Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2012

 

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 x 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 x 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 o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

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 x

 

There were 98,614,774 shares of the registrant’s Common Stock issued and outstanding as of December 10, 2012.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page
No.

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

1

 

 

 

 

Condensed Consolidated Balance Sheets as of October 31, 2012 and January 31, 2012

1

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 31, 2012 and 2011

2

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended October 31, 2012 and 2011

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2012 and 2011

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

26

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

Item1A.

Risk Factors

27

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

 

 

 

Item 6.

Exhibits

48

 

 

 

 

Signatures

49

 



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Splunk Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

October 31,
2012

 

January 31,
2012

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

273,324

 

$

31,599

 

Accounts receivable, net

 

40,178

 

34,495

 

Prepaid expenses and other current assets

 

5,694

 

4,261

 

Total current assets

 

319,196

 

70,355

 

 

 

 

 

 

 

Restricted cash

 

 

514

 

Property and equipment, net

 

10,758

 

8,919

 

Other assets

 

281

 

2,435

 

Total assets

 

$

330,235

 

$

82,223

 

 

 

 

 

 

 

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,195

 

$

1,455

 

Accrued payroll and compensation

 

25,715

 

16,142

 

Accrued expenses and other liabilities

 

4,672

 

7,711

 

Deferred revenue, current portion

 

61,964

 

42,923

 

Term debt, current portion

 

 

982

 

Total current liabilities

 

93,546

 

69,213

 

 

 

 

 

 

 

Deferred revenue, non-current

 

12,002

 

9,742

 

Preferred stock warrant liability

 

 

2,133

 

Other liabilities, non-current

 

322

 

561

 

Term debt, non-current

 

 

1,307

 

Total non-current liabilities

 

12,324

 

13,743

 

Total liabilities

 

105,870

 

82,956

 

 

 

 

 

 

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock

 

 

 

 

 

Convertible preferred stock, $0.001 par value; no shares authorized, issued or outstanding at October 31, 2012, and 57,904,560 shares authorized with 56,930,194 shares issued and outstanding at January 31, 2012

 

 

40,913

 

Stockholders’ equity (deficit):

 

 

 

 

 

Preferred stock: $0.001 par value; 20,000,000 shares authorized; no shares issued or outstanding at October 31, 2012; and no shares authorized, issued or outstanding at January 31, 2012

 

 

 

Common stock: $0.001 par value; 1,000,000,000 shares authorized; 96,925,524 shares issued and outstanding at October 31, 2012, and 106,511,960 shares authorized with 23,092,407 shares issued and outstanding at January 31, 2012

 

97

 

23

 

Accumulated other comprehensive loss

 

(15

)

(24

)

Additional paid-in capital

 

308,820

 

12,373

 

Accumulated deficit

 

(84,537

)

(54,018

)

Total stockholders’ equity (deficit)

 

224,365

 

(41,646

)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

 

$

330,235

 

$

82,223

 

 

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

 

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Table of Contents

 

Splunk Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months
Ended October 31,

 

Nine Months
Ended
 October 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues

 

 

 

 

 

 

 

 

 

License

 

$

34,557

 

$

22,182

 

$

89,146

 

$

55,494

 

Maintenance and services

 

17,488

 

8,991

 

44,573

 

22,267

 

Total revenues

 

52,045

 

31,173

 

133,719

 

77,761

 

Cost of revenues (1)

 

 

 

 

 

 

 

 

 

License

 

62

 

153

 

283

 

712

 

Maintenance and services

 

5,817

 

3,040

 

14,506

 

7,458

 

Total cost of revenues

 

5,879

 

3,193

 

14,789

 

8,170

 

Gross profit

 

46,166

 

27,980

 

118,930

 

69,591

 

 

 

 

 

 

 

 

 

 

 

Operating expenses (1)

 

 

 

 

 

 

 

 

 

Research and development

 

11,074

 

6,475

 

28,568

 

16,227

 

Sales and marketing

 

32,847

 

19,179

 

84,753

 

48,337

 

General and administrative

 

7,625

 

5,370

 

21,718

 

13,108

 

Total operating expenses

 

51,546

 

31,024

 

135,039

 

77,672

 

Operating loss

 

(5,380

)

(3,044

)

(16,109

)

(8,081

)

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

31

 

(27

)

115

 

(70

)

Change in fair value of preferred stock warrants

 

 

(439

)

(14,087

)

(1,515

)

Total other income (expense), net

 

31

 

(466

)

(13,972

)

(1,585

)

Loss before income taxes

 

(5,349

)

(3,510

)

(30,081

)

(9,666

)

Provision for income taxes

 

125

 

50

 

438

 

50

 

Net loss

 

$

(5,474

)

$

(3,560

)

$

(30,519

)

$

(9,716

)

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.06

)

$

(0.17

)

$

(0.41

)

$

(0.48

)

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

96,671

 

21,220

 

73,951

 

20,069

 

 


(1)      Amounts include stock-based compensation expense, as follows:

 

Cost of revenues

 

$

322

 

$

37

 

$

697

 

$

83

 

Research and development

 

1,560

 

229

 

3,722

 

531

 

Sales and marketing

 

2,093

 

405

 

4,456

 

829

 

General and administrative

 

710

 

370

 

2,348

 

824

 

 

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 October 31,

 

Nine Months
Ended October 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net loss

 

$

(5,474

)

$

(3,560

)

$

(30,519

)

$

(9,716

)

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

21

 

(26

)

9

 

(26

)

Comprehensive loss

 

$

(5,453

)

$

(3,586

)

$

(30,510

)

$

(9,742

)

 

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)

 

 

 

Nine Months
Ended October 31,

 

 

 

2012

 

2011

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(30,519

)

$

(9,716

)

Adjustments to reconcile net loss to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

3,357

 

1,429

 

Change in fair value of preferred stock warrants

 

14,087

 

1,515

 

Stock-based compensation expense

 

11,223

 

2,267

 

Changes in operating assets and liabilities

 

 

 

 

 

Accounts receivable, net

 

(5,683

)

(7,379

)

Prepaid expenses, other current and non-current assets

 

(1,280

)

(2,230

)

Accounts payable

 

(268

)

(289

)

Accrued compensation

 

9,573

 

2,749

 

Accrued expenses and other liabilities

 

81

 

2,006

 

Deferred revenue

 

21,301

 

14,263

 

Net cash provided by operating activities

 

21,872

 

4,615

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Change in restricted cash

 

514

 

 

Purchases of property and equipment

 

(5,720

)

(6,096

)

Net cash used in investing activities

 

(5,206

)

(6,096

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Payments of financing obligation under sale leaseback

 

 

(142

)

Repayments of term debt

 

(2,289

)

(475

)

Proceeds from term debt

 

 

3,000

 

Proceeds from initial public offering, net of offering costs

 

225,225

 

 

Proceeds from early exercise of employee stock options

 

 

735

 

Proceeds from exercise of stock options

 

2,123

 

1,623

 

Net cash provided by financing activities

 

225,059

 

4,741

 

Net increase in cash and cash equivalents

 

241,725

 

3,260

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

Beginning of period

 

31,599

 

19,737

 

End of period

 

$

273,324

 

$

22,997

 

 

 

 

 

 

 

Supplemental disclosures

 

 

 

 

 

Cash paid for interest

 

$

40

 

$

75

 

Cash paid for income taxes

 

80

 

 

Non-cash investing and financing activities

 

 

 

 

 

Accrued purchases of property and equipment

 

60

 

124

 

 

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”) provides an innovative software platform that enables organizations to gain real-time operational intelligence by harnessing the value of their data. Our software collects and indexes data regardless of format or source, and enables users to search, correlate, analyze, monitor and report on this data. Our software addresses large and diverse data sets, commonly referred to as big data, and is specifically tailored for machine-generated data. Machine data is produced by nearly every software application and electronic device in an organization and contains a definitive, time-stamped record of various activities, such as transactions, customer and user activities, and security threats. Our software is designed to help users in various roles, including IT and business professionals, analyze machine data and realize real-time visibility into and intelligence about their organization’s operations. This operational intelligence enables organizations to improve service levels, reduce costs, mitigate security risks, demonstrate and maintain compliance, and gain new insights that enable them to drive better business decisions. Splunk was incorporated in California in October 2003 and was reincorporated in Delaware in May 2006.

 

Fiscal Year

 

The Company’s fiscal year ends on January 31. References to fiscal 2013, for example, refer to the fiscal year ending January 31, 2013.

 

Initial Public Offering

 

On April 24, 2012, we closed our initial public offering (“IPO”) whereby 15,525,000 shares of common stock were sold to the public (inclusive of 2,025,000 shares of common stock pursuant to the full exercise of an overallotment option granted to the underwriters and 992,722 shares of common stock sold by selling stockholders). The aggregate net proceeds received by us from the offering were $225.2 million, net of underwriting discounts and commissions and offering expenses payable by us. Upon the closing of the IPO, all shares of our outstanding convertible preferred stock automatically converted into 56,930,194 shares of common stock, and outstanding warrants to purchase convertible preferred stock automatically converted into warrants to purchase 469,557 shares of common stock.

 

Follow-on Offering

 

On July 25, 2012, we closed our follow-on offering, in which certain stockholders of our company offered 11,744,064 shares of common stock at a price to the public of $28.25 per share. The aggregate offering price for shares sold in the offering was approximately $320.2 million, net of underwriting discounts and commissions. On August 1, 2012, the underwriters exercised in full their option to purchase 1,761,609 additional shares of common stock from our selling stockholders. We did not receive any proceeds from the sale of shares in this offering.

 

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, 2012 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 prospectus filed with the SEC on July 20, 2012 pursuant to Rule 424(b) under the Securities Act of 1933 (the “Prospectus”). 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, 2012 included in the Prospectus filed with the SEC.

 

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 2013.

 

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Table of Contents

 

Recently Issued Accounting Pronouncements

 

On June 16, 2011, the FASB issued new authoritative guidance on comprehensive income (loss) that eliminates the option to present the components of other comprehensive income (loss) as part of the statement of shareholders’ equity. Instead, we must report comprehensive income (loss) in either a single continuous statement of comprehensive income (loss), which contains two sections, net income and other comprehensive income (loss), or in two separate but consecutive statements. We adopted this authoritative guidance in our first fiscal quarter ended April 30, 2012 by including a new separate consolidated statement of comprehensive loss.

 

Principles of Consolidation

 

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

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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, stock-based compensation expense, income taxes and contingencies. Actual results could differ from those estimates.

 

(2)  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. Based on borrowing rates currently available to us for financing obligations with similar terms and considering our credit risks, the carrying value of the financing obligation approximates fair value.

 

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.

 

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The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of October 31, 2012 and January 31, 2012 (in thousands):

 

 

 

October 31, 2012

 

January 31, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

250,732

 

$

 

$

 

$

250,732

 

$

20,142

 

$

 

$

 

$

20,142

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock warrants

 

$

 

$

 

$

 

$

 

$

 

$

 

$

(2,133

)

$

(2,133

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

$

250,732

 

 

 

 

 

 

 

$

19,499

 

Prepaid expenses and other current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

129

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

514

 

Total

 

 

 

 

 

 

 

$

250,732

 

 

 

 

 

 

 

$

20,142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock warrant liability

 

 

 

 

 

 

 

$

 

 

 

 

 

 

 

$

(2,133

)

 

Our investments in money market funds are measured at fair value on a recurring basis. Our money market funds are targeted to be priced and have a value of $1 net asset value per share. These money market funds are actively traded and reported daily through a variety of sources. The fair value of the money market fund investments are classified as Level 1.

 

During the nine months ended October 31, 2012, we did not remeasure any nonfinancial assets and liabilities measured at fair value on a nonrecurring basis, such as intangible assets, and property and equipment.

 

Prior to the closing of our IPO on April 24, 2012, our preferred stock warrants were categorized as Level 3 because they were valued based on unobservable inputs and management’s judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such financial instruments. These assumptions are inherently subjective and involve significant management judgment.

 

We performed a fair value assessment of the preferred stock warrant inputs at January 31, 2012. The fair value of the preferred stock warrant liability was estimated using the Black-Scholes pricing model.  We performed the final remeasurement of the warrants at the closing date of our IPO. See Note 7 for further information.

 

(3)  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

 

 

 

October 31, 2012

 

January 31, 2012

 

Computer equipment and software

 

$

15,454

 

$

10,712

 

Furniture and fixtures

 

2,652

 

1,964

 

Leasehold improvements

 

1,669

 

1,903

 

 

 

19,775

 

14,579

 

Less: accumulated depreciation and amortization

 

(9,017

)

(5,660

)

 

 

$

10,758

 

$

8,919

 

 

Depreciation and amortization expense was $1.2 million and $0.6 million for the three months ended October 31, 2012 and 2011, respectively, and $3.4 million and $1.4 million for the nine months ended October 31, 2012 and 2011, respectively.

 

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(4)  Commitments and Contingencies

 

Operating Lease Commitments

 

We lease our office spaces under non-cancelable operating leases with rent expense recognized on a straight-line basis over the lease term. Rent expense was $0.9 million and $0.8 million for the three months ended October 31, 2012 and 2011, respectively, and $2.6 million and $1.8 million for the nine months ended October 31, 2012 and 2011, respectively. Future minimum rental payments required under the operating lease agreements as of November 20, 2012 are as follows:

 

 

 

Payments Due by Period*

 

 

 

Total

 

Less Than 1
year

 

1-3 years

 

3-5 years

 

More Than 5
years

 

 

 

(in thousands)

 

Operating lease obligations

 

$

45,585

 

$

3,325

 

$

13,442

 

$

14,977

 

$

13,841

 

 


*                 This amount includes $30.6 million of future minimum rental payments due to an amendment extending the lease of our headquarters in San Francisco, executed on November 20, 2012. In addition, we entered into a sublease agreement on November 16, 2012 for a portion of our office space in the United Kingdom, and the future sublease rental income of $2.8 million has been included as an offset to our future minimum rental payments.

 

Legal Proceedings

 

We are subject to certain routine legal 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 condensed 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 and their affiliates for certain intellectual property infringement and other claims by third parties with respect to our products and services and in connection with our commercial end-user license arrangements.

 

As permitted under Delaware law, we have entered into indemnification agreements with our officers and directors, indemnifying them for certain events or occurrences while they serve as officers or directors of the company.

 

To date, there have not been any costs incurred in connection with such indemnification obligations; therefore, there is no accrual of such amounts at October 31, 2012.  We are unable to estimate the maximum potential impact of these indemnifications on our future results of operations.

 

Export Contingency

 

Our products are subject to U.S. export controls that prohibit the shipment of certain products and services without the required export authorizations or export to countries, governments, and persons targeted by U.S. sanctions. While we have taken precautions to prevent our products and services from being exported in violation of these laws, in certain instances we shipped our encryption products prior to obtaining the required export authorizations and certain of our products that are available at no cost have been downloaded by persons in countries that are the subject of U.S. embargoes. These exports were likely made in violation of U.S. export control and sanction laws.  As a result, in March 2012, we filed Final Voluntary Self Disclosures with the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”), and the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”), concerning these potential violations. On July 3, 2012, OFAC notified us that it had completed its review of these matters and closed its review with the issuance of a Cautionary Letter, and on November 15, 2012, BIS notified us that it had completed its review of these matters and closed its review with the issuance of a Warning Letter.  No monetary penalties were assessed against the Company by either OFAC or BIS.

 

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(5)  Debt Financing Facilities

 

In May 2009, we entered into a Loan and Security Agreement with Silicon Valley Bank, which was most recently amended in October 2012. As amended, the agreement includes a revolving line of credit facility as described below. The agreement contains financial covenants and other customary affirmative and negative covenants.  We were in compliance with all covenants as of October 31, 2012. As part of the agreement, we granted the lender a security interest in our personal property, excluding intellectual property and other intangible assets.

 

We are able to borrow up to $10.0 million under the revolving line of credit facility, subject to a borrowing base determined on eligible accounts receivable and subject to a total maximum outstanding of $10.0 million. As of October 31, 2012, we had no balance outstanding on the revolving line of credit. Interest on any drawdown under the revolving line of credit accrues at the prime rate (3.25% in October 2012).

 

(6)  Common Stock

 

Our certificate of incorporation, as amended and restated, authorizes us to issue 1,000,000,000 shares of common stock, $0.001 par value per share. At October 31, 2012 and January 31, 2012, 96,925,524 shares and 23,092,407 shares of common stock were issued and outstanding, respectively.

 

Early Exercise of Employee Options

 

Stock options granted under our stock option plan provide certain employee option holders the right to exercise unvested options for shares of restricted common stock. Shares of restricted common stock, in the amounts of 103,240 and 411,318 at October 31, 2012 and January 31, 2012, respectively, were subject to a repurchase right held by us at the original issuance price in the event the optionees’ employment is terminated either voluntarily or involuntarily. For early exercises of employee options, this repurchase right generally lapses as to 1/4th of the shares subject to the option on the first anniversary of the vesting start date and as to 1/48th of the shares monthly thereafter.

 

These repurchase terms are considered to be a forfeiture provision and do not result in variable accounting. The restricted shares issued upon early exercise of stock options are legally issued and outstanding. However, these restricted shares are only deemed outstanding for basic earnings per share computation purposes upon the respective repurchase rights lapsing. We treat cash received from employees for the exercise of unvested options as a refundable deposit shown as a liability in our condensed consolidated balance sheets.

 

(7)  Convertible Preferred Stock

 

Upon the closing of our IPO, all outstanding shares of convertible preferred stock were converted into shares of common stock. Warrants to purchase convertible preferred stock were converted into warrants to purchase common stock.

 

Warrants to Purchase Convertible Preferred Stock

 

Prior to the closing of our IPO, we remeasured the fair value of the preferred stock warrants at each balance sheet date. The fair value of the outstanding warrants was classified within non-current liabilities on the condensed consolidated balance sheets, and any changes in fair value were recognized as a component of Other income (expense), net in our condensed consolidated statements of operations. We performed the final remeasurement of the warrants at the closing date of our IPO and recorded an expense of $14.1 million arising from the revaluation during the three months ended April 30, 2012. The fair value of the outstanding warrants was determined using the Black-Scholes option-pricing model. We determined the fair value of each warrant on the issuance date and subsequent reporting dates using the Black-Scholes pricing model utilizing the assumptions noted below. The expected term of the warrant is based on the remaining contractual expiration period. The expected stock price volatility for our stock was determined by examining the historical volatilities of a group of our industry peers as we did not have any trading history of our common stock. The risk-free interest rate was calculated using the average of the published interest rates for U.S. Treasury zero-coupon issues with maturities that approximate the expected term. The dividend yield assumption is zero as we did not have any history of, nor plans for, dividend payments.

 

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We did not revalue the preferred stock warrants during the three months ended October 31, 2012. The following assumptions were used to estimate the value of the preferred stock warrants during the three months ended April 30, 2012 and the year ended January 31, 2012, respectively:

 

 

 

Three Months

 

Year

 

 

 

Ended April 30, 2012

 

Ended January 31, 2012

 

Expected volatility

 

49.7-53.2

%

49.4-57.1

%

Risk-free rate

 

0.50-1.40

%

0.39-1.09

%

Dividend yield

 

0.0

%

0.0

%

Expected term (in years)

 

3.38-6.30

 

2.65-7.22

 

 

The change in the fair value of the preferred stock warrant liability is summarized below:

 

 

 

Warrant Liability

 

(in thousands)

 

Balance at
beginning
of period

 

Change in fair
value of preferred
stock warrants

 

Exercises

 

Conversion
of
preferred
stock
warrants to
common
stock
warrants

 

Balance at
end of period

 

 

 

 

 

 

 

 

 

 

 

 

 

January 31, 2012

 

$

1,013

 

$

2,034

 

$

(914

)

$

 

$

2,133

 

April 30, 2012

 

2,133

 

14,087

 

 

(16,220

)

 

 

(8)  Stock Compensation Plans

 

Equity Incentive Plans

 

In April 2003, our board adopted the 2003 Equity Incentive Plan (the “2003 Plan”). The 2003 Plan authorizes the granting of common stock options and restricted stock awards to employees, directors and consultants.

 

In March 2012, our board approved the 2012 Equity Incentive Plan (the “2012 Plan”), which became effective upon the effectiveness of our registration statement on Form S-1, on April 18, 2012. The 2012 Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Code, to our employees and any parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights, performance units and performance shares to our employees, directors and consultants and our parent and subsidiary corporations’ employees and consultants. Upon the effectiveness of our registration statement on Form S-1, all shares that were reserved but not issued under the 2003 Plan became available for issuance under the 2012 Plan and no further shares will be granted pursuant to the 2003 Plan.  Cancelled or forfeited equity awards under the 2003 Plan will also become available for issuance under the 2012 Plan.

 

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Table of Contents

 

The following table summarizes the stock option and RSU award activity during the nine months ended October 31, 2012:

 

 

 

 

 

Options Outstanding

 

RSUs
Outstanding

 

 

 

Available
for Grant

 

Shares

 

Weighted-
Average
Exercise
Price
Per Share

 

Weighted-
Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic
Value (1)

 

Shares

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

Balances as of January 31, 2012

 

3,315,989

 

21,905,290

 

$

1.92

 

 

 

 

 

 

 

Additional Shares Authorized

 

10,000,000

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

(3,549,276

)

3,549,276

 

13.24

 

 

 

 

 

 

 

RSUs granted

 

(401,724

)

 

 

 

 

 

 

 

 

401,724

 

Options exercised

 

 

 

(2,308,582

)

0.92

 

 

 

 

 

 

 

Options forfeited

 

955,819

 

(955,819

)

3.23

 

 

 

 

 

 

 

RSUs forfeited

 

2,500

 

 

 

 

 

 

 

 

 

(2,500

)

Balances as of October 31, 2012

 

10,323,308

 

22,190,165

 

3.77

 

7.81

 

$

542,345

 

399,224

 

Vested and expected to vest

 

 

 

20,904,544

 

$

3.65

 

7.75

 

$

513,409

 

356,242

 

Exercisable as of October 31, 2012

 

 

 

10,281,417

 

$

1.06

 

6.62

 

$

277,245

 

 

 

 


(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 October 31, 2012.

 

No income tax benefit has been recognized relating to stock-based compensation expenses and no tax benefits have been realized from exercised stock options. At October 31, 2012, there was a total unrecognized compensation cost of $32.7 million related to these stock options, adjusted for estimated forfeitures, which is expected to be recognized over a weighted-average period of 3.2 years. At October 31, 2012, there was a total unrecognized compensation cost of $11.5 million related to RSUs, adjusted for estimated forfeitures, which is expected to be recognized over the next 3.74 years.

 

The total intrinsic value of options exercised during the nine months ended October 31, 2012 was $46.8 million. The weighted-average grant date fair value of options granted was $7.52 per share for the nine months ended October 31, 2012. The weighted-average grant date fair value of RSUs granted was $34.60 per share for the nine months ended October 31, 2012.

 

Employee Stock Purchase Plan

 

Concurrent with the effectiveness of our registration statement on Form S-1, on April 18, 2012, our 2012 Employee Stock Purchase Plan (the “ESPP”) became effective. The ESPP allows eligible employees to purchase shares of our common stock at a discount through payroll deductions of up to 15% of their eligible compensation, at not less than 85% of the fair market value, as defined in the ESPP, subject to any plan limitations. The ESPP provides for consecutive 12-month offering periods, starting on the first trading day on or after June 15 and December 15 of each year.  The first offering period began on the first trading day after the effective date of our registration statement and will end on June 15, 2013.

 

Stock-Based Compensation Expense

 

Stock-based compensation expense related to our stock-based awards, employee stock purchases and restricted stock units was allocated as follows:

 

 

 

Three Months
Ended October 31,

 

Nine Months
Ended October 31,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

$

322

 

$

37

 

$

697

 

$

83

 

Research and development

 

1,560

 

229

 

3,722

 

531

 

Sales and marketing

 

2,093

 

405

 

4,456

 

829

 

General and administrative

 

710

 

307

 

2,348

 

824

 

Total stock-based compensation expense

 

$

4,685

 

$

1,041

 

$

11,223

 

$

2,267

 

 

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Valuation Assumptions

 

We estimated the fair values of each option awarded on the date of grant using the Black-Scholes option pricing model utilizing the assumptions noted below. The expected term of the options is based on the average period the stock options are expected to remain outstanding calculated as the midpoint of the options’ vesting terms and contractual expiration periods, as we do not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. The expected stock price volatility for our stock was determined by examining the historical volatilities of a group of our industry peers as we do not have sufficient trading history of our common stock. The risk-free interest rate was calculated using the average of the published interest rates U.S. Treasury zero-coupon issues with maturities that approximate the expected term. The dividend yield assumption is zero as we do not have any history of, nor plans to make, dividend payments.

 

The following assumptions were used to estimate the fair value of options granted to employees:

 

 

 

Three Months
Ended October 31,

 

Nine Months
Ended October 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Expected volatility

 

50.0-50.1

%

49.2-49.7

%

50.0-50.5

%

48.4-56.5

%

Risk-free rate

 

0.85-0.89

%

1.21-1.39

%

0.85-1.41

%

1.21-2.47

%

Dividend yield

 

0.0

%

0.0

%

0.0

%

0.0

%

Expected term (in years)

 

5.96-6.13

 

5.95-6.06

 

5.90-6.13

 

5.73-6.08

 

 

Forfeitures were estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates. Forfeitures were estimated based on historical experience.

 

The following assumptions were used to estimate the fair value of nonemployee options:

 

 

 

Three Months
Ended October 31,

 

Nine Months
Ended October 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Expected volatility

 

49.2-52.8

%

55.6-60.4

%

49.2-57.9

%

55.6-64.9

%

Risk-free rate

 

1.27-1.71

%

1.80-2.17

%

1.22-2.19

%

1.80-3.41

%

Dividend yield

 

0.0

%

0.0

%

0.0

%

0.0

%

Expected term (in years)

 

8.31-9.94

 

9.23-9.96

 

8.31-9.97

 

9.23-9.96

 

 

The following assumptions were used to estimate the fair value of the ESPP:

 

 

 

Three Months
Ended October 31,

 

Nine Months
Ended October 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Expected volatility

 

48.3-49.1

%

 

48.3-49.1

%

 

Risk-free rate

 

0.14-0.19

%

 

0.14-0.19

%

 

Dividend yield

 

0.0

%

 

0.0

%

 

Expected term (in years)

 

0.67-1.16

 

 

0.67-1.16

 

 

 

(9)  Information About Revenues by Geographic Areas

 

Revenues by geography are based on the shipping address of the customer. The following tables present our revenues by geographic region for the periods presented (in thousands):

 

 

 

Three Months
Ended October 31,

 

Nine Months
Ended October 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

United States

 

$

41,989

 

$

24,418

 

$

107,580

 

$

59,110

 

International

 

10,056

 

6,755

 

26,139

 

18,651

 

 

 

$

52,045

 

$

31,173

 

$

133,719

 

$

77,761

 

 

Other than the United States, no other individual country exceeded 10% of total revenues during any of the periods presented. No individual customer represented greater than 10% of total revenues during any of the periods presented. At October 31, 2012, no customer represented greater than 10% of total accounts receivable. At January 31, 2012, there was one customer that represented approximately 17% of total accounts receivable.

 

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Table of Contents

 

(10)  Income Taxes

 

For the three months ended October 31, 2012 and 2011, we recorded $0.1 million and $0 in income tax expense, respectively. For the nine months ended October 31, 2012 and 2011, we recorded $0.4 million and $0 in income tax expense, respectively. The increase was primarily due to the increase in taxable income in our international jurisdictions.

 

There were no material changes to our unrecognized tax benefits in the nine months ended October 31, 2012, and we do not expect to have any significant changes to unrecognized tax benefits through the end of the fiscal year. Because of our history of tax losses, all years remain open to tax audit.

 

(11)  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. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including preferred stock, stock options, RSUs, and warrants, 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 October 31,

 

Nine Months
Ended October 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(5,474

)

$

(3,560

)

$

(30,519

)

$

(9,716

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

96,786

 

21,544

 

74,210

 

20,308

 

Less: Weighted-average unvested common shares subject to repurchase or forfeiture

 

(115

)

(324

)

(259

)

(239

)

Weighted-average shares used to compute net loss per share, basic and diluted

 

96,671

 

21,220

 

73,951

 

20,069

 

Net loss per share, basic and diluted

 

$

(0.06

)

$

(0.17

)

$

(0.41

)

$

(0.48

)

 

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 October 31,

 

 

 

2012

 

2011

 

Shares subject to outstanding common stock options

 

22,190

 

19,430

 

Shares subject to outstanding RSUs

 

399

 

 

Series A convertible preferred stock

 

 

20,400

 

Series B convertible preferred stock

 

 

20,304

 

Series C convertible preferred stock

 

 

16,026

 

Employee stock purchase plan

 

623

 

 

Shares subject to common stock warrants

 

405

 

 

Shares subject to preferred stock warrants

 

 

670

 

Total

 

23,617

 

76,830

 

 

(12)  Related Party Transactions

 

Certain members of our 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 an arm’s-length basis on terms that are consistent with similar transactions with our other similarly situated customers or vendors. We recognized revenue from sales to these companies of $0.5 million and $0.1 million for the three months ended October 31, 2012 and 2011, respectively, and $1.4 million and $0.4 million for the nine months ended October 31, 2012 and 2011, respectively. We had $0.2 million and $1.2 million of accounts receivable from these companies as of October 31, 2012 and January 31, 2012, respectively. We also recorded $0.2 million and $0.2 million in expenses related to purchases from these companies during the three months ended October 31, 2012 and 2011, respectively, and $0.6 million and $0.4 million for the nine months ended October 31, 2012 and 2011, respectively. There were no accounts payable to these companies as of October 31, 2012 or January 31, 2012.

 

(13)  Subsequent Events

 

On November 20, 2012, we executed an amendment for the operating lease of our San Francisco headquarters and extended our lease commitment to early 2019. The additional future minimum rental payments amount to approximately $30.6 million.

 

On November 16, 2012, we entered into a noncancelable sublease agreement for a portion of our office space in the United Kingdom. Future minimum sublease rental payments amount to approximately $2.8 million, which will offset future minimum rental payments.

 

On November 1, 2012, a warrant to purchase 404,651 shares of common stock was exercised for cash proceeds of $631,256.

 

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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 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,” “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 market opportunity; our future financial and operating results; investment strategy and growth strategy; sales and marketing strategy; management’s plans, beliefs and objectives for future operations; economic and industry trends or trend analysis; expectations about seasonality; revenue mix; use of non-GAAP financial measures; operating expenses, including changes 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; and 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 an innovative software platform that enables organizations to gain real-time operational intelligence by harnessing the value of their data. Our software collects and indexes data at massive scale, regardless of format or source, and enables users to quickly and easily search, correlate, analyze, monitor and report on this data, all in real time. Our software addresses the risks, challenges and opportunities organizations face with increasingly large and diverse data sets, commonly referred to as big data, and is specifically tailored for machine-generated data. Machine data is produced by nearly every software application and electronic device in an organization and contains a definitive, time-stamped record of various activities, such as transactions, customer and user activities, and security threats. Our software is designed to help users in various roles, including IT and business professionals, quickly analyze their machine data and realize real-time visibility into and intelligence about their organization’s operations. This operational intelligence enables organizations to improve service levels, reduce costs, mitigate security risks, demonstrate and maintain compliance and gain new insights that enable them to drive better business decisions.

 

We believe the market for software that provides 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 software architecture is designed to accelerate adoption and return-on-investment for our customers. It does not require customization, long deployment cycles or extensive professional services commonly associated with traditional enterprise software applications. Users can simply download and install the software, typically in a matter of hours, connect to their relevant machine data sources and begin realizing operational intelligence. We also offer customers with complex IT infrastructure the ability to leverage the expertise of our professional services organization to deploy our software. We base our license fees on the estimated daily data indexing capacity our customers require. Prospective customers can download a 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. We primarily license our software under 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.

 

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Table of Contents

 

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. In addition, we expect to continue to aggressively expand our sales and marketing organizations to market our software both in the United States and internationally.

 

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 acquire new customers.

·                  Further penetrate our existing customer base.

·                  Develop additional solutions in adjacent markets as well as products that enable organizations to use our software in different ways, such as Splunk Storm, our cloud-based service that was made generally available in August 2012.

·                  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.

·                  Become the developer platform for machine data.

 

We believe the factors that will influence our ability to achieve our goals include, among other things, our ability to deliver additional functionality; drive efficient acquisition of 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 unlock 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; and help software developers leverage the functionality of our machine data engine through software development kits (SDKs) and application programming interfaces (APIs).

 

On April 24, 2012, we closed our initial public offering (“IPO”) whereby 15,525,000 shares of common stock were sold to the public (inclusive of 2,025,000 shares of common stock pursuant to the full exercise of an overallotment option granted to the underwriters and 992,722 shares of common stock sold by selling stockholders). The aggregate net proceeds from the offering were $225.2 million, net of underwriting discounts and commissions and offering expenses payable by us. On July 25, 2012, we closed our follow-on offering, in which certain of our stockholders sold 11,744,064 shares of common stock to the public. The aggregate offering price for shares sold in the offering was approximately $320.2 million, net of underwriting discounts and commissions. On August 1, 2012, the underwriters exercised in full their option to purchase 1,761,609 additional shares of common stock from our selling stockholders. We did not receive any proceeds from the sale of shares in the follow-on offering.

 

For the three months ended October 31, 2012 and 2011, our revenues were $52.0 million and $31.2 million, respectively, representing year-over-year growth of approximately 67%. For the three months ended October 31, 2012, approximately 19% of our revenues 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 October 31, 2012, we had over 4,800 Splunk Enterprise customers, including a majority of the Fortune 100.

 

For the fiscal quarter ended October 31, 2012 and 2011, our GAAP operating loss was $5.4 million and $3.0 million, respectively, and our non-GAAP operating loss was $0.7 million and $2.0 million, respectively.

 

For the fiscal quarter ended October 31, 2012 and 2011, our GAAP net loss was $5.5 million and $3.6 million, respectively, and our non-GAAP net loss was $0.8 million and $2.1 million, 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 revenue in the 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

 

In addition to our results determined under U.S. generally accepted accounting principles (“GAAP”) discussed above, we believe that certain non-GAAP financial measures, including non-GAAP operating loss, non-GAAP operating margin, non-GAAP net loss and non-GAAP loss per share (collectively the “non-GAAP financial measures”), are useful to investors in evaluating our operating performance. These non-GAAP financial measures exclude stock-based compensation expense and the change in fair value of certain previously issued preferred stock warrants.  In addition, non-GAAP financial measures include free cash flow, which represents cash from operations less purchases of property and equipment.

 

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Table of Contents

 

We exclude stock-based compensation expense from our non-GAAP operating loss, non-GAAP operating margin, non-GAAP net loss and non-GAAP loss per share because such expense is non-cash in nature.  We exclude expense attributable to the change in fair value of certain preferred stock warrants from our non-GAAP financial measures because it is a non-recurring, non-cash expense. 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. We believe these non-GAAP financial measures are useful to investors in that they provide meaningful supplemental information regarding our operational performance, provide greater transparency to certain line items in our financial statements, enhance an overall understanding of our past financial performance and future prospects, help with period to period comparisons and facilitate comparisons to competitors’ operating results.

 

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.  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 other companies, and exclude expenses that may have a material impact on 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.  We urge our investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below and not to rely on any single financial measure to evaluate our business.

 

The following table reconciles GAAP operating loss to non-GAAP operating loss for the three and nine months ended October 31, 2012 and 2011 (in thousands):

 

 

 

Three Months
Ended October 31,

 

Nine Months
Ended October 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

GAAP operating loss

 

$

(5,380

)

$

(3,044

)

$

(16,109

)

$

(8,081

)

Stock-based compensation expense

 

4,685

 

1,041

 

11,223

 

2,267

 

Non-GAAP operating loss

 

$

(695

)

$

(2,003

)

$

(4,886

)

$

(5,814

)

 

The following table reconciles GAAP operating margin to non-GAAP operating margin for the three and nine months ended October 31, 2012 and 2011:

 

 

 

Three Months
Ended October 31,

 

Nine Months
Ended October 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

GAAP operating margin

 

(10.3

)%

(9.8

)%

(12.0

)%

(10.4

)%

Stock-based compensation expense

 

9.0

 

3.3

 

8.4

 

2.9

 

Non-GAAP operating margin

 

(1.3

)%

(6.5

)%

(3.6

)%

(7.5

)%

 

The following table reconciles GAAP net loss to non-GAAP net loss for the three and nine months ended October 31, 2012 and 2011 (in thousands):

 

 

 

Three Months
Ended October 31,

 

Nine Months
Ended October 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

GAAP net loss

 

$

(5,474

)

$

(3,560

)

$

(30,519

)

$

(9,716

)

Stock-based compensation expense

 

4,685

 

1,041

 

11,223

 

2,267

 

Change in fair value of preferred stock warrants

 

 

439

 

14,087

 

1,515

 

Non-GAAP net loss

 

$

(789

)

$

(2,080

)

$

(5,209

)

$

(5,934

)

 

The following table reconciles GAAP net loss per share to non-GAAP basic and diluted net loss per share for the three and nine months ended October 31, 2012 and 2011 (in thousands, except per share amounts):

 

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Table of Contents

 

 

 

Three Months
Ended October 31,

 

Nine Months
Ended October 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

GAAP net loss per share

 

$

(0.06

)

$

(0.17

)

$

(0.41

)

$

(0.48

)

Stock-based compensation expense

 

0.05

 

0.05

 

0.15

 

0.11

 

Change in fair value of preferred stock warrants

 

 

0.02

 

0.19

 

0.07

 

Non-GAAP basic and diluted loss per share

 

$

(0.01

)

$

(0.10

)

$

(0.07

)

$

(0.30

)

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used in computing Non-GAAP basic and diluted net loss per share

 

96,671

 

21,220

 

73,951

 

20,069

 

 

The following table reconciles our net cash provided by operating activities to free cash flow for the three and nine months ended October 31, 2012 and 2011 (in thousands):

 

 

 

Three Months
Ended October 31,

 

Nine Months
Ended October 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net cash provided by operating activities

 

$

6,480

 

$

6,701

 

$

21,872

 

$

4,615

 

Less purchases of property and equipment

 

(2,246

)

(2,186

)

(5,720

)

(6,096

)

Free cash flow (non-GAAP)

 

4,234

 

4,515

 

16,152

 

(1,481

)

Net cash used in investing activities

 

(1,732

)

(2,186

)

(5,206

)

(6,096

)

Net cash provided by financing activities

 

$

298

 

$

699

 

$

225,059

 

$

4,741

 

 

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 substantial 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 activity remains consistent. 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. 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 involving a term license, we recognize both the license and maintenance revenues ratably, on a straight-line basis, 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.

 

Professional services and training revenues as a percentage of total revenues were 9% and 7% for the three months ended October 31, 2012 and 2011, respectively. 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.

 

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Table of Contents

 

We expect maintenance and services revenues to become a larger percentage of our total revenues as our installed customer base grows.

 

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, 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 primarily consists of expenses relating to salaries, benefits, stock-based compensation for our maintenance and services organization, allocated overhead for depreciation of equipment, facilities and IT, and costs associated with delivering our cloud-based service offering. 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, and stock-based compensation. 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. 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 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, legal, accounting and other professional services fees, and other corporate expenses. We have recently incurred additional expenses due to growing our operations and continue to incur additional expenses associated with being a publicly traded company, including higher legal, corporate insurance and accounting expenses, and the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act and related regulations. We also expect that general and administrative expenses will continue to increase, in absolute dollars, as we expand our operations, including internationally.

 

Other Income (Expense), net

 

Other income (expense), net consists primarily of the changes in the fair value of preferred stock warrants, interest expense on outstanding debt, and interest income on our cash and cash equivalents balances.

 

Provision for Income Taxes

 

Provision for income taxes is based on the amount of earnings and enacted federal, state and foreign tax rates and adjusted for allowable credits and deductions. Our provision for income taxes consists of state and foreign taxes.  Our income tax provision may be significantly affected by changes to our estimates for tax in jurisdictions in which we operate and other estimates utilized in determining the global effective tax rate. Actual results may also differ from our estimates based on changes in economic conditions. Such changes could have a substantial impact on the income tax provision.

 

Because of our history of U.S. net operating losses, we have established a full valuation allowance against potential future benefits for deferred tax assets including loss carryforwards and research and development and other tax credits.  Our income tax provision could be significantly impacted by estimates surrounding our uncertain tax positions and changes to our valuation allowance in future periods. We reevaluate the judgments surrounding our estimates and make adjustments as appropriate each reporting period.

 

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Table of Contents

 

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 October 31,

 

Nine Months
Ended October 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in thousands)

 

Condensed Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

License

 

$

34,557

 

$

22,182

 

$

89,146

 

$

55,494

 

Maintenance and services

 

17,488

 

8,991

 

44,573

 

22,267

 

Total revenues

 

52,045

 

31,173

 

133,719

 

77,761

 

Cost of revenues

 

 

 

 

 

 

 

 

 

License

 

62

 

153

 

283

 

712

 

Maintenance and services

 

5,817

 

3,040

 

14,506

 

7,458

 

Total cost of revenues

 

5,879

 

3,193

 

14,789

 

8,170

 

Gross profit

 

46,166

 

27,980

 

118,930

 

69,591

 

Operating expenses

 

 

 

 

 

 

 

 

 

Research and development

 

11,074

 

6,475

 

28,568

 

16,227

 

Sales and marketing

 

32,847

 

19,179

 

84,753

 

48,337

 

General and administrative

 

7,625

 

5,370

 

21,718

 

13,108

 

Total operating expenses

 

51,546

 

31,024

 

135,039

 

77,672

 

Operating loss

 

(5,380

)

(3,044

)

(16,109

)

(8,081

)

Other income (expense), net

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

31

 

(27

)

115

 

(70

)

Change in fair value of preferred stock warrants

 

 

(439

)

(14,087

)

(1,515

)

Total other income (expense), net

 

31

 

(466

)

(13,972

)

(1,585

)

Loss before income taxes

 

(5,349

)

(3,510

)

(30,081

)

(9,666

)

Provision for income taxes

 

125

 

50

 

438

 

50

 

Net loss

 

$

(5,474

)

$

(3,560

)

$

(30,519

)

$

(9,716

)

 

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Table of Contents

 

 

 

Three Months
Ended October 31,

 

Nine Months
Ended October 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(as % of revenues)

 

Condensed Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

License

 

66.4

%

71.2

%

66.7

%

71.4

%

Maintenance and services

 

33.6

 

28.8

 

33.3

 

28.6

 

Total revenues

 

100.0

 

100.0

 

100.0

 

100.0

 

Cost of revenues

 

 

 

 

 

 

 

 

 

License(1)

 

0.2

 

0.7

 

0.3

 

1.3

 

Maintenance and services(1)

 

33.3

 

33.8

 

32.5

 

33.5

 

Total cost of revenues

 

11.3

 

10.2

 

11.1

 

10.5

 

Gross profit

 

88.7

 

89.8

 

88.9

 

89.5

 

Operating expenses

 

 

 

 

 

 

 

 

 

Research and development

 

21.3

 

20.8

 

21.4

 

20.9

 

Sales and marketing

 

63.1

 

61.5

 

63.4

 

62.2

 

General and administrative

 

14.7

 

17.2

 

16.2

 

16.9

 

Total operating expenses

 

99.1

 

99.5

 

101.0

 

100.0

 

Operating loss

 

(10.4

)

(9.7

)

(12.1

)

(10.5

)

Other income (expense), net

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

0.1

 

(0.1

)

0.1

 

(0.1

)

Change in fair value of preferred stock warrants

 

 

(1.4

)

(10.5

)

(1.9

)

Total other income (expense), net

 

0.1

 

(1.5

)

(10.4

)

(2.0

)

Loss before income taxes

 

(10.3

)

(11.2

)

(22.5

)

(12.5

)

Provision for income taxes

 

0.2

 

0.2

 

0.3

 

0.1

 

Net loss

 

(10.5

)%

(11.4

)%

(22.8

)%

(12.6

)%

 


(1)                                 Calculated as a percentage of the associated revenues.

 

Comparison of the Three Months Ended October 31, 2012 and 2011

 

Revenues

 

 

 

Three Months
Ended October 31,

 

 

 

 

 

2012

 

2011

 

% Change

 

 

 

($ amounts in thousands)

 

 

 

Revenues

 

 

 

 

 

 

 

License

 

$

34,557

 

$

22,182

 

55.8

%

Maintenance and services

 

17,488

 

8,991

 

94.5

%

Total revenues

 

$

52,045

 

$

31,173

 

67.0

%

Percentage of revenues

 

 

 

 

 

 

 

License

 

66.4

%

71.2

%

 

 

Maintenance and services

 

33.6

 

28.8

 

 

 

Total

 

100.0

%

100.0

%

 

 

 

Total revenues increased $20.9 million primarily due to growth in license revenues. The increase in license revenues was primarily driven by increases in our total number of customers, sales to existing customers and an increase in the number of larger orders. For example, we had 125 and 77 orders greater than $100,000 for the three months ended October 31, 2012 and 2011, respectively. Our total number of Splunk Enterprise customers increased from approximately 3,300 at October 31, 2011 to approximately 4,800 at October 31, 2012. The increase in maintenance and services revenues was due to increases in sales of maintenance agreements resulting from the growth of our installed customer base as well as sales of our professional services.

 

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Table of Contents

 

Cost of Revenues and Gross Margin

 

 

 

Three Months
Ended October 31,

 

 

 

 

 

2012

 

2011

 

% Change

 

 

 

($ amounts in thousands)

 

 

 

Cost of revenues

 

 

 

 

 

 

 

License

 

$

62

 

$

153

 

(59.5

)%

Maintenance and services

 

5,817

 

3,040

 

91.3

%

Total cost of revenues

 

$

5,879

 

$

3,193

 

84.1

%

Gross margin

 

 

 

 

 

 

 

License

 

99.8

%

99.3

%

 

 

Maintenance and services

 

66.7

%

66.2

%

 

 

Total gross margin

 

88.7

%

89.8

%

 

 

 

Total cost of revenues increased $2.7 million due to the increase in cost of maintenance and services revenues offset by a decrease in the cost of license revenues. The increase in cost of maintenance and services revenues of $2.8 million was related to an increase of $1.2 million in salaries and benefits expense due to increased headcount, $0.7 million related to an increase in contractors providing professional services, and $0.6 million related to overhead costs. Total gross margin remained flat and in line with prior quarters.

 

Operating Expenses

 

 

 

Three Months
Ended October 31,

 

 

 

 

 

2012

 

2011

 

% Change

 

 

 

($ amounts in thousands)

 

 

 

Operating expenses

 

 

 

 

 

 

 

Research and development

 

$

11,074

 

$

6,475

 

71.0

%

Sales and marketing

 

32,847

 

19,179

 

71.3

%

General and administrative

 

7,625

 

5,370

 

42.0

%

Total operating expenses

 

$

51,546

 

$

31,024

 

66.1

%

Percentage of revenues

 

 

 

 

 

 

 

Research and development

 

21.3

%

20.8

%

 

 

Sales and marketing

 

63.1

 

61.5

 

 

 

General and administrative

 

14.7

 

17.2

 

 

 

Total

 

99.1

%

99.5

%

 

 

Includes stock-based compensation expense of:

 

 

 

 

 

 

 

Research and development

 

$

1,560

 

$

229

 

 

 

Sales and marketing

 

2,093

 

405

 

 

 

General and administrative

 

710

 

370

 

 

 

Total stock-based compensation expense

 

$

4,363

 

$

1,004

 

 

 

 

Research and development expense.  Research and development expense increased $4.6 million primarily due to a $4.0 million increase in salaries and benefits, which includes a $1.3 million increase in stock-based compensation expense, as we increased headcount as part of our focus on further developing and enhancing our products. We also had an increase of $0.5 million related to overhead costs.

 

Sales and marketing expense.  Sales and marketing expense increased $13.7 million primarily due to a $8.9 million increase in salaries and benefits, which includes a $1.6 million increase in stock-based compensation expense as we increased headcount to expand our field sales organization, as well as commissions on increased customer orders. We also had an increase in sales and marketing related expenses of $2.9 million, primarily as a result of an increase in marketing events, our annual users’ conference and advertising. Additionally, we experienced increases in overhead costs of $1.2 million and travel expenses of $0.5 million due to increased headcount.

 

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Table of Contents

 

General and administrative expense.  General and administrative expense increased $2.3 million due to an increase of $2.3 million related to salaries and benefits, which includes a $0.5 million increase in stock compensation expense, driven by an increase in headcount for accounting and legal activities in connection with operating as a public company.

 

Other Income (Expense), net

 

 

 

Three Months
Ended October 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Other income (expense), net

 

$

31

 

$

(466

)

 

Other income (expense), net reflects a net decrease in expense of $0.5 million due to the absence of any warrant re-measurement expense, as we recorded the final revaluation of our preferred stock warrants during the three months ended April 30, 2012, in conjunction with the completion of our IPO.

 

Provision for Income Taxes

 

 

 

Three Months
Ended October 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Provision for income taxes

 

$

125

 

$

50

 

 

For the three months ended October 31, 2012, we recorded income taxes that were principally attributable to foreign and state taxes. The increase in tax expense is primarily due to increased activity in our foreign operations.

 

Comparison of the Nine Months Ended October 31, 2012 and 2011

 

Revenues

 

 

 

Nine Months
Ended October 31,

 

 

 

 

 

2012

 

2011

 

% Change

 

 

 

($ amounts in thousands)

 

 

 

Revenues

 

 

 

 

 

 

 

License

 

$

89,146

 

$

55,494

 

60.6

%

Maintenance and services

 

44,573

 

22,267

 

100.2

%

Total revenues

 

$

133,719

 

$

77,761

 

72.0

%

Percentage of revenues

 

 

 

 

 

 

 

License

 

66.7

%

71.4

%

 

 

Maintenance and services

 

33.3

 

28.6

 

 

 

Total

 

100.0

%

100.0

%

 

 

 

Total revenues increased $56.0 million primarily due to growth in license revenues. The increase in license revenues was primarily driven by increases in our total number of customers, sales to existing customers and an increase in the number of larger orders. For example, we had 296 and 188 orders greater than $100,000 for the nine months ended October 31, 2012 and 2011, respectively. Our total number of Splunk Enterprise customers increased from approximately 3,300 at October 31, 2011 to approximately 4,800 at October 31, 2012. The increase in maintenance and services revenues was due to increases in sales of maintenance agreements resulting from the growth of our installed customer base as well as sales of our professional services.

 

Cost of Revenues and Gross Margin

 

 

 

Nine Months
Ended October 31,

 

 

 

 

 

2012