The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Management's Discussion and Analysis of Financial Condition and Results of Operations and audited consolidated financial statements included in our Annual Report on Form 10-K for the year endedApril 30, 2022 . As discussed in the section titled "Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such difference include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" under Part II, Item 1A in this Quarterly Report on Form 10-Q. Our fiscal year end isApril 30 , and our fiscal quarters end onJuly 31 ,October 31 ,January 31 , andApril 30 . Our fiscal year endedApril 30, 2022 is referred to as fiscal 2022, and our fiscal year endingApril 30, 2023 is referred to as fiscal 2023. Overview Elastic is a data analytics company built on the power of search. Our platform, which is available as both a hosted, managed service across public clouds as well as self-managed software, allows our customers to almost instantly find insights from large amounts of data and take action. We offer three search-powered solutions - Enterprise Search, Observability, and Security - that are built into the platform. We help organizations, their employees, and their customers find what they need faster, while keeping mission-critical applications running smoothly, and protecting against cyber threats. Our platform is built on the Elastic Stack, a powerful set of software products that ingest data from any source, in any format, and perform search, analysis, and visualization of that data. At the core of the Elastic Stack isElasticsearch - a highly scalable document store and search engine, and the only data store for all of our solutions and use cases. The Elastic Stack can be used by developers to power a variety of use cases. It is a distributed, real-time search and analytics engine and data store for all types of data including textual, numerical, geospatial, structured, and unstructured. We make our platform available as a hosted, managed service. Customers can also deploy our platform across hybrid clouds, public or private clouds, and multi-cloud environments. As digital transformation and cloud adoption drive mission critical business functions online and to the cloud, we believe that every company will need to build around a search-based data analytics platform, one which brings speed, scale, and relevance to the vast volumes of data being generated. Our business model is based primarily on a combination of a paid Elastic-managed hosted service offering and paid and free proprietary self-managed software. Our paid offerings for our platform are sold via subscription through resource-based pricing, and all customers and users have access to all solutions. In Elastic Cloud, our family of cloud-based offerings under which we offer our software as a hosted, managed service, we offer various subscription tiers tied to different features. For users who download our software, we make some of the features of our software available for free, allowing us to engage with a broad community of developers and practitioners and introduce them to the value of the Elastic Stack. We believe in the importance of an open software development model, and we develop the majority of our software in public repositories as open code under a proprietary license. Unlike some companies, we do not build an enterprise version that is separate from our free distribution. We offer a single code base across both our self-managed software and Elastic-hosted services. All of these actions help us build a powerful commercial business model that we believe is optimized for product-led growth. We generate revenue primarily from sales of subscriptions to our platform. We offer various paid subscription tiers that provide different levels of rights to use proprietary features and access to support. We do not sell support separately. Our subscription agreements range from one to three years and are usually billed annually in advance. Our subscription agreements are both term-based and consumption-based, with the vast majority of Elastic Cloud subscriptions being consumption-based. We sell subscriptions in various currencies, with the majority of our subscriptions contracted in US dollars, and a smaller portion contracted in Euro, British Pound Sterling, and other currencies. Elastic Cloud customers may also purchase subscriptions on a month-to-month basis without a commitment, with usage billed at the end of each month. Subscriptions accounted for 93% and 92% of total revenue for the three months endedJuly 31, 2022 and 2021, respectively. We also generate revenue from consulting and training services. We make it easy for users to begin using our products in order to drive rapid adoption. Users can either sign up for a free trial on Elastic Cloud or download our software directly from our website without any sales interaction, and immediately begin using the full set of features. Users can also sign up for Elastic Cloud through public cloud marketplaces. We conduct low-touch campaigns to keep users and customers engaged once they have begun using Elastic Cloud or have downloaded our software. As ofJuly 31, 2022 , we had over 19,300 customers compared to over 16,000 customers as ofJuly 31, 2021 . The majority of our new customers use Elastic Cloud. We define a customer as an entity that generated revenue in the quarter ending on the measurement date from an annual or month-to-month subscription. Affiliated entities are typically counted as a single customer. 24
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Many of these customers start with limited initial spending, but can significantly grow their spending. We drive high-touch engagement with qualified prospects and customers to drive further awareness, adoption, and expansion of our products with paid subscriptions. Expansion includes increasing the number of developers and practitioners using our products, increasing the utilization of our products for a particular use case, and applying our products to new use cases. The number of customers who represented greater than$100,000 in annual contract value ("ACV") was over 1,010 and over 780 as ofJuly 31, 2022 and 2021, respectively. The ACV of a customer's commitments is calculated based on the terms of that customer's subscriptions, and represents the total committed annual subscription amount as of the measurement date. Month-to-month subscriptions are not included in the calculation of ACV. Our sales teams are organized primarily by geography and secondarily by customer segments. They focus on both initial conversion of users into customers and additional sales to existing customers. In addition to our direct sales efforts, we also maintain partnerships to further extend our reach and awareness of our products around the world. We continue to make substantial investments in developing the Elastic Stack and our solutions and expanding our global sales and marketing footprint. With a distributed team spanning over 40 countries, we are able to recruit, hire, and retain high-quality, experienced technical and sales personnel and operate at a rapid pace to drive product releases, fix bugs, and create and market new products. We had 3,056 employees as ofJuly 31, 2022 .
COVID-19
The ongoing COVID-19 pandemic continues to evolve and negatively impact worldwide economic activity. Efforts to control its spread have significantly curtailed the movement of people, goods and services worldwide, including in many of the regions in which we sell our products and services and conduct our business operations, negatively impacting worldwide economic activity. The impact of the COVID-19 pandemic has varied significantly across different industries with certain industries experiencing increased demand for their products and services, while others have struggled to maintain demand for their products and services consistent with historical levels. The ongoing impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the virus, success of preventative measures to contain or mitigate the spread of the virus and emerging variants, effectiveness, distribution and acceptance of COVID-19 vaccines, impact on our customers and our sales cycles, impact on our customer, employee or industry events, effect on our vendors, and the uneven impact of the COVID-19 pandemic on certain industries, all of which continue to remain uncertain and cannot be predicted. Notwithstanding the potential and actual adverse impacts described above, as the pandemic has caused more of our customers to shift to a virtual workforce or accelerate their digital transformation efforts, we believe the value of our solutions has become even more evident. In addition, we have benefited from lower spending on travel by our employees due to COVID-19 travel restrictions and from holding events virtually, however we expect live events and travel costs to trend back higher in the near-term. In response to the COVID-19 pandemic and in an effort to focus on maintaining business continuity and preparing for the future and long-term success of our business, we have taken precautionary measures intended to help minimize the risk of the virus to our employees, customers, and the communities in which we operate, including modifying our business practices, such as suspending employee travel, adapting employee work locations, and holding events and trainings virtually. Further, we also temporarily reduced the pace of investments in our business in response to the COVID-19 pandemic in the first quarter of fiscal 2021, but began to gradually increase our investments in our business in subsequent quarters. We intend to continue to make additional investments in the business in the remainder of fiscal 2023. We continue to monitor the major impacts of the COVID-19 pandemic and make changes in our business as appropriate, in response to such impacts. See "Risk Factors" included in Part II, Item 1A of this Quarterly Report on Form 10-Q for a discussion of additional risks. Key Factors Affecting Our Performance We believe that the growth and future success of our business depends on many factors, including those described below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations. Increasing adoption of Elastic Cloud. Elastic Cloud, our family of cloud-based offerings is an important growth opportunity for our business. Organizations are increasingly looking for hosted deployment alternatives with reduced administrative burdens. In some cases, users of our source available software that have been self-managing deployments of the Elastic Stack subsequently become paying subscribers of Elastic Cloud. For the three months endedJuly 31, 2022 and 2021, Elastic Cloud contributed 39% and 32% of our total revenue, respectively. We believe that offering Elastic Cloud is important for achieving our long-term growth potential, and we expect Elastic Cloud's contribution to our subscription revenue to increase over time. However, we expect that an increase in the relative contribution of Elastic Cloud to our business will have a modest adverse impact on our gross margin as a result of the associated third-party hosting costs. 25
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Growing the Elastic community. Our strategy consists of providing access to source available software, on both a paid and free basis, and fostering a community of users and developers. Our strategy is designed to pursue what we believe to be significant untapped potential for the use of our technology. After developers begin to use our software and start to participate in our developer community, they become more likely to apply our technology to additional use cases and evangelize our technology within their organizations. This reduces the time required for our sales force to educate potential leads on our solutions. In order to capitalize on our opportunity, we intend to make further investments to keep the Elastic Stack accessible and well known to software developers around the world. We intend to continue to invest in our products and support and engage our user base and developer community through content, events, and conferences in theU.S. and internationally. Our results of operations may fluctuate as we make these investments. Developing new features for the Elastic Stack. The Elastic Stack is applied to various use cases by customers, including through the solutions we offer. Our revenue is derived primarily from subscriptions of Enterprise Search, Observability and Security built into the Elastic Stack. We believe that releasing additional features of the Elastic Stack, including our solutions, drives usage of our products and ultimately drives our growth. To that end, we plan to continue to invest in building new features and solutions that expand the capabilities of the Elastic Stack. These investments may adversely affect our operating results prior to generating benefits, to the extent that they ultimately generate benefits at all. Growing our customer base by converting users of our software to paid subscribers. Our financial performance depends on growing our paid customer base by converting free users of our software into paid subscribers. Our distribution model has resulted in rapid adoption by developers around the world. We have invested, and expect to continue to invest, heavily in sales and marketing efforts to convert additional free users to paid subscribers. Our investment in sales and marketing is significant given our large and diverse user base. The investments are likely to occur in advance of the anticipated benefits resulting from such investments, such that they may adversely affect our operating results in the near term. Expanding within our current customer base. Our future growth and profitability depend on our ability to drive additional sales to existing customers. Customers often expand the use of our software within their organizations by increasing the number of developers using our products, increasing the utilization of our products for a particular use case, and expanding use of our products to additional use cases. We focus some of our direct sales efforts on encouraging these types of expansion within our customer base. We believe that a useful indication of how our customer relationships have expanded over time is through our Net Expansion Rate, which is based upon trends in the rate at which customers increase their spend with us. To calculate an expansion rate as of the end of a given month, we start with the annualized spend from all such customers as of twelve months prior to that month end, or Prior Period Value. A customer's annualized spend is measured as their ACV, or in the case of customers charged on usage-based arrangements, by annualizing the usage for that month. We then calculate the annualized spend from these same customers as of the given month end, or Current Period Value, which includes any growth in the value of their subscriptions or usage and is net of contraction or attrition over the prior twelve months. We then divide the Current Period Value by the Prior Period Value to arrive at an expansion rate. The Net Expansion Rate at the end of any period is the weighted average of the expansion rates as of the end of each of the trailing twelve months. The Net Expansion Rate includes the dollar-weighted value of our subscriptions or usage that expand, renew, contract, or attrit. For instance, if each customer had a one-year subscription and renewed its subscription for the exact same amount, then the Net Expansion Rate would be 100%. Customers who reduced their annual subscription dollar value (contraction) or did not renew their annual subscription (attrition) would adversely affect the Net Expansion Rate. Our Net Expansion Rate was slightly below 130% for the three months endedJuly 31, 2022 . As large organizations expand their use of the Elastic Stack across multiple use cases, projects, divisions and users, they often begin to require centralized provisioning, management and monitoring across multiple deployments. To satisfy these requirements, our Enterprise subscription tier provides access to key orchestration and deployment management capabilities. We will continue to focus some of our direct sales efforts on driving adoption of our paid offerings. Components of Results of Operations
Revenue
Subscription. Our revenue is primarily generated through the sale of subscriptions to software, which is either self-managed by the user or hosted and managed by us in the cloud. Subscriptions provide the right to use paid proprietary software features and access to support for our paid and unpaid software.
A portion of the revenue from self-managed subscriptions is generally recognized up front at the point in time when the license is delivered and the remainder is recognized ratably over the subscription term. Revenue from subscriptions that require access to the cloud or that are hosted and managed by us is recognized ratably over the subscription term or on a usage 26
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basis for consumption-based arrangements; both are presented within Subscription revenue in our condensed consolidated statements of operations.
Services. Services is composed of consulting services as well as public and private training. Revenue for services is recognized as these services are delivered.
Cost of Revenue
Subscription. Cost of subscription consists primarily of personnel and related costs for employees associated with supporting our subscription arrangements, certain third-party expenses, and amortization of certain intangible and other assets. Personnel and related costs, or personnel costs, comprise cash compensation, benefits and stock-based compensation to employees, costs of third-party contractors, and allocated overhead costs. Third-party expenses consist of cloud hosting costs and other expenses directly associated with our customer support. We expect our cost of subscription to increase in absolute dollars as our subscription revenue increases.
Services. Cost of services revenue consists primarily of personnel costs directly associated with delivery of training, implementation and other services, costs of third-party contractors, facility rental charges and allocated overhead costs. We expect our cost of services to increase in absolute dollars as we invest in our business and as services revenue increases.
Gross profit and gross margin. Gross profit represents revenue less cost of revenue. Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the timing of our acquisition of new customers and our renewals with existing customers, the average sales price of our subscriptions and services, the amount of our revenue represented by hosted services, the mix of subscriptions sold, the mix of revenue between subscriptions and services, the mix of services between consulting and training, transaction volume growth and support case volume growth. We expect our gross margin to fluctuate over time depending on the factors described above. We expect our revenue from Elastic Cloud to continue to increase as a percentage of total revenue, which we expect will adversely impact our gross margin as a result of the associated hosting costs.
Operating Expenses
Research and development. Research and development expense mainly consists of personnel costs and allocated overhead costs for employees and contractors. We expect our research and development expense to increase in absolute dollars for the foreseeable future as we continue to develop new technology and invest further in our existing products. Sales and marketing. Sales and marketing expense mainly consists of personnel costs, commissions, allocated overhead costs and costs related to marketing programs and user events. Marketing programs consist of advertising, events, brand-building and customer acquisition and retention activities. We expect our sales and marketing expense to increase in absolute dollars as we expand our salesforce and increase our investments in marketing resources. We capitalize sales commissions and associated payroll taxes paid to internal sales personnel that are related to the acquisition of customer contracts. Sales commissions costs are amortized over the expected benefit period. General and administrative. General and administrative expense mainly consists of personnel costs for our management, finance, legal, human resources, and other administrative employees. Our general and administrative expense also includes professional fees, accounting fees, audit fees, tax services and legal fees, as well as insurance, allocated overhead costs, and other corporate expenses. We expect our general and administrative expense to increase in absolute dollars as we increase the size of our general and administrative functions to support the growth of our business.
Other Expense, Net
Other expense, net primarily consists of interest expense, gains and losses from transactions denominated in a currency other than the functional currency, and interest income.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes related tothe Netherlands ,U.S. federal, state and foreign jurisdictions in which we conduct business. Our effective tax rate is affected by recurring items, such as tax rates in jurisdictions outsidethe Netherlands and the relative amounts of income we earn in those jurisdictions, and non-deductible stock-based compensation. 27
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Results of Operations
The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our total revenue. The period to period comparison of results is not necessarily indicative of results for future periods. Three Months Ended July 31, 2022 2021 (in thousands) Revenue Subscription$ 231,814 $ 177,185 Services 18,267 15,910 Total revenue 250,081 193,095 Cost of revenue (1)(2)(3) Subscription 53,551 37,520 Services 19,428 12,142 Total cost of revenue 72,979 49,662 Gross profit 177,102 143,433 Operating expenses (1)(2)(3)(4) Research and development 78,649 59,382 Sales and marketing 125,006 88,033 General and administrative 34,088 27,052 Total operating expenses 237,743 174,467 Operating loss (1)(2)(3)(4) (60,641) (31,034) Other expense, net Interest expense (6,401) (1,820) Other income, net 339 1,018 Loss before income taxes (66,703) (31,836) Provision for (benefit from) income taxes 2,848 2,653 Net loss$ (69,551) $ (34,489)
(1) Includes stock-based compensation expense as follows:
Three Months Ended July 31, 2022 2021 (in thousands) Cost of revenue Subscription$ 2,160 $ 2,134 Services 2,225 1,575 Research and development 18,710 12,097 Sales and marketing 15,647 9,850 General and administrative 8,141 4,522 Total stock-based compensation expense$ 46,883 $
30,178
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(2) Includes employer payroll taxes on employee stock transactions as follows: Three Months Ended July 31, 2022 2021 (in thousands) Cost of Revenue Subscription $ 223$ 262 Services 144 364 Research and development 962 1,598 Sales and marketing 775 1,691 General and administrative 278 484 Total employer payroll tax on stock transactions $
2,382
(3) Includes amortization of acquired intangible assets as follows:
Three Months Ended July 31, 2022 2021 (in thousands) Cost of Revenue Subscription$ 2,964 $ 2,012 Sales and marketing 1,231 1,429 Total amortization of acquired intangibles$ 4,195
(4) Includes acquisition-related expenses as follows:
Three Months Ended July 31, 2022 2021 (in thousands) Research and development $ 2,480 $ - General and administrative 37 226 Total acquisition-related expenses $ 2,517$ 226 29
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The following table sets forth selected condensed consolidated statements of operations data for each of the periods indicated as a percentage of total revenue: Three Months Ended July 31, 2022 2021 Revenue Subscription 93 % 92 % Services 7 % 8 % Total revenue 100 % 100 % Cost of revenue (1)(2)(3) Subscription 21 % 19 % Services 8 % 7 % Total cost of revenue 29 % 26 % Gross profit 71 % 74 % Operating expenses (1)(2)(3)(4) Research and development 31 % 31 % Sales and marketing 50 % 45 % General and administrative 14 % 14 % Total operating expenses 95 % 90 % Operating loss (1)(2)(3)(4) (24) % (16) % Other expense, net Interest expense (2) % (1) % Other income, net 0 % 1 % Loss before income taxes (26) % (16) % Provision for (benefit from) income taxes 2 % 2 % Net loss (28) % (18) %
(1) Includes stock-based compensation expense as follows:
Three Months Ended July 31, 2022 2021 Cost of revenue Subscription 1 % 1 % Services 1 % 1 % Research and development 8 % 6 % Sales and marketing 6 % 5 % General and administrative 3 % 3 % Total stock-based compensation expense 19 %
16 %
(2) Includes employer payroll taxes on employee stock transactions as follows: Three Months Ended July 31, 2022 2021 Cost of Revenue Subscription - % - % Services - % - % Research and development 1 % 1 % Sales and marketing - % 1 % General and administrative - % - % Total employer payroll tax on stock transactions
1 % 2 %
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(3) Includes amortization of acquired intangible assets as follows:
Three Months Ended July 31, 2022 2021 Cost of Revenue Subscription 1 % 1 % Sales and marketing - % 1 % Total amortization of acquired intangibles 1 %
2 %
(4) Includes acquisition-related expenses as follows:
Three Months Ended July 31, 2022 2021 Research and development 1 % - % General and administrative - % - % Total acquisition-related expenses 1 % - %
Comparison of Three Months Ended
Revenue Three Months Ended July 31, Change 2022 2021 $ % (in thousands) Revenue Subscription$ 231,814 $ 177,185 $ 54,629 31 % Services 18,267 15,910 2,357 15 % Total revenue$ 250,081 $ 193,095 $ 56,986 30 % Subscription revenue increased by$54.6 million , or 31%, for the three months endedJuly 31, 2022 compared to the same period of the prior year. The increase in revenue was primarily caused by volume-driven increases from new business, as existing customers purchased additional subscriptions, and we grew our subscription customer base to over 19,300 customers for the three months endedJuly 31, 2022 compared to over 16,000 customers in the same period of the prior year. Services revenue increased by$2.4 million , or 15%, for the three months endedJuly 31, 2022 compared to the same period of the prior year. The increase in services revenue was attributable to increased adoption of our services offerings.
Cost of Revenue and Gross Margin
Three Months Ended July 31, Change 2022 2021 $ % (in thousands) Cost of revenue Subscription$ 53,551 $ 37,520 $ 16,031 43 % Services 19,428 12,142 7,286 60 % Total cost of revenue$ 72,979 $ 49,662 $ 23,317 47 % Gross profit$ 177,102 $ 143,433 $ 33,669 23 % Gross margin: Subscription 77 % 79 % Services (6) % 24 % Total gross margin 71 % 74 % 31
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Cost of subscription revenue increased by$16.0 million , or 43%, for the three months endedJuly 31, 2022 compared to the same period of the prior year. This increase was primarily due to an increase of$14.1 million in cloud infrastructure costs and an increase of$1.0 million in intangible asset amortization. In addition, personnel and related costs increased by$0.6 million . The increase in personnel and related costs includes an increase of$0.5 million in salaries and related taxes and an increase of$0.1 million in employee benefit expense. Total subscription margin decreased to 77% for the three months endedJuly 31, 2022 compared to 79% for the same period of the prior year. Cost of services revenue increased by$7.3 million , or 60%, for the three months endedJuly 31, 2022 compared to the same period of the prior year. This increase was primarily due to an increase of$4.1 million in personnel and related costs, including increases of$2.7 million in salaries and related taxes,$0.6 million in stock-based compensation, and$0.3 million in employee benefits expense driven by an increase in headcount in our services organization. In addition, subcontractor costs increased by$2.5 million and travel costs increased by$0.3 million . Gross margin for services revenue was (6)% for the three months endedJuly 31, 2022 compared to 24% for the same period of the prior year. The decrease in margin is primarily due to the cost of services, including personnel and related costs and subcontractor costs, growing at a higher rate than services revenue. We continue to invest in headcount for our services organization that we believe will be needed as we continue to grow and expect travel related costs will increase in the future as COVID-19 risks and travel restrictions abate. Our gross margin for services may fluctuate or decline in the near-term as we seek to expand our services business. Operating Expenses Research and development Three Months Ended July 31, Change 2022 2021 $ % (in thousands) Research and development$ 78,649 $ 59,382 $ 19,267 32 % Research and development expense increased by$19.3 million , or 32%, for the three months endedJuly 31, 2022 compared to the same period of the prior year as we continued to invest in the development of new and existing offerings. Personnel and related costs increased by$16.2 million and software and equipment expense increased$0.4 million as a result of growth in headcount. In addition, cloud infrastructure costs related to our research and development activities increased by$1.3 million , consulting costs increased by$0.7 million , and travel costs increased by$0.5 million . The increase in personnel and related costs includes an increase of$6.6 million in stock-based compensation, an increase of$5.6 million in salaries and related taxes, an increase of$2.5 million in acquisition related compensation, and an increase of$1.0 million in employee benefits expense. Sales and marketing Three Months Ended July 31, Change 2022 2021 $ % (in thousands) Sales and marketing$ 125,006 $ 88,033 $ 36,973 42 % Sales and marketing expense increased by$37.0 million , or 42%, for the three months endedJuly 31, 2022 compared to the same period of the prior year. This increase was primarily due to an increase of$30.1 million in personnel related costs and a$1.6 million increase in software and equipment charges due to growth in headcount. In addition, travel expenses increased by$4.1 million and consulting costs increased by$0.8 million . The increase in personnel and related costs includes an increase of$16.5 million in salaries and related taxes, an increase of$5.8 million in stock-based compensation, an increase of$3.6 million in commission expense, and an increase of$2.8 million in employee benefits expense. General and administrative Three Months Ended July 31, Change 2022 2021 $ % (in thousands) General and administrative$ 34,088 $ 27,052 $ 7,036 26 % 32
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General and administrative expense increased by$7.0 million , or 26%, for the three months endedJuly 31, 2022 compared to the same period of the prior year. This increase was primarily due to an increase of$8.2 million in personnel related costs and a$0.4 million increase in software and equipment charges due to headcount growth. In addition, insurance and other taxes increased by$0.6 million . These increases were partially offset by a$2.5 million decrease in legal and professional fees. The increase in personnel and related costs includes an increase of$3.6 million in stock-based compensation expense, an increase of$3.5 million in salaries and related taxes, and an increase of$0.5 million in employee benefits expense. Other Expense, Net Three Months Ended July 31, Change 2022 2021 $ % (in thousands) Other expense, net $ (6,062)$ (802) $ (5,260) 656 % Other expense was$6.1 million for the three months endedJuly 31, 2022 compared to$0.8 million in the prior year. This was primarily due to a net increase in interest expense of$4.6 million primarily due to the issuance of our Senior Notes during the prior fiscal year. In addition, we recognized a foreign currency transaction loss of$1.0 million in the three months endedJuly 31, 2022 compared to a foreign currency transaction gain of$1.0 million in the same period of the prior year. These were partially offset by an increase of$1.3 million in interest income from investments. Provision for Income Taxes Three Months Ended July 31, Change 2022 2021 $ % (in thousands) Provision for income taxes$ 2,848 $ 2,653 $ 195 7 % The provision for income taxes increased$0.2 million , or 7%, for the three months endedJuly 31, 2022 compared to the same period of the prior year. Our effective tax rate was (4)% and (8)% of our net loss before taxes for the three months endedJuly 31, 2022 and 2021, respectively. Our effective tax rate is affected by recurring items, such as tax rates in jurisdictions outsidethe Netherlands and the relative amounts of income we earn in those jurisdictions. The increase in tax expense is driven primarily by growth in foreign jurisdictions for which we are not subject to valuation allowances or net operating losses. Liquidity and Capital Resources As ofJuly 31, 2022 , we had cash and cash equivalents and restricted cash of$848.8 million and$2.4 million , respectively, and working capital of$539.9 million . Our restricted cash consists primarily of cash deposits with financial institutions in support of letters of credit in favor of landlords for non-cancelable lease agreements. We have generated significant operating losses from our operations as reflected in our accumulated deficit of$886.7 million as ofJuly 31, 2022 . We have historically incurred, and expect to continue to incur, operating losses and may generate negative cash flows from operations on an annual basis for the foreseeable future due to the investments we intend to make as described above, and as a result, we may require additional capital resources to execute on our strategic initiatives to grow our business. We believe that our existing cash and cash equivalents will be sufficient to fund our operating and capital needs for at least the next 12 months, despite the uncertainty in the changing market and economic conditions related to COVID-19. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary as a result of, and our future capital requirements, both near-term and long-term, will depend on, many factors, including our growth rate, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing activities, the timing of new introductions of solutions or features, and the continuing market acceptance of our solutions and services. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. InJuly 2021 , we issued long-term debt of$575.0 million , and we may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results and financial condition would be adversely affected. 33
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The following table summarizes our cash flows for the periods presented:
Three Months Ended July 31, 2022 2021 (in thousands) Net cash provided by (used in) operating activities$ (9,705) $ 14,051 Net cash used in investing activities $ (479)$ (1,634) Net cash provided by financing activities $
3,397
Net Cash Provided By (Used In) Operating Activities
Net cash used in operating activities during the three months endedJuly 31, 2022 was$9.7 million , which resulted from a net loss of$69.6 million and net cash outflow of$15.4 million from changes in operating assets and liabilities adjusted for non-cash charges of$75.3 million . Non-cash charges primarily consisted of$46.9 million for stock-based compensation expense,$17.4 million for amortization of deferred contract acquisition costs,$5.2 million of depreciation and intangible asset amortization expense,$3.0 million in non-cash operating lease costs, a net foreign currency transaction loss of$1.8 million , an increase of$0.7 million in deferred tax assets, and amortization of debt issuance costs of$0.3 million . The net cash outflow from changes in operating assets and liabilities was the result of a$27.0 million decrease in deferred revenue, an increase in deferred contract acquisition costs of$19.7 million as our sales commissions increased due to increased business volume, a net decrease of$18.4 million in accounts payable, accrued expenses and accrued compensation and benefits, and a decrease of$3.2 million in operating lease liabilities. These were partially offset by a decrease of$46.0 million in accounts receivable and a decrease of$6.8 million in prepaid and other assets. Net cash provided by operating activities during the three months endedJuly 31, 2021 was$14.1 million , which resulted from non-cash charges of$49.2 million and was partially offset by a net loss of$34.5 million and net cash outflow of$0.7 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$30.2 million for stock-based compensation expense,$13.9 million for amortization of deferred contract acquisition costs,$4.5 million of depreciation and intangible asset amortization expense,$1.9 million in non-cash operating lease costs, and$0.1 million of other which were partially offset by a foreign currency transaction gain of$1.1 million and an increase in deferred income taxes of$0.1 million . The net cash outflow from changes in operating assets and liabilities was the result of a decrease of$30.6 million in deferred revenue, an increase in deferred contract acquisition costs of$14.8 million as our sales commissions increased due to the addition of new customers, an increase of$10.7 million in prepaid expenses and other assets, and a$1.9 million decrease in operating lease liabilities. These outflows were partially offset by a decrease in accounts receivable of$48.3 million and a net increase of$9.0 million in accounts payable, accrued expenses, and accrued compensation and benefits.
Net cash used in investing activities of
Net cash used in investing activities during the three months ended
Net Cash Provided by Financing Activities
Net cash provided by financing activities of
Net cash provided by financing activities during the three months endedJuly 31, 2021 was$578.8 million due to the proceeds of$575.0 million from debt issuance and$11.0 million of proceeds from option exercises during the period which were partially offset by payments of debt issuance costs of$7.2 million .
Contractual Obligations and Commitments
Our principal commitments consist of obligations under our operating leases, which are primarily for office space, and purchase commitments to our cloud hosting providers. There have been no material changes to our contractual obligations and commitments discussed in our Annual Report on Form 10-K for the year endedApril 30, 2022 . 34
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Recently Issued Accounting Pronouncements
Refer to Note 2 of our accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements and new accounting pronouncements not yet adopted as of the date of this report.
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