10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 (MARK ONE)
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2015
 
OR
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM              TO
 
COMMISSION FILE NUMBER 001-35498
 ____________________________________________________

SPLUNK INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________
Delaware
 
86-1106510
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
250 Brannan Street
San Francisco, California 94107
(Address of principal executive offices)
(Zip Code)
 
(415) 848-8400
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý

There were 128,475,148 shares of the registrant’s Common Stock issued and outstanding as of September 2, 2015.
 


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I. FINANCIAL INFORMATION
 Item 1. Financial Statements (Unaudited)


Splunk Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
 
July 31, 2015

January 31, 2015
ASSETS
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
326,200

 
$
387,315

Investments, current portion
 
529,174

 
462,849

Accounts receivable, net
 
99,694

 
128,413

Prepaid expenses and other current assets
 
22,312

 
21,256

Total current assets
 
977,380

 
999,833

Investments, non-current
 
71,685

 
165,082

Property and equipment, net
 
77,013

 
50,374

Intangible assets, net
 
55,842

 
10,416

Goodwill
 
124,321

 
19,070

Other assets
 
6,899

 
3,016

Total assets
 
$
1,313,140

 
$
1,247,791

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable
 
$
4,116

 
$
3,726

Accrued payroll and compensation
 
57,174

 
65,220

Accrued expenses and other liabilities
 
33,702

 
27,819

Deferred revenue, current portion
 
263,157

 
249,883

Total current liabilities
 
358,149

 
346,648

Deferred revenue, non-current
 
58,093

 
54,202

Other liabilities, non-current
 
59,311

 
33,620

Total non-current liabilities
 
117,404

 
87,822

Total liabilities
 
475,553

 
434,470

Commitments and contingencies (Note 3)
 


 


Stockholders’ equity
 
 

 
 

Common stock: $0.001 par value; 1,000,000,000 shares authorized; 128,340,232 shares issued and outstanding at July 31, 2015, and 123,538,492 shares issued and outstanding at January 31, 2015
 
128

 
123

Accumulated other comprehensive loss
 
(2,164
)
 
(837
)
Additional paid-in capital
 
1,352,921

 
1,200,858

Accumulated deficit
 
(513,298
)
 
(386,823
)
Total stockholders’ equity
 
837,587

 
813,321

Total liabilities and stockholders’ equity
 
$
1,313,140

 
$
1,247,791

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
 
2015
 
2014
 
2015
 
2014
Revenues
 
 

 
 

 
 

 
 

License
 
$
87,960

 
$
62,081

 
$
159,832

 
$
113,355

Maintenance and services
 
60,366

 
39,466

 
114,159

 
74,099

Total revenues
 
148,326

 
101,547

 
273,991

 
187,454

Cost of revenues (1)
 
 

 
 

 
 
 
 
License
 
1,813

 
72

 
2,974

 
150

Maintenance and services
 
23,227

 
14,999

 
45,151

 
29,108

Total cost of revenues
 
25,040

 
15,071

 
48,125

 
29,258

Gross profit
 
123,286

 
86,476

 
225,866

 
158,196

Operating expenses (1)
 
 

 
 

 
 
 
 
Research and development
 
48,308

 
34,179

 
93,006

 
63,921

Sales and marketing
 
111,786

 
79,978

 
213,775

 
151,056

General and administrative
 
28,760

 
32,676

 
55,632

 
53,679

Total operating expenses
 
188,854

 
146,833

 
362,413

 
268,656

Operating loss
 
(65,568
)
 
(60,357
)
 
(136,547
)
 
(110,460
)
Interest and other income (expense), net
 
 

 
 

 
 
 
 
Interest income, net
 
425

 
163

 
785

 
293

Other income (expense), net
 
(295
)
 
(54
)
 
(206
)
 
(274
)
Total interest and other income (expense), net
 
130

 
109

 
579

 
19

Loss before income taxes
 
(65,438
)
 
(60,248
)
 
(135,968
)
 
(110,441
)
Income tax provision (benefit)
 
(10,149
)
 
534

 
(9,493
)
 
1,096

Net loss
 
$
(55,289
)
 
$
(60,782
)
 
$
(126,475
)
 
$
(111,537
)
 
 
 

 
 

 
 
 
 
Basic and diluted net loss per share
 
$
(0.44
)
 
$
(0.51
)
 
$
(1.01
)
 
$
(0.94
)
 
 
 

 
 

 
 
 
 
Weighted-average shares used in computing basic and diluted net loss per share
 
126,621

 
119,012

 
125,602

 
118,165

 
(1)      Amounts include stock-based compensation expense, as follows:  
Cost of revenues
 
$
5,662


$
3,808


$
12,194

 
$
7,614

Research and development
 
19,301


13,578


39,376

 
26,165

Sales and marketing
 
28,210


21,263


57,820

 
40,383

General and administrative
 
10,436


20,861


20,328

 
28,587


The accompanying notes are an integral part of these condensed consolidated financial statements.

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Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
 
2015
 
2014
 
2015
 
2014
Net loss
 
$
(55,289
)
 
$
(60,782
)
 
$
(126,475
)
 
$
(111,537
)
Other comprehensive loss
 
 

 
 

 
 
 
 
Net unrealized loss on investments
 
(20
)
 
(10
)
 
(45
)
 
(4
)
Foreign currency translation adjustments
 
(1,297
)
 
(41
)
 
(1,282
)
 
(12
)
Total other comprehensive loss
 
(1,317
)
 
(51
)
 
(1,327
)
 
(16
)
Comprehensive loss
 
$
(56,606
)
 
$
(60,833
)
 
$
(127,802
)
 
$
(111,553
)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
 
Six Months Ended July 31,
 
 
2015
 
2014
Cash flows from operating activities
 
 

 
 

Net loss
 
$
(126,475
)

$
(111,537
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
7,776


5,538

Amortization of investment premiums
 
722

 
136

Stock-based compensation
 
129,718


102,749

Deferred income taxes
 
(11,305
)

(513
)
Excess tax benefits from employee stock plans
 
(652
)

(868
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
Accounts receivable, net
 
28,719


13,510

Prepaid expenses, other current and non-current assets
 
12,468


1,492

Accounts payable
 
(100
)

391

Accrued payroll and compensation
 
(8,698
)

(6,664
)
Accrued expenses and other liabilities
 
(7,085
)

9,339

Deferred revenue
 
17,165


14,674

Net cash provided by operating activities
 
42,253


28,247

Cash flows from investing activities
 
 
 
 

Purchases of investments
 
(219,195
)
 
(303,953
)
Maturities of investments
 
247,000


15,000

Acquisitions, net of cash acquired
 
(142,693
)
 
(2,500
)
Purchases of property and equipment
 
(9,224
)

(7,146
)
Other investment activities
 
(1,500
)
 

Net cash used in investing activities
 
(125,612
)

(298,599
)
Cash flows from financing activities
 
 
 
 
Proceeds from the exercise of stock options
 
10,736

 
9,418

Excess tax benefits from employee stock plans
 
652

 
868

Proceeds from employee stock purchase plans
 
10,906

 
8,355

Payment related to build-to-suit lease obligation
 

 
(523
)
Net cash provided by financing activities
 
22,294


18,118

Effect of exchange rate changes on cash and cash equivalents
 
(50
)

179

Net decrease in cash and cash equivalents
 
(61,115
)

(252,055
)
Cash and cash equivalents
 
 

 
 

Beginning of period
 
387,315


897,453

End of period
 
$
326,200


$
645,398

Supplemental disclosures
 
 

 
 

Cash paid for income taxes
 
$
706

 
$
585

Non-cash investing and financing activities
 
 

 
 

Change in accrued purchases of property and equipment
 
(145
)
 
1,472

Vesting of early exercised options
 
56

 
56

Change in capitalized construction costs related to build-to-suit lease
 
22,109

 
14,668

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
(1)  Description of the Business and Significant Accounting Policies
 
Business
 
Splunk Inc. (“we,” "us," "our") provides innovative software products that enable organizations to gain real-time operational intelligence by harnessing the value of their data. Our products enable users to collect, index, search, explore, monitor and analyze data regardless of format or source. Our products address large and diverse data sets, commonly referred to as big data, and are specifically tailored for machine-generated data. Machine data is produced by nearly every software application and electronic device and contains a definitive, time-stamped record of various activities, such as transactions, customer and user activities and security threats. Our products help users derive new insights from machine data that can be used to, among other things, improve service levels, reduce operational costs, mitigate security risks, demonstrate and maintain compliance, and drive better business decisions. We were incorporated in California in October 2003 and reincorporated in Delaware in May 2006.
 
Fiscal Year
 
Our fiscal year ends on January 31. References to fiscal 2016 or fiscal year 2016, for example, refer to the fiscal year ending January 31, 2016.
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet data as of January 31, 2015 was derived from audited financial statements, but does not include all disclosures required by GAAP. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K for the fiscal year ended January 31, 2015, filed with the SEC on March 31, 2015. There have been no changes in the significant accounting policies from those that were disclosed in the audited consolidated financial statements for the fiscal year ended January 31, 2015 included in the Annual Report on Form 10-K.
 
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to state fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year 2016.

Recently Issued Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2015-05, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not include a software license, then the customer should account for the arrangement as a service contract. The standard is effective for us for our first quarter of fiscal 2017, although early adoption is permitted, and will be applied on either a prospective or retrospective basis. We are currently evaluating adoption methods and whether this standard will have a material impact on our condensed consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenues and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, which provides a one-year deferral in the

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effective date of ASU No. 2014-09. Early adoption will be permitted, but not earlier than the original effective date for annual and interim periods. In accordance with the deferral, the effective date applicable to us will be the first quarter of fiscal 2019. We have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our condensed consolidated financial statements and related disclosures.

Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods covered by the financial statements and accompanying notes. In particular, we make estimates with respect to the fair value of multiple elements in revenue recognition, uncollectible accounts receivable, the assessment of the useful life and recoverability of long-lived assets (property and equipment, goodwill and identified intangibles), stock-based compensation expense, the fair value of assets acquired and liabilities assumed for business combinations, income taxes and contingencies. Actual results could differ from those estimates.

Segments

We operate our business as one operating segment: the development and marketing of software products that enable our customers to gain real-time operational intelligence by harnessing the value of their data. Our chief operating decision maker is our Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources.

Principles of Consolidation
 
The accompanying unaudited condensed consolidated financial statements include the accounts of Splunk Inc. and its direct and indirect wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.

Foreign Currency

The functional currency of our foreign subsidiaries is the respective local currency. Translation adjustments arising from the use of differing exchange rates from period to period are included in Accumulated Other Comprehensive Loss within Stockholders' Equity. Foreign currency transaction gains and losses are included in Other income (expense), net and were not material for the three and six months ended July 31, 2015 and 2014. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. All of our revenues are generated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located and are translated at the average exchange rate during the period. Equity and property, plant and equipment related transactions are translated using historical exchange rates.

Foreign Currency Contracts

In the first quarter of fiscal 2016, we began to use foreign currency forward contracts as a part of our strategy to manage exposure related to foreign currency denominated monetary assets and liabilities. These contracts typically have maturities of one month. They are not designated as cash flow or fair value hedges under ASC Topic 815, Derivatives and Hedging. These contracts hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value as either assets or liabilities on the condensed consolidated balance sheets with changes in the fair value recorded to Other income (expense), net in the condensed consolidated statements of operations.

Investments

We determine the appropriate classification of our investments at the time of purchase and reevaluate such determination at each balance sheet date. Securities are classified as available-for-sale and are carried at fair value, with the change in unrealized gains and losses, net of tax, reported as a separate component on the consolidated statements of comprehensive income (loss). Fair value is determined based on quoted market rates when observable or utilizing data points that are observable, such as quoted prices, interest rates and yield curves. Declines in fair value judged to be other-than-temporary on securities available for sale are included as a component of investment income. In order to determine whether a decline in value is other-than-temporary, we evaluate, among other factors, the duration and extent to which the fair value has been less than the carrying value and our intent and ability to retain the investment for a period of time sufficient to allow for

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any anticipated recovery in fair value. The cost of securities sold is based on the specific-identification method. Interest on securities classified as available-for-sale is included as a component of interest income.

Business Combinations

We use our best estimates and assumptions to allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Our estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. We continue to collect information and reevaluate these estimates and assumptions quarterly and record any adjustments to our preliminary estimates to goodwill provided that we are within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our condensed consolidated statements of operations.

(2)  Investments and Fair Value Measurements
 
The carrying amounts of certain of our financial instruments including cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short-term maturities.
 
Assets and liabilities recorded at fair value in the financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels that are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:
 
Level 1—Observable inputs, such as quoted prices in active markets for identical assets or liabilities.
 
Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of July 31, 2015 and January 31, 2015 (in thousands):
 

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July 31, 2015
 
January 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Money market funds
 
$
296,990

 
$

 
$

 
$
296,990

 
$
374,682

 
$

 
$

 
$
374,682

U.S. treasury securities
 

 
599,359

 

 
599,359

 

 
627,931

 

 
627,931

Other
 

 

 
1,500

 
1,500

 

 

 

 

Reported as:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
 

 
 

 
 

 
$
296,990

 
 

 
 

 
 

 
$
374,682

Investments, current portion
 
 
 
 
 
 
 
529,174

 
 
 
 
 
 
 
462,849

Investments, non-current
 
 
 
 
 
 
 
71,685

 
 
 
 
 
 
 
165,082

Total
 
 

 
 

 
 

 
$
897,849

 
 

 
 

 
 

 
$
1,002,613


The following table represents our investments in U.S. treasury securities, which we have classified as available-for-sale investments as of July 31, 2015 (in thousands): 

 
 
July 31, 2015
 
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Investments, current portion:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
529,203

 
$
52

 
$
(81
)
 
$
529,174

Investments, non-current:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
70,198

 
13

 
(26
)
 
70,185

Total available-for-sale investments in U.S. treasury securities
 
$
599,401

 
$
65

 
$
(107
)
 
$
599,359


As of July 31, 2015, the following marketable securities were in an unrealized loss position (in thousands):
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
U.S. treasury securities
 
$
286,905

 
$
(106
)
 
$
17,005

 
$
(1
)
 
$
303,910

 
$
(107
)

As of July 31, 2015, we did not consider any of our investments to be other-than-temporarily impaired.

The contractual maturities of our investments in U.S. treasury securities are as follows (in thousands):
 
 
July 31, 2015
Due within one year
 
$
529,174

Due within one to two years
 
70,185

Total
 
$
599,359


Investments with maturities of less than 12 months from the balance sheet date are classified as current assets, which are available for use to fund current operations. Investments with maturities greater than 12 months from the balance sheet date are classified as long-term assets.

 
Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs

We invested in a two-year convertible promissory note of a privately-held company that we have classified as an available-for-sale investment and is included in investments, non-current, on our condensed consolidated balance sheets. This investment is recorded at fair value using significant unobservable inputs or data in an inactive market and the valuation requires our judgment due to the absence of quoted prices in active markets and inherent lack of liquidity. Unrealized gains and

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losses on our available-for-sale investment are excluded from earnings and reported, net of tax, as a separate component on the consolidated statements of comprehensive income (loss). During the three months ended July 31, 2015, we have not recognized any unrealized gains or losses or an other-than-temporary impairment charge on our investment. The carrying value of our convertible promissory note investment was $1.5 million as of July 31, 2015.

(3)  Commitments and Contingencies
 
Office Lease Commitments
 
We lease our office spaces under non-cancelable leases with rent expense recognized on a straight-line basis over the lease term. Rent expense was $3.4 million and $2.7 million for the three months ended July 31, 2015 and 2014, respectively, and $6.3 million and $4.9 million for the six months ended July 31, 2015 and 2014, respectively.
 
On April 29, 2014, we entered into an office lease (the "Lease") for approximately 182,000 square feet located at 270 Brannan Street, San Francisco, California (the "Premises"). The Premises will be allocated to approximately 95,000 square feet of rentable space (the "Initial Premises") and approximately 87,000 square feet of rentable space (the "Additional Premises"). We expect to occupy the Premises in the first quarter of fiscal 2017. The term of the Additional Premises begins one year after the Initial Premises and each have a term of 84 months. Our total obligation for the base rent is approximately $92.0 million. On May 13, 2014, we entered into an irrevocable, standby letter of credit with Silicon Valley Bank for $6.0 million to serve as a security deposit for the Lease.

As a result of our involvement during the construction period, whereby we have certain indemnification obligations related to the construction, we are considered for accounting purposes only, the owner of the construction project under build-to-suit lease accounting. We have recorded estimated project construction costs incurred by the landlord as an asset and a corresponding long term liability in “Property and equipment, net” and “Other liabilities, non-current” respectively, on our condensed consolidated balance sheets. We will increase the asset and corresponding long term liability as additional building costs are incurred by the landlord during the construction period. Once the landlord completes the construction of the Initial Premises, which is estimated to be in January 2016, we will evaluate the Lease in order to determine whether or not the Lease meets the criteria for “sale-leaseback” treatment.

The following summarizes our contractual commitments and obligations as of July 31, 2015:
 
 
Payments Due by Period*
 
 
Total
 
Less Than 1
year
 
1-3 years
 
3-5 years
 
More Than 5
years
 
 
(in thousands)
Office lease obligations
 
$
143,356

 
$
15,739

 
$
43,872

 
$
37,075

 
$
46,670

 _________________________
*We entered into sublease agreements for portions of our office spaces in London and Virginia, and the future sublease rental income of $1.4 million has been included as an offset to our future minimum rental payments.

Legal Proceedings
 
We are subject to certain routine legal and regulatory proceedings, as well as demands and claims that arise in the normal course of our business. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. In our opinion, resolution of any pending claims (either individually or in the aggregate) is not expected to have a material adverse impact on our consolidated results of operations, cash flows or financial position, nor is it possible to provide an estimated amount of any such loss. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect our future results of operations or cash flows, or both, in a particular quarter.

Indemnification Arrangements
 
During the ordinary course of business, we may indemnify, hold harmless and agree to reimburse for losses suffered or incurred, our customers, vendors, and each of their affiliates for certain intellectual property infringement and other claims by third parties with respect to our products and services, in connection with our commercial license arrangements or related to general business dealings with those parties.

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As permitted under Delaware law, we have entered into indemnification agreements with our officers, directors and certain employees, indemnifying them for certain events or occurrences while they serve as our officers or directors or those of our direct and indirect subsidiaries.
 
To date, there have not been any costs incurred in connection with such indemnification obligations; therefore, there is no accrual of such amounts at July 31, 2015.  We are unable to estimate the maximum potential impact of these indemnifications on our future results of operations.

(4)  Property and Equipment
 
Property and equipment are stated at cost, net of accumulated depreciation and amortization. These assets are depreciated and amortized using the straight-line method over their estimated useful lives. Property and equipment consisted of the following (in thousands):
 
 
 
As of
 
 
July 31, 2015
 
January 31, 2015
Computer equipment and software
 
$
33,590

 
$
28,342

Furniture and fixtures
 
8,386

 
7,707

Leasehold improvements
 
13,600

 
10,146

Construction in progress (1)
 
51,469

 
29,360

 
 
107,045

 
75,555

Less: accumulated depreciation and amortization
 
(30,032
)
 
(25,181
)
Property and equipment, net
 
$
77,013

 
$
50,374

 _________________________ 
(1) This relates to the capitalization of construction costs in connection with our build-to-suit lease obligation, where we are considered the owner of the asset during the construction period for accounting purposes only. There is a corresponding long-term liability for this obligation on our condensed consolidated balance sheets under “Other liabilities, non-current.” Refer to Note 3 “Commitments and Contingencies” for details.

Depreciation and amortization expense on Property and Equipment, net was $2.5 million and $2.0 million for the three months ended July 31, 2015 and 2014, respectively, and $4.8 million and $3.7 million for the six months ended July 31, 2015 and 2014, respectively.

(5)  Acquisitions, Goodwill and Intangible Assets
 
Metafor Software
    
On June 23, 2015, we acquired 100% of the voting equity interest of Metafor Software Inc. ("Metafor Software"), a privately-held British Columbia corporation, which develops technology that provides anomaly detection and behavioral analytics for IT operations. This acquisition has been accounted for as a business combination. The purchase price of $16.4 million, paid in cash, was preliminarily allocated as follows: $2.7 million to identifiable intangible assets, $0.5 million to net assets acquired and $0.1 million to net deferred tax assets, with the excess $13.1 million of the purchase price over the fair value of net tangible and intangible assets acquired recorded as goodwill, allocated to our one operating segment. Goodwill is primarily attributable to the value expected from the synergies of the combination, including accelerating our anomaly detection capabilities for our core IT operations and security use cases. This goodwill is not deductible for income tax purposes. The results of operations of Metafor Software, which are not material, have been included in our condensed consolidated financial statements from the date of purchase. Pro forma results of operations of Metafor Software have not been presented as we do not consider the results to have a material effect on any of the periods presented in our condensed consolidated statements of operations. We are still finalizing the allocation of the purchase price, which may be subject to change as additional information becomes available to us.

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands, except useful life):

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Fair Value
 
 Useful Life (months)
Developed technology
 
$
2,300

 
48
Other acquired intangible assets
 
370

 
36
Total intangible assets acquired
 
$
2,670

 
 

Caspida

On July 9, 2015, we acquired 100% of the voting equity interest of Caspida, Inc. ("Caspida"), a privately-held Delaware corporation, which develops technology that provides behavioral analytics to help detect, respond to and mitigate advanced security threats and insider security threats. This acquisition has been accounted for as a business combination. The purchase price of $128.4 million, paid in cash, was preliminarily allocated as follows: $45.8 million to identifiable intangible assets, $11.4 million to net deferred tax liability and $1.2 million to net assets acquired, with the excess $92.8 million of the purchase price over the fair value of net tangible and intangible assets acquired recorded as goodwill, allocated to our one operating segment. Goodwill is primarily attributable to the value expected from the synergies of the combination, including combined selling opportunities with our products as well as our ability to sell into the security market. This goodwill is not deductible for income tax purposes. The results of operations of Caspida, which are not material, have been included in our condensed consolidated financial statements from the date of purchase. We are still finalizing the allocation of the purchase price, which may be subject to change as additional information becomes available to us. Additionally, we recognized $1.7 million of acquisition-related costs as general and administrative expense on our condensed consolidated statements of operations.

Per the terms of the merger agreement with Caspida, certain unvested shares of stock and unvested stock options held by Caspida employees were cancelled and exchanged for unvested restricted stock units and replacement stock options to purchase shares of our common stock under our 2012 Equity Incentive Plan. Additionally, certain shares of stock held by key employees of Caspida were cancelled and exchanged for unregistered restricted shares of our common stock subject to vesting. The fair value of $61.6 million of these issued awards, which are subject to the recipient's continued service with us and thus excluded from the purchase price, will be recognized ratably as stock-based compensation expense over the required service period.

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands, except useful life):
 
 
Fair Value
 
 Useful Life (months)
Developed technology
 
$
44,300

 
72
In-process research and development
 
1,300

 
Indefinite*
Customer relationships
 
190

 
36
Total intangible assets acquired
 
$
45,790

 
 
 ______________________
*The in-process research and development is considered an indefinite-lived intangible asset until the completion or abandonment of the associated research and development efforts.

Unaudited Pro Forma Financial Information

The following unaudited pro forma information presents the combined results of operations as if the acquisition of Caspida had been completed on February 1, 2014, the beginning of the comparable prior annual reporting period. The unaudited pro forma results include: (i) amortization associated with preliminary estimates for the acquired intangible assets; (ii) recognition of post-acquisition stock-based compensation; and (iii) the associated tax impact on these unaudited pro forma adjustments.

The unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies or the effect of the incremental costs incurred in integrating the two companies. Accordingly, these unaudited pro forma results are presented for informational purpose only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations (in thousands, except per share amounts):

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Three Months
Ended July 31,
 
Six Months
Ended July 31,
 
 
2015
 
2014
 
2015
 
2014
Revenues
 
$
148,326

 
$
101,547

 
$
273,991

 
$
187,454

Net loss
 
$
(71,916
)
 
$
(66,458
)
 
$
(149,562
)
 
$
(111,288
)
Basic and diluted net loss per share
 
$
(0.57
)
 
$
(0.56
)
 
$
(1.19
)
 
$
(0.94
)

Goodwill

Goodwill balances are presented below (in thousands):
 
 
Carrying amount
Balance as of January 31, 2015
 
$
19,070

Goodwill acquired
 
105,916

Foreign currency translation adjustments
 
(665
)
Balance as of July 31, 2015
 
$
124,321


Intangible Assets

Intangible assets subject to amortization obtained from acquisitions as of July 31, 2015 are as follows (in thousands, except useful life):
 
 
Gross Fair Value
 
Accumulated Amortization
 
Net Book Value
 
Weighted Average Remaining Useful Life
(months)
Developed technology
 
$
59,370

 
$
(6,215
)
 
$
53,155

 
64
Customer relationships
 
1,810

 
(986
)
 
824

 
19
Other acquired intangible assets
 
1,180

 
(617
)
 
563

 
28
Total intangible assets subject to amortization
 
$
62,360

 
$
(7,818
)
 
$
54,542

 
 

Additionally, we obtained $1.3 million of in-process research and development upon the acquisition of Caspida, which has an indefinite useful life. We will assess the carrying value and useful life of the asset once the associated research and development efforts are completed.

Amortization expense from acquired intangible assets during the three and six months ended July 31, 2015 was $1.8 million and $2.9 million, respectively.

The expected future amortization expense for acquired intangible assets as of July 31, 2015 is as follows (in thousands):
Fiscal Period:
 
 
Remaining six months of fiscal 2016
 
$
6,261

Fiscal 2017
 
11,921

Fiscal 2018
 
10,272

Fiscal 2019
 
8,014

Fiscal 2020
 
7,615

Fiscal 2021
 
7,383

Thereafter
 
3,076

Total amortization expense
 
$
54,542


(6)  Debt Financing Facilities

On May 9, 2013 we entered into a Loan Agreement with Silicon Valley Bank, which was most recently amended in May 2015. As amended, the agreement provides for a revolving line of credit facility, which expires May 9, 2017. Under the

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agreement, we are able to borrow up to $25 million. Interest on any drawdown under the revolving line of credit accrues either at the prime rate (3.25% in July 2015) or the LIBOR rate plus 2.75%. As of July 31, 2015, we had no balance outstanding under this agreement. The agreement contains customary financial covenants and other affirmative and negative covenants. We were in compliance with all covenants as of July 31, 2015.

(7)  Stock Compensation Plans
 
The following table summarizes the stock option, restricted stock unit ("RSU") and performance unit ("PSU") award activity during the six months ended July 31, 2015:
 
 
 
 
 
Options Outstanding
 
RSUs and PSUs
Outstanding
 
 
 
Shares Available
for Grant
 
Shares
 
Weighted-
Average
Exercise
Price
Per Share
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value (1)
 
Shares
 
 
 
 
 
 
 
 
 
(in years)
 
(in thousands)
 
 
 
Balances as of January 31, 2015
 
6,718,878

 
6,536,855

 
$
5.76

 
5.59
 
$
301,532

 
12,480,368

 
Additional shares authorized
 
6,176,924

 


 


 

 


 


 
Options granted
 
(86,753
)
 
86,753

 
1.30

 
 
 
 
 
 
 
Options exercised
 


 
(2,062,822
)
 
5.20

 

 


 


 
Options forfeited and expired
 
128,422

 
(128,422
)
 
32.91

 

 


 


 
RSUs and PSUs granted
 
(2,008,628
)
 


 


 

 


 
2,008,628

 
RSUs vested
 


 


 


 

 


 
(1,809,945
)
 
RSUs forfeited and canceled
 
868,733

 


 


 

 


 
(868,733
)
 
Balances as of July 31, 2015
 
11,797,576

 
4,432,364

 
$
5.15

 
4.85
 
$
287,275

 
11,810,318

 
Vested and expected to vest
 
 
 
4,429,149

 
$
5.15

 
4.85
 
$
287,077

 
11,375,584

 
Exercisable as of July 31, 2015
 
 
 
3,645,966

 
$
3.77

 
4.40
 
$
241,306

 
 
 
 _________________________ 
(1) The intrinsic value is calculated as the difference between the exercise price of the underlying stock option award and the closing market price of our common stock as of July 31, 2015.

During fiscal 2016, we granted PSUs to certain executives under our 2012 Equity Incentive Plan. The number of PSUs earned and eligible to vest will be determined after a one year performance period, based on achievement of certain company financial performance measures and the recipient's continued service with us. The number of shares of our stock to be received at vesting can range from 0% to 200% of the target amount. Compensation expense for PSUs is measured using the fair value at the date of grant and recorded over the vesting period under the graded-vesting attribution method, and may be adjusted over the vesting period based on interim estimates of performance against the pre-set objectives.

During the six months ended July 31, 2015, $0.7 million of tax benefits have been realized from exercised stock options. At July 31, 2015, total unrecognized compensation cost related to these stock options was $8.6 million, adjusted for estimated forfeitures, which is expected to be recognized over a weighted-average period of 0.9 years. At July 31, 2015, total unrecognized compensation cost was $540.5 million related to RSUs, adjusted for estimated forfeitures, which is expected to be recognized over the next 2.8 years. At July 31, 2015, total unrecognized compensation cost was $11.3 million related to PSUs, adjusted for estimated forfeitures, which is expected to be recognized over the next 3.6 years. Additionally, during the three months ended July 31, 2015, we issued 671,782 restricted shares of our common stock ("RSAs") and at July 31, 2015, total unrecognized compensation cost was $38.0 million related to RSAs, adjusted for estimated forfeitures, which is expected to be recognized over the next 3.4 years.
 
The total intrinsic value of options exercised during the six months ended July 31, 2015 was $126.1 million. The weighted-average grant date fair value of RSUs granted was $66.29 per share for the six months ended July 31, 2015. The weighted-average grant date fair value of PSUs granted was $61.83 per share for the six months ended July 31, 2015. The weighted-average grant date fair value of RSAs granted was $69.00 per share for the six months ended July 31, 2015.

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(8)  Geographic Information
 
Revenues

Revenues by geography are based on the shipping address of the customer. The following table presents our revenues by geographic region for the periods presented (in thousands):
 
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
 
2015

2014
 
2015
 
2014
United States
 
$
114,273

 
$
76,026

 
$
209,460

 
$
140,705

International
 
34,053

 
25,521

 
64,531

 
46,749

Total revenues
 
$
148,326

 
$
101,547

 
$
273,991

 
$
187,454

 
Other than the United States, no other individual country exceeded 10% of total revenues during any of the periods presented. One channel partner represented approximately 13% and 14% of total revenues during the three months ended July 31, 2015 and 2014, respectively, and approximately 12% of total revenues during the six months ended July 31, 2015 and 2014. The revenues from this channel partner is comprised of a number of customer transactions, none of which were individually greater than 10% of total revenues for the three months or six months ended July 31, 2015 and 2014. At July 31, 2015, one channel partner represented approximately 16% of total accounts receivable and a second channel partner represented approximately 15% of total accounts receivable. At January 31, 2015, no customer or channel partner represented greater than 10% of total accounts receivable.

Property and Equipment

The following table presents our property and equipment by geographic region for the periods presented (in thousands):

 
 
As of
 
 
July 31, 2015
 
January 31, 2015
United States
 
$
72,876

 
$
47,236

International
 
4,137

 
3,138

Total property and equipment, net
 
$
77,013

 
$
50,374


Other than the United States, no other country represented 10% or more of our total property and equipment as of July 31, 2015 or January 31, 2015.

(9)  Income Taxes
 
For the three months ended July 31, 2015 and 2014, we recorded $10.1 million in income tax benefit and $0.5 million in income tax expense, respectively. For the six months ended July 31, 2015 and 2014, we recorded $9.5 million in income tax benefit and $1.1 million in income tax expense, respectively. The recorded tax benefit was due to the partial release of the deferred tax asset valuation allowance from the acquisition of Caspida, partially offset by an increase in taxable income in our international jurisdictions. The net deferred tax liability from the acquisition of Caspida provided an additional source of taxable income to support the realizability of the pre-existing deferred tax assets and as a result, we released a portion of the deferred tax asset valuation allowance.

During the three months ended July 31, 2015, we recorded additional long-term taxes payable of $1.3 million from unrecognized tax benefits as a result of our acquisition of Metafor Software. At this time, we are unable to make a reasonably reliable estimate of the timing of payments, and hence these unrecognized tax benefits are reported as long term. Because of our history of tax losses, all years remain open to tax audit.

(10)  Net Loss Per Share
 
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase or forfeiture.

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Diluted net loss per share is computed by giving effect to all potential shares of common stock, including preferred stock, stock options, RSUs, PSUs and RSAs to the extent dilutive.
 
The following table sets forth the computation of historical basic and diluted net loss per share (in thousands, except per share data):
 
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 

 
 

 
 

 
 

Net loss
 
$
(55,289
)
 
$
(60,782
)
 
$
(126,475
)
 
$
(111,537
)
Denominator:
 
 

 
 

 
 

 
 

Weighted-average common shares outstanding
 
126,627

 
119,055

 
125,612

 
118,213

Less: Weighted-average unvested common shares subject to repurchase or forfeiture
 
(6
)
 
(43
)
 
(10
)
 
(48
)
Weighted-average shares used to compute net loss per share, basic and diluted
 
126,621

 
119,012

 
125,602

 
118,165

Net loss per share, basic and diluted
 
$
(0.44
)
 
$
(0.51
)
 
$
(1.01
)
 
$
(0.94
)
 
Since we were in a net loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows (in thousands):
 
 
 
As of July 31,
 
 
2015
 
2014
Shares subject to outstanding common stock options
 
4,432

 
8,236

Shares subject to outstanding RSUs, PSUs and RSAs
 
12,482

 
10,386

Employee stock purchase plan
 
319

 
337

Total
 
17,233

 
18,959

 
(11)  Related Party Transactions
 
Certain members of our board of directors ("Board") serve on the board of directors of and/or are executive officers of, and, in some cases, are investors in, companies that are customers or vendors of ours. Certain of our executive officers also serve on the board of directors of companies that are customers or vendors of ours.  We believe the transactions between these companies and us were carried out on terms that are consistent with similar transactions with our other similarly situated customers or vendors. We recognized revenues from sales to these companies of $1.4 million and $0.8 million for the three months ended July 31, 2015 and 2014, respectively, and $2.5 million and $1.5 million for the six months ended July 31, 2015 and 2014, respectively. We also recorded $0.5 million and $0.5 million in expenses related to purchases from these companies during the three months ended July 31, 2015 and 2014, respectively, and $1.1 million and $1.0 million for the six months ended July 31, 2015 and 2014, respectively. We had $0.5 million and $1.8 million of accounts receivable from these companies as of July 31, 2015 and January 31, 2015, respectively. There were no accounts payable to these companies as of July 31, 2015 or January 31, 2015.
 
(12)  Subsequent Event
 
On August 24, 2015, we entered into an office lease for approximately 235,000 square feet located in San Jose, California. This lease term is expected to commence in the third quarter of fiscal 2017 for a term of 10 years and nine months, subject to the completion of certain pre-occupancy improvements by our landlord. Our total obligation for the base rent will be approximately $120.5 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
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 appearing elsewhere in this Quarterly

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Report on Form 10-Q. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. Such statements include, but are not limited to, statements concerning our market opportunity, our future financial and operating results; our planned investments, particularly in our product development efforts; our planned expansion of our sales and marketing organization; our growth and product integration strategies; our continued efforts to market and sell both domestically and internationally; our expectations about seasonal trends; our expectations regarding our revenues mix; use of non-GAAP financial measures; our expectations regarding our operating expenses, including increases in research and development, sales and marketing, and general and administrative expenses; sufficiency of cash to meet cash needs for at least the next 12 months; exposure to interest rate changes; inflation; anticipated income tax rates; our expectations regarding our leases; exposure to exchange rate fluctuations and our ability to manage such exposure; and our expected capital expenditures, cash flows and liquidity.

These statements are based on the beliefs and assumptions of our management based on information currently available to us. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.

Overview

Splunk provides innovative software products that enable organizations to gain real-time operational intelligence by harnessing the value of their data. Our products enable users to collect, index, search, explore, monitor and analyze data regardless of format or source. Our products address large and diverse data sets, commonly referred to as big data, and are specifically tailored for machine-generated data. Machine data is produced by nearly every software application and electronic device and contains a definitive, time-stamped record of various activities, such as transactions, customer and user activities and security threats. Beyond an organization's traditional IT and security infrastructure, every processor-based system, including HVAC controllers, smart electrical meters, GPS devices and radio-frequency identification tags, and many consumer-oriented systems, such as electronic wearables, many manufacturing systems, mobile devices, automobiles and medical devices that contain embedded electronic devices, are also continuously generating machine data. Our products help organizations gain value from all of these different sources and forms of machine data.

We believe the market for products that provide operational intelligence presents a substantial opportunity as data grows in volume and diversity, creating new risks, opportunities and challenges for organizations. Since our inception, we have invested a substantial amount of resources developing our products and technology to address this market, specifically with respect to machine data.
 
Our products are designed to accelerate return-on-investment for our customers. They generally do not require customization, long deployment cycles or extensive professional services commonly associated with traditional enterprise software applications. For Splunk Enterprise, users can simply download and install the software, typically in a matter of hours, to connect to their relevant machine data sources. Alternatively, they can sign up for our Splunk Cloud service and avoid the need to provision, deploy and manage internal infrastructure. They can also provision a compute instance on Amazon Web Services via a pre-built Amazon Machine Image, which delivers a pre-configured virtual machine instance with our Splunk Enterprise software. We also offer support, training and professional services to our customers to assist in the deployment of our software.

For Splunk Enterprise, we base our license fees on the estimated daily data indexing capacity our customers require. Prospective customers can download a free trial version of our software that provides a full set of features but limited data indexing capacity. Following the 60-day trial period, prospective customers can purchase a license for our product or continue using our product with reduced features and limited data indexing capacity. A majority of our license revenues consist of revenues from perpetual licenses, whereby we generally recognize the license fee portion of these arrangements upfront. As a result, the timing of when we enter into large perpetual licenses may lead to fluctuations in our revenues and operating results because our expenses are largely fixed in the short-term. Additionally, we license our software under term licenses, which are

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generally recognized ratably over the contract term. From time to time, we also enter into transactions that are designed to enable broad adoption of our software within an enterprise, referred to as enterprise adoption agreements. These agreements often include provisions that require revenue deferral and recognition over time.

Our Splunk Cloud service delivers the core functionalities of Splunk Enterprise as a scalable, reliable cloud service. Our Splunk Cloud customers pay an annual subscription fee based on the combination of the volume of data indexed per day and the length of the data retention period. Our product, Hunk: Splunk Analytics for Hadoop and NoSQL Data Stores, is a software product that enables exploration, analysis and visualization of data in Hadoop and NoSQL data stores. Our Splunk MINT product enables customers to gain greater operational intelligence from mobile apps and enables Splunk Enterprise customers to analyze their mobile data, establish alerts and searches based on mobile data, and correlate mobile data with other machine data.

We intend to continue investing for long-term growth. We have invested and expect to continue to invest heavily in our product development efforts to deliver additional compelling features, address customer needs and enable solutions that can address new end markets. For example, in March 2015, we introduced Splunk Light, a product designed for smaller IT environments. In addition, we expect to continue to aggressively expand our sales and marketing organizations to market and sell our software both in the United States and internationally. We have utilized and expect to continue to utilize acquisitions to contribute to our long-term growth objectives. In June 2015, we acquired Metafor Software, a privately-held British Columbia corporation, which developed technology that provides anomaly detection and behavioral analytics for IT operations. In July 2015, we acquired Caspida, a privately-held Delaware corporation, which developed technology that provides behavioral analytics to help detect, respond to and mitigate advanced security threats and insider security threats.
 
Our goal is to make our software the platform for delivering operational intelligence and real-time business insights from machine data. The key elements of our growth strategy are to:
 
Extend our technological capabilities.

Continue to expand our direct and indirect sales organization, including our channel relationships, to increase our sales capacity and enable greater market presence.

Further penetrate our existing customer base and drive enterprise-wide adoption.

Enhance our value proposition through a focus on solutions which address core and expanded use cases.

Grow our user communities and partner ecosystem to increase awareness of our brand, target new use cases, drive operational leverage and deliver more targeted, higher value solutions.

Continue to deliver a rich developer environment to enable rapid development of enterprise applications that leverage machine data and the Splunk platform.
 
We believe the factors that will influence our ability to achieve our goals include, among other things, our ability to deliver new products as well as additional product functionality; acquire new customers across geographies and industries; cultivate incremental sales from our existing customers by driving increased use of our software within organizations; provide additional solutions that leverage our core machine data engine to help organizations understand and realize the value of their machine data in specific end markets and use cases; add additional OEM and strategic relationships to enable new sales channels for our software as well as extend our integration with third party products; help software developers leverage the functionality of our machine data engine through SDKs and APIs; and successfully integrate acquired businesses and technologies.

For the three months ended July 31, 2015 and 2014, our total revenues were $148.3 million and $101.5 million, respectively. For the three months ended July 31, 2015 and 2014, approximately 23% and 25% of our total revenues, respectively, were derived from customers located outside the United States. Our customers and end-users represent the public sector and a wide variety of industries, including financial services, manufacturing, retail and technology, among others. As of July 31, 2015, we had over 10,000 customers, including 82 of the Fortune 100 companies.

For the three months ended July 31, 2015 and 2014, our GAAP operating loss was $65.6 million and $60.4 million, respectively. Our non-GAAP operating income was $4.8 million and $1.6 million for the three months ended July 31, 2015 and 2014, respectively.


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For the three months ended July 31, 2015 and 2014, our GAAP net loss was $55.3 million and $60.8 million, respectively. Our non-GAAP net income was $4.1 million and $1.2 million for the three months ended July 31, 2015 and 2014, respectively.
 
Our quarterly results reflect seasonality in the sale of our products and services. Historically, a pattern of increased license sales in the fourth fiscal quarter as a result of industry buying patterns has positively impacted sales activity in that period, which can result in lower sequential revenues in the following first fiscal quarter. Our gross margins and operating losses have been affected by these historical trends because the majority of our expenses are relatively fixed in the short-term. The majority of our expenses are personnel-related and include salaries, stock-based compensation, benefits and incentive-based compensation plan expenses. As a result, we have not experienced significant seasonal fluctuations in the timing of expenses from period to period.

Non-GAAP Financial Results
 
To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP gross margin, non-GAAP operating income (loss), non-GAAP operating margin, non-GAAP net income (loss) and non-GAAP net income (loss) per share (collectively the “non-GAAP financial measures”). These non-GAAP financial measures exclude all or a combination of the following (as reflected in the following reconciliation tables): stock-based compensation expense, employer payroll tax expense related to employee stock plans, amortization of acquired intangible assets, acquisition-related costs, ground lease expense related to a build-to-suit lease obligation and the partial release of the valuation allowance due to acquisition. In addition, non-GAAP financial measures include free cash flow, which represents cash from operations less purchases of property and equipment. The presentation of the non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key metrics used by our management in its financial and operational decision making. In addition, these non-GAAP financial measures facilitate comparisons to competitors’ operating results.

We exclude stock-based compensation expense from our non-GAAP financial measures because it is non-cash in nature and excluding this expense provides meaningful supplemental information regarding our operational performance. In particular, because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies can use under FASB ASC Topic 718, we believe that providing non-GAAP financial measures that exclude this expense allows investors the ability to make more meaningful comparisons between our operating results and those of other companies. We exclude employer payroll tax expense related to employee stock plans in order for investors to see the full effect that excluding that stock-based compensation expense had on our operating results. These expenses are tied to the exercise or vesting of underlying equity awards and the price of our common stock at the time of vesting or exercise, which may vary from period to period independent of the operating performance of our business. We also exclude amortization of acquired intangible assets, acquisition-related costs, ground lease expense related to a build-to-suit lease obligation and the partial release of valuation allowance due to acquisition from our non-GAAP financial measures because these are considered by management to be outside of our core operating results. Accordingly, we believe that excluding these expenses provides investors and management with greater visibility of the underlying performance of our business operations, facilitates comparison of our results with other periods and may also facilitate comparison with the results of other companies in our industry. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that can be used for strategic opportunities, including investing in our business, making strategic acquisitions and strengthening our balance sheet.
    
There are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by our competitors and exclude expenses that may have a material impact upon our reported financial results. Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees. The non-GAAP financial measures are meant to supplement and be viewed in conjunction with GAAP financial measures.

The following table reconciles net cash provided by operating activities to free cash flow for the three and six months ended July 31, 2015 and 2014 (in thousands):
 

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Three Months
Ended July 31,
 
Six Months
Ended July 31,
 
 
2015

2014
 
2015
 
2014
Net cash provided by operating activities
 
$
13,638

 
$
9,336

 
$
42,253

 
$
28,247

Less purchases of property and equipment
 
(2,809
)
 
(2,908
)
 
(9,224
)
 
(7,146
)
Free cash flow (Non-GAAP)
 
$
10,829

 
$
6,428

 
$
33,029

 
$
21,101

Net cash used in investing activities
 
$
(117,183
)
 
$
(43,478
)
 
$
(125,612
)
 
$
(298,599
)
Net cash provided by financing activities
 
$
16,462

 
$
11,803

 
$
22,294

 
$
18,118


The following table reconciles GAAP gross margin to non-GAAP gross margin for the three and six months ended July 31, 2015 and 2014:
 
 
 
Three Months
Ended July 31,
 
Six Months
Ended July 31,
 
 
2015

2014
 
2015
 
2014
GAAP gross margin
 
83.1
%
 
85.2
%
 
82.4
%
 
84.4
%
Stock-based compensation expense
 
3.8

 
3.7

 
4.5

 
4.1

Employer payroll tax on employee stock plans
 
0.3

 
0.1

 
0.2

 
0.1

Amortization of acquired intangible assets
 
1.1

 
0.7

 
0.9

 
0.7

Non-GAAP gross margin
 
88.3
%
 
89.7
%
 
88.0
%
 
89.3
%

The following table reconciles GAAP operating loss to non-GAAP operating income (loss) for the three and six months ended July 31, 2015 and 2014 (in thousands):
 
 
 
Three Months
Ended July 31,
 
Six Months
Ended July 31,
 
 
2015
 
2014
 
2015
 
2014
GAAP operating loss
 
$
(65,568
)
 
$
(60,357
)
 
$
(136,547
)
 
$
(110,460
)
Stock-based compensation expense
 
63,609

 
59,510

 
129,718

 
102,749

Employer payroll tax on employee stock plans
 
2,717

 
1,341

 
5,539

 
3,729

Amortization of acquired intangible assets
 
1,806

 
922

 
2,936

 
1,825

Acquisition-related costs
 
1,993

 

 
1,993

 

Ground lease expense related to build-to-suit lease obligation
 
222

 
222

 
444

 
222

Non-GAAP operating income (loss)
 
$
4,779

 
$
1,638

 
$
4,083

 
$
(1,935
)

The following table reconciles GAAP operating margin to non-GAAP operating margin for the three and six months ended July 31, 2015 and 2014:
 
 
 
Three Months
Ended July 31,
 
Six Months
Ended July 31,
 
 
2015
 
2014
 
2015
 
2014
GAAP operating margin
 
(44.2
)%
 
(59.4
)%
 
(49.8
)%
 
(58.9
)%
Stock-based compensation expense
 
43.0

 
58.6

 
47.3

 
54.8

Employer payroll tax on employee stock plans
 
1.8

 
1.3

 
2.0

 
2.0

Amortization of acquired intangible assets
 
1.2

 
0.9

 
1.1

 
1.0

Acquisition-related costs
 
1.3

 

 
0.7

 

Ground lease expense related to build-to-suit lease obligation
 
0.1

 
0.2

 
0.2

 
0.1

Non-GAAP operating margin
 
3.2
 %
 
1.6
 %
 
1.5
 %
 
(1.0
)%
 
The following table reconciles GAAP net loss to non-GAAP net income (loss) for the three and six months ended July 31, 2015 and 2014 (in thousands):

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Three Months
Ended July 31,
 
Six Months
Ended July 31,
 
 
2015
 
2014
 
2015
 
2014
GAAP net loss
 
$
(55,289
)
 
$
(60,782
)
 
$
(126,475
)
 
$
(111,537
)
Stock-based compensation expense
 
63,609

 
59,510

 
129,718

 
102,749

Employer payroll tax on employee stock plans
 
2,717

 
1,341

 
5,539

 
3,729

Amortization of acquired intangible assets
 
1,806

 
922

 
2,936

 
1,825

Acquisition-related costs
 
1,993

 

 
1,993

 

Ground lease expense related to build-to-suit lease obligation
 
222

 
222

 
444

 
222

Partial release of the valuation allowance due to acquisition
 
(10,924
)
 

 
(10,924
)
 

Non-GAAP net income (loss)
 
$
4,134

 
$
1,213

 
$
3,231

 
$
(3,012
)
 
The following table reconciles the shares used in computing basic and diluted GAAP and non-GAAP net income (loss) per share for the three and six months ended July 31, 2015 and 2014 (in thousands, except per share amounts):

 
 
Three Months
Ended July 31,
 
Six Months
Ended July 31,
 
 
2015
 
2014
 
2015
 
2014
Weighted-average shares used in computing GAAP basic net loss per share
 
126,621

 
119,012

 
125,602

 
118,165

Effect of dilutive securities: Employee stock awards
 
5,380

 
6,606

 
5,551

 

Weighted-average shares used in computing non-GAAP basic and diluted net income (loss) per share
 
132,001

 
125,618

 
131,153

 
118,165

 
 
 
 
 
 
 
 
 
GAAP basic and diluted net loss per share
 
$
(0.44
)
 
$
(0.51
)
 
$
(1.01
)
 
$
(0.94
)
Non-GAAP basic and diluted net income (loss) per share
 
$
0.03

 
$
0.01

 
$
0.02

 
$
(0.03
)

Components of Operating Results
 
Revenues
 
License revenues.  License revenues reflect the revenues recognized from sales of licenses to new customers and additional licenses to existing customers. We are focused on acquiring new customers and increasing revenues from our existing customers as they realize the value of our software by indexing higher volumes of machine data and expanding the use of our software through additional use cases and broader deployment within their organizations. A majority of our license revenues consists of revenues from perpetual licenses, under which we generally recognize the license fee portion of the arrangement upfront, assuming all revenue recognition criteria are satisfied. Customers can also purchase term license agreements, under which we recognize the license fee ratably, on a straight-line basis, over the term of the license. Due to the differing revenue recognition policies applicable to perpetual and term licenses, shifts in the mix between perpetual and term licenses from quarter to quarter could produce substantial variation in revenues recognized even if our sales remain consistent. In addition, seasonal trends that contribute to increased sales activity in the fourth fiscal quarter often result in lower sequential revenues in the first fiscal quarter, and we expect this trend to continue. Comparing our revenues on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance.
 
Maintenance and services revenues.  Maintenance and services revenues consist of revenues from maintenance agreements and, to a lesser extent, professional services and training, as well as revenues from our cloud services. Typically, when purchasing a perpetual license, a customer also purchases one year of maintenance service for which we charge a percentage of the license fee. When a term license is purchased, maintenance service is typically bundled with the license for the term of the license period. Customers with maintenance agreements are entitled to receive support and unspecified upgrades and enhancements when and if they become available during the maintenance period. We recognize the revenues associated with maintenance agreements ratably, on a straight-line basis, over the associated maintenance period. In arrangements

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involving a term license, we recognize both the license and maintenance revenues over the contract period. We have a professional services organization focused on helping some of our largest customers deploy our software in highly complex operational environments and train their personnel. We recognize the revenues associated with these professional services on a time and materials basis as we deliver the services or provide the training. We expect maintenance and services revenues to become a larger percentage of our total revenues as our installed customer base grows. We generally recognize the revenues associated with our cloud services ratably, on a straight-line basis, over the associated subscription term.

Professional services and training revenues as a percentage of total revenues were 7% for the three months ended July 31, 2015 and 2014. We have experienced continued growth in our professional services revenues primarily due to the deployment of our software with some customers that have large, highly complex IT environments.
 
Cost of Revenues
 
Cost of license revenues.  Cost of license revenues includes all direct costs to deliver our product, including salaries, benefits, stock-based compensation and related expenses such as employer taxes, allocated overhead for facilities and IT and amortization of acquired intangible assets. We recognize these expenses as they are incurred.

Cost of maintenance and services revenues.  Cost of maintenance and services revenues includes salaries, benefits, stock-based compensation and related expenses such as employer taxes for our maintenance and services organization, allocated overhead for depreciation of equipment, facilities and IT, amortization of acquired intangible assets and third-party hosting fees related to our cloud services. We recognize expenses related to our maintenance and services organization as they are incurred.
 
Operating Expenses

Our operating expenses are classified into three categories: research and development, sales and marketing and general and administrative. For each category, the largest component is personnel costs, which include salaries, employee benefit costs, bonuses, commissions as applicable, stock-based compensation and related expenses such as employer taxes. Operating expenses also include allocated overhead costs for depreciation of equipment, facilities and IT. Allocated costs for facilities consist of leasehold improvements and rent. Our allocated costs for IT include costs for compensation of our IT personnel and costs associated with our IT infrastructure. Operating expenses are generally recognized as incurred.
 
Research and development.  Research and development expenses primarily consist of personnel and facility-related costs attributable to our research and development personnel. We have devoted our product development efforts primarily to enhancing the functionality and expanding the capabilities of our software and services. We expect that our research and development expenses will continue to increase, in absolute dollars, as we increase our research and development headcount to further strengthen and enhance our software and services and invest in the development of our solutions and apps.

Sales and marketing.  Sales and marketing expenses primarily consist of personnel and facility-related costs for our sales, marketing and business development personnel, commissions earned by our sales personnel, and the cost of marketing and business development programs. We expect that sales and marketing expenses will continue to increase, in absolute dollars, as we continue to hire additional personnel and invest in marketing programs.
 
General and administrative.  General and administrative expenses primarily consist of personnel and facility-related costs for our executive, finance, legal, human resources and administrative personnel; our legal, accounting and other professional services fees; and other corporate expenses. We anticipate continuing to incur additional expenses due to growing our operations and being a publicly traded company, including higher legal, corporate insurance and accounting expenses and costs related to maintaining compliance with Section 404 of the Sarbanes-Oxley Act and related regulations.
 
Interest and other income (expense), net
 
Interest and other income (expense), net consists primarily of foreign exchange gains and losses, interest income on our investments and cash and cash equivalents balances and changes in the fair value of forward exchange contracts.
 
Provision for income taxes

The provision for income taxes consists of federal, state and foreign income taxes. We recognize deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which we expect the differences to reverse.  We record a

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valuation allowance to reduce the deferred tax assets to the amount that we are more-likely-than-not to realize.  Because of our history of U.S. net operating losses, we have established, in prior years, a full valuation allowance against potential future benefits for U.S. deferred tax assets including loss carry-forwards and research and development and other tax credits.  We regularly assess the likelihood that our deferred income tax assets will be realized based on the realization guidance available. To the extent that we believe any amounts are not more-likely-than-not to be realized, we record a valuation allowance to reduce the deferred income tax assets. We regularly assess the need for the valuation allowance on our deferred tax assets, and to the extent that we determine that an adjustment is needed, such adjustment will be recorded in the period that the determination is made.

Results of Operations
 
The following tables set forth our results of operations for the periods presented and as a percentage of our total revenues for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.
 
 
 
Three Months
Ended July 31,
Six Months
Ended July 31,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Condensed Consolidated Statement of Operations Data:
 
 

 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
License
 
$
87,960

 
$
62,081

 
$
159,832

 
$
113,355

Maintenance and services
 
60,366

 
39,466

 
114,159

 
74,099

Total revenues
 
148,326

 
101,547

 
273,991

 
187,454

Cost of revenues
 
 
 
 

 
 

 
 
License
 
1,813

 
72

 
2,974

 
150

Maintenance and services
 
23,227

 
14,999

 
45,151

 
29,108

Total cost of revenues
 
25,040

 
15,071

 
48,125

 
29,258

Gross profit
 
123,286

 
86,476

 
225,866

 
158,196

Operating expenses
 
 

 
 

 
 

 
 
Research and development
 
48,308

 
34,179

 
93,006

 
63,921

Sales and marketing
 
111,786

 
79,978

 
213,775

 
151,056

General and administrative
 
28,760

 
32,676

 
55,632

 
53,679

Total operating expenses
 
188,854

 
146,833

 
362,413

 
268,656

Operating loss
 
(65,568
)
 
(60,357
)
 
(136,547
)
 
(110,460
)
Interest and other income (expense), net
 
 
 
 
 
 
 
 
Interest income, net
 
425

 
163

 
785

 
293

Other income (expense), net
 
(295
)
 
(54
)
 
(206
)
 
(274
)
Total interest and other income (expense), net
 
130

 
109

 
579

 
19

Loss before income taxes
 
(65,438
)
 
(60,248
)
 
(135,968
)
 
(110,441
)
Income tax provision (benefit)
 
(10,149
)
 
534

 
(9,493
)
 
1,096

Net loss
 
$
(55,289
)
 
$
(60,782
)
 
$
(126,475
)
 
$
(111,537
)


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Three Months
Ended July 31,
Six Months
Ended July 31,
 
 
2015
 
2014
 
2015
 
2014
 
 
(as % of revenues)
Condensed Consolidated Statement of Operations Data:
 
 

 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
License
 
59.3
 %
 
61.1
 %
 
58.3
 %
 
60.5
 %
Maintenance and services
 
40.7

 
38.9

 
41.7

 
39.5

Total revenues
 
100.0

 
100.0

 
100.0

 
100.0

Cost of revenues
 
 
 
 

 
 
 
 
License (1)
 
2.1

 
0.1

 
1.9

 
0.1

Maintenance and services (1)
 
38.5

 
38.0

 
39.6

 
39.3

Total cost of revenues
 
16.9

 
14.8

 
17.6

 
15.6

Gross profit
 
83.1

 
85.2

 
82.4

 
84.4

Operating expenses
 
 

 
 

 
 

 
 
Research and development
 
32.6

 
33.7

 
33.9

 
34.1

Sales and marketing
 
75.4

 
78.7

 
78.0

 
80.6

General and administrative
 
19.3

 
32.2

 
20.3

 
28.6

Total operating expenses
 
127.3

 
144.6

 
132.2

 
143.3

Operating loss
 
(44.2
)
 
(59.4
)
 
(49.8
)
 
(58.9
)
Interest and other income (expense), net
 
 
 
 
 
 
 
 
Interest income, net
 
0.3

 
0.2

 
0.3

 
0.2

Other income (expense), net
 
(0.2
)
 
(0.1
)
 
(0.1
)
 
(0.1
)
Total interest and other income (expense), net
 
0.1

 
0.1

 
0.2

 
0.1

Loss before income taxes
 
(44.1
)
 
(59.3
)
 
(49.6
)
 
(58.8
)
Income tax provision (benefit)
 
(6.8
)
 
0.5

 
(3.4
)
 
0.6

Net loss
 
(37.3
)%
 
(59.8
)%
 
(46.2
)%
 
(59.4
)%
 _________________________ 
(1) Calculated as a percentage of the associated revenues.

Comparison of the Three Months Ended July 31, 2015 and 2014
 
Revenues
 
 
 
Three Months
Ended July 31,
 
 
 
 
2015

2014
 
% Change
 
 
($ amounts in thousands)
 
 
Revenues
 
 
 
 

 
 

License
 
$
87,960

 
$
62,081

 
41.7
%
Maintenance and services
 
60,366

 
39,466

 
53.0
%
Total revenues
 
$
148,326

 
$
101,547

 
46.1
%
Percentage of revenues
 
 

 


 
 

License
 
59.3
%
 
61.1
%
 
 
Maintenance and services
 
40.7

 
38.9

 
 
Total
 
100.0
%
 
100.0
%
 
 
 
The increase in license revenues of $25.9 million was primarily driven by increases in our total number of customers, sales to existing customers and an increase in the number of large orders. For example, we had 327 and 226 orders greater than $100,000 for the three months ended July 31, 2015 and 2014, respectively. Our total number of customers increased from approximately 7,900 at July 31, 2014 to more than 10,000 at July 31, 2015. The increase in maintenance and services revenues

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of $20.9 million was due to increases in sales of maintenance agreements as well as sales of professional services resulting from the growth of our installed customer base.

Cost of Revenues and Gross Margin
 
 
 
Three Months
Ended July 31,
 
 
 
 
2015

2014
 
% Change
 
 
($ amounts in thousands)
 
 
<