic Cloud to our business could adversely impact our gross margin as a
result of the associated hosting costs.
Components of Results of OperationsRevenue
Subscription. Our revenue is primarily generated through the sale of
subscriptions to software, which is either self-managed by the user or hosted
and managed by us in the cloud. Subscriptions provide the right to use paid
proprietary software features and access to support for our paid and unpaid
software.
A portion of the revenue from self-managed subscriptions is generally recognized
up front at the point in time when the license is delivered. This revenue is
presented as License - self-managed in our consolidated statements of
operations. The remainder of revenue from self-managed subscriptions is
recognized ratably over the subscription term while revenue from subscriptions
that require access to the cloud or that are hosted and managed by us or by a
partner on our behalf in the cloud is recognized ratably over the subscription
term or on a usage basis; both are presented within Subscription - self-managed
and SaaS in our consolidated statements of operations.
Professional services. Professional services is composed of consulting services
as well as public and private training. Consulting services are generally
time-based arrangements. Revenue for professional services is recognized as
these services are performed.
Cost of Revenue
Subscription. Cost of license - self-managed consists of amortization of certain
intangible assets. Cost of subscription - self-managed and SaaS consists
primarily of personnel and related costs for employees associated with
supporting our subscription arrangements, certain third-party expenses, and
amortization of certain intangible and other assets. Personnel and related
costs, or personnel costs, comprise cash compensation, benefits and stock-based
compensation to employees, costs of third-party contractors, and allocated
overhead costs. Third-party expenses consist of cloud hosting costs and other
expenses directly associated with our customer support. We expect our cost of
subscription - self-managed and SaaS to increase in absolute dollars as our
subscription revenue increases.
Professional services. Cost of professional services revenue consists primarily
of personnel costs directly associated with delivery of training, implementation
and other professional services, costs of third-party contractors, facility
rental charges and allocated overhead costs. We expect our cost of professional
services revenue to increase in absolute dollars as we invest in our business
and as professional services revenue increases.
Gross profit and gross margin. Gross profit represents revenue less cost of
revenue. Gross margin, or gross profit as a percentage of revenue, has been and
will continue to be affected by a variety of factors, including the timing of
our acquisition of new customers and our renewals with existing customers, the
average sales price of our subscriptions and professional services, the amount
of our revenue represented by hosted services, the mix of subscriptions sold,
the mix of revenue between subscriptions and professional services, the mix of
professional services between consulting and training, transaction volume growth
and support case volume growth. We expect our gross margin to fluctuate over
time depending on the factors described above. We expect our revenue from
Elastic Cloud to continue to increase as a percentage of total revenue, which we
expect will adversely impact our gross margin as a result of the associated
hosting costs.
Operating Expenses
Research and development. Research and development expense mainly consists of
personnel costs and allocated overhead costs for employees and contractors. We
expect our research and development expense to increase in absolute dollars for
the foreseeable future as we continue to develop new technology and invest
further in our existing products.
Sales and marketing. Sales and marketing expense mainly consists of personnel
costs, commissions, allocated overhead costs and costs related to marketing
programs and user events. Marketing programs consist of advertising, events,
brand-building and customer acquisition and retention activities. We expect our
sales and marketing expense to increase in absolute dollars as we expand our
salesforce and increase our investments in marketing resources. We capitalize
sales commissions and associated payroll taxes paid to internal sales personnel
that are related to the acquisition of customer contracts. Sales commissions
costs are amortized over the expected benefit period.
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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. We also anticipate that we will
continue to incur additional costs for employees and third-party consulting
services related to operating as a public company.
Other Income (Expense), Net
Other income, net primarily consists of gains and losses from transactions
denominated in a currency other than the functional currency, interest income
and interest expense.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes related 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.
Results of Operations
The period to period comparison of results is not necessarily indicative of
results for future periods. The following tables set forth our results of
operations for the periods presented in dollars:
Three Months Ended July 31,
2021 2020
(in thousands)
Revenue
License - self-managed $ 16,221 $ 14,879
Subscription - self-managed and SaaS 160,964 106,463
Total subscription revenue 177,185 121,342
Professional services 15,910 7,528
Total revenue 193,095 128,870
Cost of revenue (1)(2)(3)
Cost of license - self-managed 346 346
Cost of subscription - self-managed and SaaS 37,174
25,890
Total cost of revenue - subscription 37,520
26,236
Cost of professional services 12,142 8,595 Total cost of revenue 49,662 34,831 Gross profit 143,433 94,039 Operating expenses(1)(2)(3)(4) Research and development 59,382 45,678 Sales and marketing 88,033 56,151 General and administrative 27,052 21,729 Total operating expenses 174,467 123,558 Operating loss (1)(2)(3)(4) (31,034) (29,519) Other income (expense), net Interest expense (1,820) (9) Other income, net 1,018 10,894 Loss before income taxes (31,836) (18,634) Provision for income taxes 2,653 367 Net loss$ (34,489) $ (19,001) 27
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(1) Includes stock-based compensation expense as follows:
Three Months Ended July 31,
2021 2020
(in thousands)
Cost of revenue
Cost of subscription - self managed and SaaS $ 2,134 $ 1,366
Cost of professional services 1,575 952
Research and development 12,097 7,130
Sales and marketing 9,850 6,192
General and administrative 4,522 2,951
Total stock-based compensation expense $ 30,178 (2) Includes employer payroll taxes on employee stock transactions as follows:
Three Months Ended
2021 2020
(in thousands)
Cost of revenue
Cost of subscription - self managed and SaaS $ 262 $ 143
Cost of professional services 364 77
Research and development 1,598 994
Sales and marketing 1,691 1,157
General and administrative 484 737
Total employer payroll taxes on employee stock-based transactions $
4,399
(3) Includes amortization of acquired intangible assets as follows:
Three Months Ended July 31,
2021 2020
(in thousands)
Cost of revenue
Cost of license - self-managed $ 346 $ 346
Cost of subscription - self-managed and SaaS 1,666 1,763
Sales and marketing 1,429
1,441
Total amortization of acquired intangibles$ 3,441
(4) Includes acquisition-related expenses as follows:
Three Months Ended July 31,
2021 2020
(in thousands)
General and administrative $ 226 $ -
Total acquisition-related expenses $ 226 $ -
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The following table sets forth selected condensed consolidated statements of
operations data for each of the periods indicated as a percentage of total
revenue:
Three Months Ended July 31,
2021 2020
Revenue
License - self-managed 9 % 11 %
Subscription - self-managed and SaaS 83 % 83 %
Total subscription revenue 92 % 94 %
Professional services 8 % 6 %
Total revenue 100 % 100 %
Cost of revenue (1)(2)(3)
Cost of license - self-managed 0 % 0 %
Cost of subscription - self-managed and SaaS 19 % 20 %
Total cost of revenue - subscription 19 % 20 %
Cost of professional services 7 % 7 %
Total cost of revenue 26 % 27 %
Gross profit 74 % 73 %
Operating expenses(1)(2)(3)(4)
Research and development 31 % 35 %
Sales and marketing 45 % 44 %
General and administrative 14 % 17 %
Total operating expenses 90 % 96 %
Operating loss (1)(2)(3)(4) (16) % (23) %
Other income (expense), net
Interest expense (1) % 0 %
Other income, net 1 % 9 %
Loss before income taxes (16) % (14) %
Provision for income taxes 2 % 1 %
Net loss (18) % (15) %
(1) Includes stock-based compensation expense as follows:
Three Months Ended July 31,
2021 2020
Cost of revenue
Cost of subscription - self managed and SaaS 1 % 1 %
Cost of professional services 1 % 1 %
Research and development 6 % 5 %
Sales and marketing 5 % 5 %
General and administrative 3 % 2 %
Total stock-based compensation expense 16 % 14 %
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(2) Includes employer payroll taxes on employee stock transactions as follows:
Three Months Ended July 31,
2021 2020
Cost of revenue
Cost of subscription - self managed and SaaS 0 % 0 %
Cost of professional services 0 % 0 %
Research and development 1 % 1 %
Sales and marketing 1 % 1 %
General and administrative 0 % 0 %Total employer payroll taxes on employee stock-based transactions
2 % 2 %
(3) Includes amortization of acquired intangible assets as follows:
Three Months Ended July 31,
2021 2020
Cost of revenue
Cost of license - self-managed 0 % 0 %
Cost of subscription - self-managed and SaaS 1 % 2 %
Sales and marketing 1 % 1 %
Total amortization of acquired intangibles 2 % 3 %
(4) Includes acquisition-related expenses as follows:
Three Months Ended July 31,
2021 2020
General and administrative 0 % 0 %
Total acquisition-related expenses 0 % 0 %
Comparison of Three Months Ended July 31, 2021 and 2020
Revenue
Three Months Ended July 31, Change
2021 2020 $ %
(dollars in thousands)
Revenue
License - self-managed $ 16,221 $ 14,879 $ 1,342 9 %
Subscription - self-managed and SaaS 160,964 106,463 54,501 51 %
Total subscription revenue 177,185 121,342 55,843 46 %
Professional services 15,910 7,528 8,382 111 %
Total revenue $ 193,095 $ 128,870 $ 64,225 50 %
Total revenue increased by $64.2 million , or 50%, in the three months ended
July 31, 2021 , compared to the same period of the prior year.
Total subscription revenue increased $55.8 million , or 46%, in the three months
ended July 31, 2021 compared to the same period of the prior year. The increase
in revenue was primarily caused by volume-driven increases from new business, as
existing customers purchased additional subscriptions, and we grew our
subscription customer base to over 16,000 customers compared to over 12,100
customers in the same period of the prior year.
Professional services revenue increased by $8.4 million , or 111%, in the three
months ended July 31, 2021 , compared to the same period of the prior year. The
increase in professional services revenue was attributable to increased adoption
of our professional services offerings as COVID-19 risks and travel restrictions
abate.
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Cost of Revenue and Gross Margin
Three Months Ended July 31, Change
2021 2020 $ %
(dollars in thousands)
Cost of revenue
Cost of license - self-managed $ 346 $ 346 $ - - %
Cost of subscription - self-managed and SaaS 37,174 25,890 11,284 44 %
Total cost of revenue - subscription 37,520 26,236 11,284 43 %
Cost of professional services 12,142 8,595 3,547 41 %
Total cost of revenue $ 49,662 $ 34,831 $ 14,831 43 %
Gross profit $ 143,433 $ 94,039 $ 49,394 53 %
Gross margin:
License - self-managed 98 % 98 %
Subscriptions - self-managed and SaaS 77 % 76 %
Total subscription margin 79 % 78 %
Professional services 24 % (14) %
Total gross margin 74 % 73 %
Total cost of subscription revenue increased by $11.3 million , or 43%, in the
three months ended July 31, 2021 compared to the same period of the prior year.
This increase was primarily due to an increase of $7.6 million in cloud hosting
costs, an increase of $2.4 million in personnel and related costs, and an
increase of $0.6 million in partner fees. The increase in personnel and related
costs includes an increase of $1.5 million in salaries and related taxes and
$0.8 million in stock-based compensation.
Total subscription margin increased to 79% for the three months ended July 31,
2021 from 78% for the three months ended July 31, 2020 .
Cost of professional services revenue increased by $3.5 million , or 41%, in the
three months ended July 31, 2021 compared to the same period of the prior
year. This increase was due to an increase of $2.3 million in personnel and
related costs, primarily due to growth in headcount and an increase in
subcontractor costs of $1.1 million .
Gross margin for professional services revenue was 24% in the three months ended
July 31, 2021 compared to (14)% for the three months ended July 31, 2020 . The
increase in margin is primarily due to the increase in revenue, and a lower than
proportionate increase in cost of professional services revenue. We continue to
invest in headcount for our professional services organization that we believe
will be needed as we continue to grow and expect travel related costs will
increase in the future as COVID-19 risks and travel restrictions abate. Our
gross margin for professional services may fluctuate, decline or be negative in
the near-term as we seek to expand our professional services business.
Operating Expenses
Research and development
Three Months Ended July 31, Change
2021 2020 $ %
(dollars in thousands)
Research and development $ 59,382 $ 45,678 $ 13,704 30 %
Research and development expense increased by $13.7 million , or 30%, in the
three months ended July 31, 2021 compared to the same period of the prior year
as we continued to invest in the development of new and existing offerings.
Personnel and related costs increased by $12.1 million and software and
equipment expense increased by $0.4 million primarily as a result of growth in
headcount. Cloud hosting costs increased by $0.4 million and consulting expense
increased by $0.4 million as well. The increase in personnel and related costs
included an increase of $6.4 million in salaries and related taxes, an increase
of $5.0 million in stock-based compensation expense and an increase of
$0.5 million in benefits expense.
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Sales and marketing
Three Months Ended July 31, Change
2021 2020 $ %
(dollars in thousands)
Sales and marketing $ 88,033 $ 56,151 $ 31,882 57 %
Sales and marketing expense increased by $31.9 million , or 57%, in the three
months ended July 31, 2021 compared to the same period of the prior year. This
increase was primarily due to an increase of $24.2 million in personnel and
related costs and a $0.7 million increase in software and equipment expense as
we continued to increase our sales and marketing headcount. In addition,
marketing expenses increased by $5.5 million , consulting expenses increased by
$0.6 million and travel expenses increased by $0.6 million . The increase in
personnel and related costs included an increase of $12.7 million in salaries
and related taxes, an increase of $6.0 million commissions expense related to
the amortization of contract acquisition costs, an increase of $3.7 million in
stock-based compensation and an increase of $1.2 million in benefits expense.
General and administrative
Three Months Ended July 31, Change
2021 2020 $ %
(dollars in thousands)
General and administrative $ 27,052 $ 21,729 $ 5,323 24 %
General and administrative expense increased by$5.3 million , or 24%, in the three months endedJuly 31, 2021 compared to the same period of the prior year. This increase was primarily due to an increase of$2.4 million in legal and professional expenses. Personnel and related costs increased$1.6 million and software and equipment expense increased by$0.3 million due to growth in headcount. Consulting expense also increased$0.7 million . The increase in personnel and related costs included increases of$1.6 million in stock-based compensation and$0.4 million in salaries and related taxes. Other Income (Expense), Net Three Months Ended July 31, Change 2021 2020 $ % (dollars in thousands) Other income (expense), net$ (802) $ 10,885
Other expense, net was$0.8 million in the three months endedJuly 31, 2021 compared to other income, net of$10.9 million in the same period of the prior year. This net decrease in income was primarily due to a decrease of$9.8 million in foreign currency gains relating to remeasurement of certain asset and liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded and an increase of$1.8 million in interest expense due to issuance of long-term debt. Provision for Income Taxes Three Months Ended July 31, Change 2021 2020 $ % (dollars in thousands) Provision for income taxes $ 2,653$ 367
The provision for income taxes increased by$2.3 million in the three months endedJuly 31, 2021 compared to the same period of the prior year. Our effective tax rate was (8)% and (2)% of our net loss before taxes for the three months endedJuly 31, 2021 and 2020, respectively. Our effective tax rate is affected by recurring items, such as tax rates in jurisdictions outsidethe Netherlands and the relative amounts of income we earn in those jurisdictions. The increase in tax expense is driven primarily by growth in foreign jurisdictions for which are not subject to valuation allowances or net operating losses. 32
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Table of Contents
Liquidity and Capital Resources
As of July 31, 2021 , we had cash and cash equivalents and restricted cash of
$991.3 million and $2.3 million , respectively, and working capital of $745.3
million . Our restricted cash consists primarily of cash on deposit with
financial institutions in support of letters of credit in favor of landlords for
non-cancelable lease agreements. We have generated significant operating losses
from our operations as reflected in our accumulated deficit of $647.8 million as
of July 31, 2021 . 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:
Three Months Ended July 31,
2021 2020
(in thousands)
Net cash provided by operating activities $ 14,051 $ 21,998
Net cash used in investing activities $ (1,634) $ (379)
Net cash provided by financing activities $ 578,791 Net Cash Provided by Operating Activities Net cash provided by operating activities during the three months endedJuly 31, 2021 was$14.1 million , which resulted from non-cash charges of$49.2 million and partially offset by a net loss of$34.5 million and net cash outflow of$0.7 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$30.2 million for stock-based compensation expense,$13.9 million for amortization of deferred contract acquisition costs,$4.5 million of depreciation and intangible asset amortization expense,$1.9 million in non-cash operating lease costs and$0.1 million of other which were partially offset by a foreign currency transaction gain of$1.1 million and an increase in deferred income taxes of$0.1 million . The net cash outflow from changes in operating assets and liabilities was the result of a decrease of$30.6 million in deferred revenue, an increase in deferred contract acquisition costs of$14.8 million as our sales commissions increased due to the addition of new customers, an increase of$10.7 million in prepaid expenses and other assets and a$1.9 million decrease in operating lease liabilities. These outflows were partially offset by a decrease in accounts receivable of$48.3 million and a net increase of$9.0 million in accounts payable, accrued expenses, accrued compensation and benefits. Net cash provided by operating activities during the three months endedJuly 31, 2020 was$22.0 million , which resulted from a net loss of$19.0 million adjusted for non-cash charges of$23.1 million and net cash inflow of$17.9 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$18.6 million for stock-based compensation expense,$9.0 million for amortization of deferred contract acquisition costs,$4.3 million of depreciation and intangible asset amortization expense and$1.7 million in non-cash operating lease costs which were partially offset by a non-cash net unrealized foreign currency exchange gain of$10.1 million and a decrease in deferred income taxes of$0.4 million . The net cash inflow from changes in operating assets and liabilities was the result of a$45.2 million decrease in accounts receivable,$1.7 million increase in deferred revenue and a decrease of$2.0 million in prepaid expenses and other assets. These inflows were partially offset by a net decrease of$12.9 million in accounts payable, accrued expenses, accrued compensation and benefits, an increase in deferred contract acquisition costs of$16.5 million as our sales commissions increased due to the addition of new customers and expansion of our existing customer subscriptions and a$1.7 million decrease in operating lease liabilities. 33
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Table of ContentsNet Cash Used in Investing Activities Net cash used in investing activities during the three months endedJuly 31, 2021 was$1.6 million due to capitalization of$1.0 million in internal-use software costs and$0.7 million of capital expenditures. Net cash used in investing activities during the three months endedJuly 31, 2020 was$0.4 million due to capital expenditures during the period. Net Cash Provided by Financing Activities Net cash provided by financing activities during the three months endedJuly 31, 2021 was$578.8 million due to the proceeds of$575.0 million from debt issuance and$11.0 million of proceeds from option exercises during the period which were partially offset by$7.2 million payments of debt issuance costs. Net cash provided by financing activities during the three months endedJuly 31, 2020 was$29.3 million due to proceeds from option exercises during the period. Off Balance Sheet Arrangements We did not have during the periods presented and we do not currently have any off balance sheet financing arrangements or any relationships with any unconsolidated entities or financial partnerships, including entities referred to as structured finance or special purpose entities, which were established for the purpose of facilitating off balance sheet arrangements or other contractually narrow or limited purposes. Contractual Obligations and Commitments Our principal commitments consist of obligations under our operating leases, which are primarily for office space, and purchase commitments to our cloud hosting providers. Except for those disclosed in Note 6 "Senior Notes" of our accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q, there have been no material changes to our contractual obligations and commitments discussed in our Annual Report on Form 10-K for the year endedApril 30, 2021 . Recently Issued Accounting Pronouncements Refer to Note 2 of our accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements and new accounting pronouncements not yet adopted as of the date of this report.
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