Elastic N.V. — Form 10-Q Summary
Reporting period: Quarter ended October 31, 2018 (fiscal 2019 second quarter); comparisons are with the prior-year quarter. Six-month figures cover the period from May 1 through October 31. Amounts below are in U.S. dollars.
Business context
Elastic sells subscriptions for its Elastic Stack and related search, logging, analytics, security and application-performance products, deployed on premises or through SaaS. Subscriptions generated 92% of revenue in both the quarter and first half. Elastic completed its IPO on October 10, 2018, issuing 8.05 million shares at $36 per share and receiving $263.8 million in net proceeds. Its fiscal year ends April 30.
Key financial results
| Metric | Three months ended October 31, 2018 | Year-over-year change | Six months ended October 31, 2018 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $63.6 million | +72% | $120.2 million | +75% |
| Subscription revenue | $58.4 million | +68% | $110.0 million | +71% |
| Professional services revenue | $5.1 million | +128% | $10.2 million | +126% |
| Gross profit / gross margin | $45.0 million / 71% | Margin down 5 percentage points | $86.1 million / 72% | Margin down 4 percentage points |
| Operating loss | $27.1 million | Prior-year loss: $7.1 million | $45.5 million | Prior-year loss: $16.3 million |
| Net loss | $27.5 million | Prior-year loss: $8.0 million | $46.1 million | Prior-year loss: $18.0 million |
| Operating cash flow | $(0.6) million | Prior-year inflow: $4.1 million | $4.6 million | Prior-year inflow: $4.9 million |
| Free cash flow | $(1.4) million | Prior-year inflow: $3.6 million | $3.4 million | Prior-year inflow: $4.0 million |
Quarterly diluted and basic net loss per share was $0.63, versus $0.25 in the prior-year quarter. For the six months, it was $1.20 versus $0.57. Subscription gross margin was 78% for the quarter and 79% for the first half, compared with 82% in each prior-year comparable period. Professional services had negative gross margins: (9)% for the quarter and (7)% for the first half.
At October 31, cash and cash equivalents were $318.6 million, restricted cash was $2.3 million, and working capital was $250.2 million. Total liabilities were $175.6 million, including $127.3 million of deferred revenue; no material funded debt is reported, though a tenant-improvement loan balance of approximately $0.2 million remained. Cash, cash equivalents and restricted cash totaled $320.8 million. Six-month financing cash flow of $269.5 million was driven principally by the IPO.
Changes and management commentary
- Revenue growth reflected new customer sales and expansion among existing customers. Management said new customers accounted for over 45% of quarterly subscription-revenue growth and over 35% of first-half growth.
- Costs and operating losses grew faster than revenue. Quarterly operating expenses rose to $72.1 million from $35.2 million, as Elastic expanded research and development, sales and marketing, and general and administrative teams. The company had 1,129 employees at period-end.
- Management attributed lower subscription margins mainly to SaaS cloud-infrastructure costs and increased support headcount. It expects Elastic Cloud to become a larger part of revenue, which may weigh on gross margin; management also cautioned that professional-services margins may fluctuate or decline near term.
- Management expects continued investment and operating losses, and said existing cash and cash equivalents should fund operating and capital needs for at least 12 months. The filing provides no specific revenue or earnings guidance and warns that results may vary materially.
Outlook, risks and unusual items
- Remaining performance obligations were $268.5 million; Elastic expected to recognize approximately 86% as revenue over the next 24 months.
- Contractual commitments at October 31 included $41.4 million of office lease payments and $25.0 million of hosting infrastructure commitments. The hosting agreement requires minimum commitments of $12.5 million in each of three years; the first-year commitment had been met.
- Stock-based compensation was $11.2 million for the quarter and $16.9 million for the first half, versus $2.8 million and $5.0 million, respectively. IPO-related vesting conditions becoming probable triggered cumulative compensation charges of $1.7 million for restricted share awards and $0.8 million for restricted stock units during October.
- Elastic acquired Lambda Lab in July for $2.0 million in cash. It also issued employee shares valued at $2.2 million, subject to continued-service vesting; these are being expensed over two years. Acquisition-related expense was $0.2 million for the quarter.
- Key disclosed risks include ongoing losses and uncertain path to profitability; competition, including cloud providers offering services based on open-source components; scaling sales, support and operations; security, availability and product defects; privacy and data-protection regulation, including GDPR; and foreign-exchange exposure. The company reported no current legal matter it considered reasonably likely to cause a material loss.
Important facts for investors to verify
- Whether revenue growth, renewals and customer expansion continue to offset substantial growth in operating expenses and losses.
- Whether SaaS growth and hosting costs continue to pressure subscription and total gross margins.
- How operating cash flow and free cash flow trend when adjusted for deferred revenue movements, contract-acquisition costs and IPO proceeds.
- The effect of stock-based compensation, including future expense from $90.4 million of unrecognized option compensation expected over a weighted-average three years, on dilution and reported results.
- Whether the company can meet its hosting and lease commitments while funding planned growth from available liquidity.
- Customer demand and competitive exposure related to open-source offerings, cloud services, security, data privacy and product reliability.