Elastic N.V. — Form 10-Q Summary
Business context and period: Elastic sells subscriptions for its Elastic Stack and related enterprise search, observability, and security products, alongside professional services. This unaudited filing covers the quarter and nine months ended January 31, 2020 (fiscal Q3 2020), compared with the corresponding 2019 periods. Dollar amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Three months ended Jan. 31, 2020 | Year-over-year change | Nine months ended Jan. 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $113.2 million | +60% | $304.0 million | +59% |
| Subscription revenue | $104.2 million | +61% | $278.3 million | +59% |
| Gross profit / gross margin | $79.8 million / 70% | Margin down 1 point | $215.6 million / 71% | Margin flat |
| Operating loss | $42.3 million | Prior-year loss: $23.8 million | $136.5 million | Prior-year loss: $69.3 million |
| Net loss | $44.3 million; $0.55 per share | Prior-year loss: $21.4 million; $0.30 per share | $136.0 million; $1.75 per share | Prior-year loss: $67.5 million; $1.37 per share |
| Operating cash flow | Use of $23.2 million | Prior-year use: $8.7 million | Use of $24.6 million | Prior-year use: $4.1 million |
| Free cash flow (non-GAAP) | Use of $24.2 million | Prior-year use: $9.9 million | Use of $28.9 million | Prior-year use: $6.5 million |
For the quarter, subscription revenue was 92% of total revenue. SaaS revenue was $25.1 million, or 22% of total revenue, compared with 17% a year earlier. Subscription gross margin was 77%, versus 78%; professional services gross margin was negative 10%, versus negative 2%. GAAP operating margin was negative 37%, versus negative 33%.
At January 31, 2020, cash and cash equivalents were $294.1 million, restricted cash was $2.3 million, working capital was $158.0 million, and shareholders’ equity was $418.4 million. Total liabilities were $323.4 million, including $209.8 million of deferred revenue and $36.3 million of operating lease liabilities. The balance sheet does not show a material borrowing balance; the cash flow statement reports only a $0.1 million repayment of notes payable in the nine-month period. Management said existing cash should fund operations and capital needs for at least 12 months, while cautioning that the estimate depends on assumptions.
Remaining performance obligations were $426.0 million; the company expected to recognize approximately 88% as revenue over the next 24 months. Calculated billings, a non-GAAP measure, increased 54% in the quarter and 48% in the nine-month period.
Material changes and notable items
- Customer growth and expansion drove revenue growth: Elastic reported more than 10,500 subscription customers, compared with more than 7,200 a year earlier.
- Operating expenses rose substantially: quarterly research and development increased 78%, sales and marketing 47%, and general and administrative 89%. The company cited hiring and continued investment in product development, sales, and global expansion.
- Elastic acquired security company Endgame in October 2019. The filing describes a $234.0 million total acquisition price, while its preliminary U.S. GAAP purchase-price allocation reports $214.3 million of consideration. The acquisition added $179.2 million of goodwill and $53.8 million of identifiable intangible assets; purchase accounting remained preliminary. Endgame’s results were described as immaterial to reported results for the periods.
- Nine-month acquisition-related expenses were $17.8 million, including non-cash share-settled expense. Stock-based compensation was $42.8 million for the nine months, up from $28.0 million.
- Cash used in investing activities was $28.6 million, principally $24.4 million for acquisitions and $4.2 million for capital expenditures. Financing cash inflow of $47.7 million mainly reflected $50.6 million from employee option exercises.
- The company adopted lease accounting on May 1, 2019, recognizing operating lease right-of-use assets and liabilities. It also changed the accounting amortization period for initial-contract commissions following a sales commission plan change.
Outlook, risks, and contingencies
- No formal revenue, earnings, or margin guidance is provided in the supplied filing text. Management expects continued investment and operating losses and negative operating cash flows for the foreseeable future. It anticipates Elastic Cloud will grow as a share of revenue and cautions that hosting costs may pressure gross margin.
- Management noted that calculated-billings growth is expected to trend down over time and may fluctuate with contract timing, renewals, contract mix, and foreign exchange.
- Risks highlighted include competition, converting free users to paid subscriptions, customer renewals, rapid growth and hiring, product reliability and security, reliance on third-party cloud infrastructure, international and currency exposure, and integrating Endgame. COVID-19 was identified as a potential business and economic risk, but its impact was uncertain at the filing date.
- Commitments include cloud-hosting purchase commitments of $60.0 million under an earlier agreement and a new $100.0 million commitment payable over four years. Operating leases had $41.9 million of undiscounted future minimum payments.
- Management reported no legal matter believed reasonably likely to result in a material loss as of January 31, 2020. The filing also reports $7.0 million of net unrecognized tax benefits. Disclosure controls were deemed effective; the company expected to become a large accelerated filer and cease being an emerging growth company as of April 30, 2020, bringing auditor attestation requirements for internal controls.
Important facts for investors to verify
- Reconcile the stated $234.0 million Endgame transaction price with the $214.3 million preliminary GAAP consideration and assess remaining purchase-accounting adjustments, integration costs, and goodwill impairment exposure.
- Track whether strong subscription and billings growth converts into improved operating leverage, cash flow, and profitability, given rising expenses and larger losses.
- Monitor SaaS growth, hosting costs, and professional services economics for their effects on gross margin.
- Assess liquidity against continuing cash use and the cloud-hosting, lease, and other commitments; management’s 12-month sufficiency statement is forward-looking.
- Evaluate dilution and compensation costs: ordinary shares outstanding increased to 81.6 million at January 31, 2020, and substantial options and restricted stock units remained outstanding.