Elastic N.V. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended January 31, 2021; nine-month results are for the period ended the same date. Fiscal year ends April 30. Financial statements are unaudited. Amounts below are USD unless noted.
Business context
Elastic sells subscriptions for the Elastic Stack and its Enterprise Search, Observability, and Security products, delivered as self-managed software or SaaS, plus professional services. Subscription revenue accounted for 94% of quarterly revenue. Elastic reported more than 13,800 customers, up from more than 10,500 a year earlier; more than 670 customers had annual contract value above $100,000, versus more than 570 a year earlier.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Change |
|---|---|---|---|
| Revenue | $157.1 million | $113.2 million | +39% |
| Subscription revenue | $147.2 million | $104.2 million | +41% |
| Gross profit / margin | $115.1 million / 73% | $79.8 million / 70% | Margin +3 pts |
| Operating loss | $34.5 million | $42.3 million | Loss narrowed |
| Net loss | $38.0 million | $44.3 million | Loss narrowed |
| Basic and diluted loss per share | $0.43 | $0.55 | Loss per share narrowed |
Revenue growth was primarily volume-driven, reflecting new customers and expansion of existing subscriptions. SaaS revenue was $44.9 million, 29% of quarterly revenue, compared with $25.1 million, or 22%, a year earlier. The company’s Net Expansion Rate remained above 130%.
- Nine-month results: Revenue rose 42% to $430.9 million. Gross margin was 73%, versus 71%; operating loss was $92.4 million, versus $136.5 million; net loss was $86.1 million, versus $136.0 million.
- Cash flow: For the nine months, operating cash flow was $24.1 million, compared with cash used of $24.6 million in the prior-year period. Free cash flow, a non-GAAP measure, was $21.4 million versus negative $28.9 million. In Q3 alone, operating cash flow was $19.4 million and free cash flow was $18.3 million, versus negative $23.2 million and negative $24.2 million, respectively.
- Liquidity and obligations: At January 31, cash and cash equivalents were $393.1 million, with restricted cash of $2.4 million; working capital was $202.6 million. Current and non-current operating lease liabilities totaled $31.9 million. The filing does not report outstanding borrowings at period-end.
- Contract visibility: Deferred revenue was $334.0 million, up from $259.7 million at April 30, 2020. Remaining performance obligations were $705.7 million; the company expected to recognize about 84% over the next 24 months.
Changes, outlook, and risks
- Cloud hosting costs increased with SaaS growth, but subscription gross margin improved to 78% from 77% in the quarter. Management expects a higher Elastic Cloud revenue mix to pressure gross margin over time because of hosting costs. Professional services gross margin remained negative in the quarter at 3% below zero, though improved from 10% below zero.
- Operating expenses continued to rise, particularly sales and marketing and research and development. Stock-based compensation was $25.2 million in Q3 and $65.3 million for the nine months. Q3 non-GAAP operating loss was approximately $0.01 million, versus $20.2 million a year earlier; nine-month non-GAAP operating loss was $6.0 million versus $62.8 million. These non-GAAP figures exclude specified expenses, including stock compensation and employer payroll taxes on stock transactions.
- Management said it temporarily moderated investment early in fiscal 2021 in response to COVID-19, then began increasing investment; it intended to increase investment further in Q4 FY2021 and fiscal 2022. It stated existing cash was expected to fund operating and capital needs for at least 12 months, while noting that the estimate depends on uncertain assumptions. No numerical revenue or earnings guidance is provided in the supplied filing text.
- COVID-19 caused longer sales cycles, delayed purchasing and services projects, and affected renewals and calculated billings; virtual events and lower travel costs partly offset these pressures. Management said the pandemic’s full impact remained uncertain.
- In February 2021, with version 7.11, Elastic changed the licensing of Elasticsearch and Kibana source code previously under Apache 2.0 to dual licensing under the Elastic License 2.0 and SSPL. The filing warns that license uncertainty and competing forks could affect adoption.
- Foreign currency movements were material to reported results: nine-month other income included an $8.3 million foreign-exchange gain, compared with a $2.4 million loss a year earlier. The company did not have a formal currency-hedging program and disclosed potential sensitivity to exchange-rate changes.
- The company reported no legal matter that it believed had a reasonable possibility of a material loss as of January 31, 2021. It also disclosed an immaterial prior-year balance-sheet classification correction: $11.6 million was reclassified between current and non-current deferred revenue, with no impact on earnings or cash flows.
Important facts for investors to verify
- Whether subscription growth, customer expansion, and SaaS adoption continue, and how SaaS hosting costs affect gross margin.
- How much of the near-break-even Q3 non-GAAP operating result reflects excluded stock-based compensation, payroll taxes, and other adjustments versus underlying operating leverage.
- Whether operating cash flow and free cash flow remain positive as deferred contract acquisition costs and planned investment increase.
- How COVID-19 effects on sales cycles, renewals, services delivery, and customer spending evolve.
- Whether the Elasticsearch and Kibana licensing change affects developer adoption, paid conversion, competition, or legal exposure.
- Potential dilution from equity compensation and option exercises; ordinary shares outstanding increased from 82.9 million at April 30, 2020 to 89.6 million at January 31, 2021.