Elastic N.V. quarterly report, Q1 FY2020

Elastic N.V. — Form 10-Q Summary

Reporting period: First quarter of fiscal 2020, the three months ended July 31, 2019; comparative period is the three months ended July 31, 2018. Amounts are in U.S. dollars. Elastic sells subscriptions for its Elastic Stack and related search, observability, security and analytics products, alongside professional services.

Financial performance and liquidity

Subscription revenue was 92% of total revenue. SaaS revenue represented 20% of total revenue, versus 18% a year earlier. Customer growth and expanded subscriptions drove revenue gains; the company reported more than 8,800 subscription customers, compared with more than 5,500 a year earlier. Calculated billings were $89.4 million, up 51% as reported by management.

At July 31, cash and cash equivalents were $315.2 million, restricted cash was $2.3 million, and working capital was $214.9 million. Total assets were $505.7 million and total liabilities were $250.7 million. The filing reports no material borrowing balance; financing cash flow included a $30,000 repayment of notes payable. The accumulated deficit was $358.8 million. Management said existing cash and cash equivalents should fund operating and capital needs for at least 12 months, while noting that it expects annual operating losses and negative operating cash flows for the foreseeable future.

Changes, outlook and notable items

• Revenue growth outpaced cost growth, but gross margin fell to 71% from 73%. Subscription margin decreased to 78% from 80%, principally as cloud infrastructure and support costs rose; professional services gross margin worsened to (13)% from (4)% as the company expanded consulting capacity.
• Operating expenses rose 78% to $105.8 million: research and development increased 85%, sales and marketing 71%, and general and administrative 84%. Higher headcount and related personnel costs were major drivers. Stock-based compensation increased to $12.8 million from $5.7 million; acquisition-related expenses were $2.5 million, mainly in general and administrative expense.
• Operating cash flow turned negative despite a $23.5 million cash inflow from collecting accounts receivable. Investing cash outflow was $1.6 million, mainly capital expenditure; financing provided $20.1 million, primarily from stock-option exercises.
• Remaining performance obligations were $362.8 million at quarter-end; Elastic expected to recognize approximately 88% over the next 24 months. This is contracted revenue not yet delivered, not a revenue forecast.
• Management expects to continue investing in product development, sales and marketing, global expansion, and cloud offerings. It expects Elastic Cloud to grow as a share of revenue, while cautioning that cloud growth may pressure gross margin. The filing provides no specific quarterly or full-year revenue or earnings guidance.
• Elastic agreed to acquire Endgame for $234 million, subject to customary adjustments, primarily through issuing Elastic shares; approximately $18 million of Endgame debt was estimated to be repaid in the transaction. Closing was expected in Q3 FY2020, subject to conditions and regulatory review. Certain termination circumstances could require a $3.5 million fee. Purchase-price allocation had not been determined.
• New lease accounting adopted May 1, 2019 added $28.1 million of right-of-use assets and $28.9 million of lease liabilities at adoption, without affecting cash flows or reported operating results. The company also changed its sales-commission plan and amortization approach: initial subscription commissions are amortized over an estimated five-year benefit period, while renewal commissions follow the associated renewal revenue pattern.
• Risks highlighted include continued losses, rapid growth and execution demands, competition (including cloud providers offering products based on open-source components), customer conversion and renewal, cloud-service performance and security, privacy regulation, foreign exchange, and acquisition integration. Elastic said it was not aware of legal matters expected to have a material adverse effect and had not accrued a material loss contingency. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was identified.

Important facts for investors to verify

• Whether subscription growth and customer expansion can continue while controlling cloud infrastructure, support, and sales costs.
• Whether gross-margin pressure and the widening operating loss are consistent with the company’s investment strategy and progress toward profitability.
• Cash conversion and the sustainability of billings growth; quarterly operating cash flow was negative and can vary with collections, contract timing, and deferred revenue.
• Endgame’s closing, financing through share issuance, assumed obligations, integration costs, and potential impact on operating margins.
• The assumptions behind the $362.8 million remaining performance obligations and expected recognition timing.
• Potential dilution from equity compensation and the Endgame transaction; outstanding options totaled 20.3 million and unvested RSUs 1.0 million at quarter-end.
• Exposure to security, privacy, regulatory, intellectual-property and open-source risks, as well as the company’s substantial hosting commitments and lease obligations.