Elastic N.V. — Form 10-Q Summary
Business context and reporting period
Elastic provides the Elastic Stack and Enterprise Search, Observability, and Security solutions, offered for self-managed and cloud deployments. This unaudited report covers the quarter ended October 31, 2021 (fiscal Q2 2022) and the six months then ended; comparisons are year over year. Fiscal year ends April 30.
Key financial metrics
| Metric | Quarter ended Oct. 31, 2021 | Year-over-year change | Six months ended Oct. 31, 2021 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $206.0 million | +42% | $399.1 million | +46% |
| Subscription revenue | $190.3 million | +42% | $367.4 million | +44% |
| Gross profit / margin | $152.1 million / 74% | Margin +1 percentage point | $295.5 million / 74% | Margin +1 percentage point |
| Operating loss | $37.2 million | Prior-year loss: $28.4 million | $68.2 million | Prior-year loss: $57.9 million |
| Net loss | $47.0 million; $0.51 per share | Prior-year loss: $29.2 million | $81.5 million; $0.89 per share | Prior-year loss: $48.2 million |
- Elastic Cloud revenue was $69.0 million for the quarter and $130.6 million for the half-year; it accounted for 34% and 33% of total revenue, respectively, versus 26% in each prior-year comparable period.
- For the quarter, subscription gross margin was 78% and professional-services margin was 26%. For the six months, these were 78% and 25%, respectively. Management expects a growing cloud mix to put modest pressure on gross margin over time because of hosting costs.
- Six-month operating cash flow was $3.7 million, compared with $4.7 million a year earlier. Investing cash outflow was $111.6 million, including $108.1 million for acquisitions. Financing cash inflow was $586.6 million, primarily from debt issuance.
- At October 31, cash and cash equivalents were $876.1 million, restricted cash was $2.9 million, and working capital was $629.5 million. Total current liabilities were $480.4 million.
- The company issued $575 million of 4.125% Senior Notes due July 2029. Net carrying value was $566.0 million; six-month interest expense related to the notes was $7.8 million. The company reported compliance with applicable indenture covenants.
- Remaining performance obligations were $831.6 million; management expected to recognize approximately 86% as revenue within 24 months. Deferred revenue was $390.3 million at period-end.
Material changes versus prior comparable periods
- Revenue growth was driven mainly by new business and additional subscriptions from existing customers. Elastic reported more than 17,000 subscription customers, up from more than 12,900 a year earlier; customers with over $100,000 in annual contract value exceeded 830, versus over 650.
- Operating expenses rose substantially: six-month research and development increased 33%, sales and marketing 52%, and general and administrative 27%. Management attributed much of the increase to headcount, compensation, marketing, and legal and professional costs.
- Stock-based compensation expense was $60.2 million for the six months, compared with $40.1 million. The six-month net loss also reflected $8.2 million of interest expense and lower foreign-currency gains than in the prior-year period.
- Two security-focused acquisitions, Cmd and build.security, closed during the quarter for stated consideration of $77.8 million and $39.3 million. Goodwill increased to $291.8 million from $198.9 million at April 30, 2021. The purchase-price allocations were preliminary.
Outlook, commentary, risks, and unusual items
- Management said existing cash and cash equivalents should fund operating and capital needs for at least the next 12 months, while noting that the estimate depends on assumptions and future business conditions. No specific numerical revenue or earnings guidance is provided in this filing.
- The company expects continued investment in research and development, sales and marketing, and hiring, and anticipates ongoing operating losses and possible negative annual operating cash flow for the foreseeable future.
- COVID-19 remained a source of uncertainty, including possible longer sales cycles, delayed customer decisions and services, and changing renewals. Management also expected travel and live-event costs to rise as restrictions ease.
- Key disclosed risks include competition and cloud-provider alternatives; the adoption and enforceability implications of licensing Elasticsearch and Kibana under the Elastic License and SSPL rather than Apache 2.0; cybersecurity, product reliability and third-party cloud dependence; hiring and growth execution; foreign-exchange exposure; and the ability to service debt.
- Management reported no known legal matter reasonably likely to result in a material loss and stated that disclosure controls were effective as of October 31, 2021. A subsequent acquisition of Optimyze for $20.0 million closed November 1, 2021.
Important facts for investors to verify
- Whether strong subscription and Elastic Cloud growth persists, and how customer expansion, renewals, and remaining performance obligations convert into revenue and cash.
- Whether operating-expense growth and stock-based compensation remain proportionate to revenue growth, and whether losses narrow over time.
- How cloud hosting costs and revenue mix affect gross margins as Elastic Cloud expands.
- The terms, cash-service burden, and covenant implications of the $575 million Senior Notes, alongside acquisition spending and future capital needs.
- Final purchase-price allocations and integration outcomes for Cmd, build.security, and the subsequent Optimyze acquisition.
- Potential effects on adoption and competition from the Elasticsearch/Kibana license changes, including the risk disclosures concerning forks and cloud-provider offerings.