Elastic NV

Previous wording

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 ended April 30, 2023. 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 is April 30, and our fiscal quarters end on July 31, October 31, January 31, and April 30. Our fiscal year ended April 30, 2023 is referred to as fiscal 2023, and our fiscal year ending April 30, 2024 is referred to as fiscal 2024.

Current wording

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 ended April 30, 2024. 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 our risk factors disclosed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended April 30, 2024 filed with the SEC on June 14, 2024.

Previous wording

Elastic is a search analytics company that enables anyone to find the answers they need in real-time from all their data, at scale. The Elasticsearch platform, available as both a hosted, managed service across public clouds as well as self-managed software, allows our customers to find insights and drive artificial intelligence (“AI”) and machine learning use cases from large amounts of data.

Current wording

Elastic, the Search AI Company, enables our customers to find the answers they need in real time, using all of their data, at scale. Our platform, combines the power of search with AI to help companies solve real-time business problems, unlock potential value, and achieve better outcomes. Our platform, available as both a hosted, managed service across public clouds as well as self-managed software, allows our customers to find insights and drive AI and machine learning use cases from large amounts of data.

Previous wording

We offer three search-powered solutions – 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.

Current wording

We offer three search-powered solutions – Search, Observability, and Security – that are built on 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.

Previous wording

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 is Elasticsearch - a highly scalable document store and search engine, and the unified data store for all of our solutions and use cases. Our platform also includes the Elasticsearch Relevance Engine™ (“ESRE”), which combines advanced AI with Elastic’s text search to give developers a full suite of sophisticated retrieval algorithms and the ability to integrate with large language models. 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.

Current wording

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 is Elasticsearch - a highly scalable document store and search engine, and the unified data store for all of our solutions and use cases. Our platform also includes the Elasticsearch Relevance Engine TM (“ESRE”), which combines advanced AI with Elastic’s text search to give developers a full suite of sophisticated retrieval algorithms and the ability to integrate with large language models. The Elastic Stack can be used by developers and IT decision makers to power a variety of use cases. It is a distributed, real-time vector search and analytics engine and data store for all types of data, including textual, numerical, geospatial, structured, and unstructured.

Previous wording

We make our platform available as a hosted, managed service across major cloud providers. Customers can also deploy our platform across hybrid clouds, public or private clouds, and multi-cloud environments. As digital transformation drives mission critical business functions to the cloud, we believe that every company will need to build around a search-based relevance engine to find the answers that matter, from all of their data, in real-time, and at scale.

Current wording

We make our platform available as a hosted, managed service across major cloud providers. Customers can also deploy our platform across hybrid clouds, public or private clouds, and multi-cloud environments. As digital transformation drives mission-critical business functions to the cloud, we believe that every company must incorporate search AI capabilities across IT and line-of-business organizations to find the answers that matter from all of its data in real-time and at scale.

Previous wording

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 maintain 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.

Current wording

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 varying levels of features across all solutions. In Elastic Cloud, our family of cloud-based offerings, 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 free of charge, 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 maintain 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-driven growth.

Previous wording

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 typically 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 U.S. 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 in the nine months ended January 31, 2024 and 2023, respectively. We also generate revenue from consulting and training services.

Current wording

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 typically 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 U.S. 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 ended July 31, 2024 and 2023, respectively. We also generate revenue from consulting and training services.

Previous wording

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 of January 31, 2024, we had approximately 20,800 customers compared to approximately 19,900 customers as of January 31, 2023. 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.

Current wording

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 of July 31, 2024, we had approximately 21,200 customers compared to approximately 20,500 customers as of July 31, 2023. 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.

Previous wording

Many of these customers start with limited initial spending on our products 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 utilizing our products to address new use cases. The number of customers who represented greater than $100,000 in annual contract value (“ACV”) was over 1,270 and over 1,110 as of January 31, 2024 and 2023, 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.

Current wording

Many of these customers start with limited initial spending on our products but can significantly increase their spending over time. 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 utilizing our products to address new use cases. The number of customers who represented greater than $100,000 in annual contract value (“ACV”) was over 1,370 and over 1,190 as of July 31, 2024 and 2023, 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.

Previous wording

Our sales teams are organized primarily by geography and secondarily by customer segments. They focus on both, prospecting to land new 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.

Current wording

Our sales teams are organized primarily by geography and secondarily by customer segments. They focus on both seeking to obtain new customers and on pursuing 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.

Previous wording

We continue to make substantial investments in developing the Elastic Stack and expanding our global sales and marketing footprint. With a distributed team spanning over 35 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 3,161 employees as of January 31, 2024.

Current wording

We continue to make substantial investments in developing the Elastic Stack and expanding our global sales and marketing footprint. With a distributed team spanning over 35 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 3,299 employees as of July 31, 2024.

Previous wording

Macroeconomic events, including inflation, slower economic growth, and political unrest, continue to evolve and negatively impact worldwide economic activity. 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 do not reflect a sustained recovery, we may continue to experience longer and more unpredictable sales cycles, increased scrutiny of deals, slowing consumption and overall customer expenditures, and the impacts of changing foreign exchange rates with a strengthening or weakening U.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. See “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q for a discussion of additional risks.

Current wording

Macroeconomic events, including continued inflation, slower economic growth, and political unrest, continue to evolve and negatively impact worldwide economic activity. Governmental and corporate responses to these factors, including changing interest rates, unpredictable and decreased spending, and layoffs, have added to the highly volatile macroeconomic landscape. We have experienced and, if economic conditions do not reflect a sustained recovery, we may continue to experience longer and more unpredictable sales cycles, increased scrutiny of deals, slowing consumption and overall customer expenditures, and the impacts of changing foreign exchange rates with a strengthening or weakening U.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. For a discussion of these risks, see “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended April 30, 2024 filed with the SEC on June 14, 2024.

Previous wording

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 ended January 31, 2024 and 2023, Elastic Cloud contributed 43% and 40% 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 continue to have a modest adverse impact on our gross margin as a result of the associated third-party hosting costs.

Current wording

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 ended July 31, 2024 and 2023, Elastic Cloud contributed 45% and 41% 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 continue to have a modest adverse impact on our gross margin as a result of the associated third-party hosting costs.

Previous wording

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 the United States and internationally. Our results of operations may fluctuate as we make these investments.

Current wording

Growing the Elastic community. Our strategy consists of providing access to source available software, on both a paid and free-of-charge 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 promote our technology within their organizations. This reduces the time required for our sales force to educate potential customers on our solutions. 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 the United States and internationally. Our results of operations may fluctuate as we make these investments.

Previous wording

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.

Current wording

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. These investments are likely to occur before we realize the anticipated benefits of such investments, such that they may adversely affect our operating results in the near term.

Previous wording

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 its 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 experience attrition. 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 109% as of January 31, 2024.

Current wording

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 its 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 experience attrition. For instance, if each customer had a one-year subscription and renewed its subscription for the same amount, 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 112% as of July 31, 2024.

Previous wording

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, which we refer to as 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.

Current wording

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 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.

Previous wording

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 continue to have a modest impact on our gross margin as a result of the associated third-party hosting costs.

Current wording

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 continue to have a modest unfavorable impact on our gross margin as a result of the associated third-party hosting costs.

Previous wording

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.

Current wording

Research and development. Research and development expense primarily consists of personnel and related 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.

Previous wording

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. Deferred contract acquisition costs are amortized over the expected benefit period.

Current wording

Sales and marketing. Sales and marketing expense primarily consists of personnel and related 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 sales force 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 certain customer contracts. Deferred contract acquisition costs are amortized over the expected benefit period.

Previous wording

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.

Current wording

General and administrative. General and administrative expense primarily consists of personnel and related 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.

Previous wording

Interest expense. Interest expense primarily consists of interest on our 4.125% Senior Notes due 2029.

Current wording

Interest expense. Interest expense primarily consists of interest on our Senior Notes.

Previous wording

(Benefit from) provision for income taxes consists primarily of income taxes related to the Netherlands, U.S. federal and state, and foreign jurisdictions in which we conduct business. 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, non-deductible stock-based compensation, as well as one-time tax benefits or charges, including an income tax benefit related to a release of the valuation allowance against U.S. federal and certain states’ deferred tax assets during the three months ended January 31, 2024.

Current wording

Provision for income taxes consists primarily of income taxes related to the Netherlands, U.S. federal and state, and foreign jurisdictions in which we conduct business. 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, including Base Erosion and Anti-abuse Tax (the “BEAT”) legislation in the U.S., non-deductible stock-based compensation, and one-time tax benefits or charges.

Previous wording

Subscription revenue increased by $52.0 million, or 20%, for the three months ended January 31, 2024 compared to the same period of the prior year. This increase was primarily driven by continued adoption of Elastic Cloud, which grew 29% over the same period and increased to 44% of total revenue for the three months ended January 31, 2024 from 40% for the three months ended January 31, 2023.

Current wording

Subscription revenue increased by $53.5 million, or 20%, for the three months ended July 31, 2024 compared to the same period of the prior year. This increase was primarily driven by continued adoption of Elastic Cloud, which grew 30% over the prior year and increased to 45% of total revenue for the three months ended July 31, 2024 from 41% for the three months ended July 31, 2023.

Previous wording

Interest expense remained relatively flat for the nine months ended January 31, 2024 compared to the same period of the prior year.

Current wording

Services revenue remained relatively flat for the three months ended July 31, 2024 compared to the same period of the prior year.

Previous wording

Cost of subscription revenue increased by $7.8 million, or 14%, for the three months ended January 31, 2024 compared to the same period of the prior year. This increase was primarily due to an increase of $7.2 million in cloud infrastructure costs. Total subscription margin increased to 79% for the three months ended January 31, 2024 compared to 78% for the same period of the prior year, primarily due to efficiencies realized in managing our subscription costs relative to revenue growth.

Current wording

Cost of subscription revenue increased by $11.1 million, or 19%, for the three months ended July 31, 2024 compared to the same period of the prior year. This increase was primarily due to an increase of $10.6 million in cloud infrastructure costs. Subscription gross margin was flat at 79% for the three months ended July 31, 2024 compared to the prior year.

Previous wording

Cost of services revenue increased by $1.6 million, or 8%, for the three months ended January 31, 2024 compared to the same period of the prior year. This increase was due to an increase of $1.9 million in personnel and related costs which were partially offset by a $0.5 million decrease in training and facility costs. The increase in personnel and related costs includes an increase of $1.1 million in salaries and related taxes and $0.8 million in stock-based compensation. Gross margin for services revenue was (2)% for the three months ended January 31, 2024 compared to (1)% for the same period of the prior year. The decrease in gross margin was primarily attributable to personnel and related costs growing at a higher rate than the growth in 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.

Current wording

Cost of services revenue increased by $3.2 million, or 16%, for the three months ended July 31, 2024 compared to the same period of the prior year. This increase was primarily due to increases of $2.5 million in personnel and related costs and $0.7 million in subcontractor costs. The increase in personnel and related costs included increases of $1.3 million in salaries and related taxes and $0.7 million in stock-based compensation. The increased costs combined with services revenue remaining relatively flat led to gross margin for services revenue decreasing to 1% for the three months ended July 31, 2024 compared to 14% for the same period of the prior year. We continue to make investments in our services organization that we believe will be needed to support our continued growth. Our gross margin for services may fluctuate or decline in the near-term as we seek to expand our services business.

Previous wording

Research and development expense increased by $16.3 million, or 7%, for the nine months ended January 31, 2024 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 $12.4 million for the current period, while cloud infrastructure costs related to our research and development activities increased by $2.8 million and travel costs increased by $0.8 million. The increase in personnel and related costs includes an increase of $10.5 million in stock-based compensation and $5.2 million in salaries and related taxes, offset in part by a decrease in acquisition-related compensation of $3.8 million.

Current wording

Research and development expense increased by $8.6 million, or 11%, for the three months ended July 31, 2024 compared to the same period of the prior year as we continued to invest in the development of new and existing offerings. This increase was primarily due to increases of $7.0 million in personnel and related costs, $1.2 million in cloud infrastructure costs related to our research and development activities, and $0.3 million in software and equipment expense. The increase in personnel and related costs included increases of $5.2 million in salaries and related taxes, $1.6 million in stock-based compensation, and $0.8 million in employee benefits expense, offset in part by a decrease in acquisition-related compensation of $0.8 million.

Previous wording

General and administrative expense increased by $6.2 million, or 18%, for the three months ended January 31, 2024 compared to the same period of the prior year. This increase was primarily attributable to increases of $5.3 million in personnel and related costs, $0.5 million in legal and professional costs, and $0.3 million in travel costs. The increase in personnel and related costs includes increases of $2.8 million in stock-based compensation expense, $1.8 million in salaries and related taxes, and $0.3 million in employee benefits expense.

Current wording

Sales and marketing expense increased by $24.2 million, or 18%, for the three months ended July 31, 2024 compared to the same period of the prior year. This increase was primarily due to increases of $19.0 million in personnel and related costs, $3.8 million in marketing expenses, and $1.2 million in travel costs. The increase in personnel and related costs included increases of $7.4 million in salaries and related taxes, $6.5 million in commissions expense, $2.3 million in employee benefits expense, and $2.2 million in stock-based compensation.

Previous wording

The benefit from income taxes was $200.3 million for the three months ended January 31, 2024 compared to a provision for income taxes of $2.4 million for the same period of the prior year. Our effective tax rate was 828% and (3)% of our loss before income taxes for the three months ended January 31, 2024 and 2023, 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 increase in tax benefit was driven primarily by a release of a valuation allowance against U.S. federal and certain states’ deferred tax assets of $250.7 million during the three months ended January 31,2024, partially offset by tax expense in the current year resulting from growth in business operations in jurisdictions for which we are not subject to valuation allowances or net operating losses.

Current wording

The provision for income taxes increased by $6.8 million, or 51%, for the three months ended July 31, 2024 compared to the same period of the prior year. Our effective tax rate was (69)% and (38)% of our net loss before income taxes for the three months ended July 31, 2024 and 2023, 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.

Previous wording

As of January 31, 2024, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $1.015 billion. Our cash, cash equivalents and marketable securities consist of highly liquid investment-grade fixed-income securities. We believe that the credit quality of the securities portfolio is strong and diversified among industries and individual issuers.

Current wording

As of July 31, 2024, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $1.147 billion. Our cash, cash equivalents and marketable securities consist of highly liquid investment-grade fixed-income securities. We believe that the credit quality of the securities portfolio is strong and diversified among industries and individual issuers.

Previous wording

We have generated significant operating losses from our operations as reflected in our accumulated deficit of $950.5 million as of January 31, 2024. We have historically incurred, and expect to continue to incur, operating losses and generate negative cash flows from operations 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.

Current wording

We have generated significant operating losses from our operations as reflected in our accumulated deficit of $1.041 billion as of July 31, 2024. We have historically incurred, and expect to continue to incur, operating losses and may generate negative cash flows from operations in the future due to the investments we intend to make. As a result, we may require additional capital resources to execute on our strategic initiatives to grow our business.

Previous wording

We believe that our existing cash, cash equivalents, and marketable securities and cash from our future operations 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 macroeconomic conditions. 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.

Current wording

We believe that our existing cash, cash equivalents, and marketable securities and cash from our future operations 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 macroeconomic conditions. 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, represented by our Senior Notes, 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.

Previous wording

Net cash provided by operating activities during the nine months ended January 31, 2024 was $87.8 million, which resulted from net income of $102.8 million and adjustments for non-cash charges of $41.1 million offset by net cash outflow of $56.1 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $176.3 million for stock-based compensation expense, $56.4 million for amortization of deferred contract acquisition costs, $13.9 million of depreciation and intangible asset amortization expense, $8.1 million in non-cash operating lease costs, and$2.3 million from foreign currency transaction loss, partially offset by $210.3 million for deferred income taxes primarily related to the release of a valuation allowance, net and $6.4 million from amortization of premium and accretion of discount on marketable securities, net. The net cash outflow from changes in operating assets and liabilities was the result of an increase in deferred contract acquisition costs of $74.1 million as our sales commissions increased due to increased business volume, a net decrease of $22.3 million in accounts payable, accrued expenses and accrued compensation and benefits, a decrease of$9.1 million in operating lease liabilities, and an increase of$4.9 million in prepaid expenses and other assets. These outflows were partially offset by inflows from a decrease of $31.0 million in accounts receivable and a $23.2 million increase in deferred revenue.

Current wording

Net cash provided by operating activities during the three months ended July 31, 2024 was $52.8 million, which resulted from adjustments for non-cash charges of $106.4 million, partially offset by net loss of $49.2 million and a net cash outflow of $4.4 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $63.5 million for stock-based compensation expense, $23.2 million for amortization of deferred contract acquisition costs, $14.7 million in deferred income taxes, $4.2 million of depreciation and intangible asset amortization expense, and $2.8 million innon-cash operating lease costs, the effects of which were partially offset by $2.2 million from amortization of premium and accretion of discount on marketable securities, net. The net cash outflow from changes in operating assets and liabilities resulted from a $69.3 million decrease in deferred revenue, a $43.2 million decrease in accounts payable, accrued expenses, and accrued compensation and benefits, a $13.9 million increase in deferred contract acquisition costs, a $3.4 million decrease in operating lease liabilities, and a $1.8 million increase in prepaid expenses and other assets. These outflows were partially offset by inflows from a $127.2 million decrease in accounts receivable, net.

Previous wording

Net cash provided by operating activities during the nine months ended January 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 inflows from 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.

Current wording

Net cash provided by operating activities during the three months ended July 31, 2023 was $37.8 million, which resulted from adjustments for non-cash charges of $81.8 million and net cash inflow of $4.6 million from changes in operating assets and liabilities, offset by a net loss of $48.5 million. Non-cash charges primarily consisted of $57.1 million for stock-based compensation expense, $17.6 million for amortization of deferred contract acquisition costs, $1.2 million of foreign currency exchange losses, $5.1 million of depreciation and intangible asset amortization expense, and $2.7 million in non-cash operating lease costs. The net cash inflow from changes in operating assets and liabilities was the result of a decrease of $75.9 million in accounts receivable and a decrease of $5.6 million in prepaid expenses and other assets. These outflows were partially offset by a $29.1 million decrease in deferred revenue, a net decrease of $23.5 million in accounts payable, accrued expenses and accrued compensation and benefits, an increase in deferred contract acquisition costs of $21.1 million as our sales commissions increased due to increased business volume, and a decrease of $3.1 million in operating lease liabilities.

Previous wording

Net cash used in investing activities of $229.6 million during the nine months ended January 31, 2024 was primarily due to the purchase of marketable securities of $358.3 million and business acquisitions, net of cash acquired, of $19.0 million, offset by cash provided by maturities of marketable securities of $150.2 million. In addition, we incurred$2.6 million of capital expenditures.

Current wording

Net cash used in investing activities of $55.1 million during the three months ended July 31, 2023 was primarily due to the purchase of marketable securities of $83.6 million and capital expenditures of $0.6 million, offset by cash provided by maturities of marketable securities of $29.1 million.

Previous wording

Net cash provided by financing activities of $28.6 million during the nine months ended January 31, 2024 wasdue to the proceeds from stock option exercises and ESPP purchases.

Current wording

Net cash provided by financing activities of $4.7 million during the three months ended July 31, 2024 wasdue to the proceeds from stock option exercises.

Previous wording

Net cash provided by financing activities of $12.2 million during the nine months ended January 31, 2023 was due to the proceeds from stock option exercises.

Current wording

Net cash provided by financing activities of $3.8 million during the three months ended July 31, 2023 was also due to the proceeds from stock option exercises.