Elastic N.V. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended July 31, 2022; comparisons are with the three months ended July 31, 2021. Fiscal year ends April 30. Financial statements are unaudited.
Business context
Elastic sells subscriptions to its search and data analytics platform, including Enterprise Search, Observability and Security, as self-managed software and through Elastic Cloud. Subscriptions accounted for 93% of quarterly revenue. Elastic reported more than 19,300 customers, up from more than 16,000 a year earlier; its Net Expansion Rate was slightly below 130%.
Key financial results
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total revenue | $250.1 million | $193.1 million | +30% |
| Subscription revenue | $231.8 million | $177.2 million | +31% |
| Services revenue | $18.3 million | $15.9 million | +15% |
| Gross profit / margin | $177.1 million / 71% | $143.4 million / 74% | Margin down 3 percentage points |
| Operating expenses | $237.7 million | $174.5 million | +36% |
| Operating loss | $(60.6) million | $(31.0) million | Loss widened |
| Net loss | $(69.6) million | $(34.5) million | Loss widened |
| Basic and diluted loss per share | $(0.74) | $(0.38) | — |
| Operating cash flow | $(9.7) million | $14.1 million | Declined |
Liquidity, debt and other metrics
- Cash and cash equivalents were $848.8 million; restricted cash was $2.4 million. Working capital was $539.9 million.
- Operating cash outflow reflected the net loss and working-capital movements, including a $27.0 million decline in deferred revenue and $19.7 million of additional deferred contract acquisition costs.
- Investing cash outflow was $0.5 million; financing cash inflow was $3.4 million, primarily from stock-option exercises. The prior-year financing inflow of $578.8 million included proceeds from the notes issuance.
- Senior Notes had $575.0 million principal outstanding, a 4.125% fixed coupon and a July 2029 maturity; their net carrying amount was $566.8 million. The company reported compliance with indenture covenants.
- Remaining performance obligations were $912.5 million; the company expected to recognize approximately 88% over the next 24 months.
- Stock-based compensation expense was $46.9 million, up from $30.2 million. The filing reported an accumulated deficit of $886.7 million.
Material changes and management commentary
- Elastic Cloud revenue was $97.7 million, or 39% of total revenue, versus $61.5 million, or 32%, a year earlier. Management expects Cloud’s revenue contribution to increase, while noting that hosting costs may pressure gross margin.
- Subscription gross margin declined to 77% from 79%, primarily as cloud infrastructure costs increased. Services gross margin fell to negative 6% from 24%: delivery personnel, subcontractor and travel costs grew faster than services revenue. Management said it continued investing in services capacity and expects travel costs to rise as restrictions abate.
- Operating expenses rose substantially, with increases in research and development, sales and marketing, and general and administrative costs. Management cited continued investment in product development, hiring and sales and marketing.
- Interest expense increased following the prior-year Senior Notes issuance. The company also reported a $1.0 million foreign-currency transaction loss, compared with a $1.0 million gain in the prior-year quarter.
Outlook, risks and unusual items
- No specific quarterly or annual revenue or earnings guidance is provided in the supplied filing text. Management said existing cash and cash equivalents were expected to fund operating and capital needs for at least 12 months, while warning that operating losses and potentially negative annual operating cash flows could continue.
- Key uncertainties include adoption and revenue variability of consumption-based Elastic Cloud subscriptions, competition and software licensing changes, customer spending amid economic and geopolitical uncertainty, currency exposure, cybersecurity and privacy risks, and the company’s ability to manage growth and control costs.
- The filing notes the transition of Shay Banon from CEO to CTO and Ashutosh Kulkarni from Chief Product Officer to CEO earlier in the year. It also describes the decision to stop offering Elasticsearch and Kibana under an Apache 2.0 license as a risk to adoption and competition.
- Management reported no legal matters believed reasonably likely to result in a material loss and no material changes to contractual commitments outside the ordinary course. Disclosure controls and procedures were considered effective as of July 31, 2022.
Important facts for investors to verify
- Whether subscription growth and customer expansion continue, particularly as Elastic Cloud and consumption-based arrangements become a larger share of revenue.
- Whether Cloud hosting costs and services delivery costs stabilize, including the sustainability of the negative services gross margin.
- Whether operating-expense growth, stock-based compensation and operating cash use improve relative to revenue growth.
- Cash generation and capacity to service the $575 million notes, especially if losses or cash outflows persist.
- Renewals, consumption patterns and conversion of remaining performance obligations into revenue; the filing cautions that quarterly results may fluctuate.
- Potential effects of competition, licensing changes, cybersecurity and privacy obligations, foreign-exchange movements, and broader economic conditions.