Elastic N.V. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 31, 2019. Unaudited results; amounts are in U.S. dollars.
Business context
Elastic sells subscriptions to its Elastic Stack and related search, observability, analytics and security products, with offerings available as self-managed software or SaaS. It also provides consulting and training. Subscriptions represented 91% of revenue for the six-month period. Elastic acquired endpoint-security company Endgame on October 8, 2019.
Key financial metrics
| Metric | Three months ended Oct. 31, 2019 | Six months ended Oct. 31, 2019 |
|---|---|---|
| Revenue | $101.1 million; +59% year over year | $190.8 million; +59% |
| Subscription revenue | $91.7 million; +57% | $174.1 million; +58% |
| Professional services revenue | $9.4 million; +83% | $16.7 million; +65% |
| Gross profit / GAAP gross margin | $72.3 million / 72% (71% prior year) | $135.8 million / 71% (72% prior year) |
| Operating loss | $52.0 million (prior-year loss: $27.1 million) | $94.3 million (prior-year loss: $45.5 million) |
| Net loss | $50.0 million (prior-year loss: $27.5 million) | $91.7 million (prior-year loss: $46.1 million) |
| Net loss per share | $0.64 | $1.20 |
| Operating cash flow | $0.3 million provided | $1.4 million used (prior year: $4.6 million provided) |
| Free cash flow | $1.4 million used | $4.6 million used (prior year: $3.4 million provided) |
At October 31, cash and cash equivalents were $305.2 million, restricted cash was $2.3 million, and working capital was $168.4 million. Total liabilities were $333.6 million, including $41.9 million of operating lease liabilities; the filing does not report material borrowings. Six-month investing cash outflow was $27.6 million, including $24.4 million for acquisitions. Financing provided $36.7 million, primarily from stock-option exercises.
Material changes and unusual items
- Revenue growth reflected new customers and expansion by existing customers. The subscription customer base exceeded 9,700, compared with more than 6,300 a year earlier. SaaS contributed 20% of six-month revenue, versus 17%.
- Operating expenses rose substantially: six-month R&D increased 66%, sales and marketing 63%, and general and administrative 127%. The company attributed increases principally to hiring and growth investments; G&A also included $16.4 million of acquisition-related expenses for the six months.
- Endgame’s stated total acquisition price was $234.0 million. The preliminary U.S. GAAP purchase consideration allocation was $214.3 million and excluded certain shares issued for accelerated equity awards and retention. Consideration included cash and shares; the acquisition added $179.2 million of goodwill and $53.8 million of identifiable intangible assets. The allocation remained preliminary. Endgame’s post-close results were immaterial to the quarter.
- Six-month calculated billings were $214.7 million, up 45% year over year; quarterly calculated billings were $125.3 million, up 41%. Remaining performance obligations were $410.0 million, with approximately 87% expected to be recognized within 24 months.
- Adoption of the new lease standard added right-of-use assets and lease liabilities to the balance sheet; management said adoption did not affect cash flows or operating results.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects operating losses and negative operating cash flow on an annual basis for the foreseeable future, while stating existing cash should fund operations and capital needs for at least 12 months. This assessment is subject to growth, spending and market risks.
- Management expects continued investment in product development, sales and marketing, and international expansion. It expects Elastic Cloud to grow as a share of revenue, while cautioning that cloud hosting costs may pressure gross margin. Professional-services margins may fluctuate or decline in the near term as the business expands.
- Key risks include sustained losses, competition (including cloud-provider offerings based on open-source components), execution and integration of Endgame, customer renewals and sales cycles, service reliability and cybersecurity, privacy regulation, and foreign-exchange exposure. The company said it had no formal currency-hedging program.
- Hosting infrastructure commitments totaled $43.0 million at October 31, 2019. The company also reported $49.1 million of undiscounted future operating lease payments. It had $2.3 million of landlord letters of credit outstanding.
- Management reported no known legal matter expected to have a material adverse effect and no material loss contingency accrued. Separately, Elastic disclosed that it had filed copyright-related litigation against floragunn GmbH and trademark/false-advertising litigation against Amazon.
- Disclosure controls were assessed as effective at October 31, 2019; no material change in internal control over financial reporting was identified during the quarter.
Important facts for investors to verify
- Whether strong subscription and calculated-billings growth continues, and how renewals and customer expansion develop.
- Whether operating-loss and cash-burn trends improve as revenue scales, including the effects of stock compensation and acquisition costs.
- Endgame integration progress, retention of employees and customers, realization of expected benefits, and final purchase-price allocation.
- Cloud growth and hosting costs, and their effect on subscription and consolidated gross margins.
- Cash sufficiency against ongoing losses, lease and hosting commitments, and any future acquisition or financing needs.
- Developments in the disclosed intellectual-property lawsuits and applicable privacy and data-protection obligations.