ELASTIC N.V. 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 fiscal 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 92% and 93% of total revenue for the nine months endedJanuary 31, 2023 and 2022, 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 ofJanuary 31, 2023 , we had approximately 19,900 customers compared to over 17,900 customers as ofJanuary 31, 2022 . 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. 26
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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 1,110 and over 890 as ofJanuary 31, 2023 and 2022, 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 2,966 employees as ofJanuary 31, 2023 .
COVID-19 and Current Economic Conditions
The ongoing effects of the COVID-19 pandemic continue to evolve and negatively impact worldwide economic activity, contributing to continued labor shortages, supply chain disruptions, and inflation. Additionally, governmental and corporate responses to these factors including rising interest rates, unpredictable and decreased spending, and layoffs have added to the highly volatile macroeconomic landscape. We have experienced and, if economic conditions continue to decline, we may continue to experience longer and more unpredictable sales cycles, increased scrutiny of deals, and slowing consumption and overall customer expenditures, as well as the impacts of changing foreign exchange rates and a strengthening or weakeningU.S. dollar. We continue to closely monitor the macroeconomic environment and its effects on our business and on global economic activity, including customer spending behavior. 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.
Restructuring
To navigate the current economic environment, we are realigning our resources internally to drive greater efficiencies and rebalance investments across all functions of the organization and reinvest some savings in key priority areas to drive growth. OnNovember 30, 2022 , we announced and began implementing a plan to align our investments more closely with our strategic priorities by reducing our workforce by approximately 13% and implementing certain facilities-related cost optimization actions. We expect to incur total pre-tax non-recurring charges of approximately$32 million to$36 million under the plan, of which$29.8 million in charges were incurred during the third quarter of fiscal 2023. We expect that the implementation of the workforce reductions and facilities cost optimization will be substantially completed by the end of the first quarter of fiscal 2024. See Note 16 "Restructuring and other related charges" in our accompanying Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information about this plan. We will continue to adjust, monitor, and curtail spending when and where needed to adapt to the current macroeconomic landscape and will reinvest some of the savings selectively in areas that we believe best position us to drive profitable growth. 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 nine months endedJanuary 31, 2023 and 2022, Elastic Cloud contributed 40% and 34% 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 continue 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. 27
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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 approximately 120% as ofJanuary 31, 2023 . 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 basis for consumption-based
arrangements; both are presented within Subscription revenue in our condensed
consolidated statements of operations.
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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 primarily consists of personnel costs and allocated overhead costs. 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 primarily 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 primarily 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. Restructuring and other related charges. Restructuring and other related charges primarily consist of employee-related severance and other termination benefits as well as lease impairment and other facilities-related charges.
Other Income (Expense), Net
Other income (expense), net primarily consists of interest income, interest expense, gains and losses from transactions denominated in a currency other than the functional currency, and miscellaneous other non-operating gains and losses.
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 as well as one-time tax benefits or charges. 29
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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 January 31, Nine Months Ended January 31,
2023 2022 2023 2022
(in thousands)
Revenue
Subscription $ 255,613 $ 209,614 $ 728,638 $ 577,056
Services 18,953 14,330 60,410 45,963
Total revenue 274,566 223,944 789,048 623,019
Cost of revenue (1)(2)(3)
Subscription 56,146 47,577 164,798 127,339
Services 19,062 13,707 58,146 37,491
Total cost of revenue 75,208 61,284 222,944 164,830
Gross profit 199,358 162,660 566,104 458,189
Operating expenses (1)(2)(3)(4)
Research and development 77,472 71,749 231,689 194,894
Sales and marketing 126,717 105,069 379,902 288,055
General and administrative 34,711 31,691 103,724 89,298
Restructuring and other related charges 29,805 - 29,805 -
Total operating expenses 268,705 208,509 745,120 572,247
Operating loss (1)(2)(3)(4) (69,347) (45,849) (179,016) (114,058)
Other income (expense), net
Interest expense (6,265) (6,175) (18,875) (14,327)
Other income (expense), net 5,460 (861) 20,774 (509)
Loss before income taxes (70,152) (52,885) (177,117) (128,894)
Provision for income taxes 2,422 3,841 12,313 9,344
Net loss $ (72,574) $ (56,726) $ (189,430) $ (138,238) (1) Includes stock-based compensation expense as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2023 2022 2023 2022
(in thousands)
Cost of revenue
Subscription $ 2,163 $ 2,064 $ 6,352 $ 6,262
Services 2,529 1,726 7,067 4,593
Research and development 20,905 16,029 58,378 41,784
Sales and marketing 19,096 12,545 50,756 30,798
General and administrative 9,763 5,029 26,073 14,116
Total stock-based compensation expense
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(2) Includes employer payroll taxes on employee stock transactions as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2023 2022 2023 2022
(in thousands)
Cost of Revenue
Subscription $ 128 $ 147 $ 381 $ 474
Services 127 113 324 591
Research and development 557 663 1,842 2,916
Sales and marketing 787 512 1,828 3,874
General and administrative 100 208 506 779
Total employer payroll tax on stock
transactions $ 1,699 $
1,643 $ 4,881
(3) Includes amortization of acquired intangible assets as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2023 2022 2023 2022
(in thousands)
Cost of Revenue
Subscription $ 2,977 $ 3,046 $ 8,902 $ 7,556
Sales and marketing 1,232 1,231 3,695 4,088
Total amortization of acquired intangibles $ 4,209
(4) Includes acquisition-related expenses as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2023 2022 2023 2022
(in thousands)
Research and development $ 870 $ 2,713 $ 5,034 $ 3,695
General and administrative 29 18 66 1,304
Total acquisition-related expenses $ 899 $ 2,731 $ 5,100 $ 4,999
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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 January 31, Nine Months Ended January 31,
2023 2022 2023 2022
Revenue
Subscription 93 % 94 % 92 % 93 %
Services 7 % 6 % 8 % 7 %
Total revenue 100 % 100 % 100 % 100 %
Cost of revenue (1)(2)(3)
Subscription 20 % 21 % 21 % 20 %
Services 7 % 6 % 7 % 6 %
Total cost of revenue 27 % 27 % 28 % 26 %
Gross profit 73 % 73 % 72 % 74 %
Operating expenses (1)(2)(3)(4)
Research and development 28 % 32 % 29 % 31 %
Sales and marketing 46 % 47 % 48 % 46 %
General and administrative 13 % 14 % 13 % 15 %
Restructuring and other related charges 11 % - % 4 % - %
Total operating expenses 98 % 93 % 94 % 92 %
Operating loss (1)(2)(3)(4) (25) % (20) % (22) % (18) %
Other income (expense), net
Interest expense (2) % (3) % (3) % (2) %
Other income (expense), net 2 % - % 3 % - %
Loss before income taxes (25) % (23) % (22) % (20) %
Provision for income taxes 1 % 2 % 2 % 2 %
Net loss (26) % (25) % (24) % (22) %
(1) Includes stock-based compensation expense as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2023 2022 2023 2022
Cost of revenue
Subscription 1 % 1 % 1 % 1 %
Services 1 % 1 % 1 % 1 %
Research and development 8 % 7 % 7 % 7 %
Sales and marketing 7 % 6 % 7 % 5 %
General and administrative 3 % 2 % 3 % 2 %
Total stock-based compensation expense 20 % 17 % 19 % 16 %
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(2) Includes employer payroll taxes on employee stock transactions as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2023 2022 2023 2022
Cost of Revenue
Subscription - % - % - % - %
Services - % - % - % - %
Research and development - % 1 % 1 % - %
Sales and marketing 1 % - % - % 1 %
General and administrative - % - % - % - %
Total employer payroll tax on stock
transactions 1 % 1 % 1 % 1 %
(3) Includes amortization of acquired intangible assets as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2023 2022 2023 2022
Cost of Revenue
Subscription 1 % 1 % 1 % 1 %
Sales and marketing 1 % 1 % 1 % 1 %
Total amortization of acquired intangibles 2 % 2 % 2 % 2 %
(4) Includes acquisition-related expenses as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2023 2022 2023 2022
Research and development - % 1 % 1 % 1 %
General and administrative - % - % - % - %
Total acquisition-related expenses - % 1 % 1 % 1 %
Comparison of Three Months Ended
Revenue
Three Months Ended January 31, Change
2023 2022 $ %
(in thousands)
Revenue
Subscription $ 255,613 $ 209,614 $ 45,999 22 %
Services 18,953 14,330 4,623 32 %
Total revenue $ 274,566 $ 223,944 $ 50,622 23 %
Subscription revenue increased by $46.0 million , or 22%, for the three months
ended January 31, 2023 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 the growth
of our subscription customer base to approximately 19,900 customers as of
January 31, 2023 compared to over 17,900 customers as of January 31, 2022 .
Services revenue increased by $4.6 million , or 32%, for the three months ended
January 31, 2023 compared to the same period of the prior year. The increase in
services revenue was attributable to increased adoption of our services
offerings.
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Cost of Revenue and Gross Margin
Three Months Ended January 31, Change
2023 2022 $ %
(in thousands)
Cost of revenue
Subscription $ 56,146 $ 47,577 $ 8,569 18 %
Services 19,062 13,707 5,355 39 %
Total cost of revenue $ 75,208 $ 61,284 $ 13,924 23 %
Gross profit $ 199,358 $ 162,660 $ 36,698 23 %
Gross margin:
Subscription 78 % 77 %
Services (1) % 4 %
Total gross margin 73 % 73 %
Cost of subscription revenue increased by $8.6 million , or 18%, for the three
months ended January 31, 2023 compared to the same period of the prior year.
This increase was primarily due to increases of $8.1 million in cloud
infrastructure costs and $0.5 million in other third-party costs. Total
subscription margin increased to 78% for the three months ended January 31, 2023
compared to 77% for the same period of the prior year.
Cost of services revenue increased by $5.4 million , or 39%, for the three months
ended January 31, 2023 compared to the same period of the prior year. This
increase was primarily due to an increase of $3.9 million in personnel and
related costs, including increases of $2.7 million in salaries and related
taxes, $0.8 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 $1.0 million and
travel costs increased by $0.2 million .
Gross margin for services revenue was (1)% for the three months ended
January 31, 2023 compared to 4% for the same period of the prior year. The
decrease in margin was 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 make investments in our services
organization that we believe will be needed as we continue to grow. 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 January 31, Change
2023 2022 $ %
(in thousands)
Research and development $ 77,472 $ 71,749 $ 5,723 8 %
Research and development expense increased by $5.7 million , or 8%, for the three
months ended January 31, 2023 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 $3.5 million as a result of growth in
headcount. In addition, cloud infrastructure costs related to our research and
development activities increased by $0.8 million , travel costs increased by $0.8
million , and consulting costs increased by $0.6 million . The increase in
personnel and related costs includes increases of $4.9 million in stock-based
compensation and $0.8 million in employee benefits expense which were partially
offset by decreases of $1.8 million in acquisition-related compensation and $0.2
million of recruiting costs.
Sales and marketing
Three Months Ended January 31, Change
2023 2022 $ %
(in thousands)
Sales and marketing $ 126,717 $ 105,069 $ 21,648 21 %
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Sales and marketing expense increased by$21.6 million , or 21%, for the three months endedJanuary 31, 2023 compared to the same period of the prior year. This increase was primarily due to an increase of$20.4 million in personnel and related costs due to growth in headcount. In addition, marketing expenses increased by$0.9 million . The increase in personnel and related costs includes an increase of$7.3 million in salaries and related taxes, an increase of$6.6 million in stock-based compensation, an increase of$3.8 million in commission expense, and an increase of$1.9 million in employee benefits expense. General and administrative Three Months Ended January 31, Change 2023 2022 $ % (in thousands) General and administrative $ 34,711$ 31,691 $ 3,020 10 % General and administrative expense increased by$3.0 million , or 10%, for the three months endedJanuary 31, 2023 compared to the same period of the prior year. This increase was primarily due to an increase of$6.5 million in personnel and related costs due to headcount growth. These increases were partially offset by a$3.5 million decrease in legal and professional fees. The increase in personnel and related costs includes an increase of$4.7 million in stock-based compensation expense, and an increase of$1.6 million in salaries and related taxes.
Restructuring and other related charges
Three Months Ended January 31, Change
2023 2022 $ %
(in thousands)
Restructuring and other related charges
- %
For the three months ended January 31, 2023 , we recorded restructuring and other
related charges comprising employee-related severance and other termination
benefits of approximately $22.0 million and facilities-related charges of
approximately $6.2 million . We had no such charges in the same period of the
prior year.
Other Income (Expense), Net
Three Months Ended January 31, Change
2023 2022 $ %
(in thousands)
Other expense, net $ (805) $ (7,036) $ 6,231 (89) %
Other expense, net was $0.8 million for the three months ended January 31, 2023
compared to Other expense, net of $7.0 million in the same period of the prior
year. The change of $6.2 million was primarily due to an increase in interest
income of $6.1 million as a result of higher interest earned on our investments
in money market funds.
Provision for Income Taxes
Three Months Ended January 31, Change
2023 2022 $ %
(in thousands)
Provision for income taxes $ 2,422 $ 3,841 $ (1,419) (37) %
The provision for income taxes decreased $1.4 million , or (37)%, for the three
months ended January 31, 2023 compared to the same period of the prior year. Our
effective tax rate was (3)% and (7)% of our net loss before taxes for the three
months ended January 31, 2023 and 2022, respectively. Our effective tax rate is
affected by recurring items, such as tax rates in jurisdictions outside the
Netherlands and the relative amounts of income we earn in those jurisdictions
and non-deductible stock-based compensation as well as one-time tax benefits or
charges. The decrease in tax expense is driven primarily by a one-time tax
benefit of $2.2 million resulting from the restructuring plan, offset by
additional tax expense resulting from growth in business operations in
jurisdictions for which we are not subject to valuation allowances or net
operating losses.
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Comparison of Nine Months Ended
Revenue
Nine Months Ended January 31, Change
2023 2022 $ %
(in thousands)
Revenue
Subscription $ 728,638 $ 577,056 $ 151,582 26 %
Services 60,410 45,963 14,447 31 %
Total revenue $ 789,048 $ 623,019 $ 166,029 27 %
Subscription revenue increased by $151.6 million , or 26%, for the nine months
ended January 31, 2023 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 approximately 19,900 customers as of
January 31, 2023 compared to over 17,900 customers as of January 31, 2022 .
Services revenue increased by $14.4 million , or 31%, for the nine months ended
January 31, 2023 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
Nine Months Ended January 31, Change
2023 2022 $ %
(in thousands)
Cost of revenue
Subscription $ 164,798 $ 127,339 $ 37,459 29 %
Services 58,146 37,491 20,655 55 %
Total cost of revenue $ 222,944 $ 164,830 $ 58,114 35 %
Gross profit $ 566,104 $ 458,189 $ 107,915 24 %
Gross margin:
Subscription 77 % 78 %
Services 4 % 18 %
Total gross margin 72 % 74 %
Cost of subscription revenue increased by $37.5 million , or 29%, for the nine
months ended January 31, 2023 compared to the same period of the prior year.
This increase was primarily due to an increase of $34.1 million in cloud
infrastructure costs. Additionally, intangible asset amortization increased by
$1.3 million and personnel and related costs increased by $1.0 million . The
increase in personnel and related costs includes an increase of $0.6 million in
salaries and related taxes and an increase of $0.2 million in employee benefit
expense. Total subscription margin decreased to 77% for the nine months ended
January 31, 2023 compared to 78% for the same period of the prior year.
Cost of services revenue increased by $20.7 million , or 55%, for the nine months
ended January 31, 2023 compared to the same period of the prior year. This
increase was primarily due to an increase of $13.7 million in personnel and
related costs, including increases of $9.2 million in salaries and related
taxes, $2.5 million in stock-based compensation, and $1.1 million in employee
benefits expense driven by an increase in headcount in our services
organization. In addition, subcontractor costs increased by $5.3 million and
travel costs increased by $0.7 million .
Gross margin for services revenue was 4% for the nine months ended January 31,
2023 compared to 18% for the same period of the prior year. The decrease in
margin was 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 make investments in our services organization that we
believe will be needed as we continue to grow. Our gross margin for services may
fluctuate or decline in the near-term as we seek to expand our services
business.
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Operating Expenses
Research and development
Nine Months Ended January 31, Change
2023 2022 $ %
(in thousands)
Research and development $ 231,689 $ 194,894 $ 36,795 19 %
Research and development expense increased by $36.8 million , or 19%, for the
nine months ended January 31, 2023 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 $28.7 million as a result of growth in
headcount. In addition, cloud infrastructure costs related to our research and
development activities increased by $3.0 million , travel costs increased by
$2.3 million , and consulting costs increased by $1.8 million . The increase in
personnel and related costs includes an increase of $16.6 million in stock-based
compensation, an increase of $8.3 million in salaries and related taxes, and an
increase of $2.5 million in employee benefits expense.
Sales and marketing
Nine Months Ended January 31, Change
2023 2022 $ %
(in thousands)
Sales and marketing $ 379,902 $ 288,055 $ 91,847 32 %
Sales and marketing expense increased by $91.8 million , or 32%, for the nine
months ended January 31, 2023 compared to the same period of the prior year.
This increase was primarily due to an increase of $78.4 million in personnel and
related costs and a $2.7 million increase in software and equipment charges due
to growth in headcount. In addition, travel expenses increased by $7.2 million
and marketing expense increased by $2.9 million . The increase in personnel and
related costs includes an increase of $36.6 million in salaries and related
taxes, an increase of $20.0 million in stock-based compensation, an increase of
$11.6 million in commission expense, and an increase of $7.2 million in employee
benefits expense.
General and administrative
Nine Months Ended January 31, Change
2023 2022 $ %
(in thousands)
General and administrative $ 103,724 $ 89,298 $ 14,426 16 %
General and administrative expense increased by $14.4 million , or 16%, for the
nine months ended January 31, 2023 compared to the same period of the prior
year. This increase was primarily due to an increase of $21.7 million in
personnel and related costs due to headcount growth. In addition, insurance and
related taxes increased by $0.9 million and travel costs increased by
$0.8 million . These increases were partially offset by a $8.2 million decrease
in legal and professional fees and a $1.1 million decrease in bad debt expense.
The increase in personnel and related costs includes an increase of
$12.0 million in stock-based compensation expense, an increase of $7.5 million
in salaries and related taxes, and an increase of $1.7 million in employee
benefits expense.
Restructuring and other related charges
Nine Months Ended January 31, Change
2023 2022 $ %
(in thousands)
Restructuring and other related charges
- %
For the nine months ended January 31, 2023 , we recorded restructuring and other
related charges comprising employee-related severance and other termination
benefits of approximately $22.0 million and facilities-related charges of
approximately $6.2 million while we had no such charges in the same period of
the prior year.
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Other Income (Expense), Net
Nine Months Ended January 31, Change
2023 2022 $ %
(in thousands)
Other income (expense), net $ 1,899 $ (14,836) $ 16,735 (113) %
Other income (expense), net was $1.9 million for the nine months ended
January 31, 2023 compared to Other expense, net of $14.8 million in the prior
year. This change of $16.7 million was primarily due to $10.2 million of income
from a favorable settlement of a legal claim during the nine months ended
January 31, 2023 and an increase in interest income, net of $6.3 million as a
result of higher interest earned on our investments in money market funds.
Provision for Income Taxes
Nine Months Ended January 31, Change
2023 2022 $ %
(in thousands)
Provision for income taxes $ 12,313 $ 9,344 $ 2,969 32 %
The provision for income taxes increased $3.0 million , or 32%, for the nine
months ended January 31, 2023 compared to the same period of the prior year. Our
effective tax rate was (7)% of our net loss before taxes for both the nine
months ended January 31, 2023 and 2022. Our effective tax rate is affected by
recurring items, such as tax rates in jurisdictions outside the Netherlands and
the relative amounts of income we earn in those jurisdictions and non-deductible
stock-based compensation as well as one-time tax benefits or charges. The
increase in tax expense is driven primarily by growth in business operations in
jurisdictions for which we are not subject to valuation allowances or net
operating losses and a one-time charge of $3.7 million related to the completion
of acquisition-related integration, reduced by a one-time benefit of
$2.2 million related to the restructuring plan.
Liquidity and Capital Resources
As of January 31, 2023 , we had cash and cash equivalents and restricted cash of
$877.7 million and $2.4 million , respectively, and working capital of
$547.6 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 $1.0 billion as of January 31, 2023 . 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 the
effects of COVID-19 and other macroeconomic developments. 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. In July 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.
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The following table summarizes our cash flows for the periods presented:
Nine Months Ended January 31,
2023 2022
(in thousands)
Net cash provided by operating activities $ 8,107 $ 8,722
Net cash used in investing activities $ (1,019) $ (125,068)
Net cash provided by financing activities $ 12,234 Net Cash Provided By Operating Activities
Net cash provided by operating activities during the nine months endedJanuary 31, 2023 was$8.1 million , which resulted from adjustments for non-cash charges of$233.4 million , mostly offset by a net loss of$189.4 million and net cash outflow of$35.8 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$148.6 million for stock-based compensation expense,$51.5 million for amortization of deferred contract acquisition costs,$15.5 million of depreciation and intangible asset amortization expense,$8.4 million in non-cash operating lease costs,$6.2 million of asset impairment charges,$2.3 million of foreign currency transaction losses, and amortization of debt issuance costs of$0.8 million . The net cash outflow from changes in operating assets and liabilities was the result of an increase in deferred contract acquisition costs of$68.2 million as our sales commissions increased due to increased business volume, a decrease of$8.4 million in operating lease liabilities, and a net decrease of$5.9 million in accounts payable, accrued expenses and accrued compensation and benefits. These outflows were partially offset by a$17.9 million increase in deferred revenue, a decrease of$14.8 million in prepaid expenses and other assets, and a decrease of$14.1 million in accounts receivable. Net cash provided by operating activities during the nine months endedJanuary 31, 2022 was$8.7 million , which resulted from a net loss of$138.2 million and net cash outflow of$16.3 million from changes in operating assets and liabilities, offset by non-cash charges of$163.3 million . Non-cash charges primarily consisted of$97.0 million for stock-based compensation expense,$43.4 million for amortization of deferred contract acquisition costs,$14.6 million of depreciation and intangible asset amortization expense,$6.3 million in non-cash operating lease costs,$1.7 million of foreign currency transaction losses,$0.6 million of amortization of debt issuance costs, and$0.1 million of other expenses which were partially offset by an increase in deferred income taxes of$0.2 million . The net cash outflow from changes in operating assets and liabilities was the result of an increase in deferred contract acquisition costs of$61.2 million as our sales commissions increased due to increased business volume, a decrease of$6.4 million in operating lease liabilities, and an increase of$3.5 million in prepaid expenses and other assets. These outflows were partially offset by a net increase of$36.7 million in accounts payable, accrued expenses, accrued compensation and benefits and a decrease of$9.8 million in accounts receivable, and an increase of$8.3 million in deferred revenue.
Net cash used in investing activities of
Net cash used in investing activities during the nine months endedJanuary 31, 2022 was$125.1 million due to cash used in the acquisitions of$119.9 million , capitalization of$4.2 million in internal-use software costs and$1.0 million of capital expenditures.
Net Cash Provided by Financing Activities
Net cash provided by financing activities of
Net cash provided by financing activities during the nine months ended
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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. During the nine months endedJanuary 31, 2023 , we entered into an amendment to a non-cancelable cloud hosting capacity agreement, effectiveDecember 31, 2022 , for a total purchase commitment of$270.0 million payable over the four years following the date of the agreement. There have been no other material changes to our contractual obligations and commitments discussed in our Annual Report on Form 10-K for the fiscal year endedApril 30, 2022 .
Recently Issued Accounting Pronouncements
See Note 2 "Summary of Significant Accounting Policies" of our accompanying Notes to Condensed Consolidated Financial Statements included 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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