Edgar Filing: SPLUNK INC

10.31.2013 10Q

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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 OCTOBER 31, 2013

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 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 ý

There were 107,269,581 shares of the registrant’s Common Stock issued and outstanding as of December 9, 2013.

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		Page No.

	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of October 31, 2013 and January 31, 2013	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 31, 2013 and 2012	2
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended October 31, 2013 and 2012	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2013 and 2012	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26
Item 4.	Controls and Procedures	27
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 6.	Exhibits	50
	Signatures	51

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Splunk Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)



	October 31, 2013			January 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	351,895		$	305,939
Accounts receivable, net	53,995			63,948
Prepaid expenses and other current assets	8,669			6,861
Total current assets	414,559			376,748
Property and equipment, net	14,437			13,205
Intangible assets, net	4,594			—
Goodwill	5,734			—
Other assets	502			492
Total assets	$	439,826		$	390,445
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,018		$	1,632
Accrued payroll and compensation	30,655			28,123
Accrued expenses and other liabilities	12,781			7,636
Deferred revenue, current portion	107,712			79,568
Total current liabilities	153,166			116,959
Deferred revenue, non-current	33,433			35,144
Other liabilities, non-current	3,145			798
Total non-current liabilities	36,578			35,942
Total liabilities	189,744			152,901
Commitments and contingencies (Note 3)
Stockholders’ equity:
Common stock: $0.001 par value; 1,000,000,000 shares authorized; 106,792,588 shares issued and outstanding at October 31, 2013, and 100,920,350 shares issued and outstanding at January 31, 2013	107			101
Accumulated other comprehensive loss	(156		)	(135		)
Additional paid-in capital	387,207			328,277
Accumulated deficit	(137,076		)	(90,699		)
Total stockholders’ equity	250,082			237,544
Total liabilities and stockholders’ equity	$	439,826		$	390,445

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 October 31,						Nine Months Ended October 31,
	2013			2012			2013			2012
Revenues
License	$	50,873		$	34,557		$	130,230		$	89,146
Maintenance and services	27,760			17,488			72,483			44,573
Total revenues	78,633			52,045			202,713			133,719
Cost of revenues (1)
License	84			62			229			283
Maintenance and services	10,441			5,817			24,398			14,506
Total cost of revenues	10,525			5,879			24,627			14,789
Gross profit	68,108			46,166			178,086			118,930
Operating expenses (1)
Research and development	18,961			11,074			49,635			28,568
Sales and marketing	53,052			32,847			138,999			84,753
General and administrative	12,917			7,625			35,275			21,718
Total operating expenses	84,930			51,546			223,909			135,039
Operating loss	(16,822		)	(5,380		)	(45,823		)	(16,109		)
Interest and other income (expense), net
Interest income	55			31			174			115
Other income (expense), net	(283		)	—			(459		)	—
Change in fair value of preferred stock warrants	—			—			—			(14,087		)
Total interest and other income (expense), net	(228		)	31			(285		)	(13,972		)
Loss before income taxes	(17,050		)	(5,349		)	(46,108		)	(30,081		)
Income tax provision (benefit)	(500		)	125			269			438
Net loss	$	(16,550	)	$	(5,474	)	$	(46,377	)	$	(30,519	)

Basic and diluted net loss per share	$	(0.16	)	$	(0.06	)	$	(0.45	)	$	(0.41	)

Weighted-average shares used in computing basic and diluted net loss per share	106,008			96,671			104,063			73,951

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



Cost of revenues	$	1,165	$	322	$	2,735	$	697
Research and development	4,405		1,560		10,995		3,722
Sales and marketing	5,947		2,093		15,425		4,456
General and administrative	2,815		710		6,969		2,348
	$	14,332	$	4,685	$	36,124	$	11,223

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,
	2013			2012			2013			2012
Net loss	$	(16,550	)	$	(5,474	)	$	(46,377	)	$	(30,519	)
Other comprehensive income (loss):
Foreign currency translation adjustments	87			21			(21		)	9
Comprehensive loss	$	(16,463	)	$	(5,453	)	$	(46,398	)	$	(30,510	)

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,
	2013			2012
Cash flows from operating activities
Net loss	$	(46,377	)	$	(30,519	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	4,500			3,357
Impairment of long-lived asset	2,128			—
Change in fair value of preferred stock warrants	—			14,087
Stock-based compensation	36,124			11,223
Excess tax benefits from employee stock plans	(539		)	—
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable, net	9,953			(5,683		)
Prepaid expenses, other current and non-current assets	(822		)	(1,280		)
Accounts payable	267			(268		)
Accrued payroll and compensation	2,532			9,573
Accrued expenses and other liabilities	5,220			66
Deferred revenue	26,433			21,301
Net cash provided by operating activities	39,419			21,857
Cash flows from investing activities
Acquisition, net of cash acquired	(8,958		)	—
Change in restricted cash	—			514
Purchases of property and equipment	(7,265		)	(5,720		)
Net cash used in investing activities	(16,223		)	(5,206		)
Cash flows from financing activities
Repayments of term debt	—			(2,289		)
Proceeds from initial public offering, net of offering costs	—			225,225
Issuance of common stock from exercise of stock options	18,865			2,123
Excess tax benefits from employee stock plans	539			—
Proceeds from employee stock purchase plan	6,076			—
Taxes paid related to net share settlement of equity awards	(2,752		)	—
Net cash provided by financing activities	22,728			225,059
Effect of exchange rate changes on cash and cash equivalents	32			15
Net increase in cash and cash equivalents	45,956			241,725
Cash and cash equivalents
Beginning of period	305,939			31,599
End of period	$	351,895		$	273,324
Supplemental disclosures
Cash paid for interest	$	—		$	40
Cash paid for income taxes	297			80
Non-cash investing and financing activities
Accrued purchases of property and equipment	856			60
Vesting of early exercised options	83			818
Conversion of preferred stock to common stock	—			40,913

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. We were incorporated in California in October 2003 and were reincorporated in Delaware in May 2006.

Fiscal Year

Our fiscal year ends on January 31. References to fiscal 2014 or fiscal year 2014, for example, refer to the fiscal year ending January 31, 2014.

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, 2013 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, 2013, filed on April 1, 2013. 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, 2013 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 2014.

Recently Issued Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (the “FASB”) issued updated authoritative guidance to allow entities to use a qualitative approach to test indefinite-lived intangible assets for impairment. This guidance permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value. Otherwise, the quantitative impairment test is not required. We do not believe that the adoption will have a material effect on the condensed consolidated financial statements.

In February 2013, the FASB issued updated authoritative guidance requiring entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. We adopted this guidance during the three months ended April 30, 2013. The adoption of this

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guidance did not impact our financial statements, as the guidance is related to disclosure only and we have not had any significant reclassifications out of accumulated other comprehensive loss.

In July 2013, the FASB determined that an unrecognized tax benefit should be presented as a reduction of a deferred tax asset for a net operating loss (“NOL”) carryforward or other tax credit carryforward when settlement in this manner is available under applicable tax law. This guidance is effective for our interim and annual periods beginning February 1, 2014. We do not expect the adoption of this guidance to have an impact on our financial position or results of operations.

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, 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 solutions 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 nine months ended October 31, 2013 and 2012. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange rate during the period. Equity transactions are translated using historical exchange rates.

(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.

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.

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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 October 31, 2013 and January 31, 2013 (in thousands):



	October 31, 2013								January 31, 2013
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	325,964	$	—	$	—	$	325,964	$	250,810	$	—	$	—	$	250,810

Reported as:
Assets:
Cash and cash equivalents							$	325,964							$	250,810
Total							$	325,964							$	250,810

(3) 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 $1.9 million and $0.9 million for the three months ended October 31, 2013 and 2012, respectively, and $4.3 million and $2.6 million for the nine months ended October 31, 2013 and 2012, respectively.

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 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.

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 officers or directors of the company or the company's 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 October 31, 2013. 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):

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	As of
	October 31, 2013			January 31, 2013
Computer equipment and software	$	18,860		$	16,077
Furniture and fixtures	4,144			2,714
Leasehold improvements	7,642			4,129
	30,646			22,920
Less: accumulated depreciation and amortization	(16,209		)	(9,715		)
Property and equipment, net	$	14,437		$	13,205

Depreciation and amortization expense was $3.6 million and $1.2 million for the three months ended October 31, 2013 and 2012, respectively. Depreciation and amortization expense was $6.5 million and $3.4 million for the nine months ended October 31, 2013 and 2012, respectively. Included in depreciation and amortization expense during the three and nine months ended October 31, 2013 was a $2.1 million impairment charge of a long-lived asset for previously capitalized Storm software development costs as a result of our decision to make Storm available to customers at no cost.

(5) Acquisition

On September 25, 2013, we acquired BugSense, a privately-held Delaware company, which developed and offered as a service an analytics solution for machine data generated by mobile devices. This acquisition has been accounted for as a business combination. The purchase price of $9.0 million paid in cash was preliminarily allocated as follows: $4.7 million to identifiable intangible assets, $0.7 million to net deferred tax liability recorded and $0.7 million to net liabilities assumed, and the excess $5.7 million of the purchase price over the fair value of net assets acquired was recorded as goodwill allocated to our one operating segment. Goodwill is primarily attributable to our ability to further improve the overall performance of our mobile data gathering capabilities, expand our visibility into machine data generated by mobile devices and the value of acquired personnel. This goodwill is not deductible for U.S. income tax purposes. Pro forma results of operations of the acquired business have not been presented as we do not consider the results to have a material effect during any of the periods presented on our Condensed Consolidated Statement of Operations. We are still finalizing the allocation of the purchase price to the individual tax liabilities assumed, 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):



	Fair value		Useful Life (months)
Developed Technology	$	2,940	36
Customer Relationships	1,460		36
Other acquired intangible assets	330		24
Total intangible assets subject to amortization	$	4,730

(6) Debt Financing Facilities

In May 2009, we entered into a Loan and Security Agreement with Silicon Valley Bank, which expired on April 30, 2013. The agreement included a revolving line of credit facility.

On May 9, 2013 we entered into a Loan Agreement with Silicon Valley Bank. The agreement provides for a revolving line of credit facility, which expires May 9, 2015. Under the 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 October 2013) or the LIBOR rate plus 2.75%. As of October 31, 2013, 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 October 31, 2013.

(7) Convertible Preferred Stock

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Upon the closing of our initial public offering ("IPO") in April 2012, 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 in April 2012, we re-measured 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 consolidated balance sheets and any changes in fair value were recognized as a component of Other income (expense), net in our consolidated statements of operations. We performed the final re-measurement 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 United States 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.

There were no preferred stock warrants outstanding during the nine months ended October 31, 2013. The assumptions below were used to estimate the value of the preferred stock warrants during the three months ended April 30, 2012:



Expected volatility	49.7-53.2%
Risk-free rate	0.50-1.40%
Dividend yield	0.0	%
Expected term (in years)	3.38-6.30

(8) Stock Compensation Plans

The following table summarizes the stock option and restricted stock unit ("RSU") award activity during the nine months ended October 31, 2013:



			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, 2013	7,867,788		18,917,547		$	4.26				2,904,707
Additional Shares Authorized	5,046,017
Options exercised			(5,393,800	)	3.50
Options forfeited and expired	332,772		(332,772	)	6.60
RSUs granted	(1,757,335	)								1,757,335
RSUs vested										(143,141)
Shares withheld related to net share settlement of RSUs	48,731
RSUs forfeited	202,793									(202,793	)
Balances as of October 31, 2013	11,740,766		13,190,975		$	4.50	6.90	$	767,799	4,316,108
Vested and expected to vest			12,876,731		$	4.44	6.87	$	750,294	4,100,303
Exercisable as of October 31, 2013			6,906,089		$	2.23	5.89	$	417,684

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(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, 2013.

Under net settlement procedures currently applicable to our outstanding RSUs for current employees, upon each settlement date, RSUs are withheld to cover the required withholding tax, which is based on the value of the RSU on the settlement date as determined by the closing price of our common stock on the trading day of the applicable settlement date. The remaining shares are delivered to the recipient as shares of our common stock. The amount remitted to the tax authorities for the employees' tax obligation is reflected as a financing activity within our condensed consolidated statements of cash flows. These shares withheld by us as a result of the net settlement of RSUs are not considered issued and outstanding, thereby reducing our shares outstanding used to calculate earnings per share. These shares are returned to the reserves and are available for future issuance under our 2012 Equity Incentive Plan.

During the nine months ended October 31, 2013, $0.3 million of tax benefits have been realized from exercised stock options. At October 31, 2013, there was a total unrecognized compensation cost of $21.5 million related to these stock options, adjusted for estimated forfeitures, which is expected to be recognized over a weighted-average period of 1.94 years. At October 31, 2013, there was a total unrecognized compensation cost of $123.0 million related to RSUs, adjusted for estimated forfeitures, which is expected to be recognized over the next 3.28 years.

The total intrinsic value of options exercised during the nine months ended October 31, 2013 was $229.1 million. The weighted-average grant date fair value of RSUs granted was $47.60 per share for the nine months ended October 31, 2013.

(9) 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 October 31,				Nine Months Ended October 31,
	2013		2012		2013		2012
United States	$	61,844	$	41,989	$	159,599	$	107,580
International	16,789		10,056		43,114		26,139
Total Revenues	$	78,633	$	52,045	$	202,713	$	133,719

Other than the United States, no other individual country exceeded 10% of total revenues during any of the periods presented. At October 31, 2013, there was one channel partner that represented approximately 23% of total accounts receivable and 16% of total revenues during the three months ended October 31, 2013. The accounts receivable and revenues from this channel partner is comprised of a number of customer transactions, none of which were individually greater than 10% of total accounts receivable at October 31, 2013 or total revenues for the three months ended October 31, 2013. At January 31, 2013, there was one customer that represented approximately 31% 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
	October 31, 2013		January 31, 2013
United States	$	12,941	$	11,471
International	1,496		1,734
Total property and equipment, net	$	14,437	$	13,205

As of October 31, 2013, our property and equipment in one country, the United Kingdom, represented approximately 10% of our total property and equipment. Other than the United States and the United Kingdom, no other country represented 10% or more of our total property and equipment.

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(10) Income Taxes

For the three months ended October 31, 2013 and 2012, we recorded $0.5 million in income tax benefit and $0.1 million in income tax expense, respectively. For the nine months ended October 31, 2013 and 2012, we recorded $0.3 million and $0.4 million in income tax expense, respectively. The decreases in income tax expense were primarily due to the partial release of the deferred tax asset valuation allowance from the acquisition, partially offset by an increase in taxable income in our international jurisdictions and federal alternative minimum tax. The net deferred tax liability from the acquisition 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.

There were no material changes to our unrecognized tax benefits in the nine months ended October 31, 2013, 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,
	2013			2012			2013			2012
Numerator:
Net loss	$	(16,550	)	$	(5,474	)	$	(46,377	)	$	(30,519	)
Denominator:
Weighted-average common shares outstanding	106,079			96,786			104,144			74,210
Less: Weighted-average unvested common shares subject to repurchase or forfeiture	(71		)	(115		)	(81		)	(259		)
Weighted-average shares used to compute net loss per share, basic and diluted	106,008			96,671			104,063			73,951
Net loss per share, basic and diluted	$	(0.16	)	$	(0.06	)	$	(0.45	)	$	(0.41	)

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,
	2013	2012
Shares subject to outstanding common stock options	13,191	22,190
Shares subject to outstanding RSUs	4,316	399
Employee stock purchase plan	296	623
Shares subject to common stock warrants	—	405
Total	17,803	23,617

(12) 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

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companies and us were carried out 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 $0.6 million and $0.5 million for the three months ended October 31, 2013 and 2012, respectively, and $1.8 million and $1.4 million for the nine months ended October 31, 2013 and 2012, respectively. We also recorded $0.3 million and $0.2 million in expenses related to purchases from these companies during the three months ended October 31, 2013 and 2012, respectively, and $0.9 million and $0.6 million for the nine months ended October 31, 2013 and 2012, respectively. We had $0.3 million and $0.0 of accounts receivable from these companies as of October 31, 2013 and January 31, 2013, respectively. There were no accounts payable to these companies as of October 31, 2013 or January 31, 2013.

(13) Subsequent Event

On December 6, 2013, we acquired Cloudmeter, a privately-held Delaware company, which developed technology that enables users to capture data directly from network traffic for $21.0 million in cash. The acquisition will be accounted for as a business combination and, accordingly, the total purchase price will be allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition date. We have not yet determined the purchase price allocation for the transaction.

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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,” “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 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 strategies; our continued efforts to market and sell both domestically and internationally; our expectations about seasonal trends; our expectations regarding our revenue mix; use of non-GAAP financial measures; our expectations regarding our 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 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 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 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 and continue to invest 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 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 generally base our license fees on the estimated peak 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. From time to time, we enter into transactions that are designed to enable broad adoption of our software within an enterprise. These arrangements typically include provisions that require revenue deferral and recognition over time.

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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 products and features, address customer needs and uses 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 and sell 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 and drive enterprise-wide adoption.


•	Develop additional solutions in adjacent markets as well as products and services that enable organizations to use our software in different ways, such as our cloud-based service, Splunk Cloud and Hunk: Splunk Analytics for Hadoop.


•	Build premium apps on our core platform that enable organizations to realize additional value from our software, such as Splunk App for Enterprise Security, Splunk App for VMware and Splunk App for PCI.


•	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 rapidly innovate and deliver compelling technology and additional functionality; create new delivery platforms; drive 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).

During the quarter, we expanded our product portfolio from a single product to become a multi-product company. We announced the general availability of Splunk Cloud, a new service that delivers Splunk Enterprise in the cloud and the general availability of Hunk: Splunk Analytics for Hadoop, a new software product that enables exploration, analysis and visualization of data in Hadoop.

For the three months ended October 31, 2013 and 2012, our revenues were $78.6 million and $52.0 million, respectively, representing year-over-year growth of approximately 51%. For the three months ended October 31, 2013 and 2012, approximately 21% and 19% of our revenues were derived from customers located outside the United States, respectively. 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, 2013, we had more than 6,400 Splunk Enterprise customers.

For the three months ended October 31, 2013 and 2012, our operating loss prepared in accordance with generally accepted accounting principles in the United States ("GAAP") was $16.8 million and $5.4 million, respectively, and our non-GAAP operating income was $0.9 million and our non-operating loss was $0.7 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 revenues 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 as a percentage of revenue, from period to period.

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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 net income (loss), non-GAAP operating margin and non-GAAP net income (loss) per share (collectively the “non-GAAP financial measures”). These non-GAAP financial measures exclude stock-based compensation expense, employer payroll tax expense related to employee stock plans, the change in fair value of certain preferred stock warrants previously issued by us, impairment of a long-lived asset, acquisition-related costs, amortization of acquired intangible assets 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 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 excluded 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 also excluded the non-cash charge for previously capitalized Splunk Storm software development costs (reflected as an impairment of a long-lived asset) as a result of our decision to make Splunk Storm available to customers at no cost. We also exclude acquisition-related costs and amortization of acquired intangible assets from our non-GAAP financial measures because they are considered by management to be outside of our core operating results. We further exclude the partial release of the valuation allowance due to acquisition from non-GAAP net income (loss) and non-GAAP net income (loss) per share because it is also considered by management to be outside our core operating results. Accordingly, we believe that excluding these expenses provides investors and management with greater visibility to 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 cash provided by operating activities to free cash flow for the three and nine months ended October 31, 2013 and 2012 (in thousands):

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	Three Months Ended October 31,						Nine Months Ended October 31,
	2013			2012			2013			2012
Net cash provided by operating activities	$	13,317		$	6,453		$	39,419		$	21,857
Less purchases of property and equipment	(4,035		)	(2,246		)	(7,265		)	(5,720		)
Free cash flow (Non-GAAP)	$	9,282		$	4,207		$	32,154		$	16,137
Net cash used in investing activities	$	(12,993	)	$	(1,732	)	$	(16,223	)	$	(5,206	)
Net cash provided by financing activities	$	4,374		$	298		$	22,728		$	225,059

The following table reconciles GAAP gross margin to non-GAAP gross margin for the three and nine months ended October 31, 2013 and 2012:



	Three Months Ended October 31,				Nine Months Ended October 31,
	2013		2012		2013		2012
GAAP gross margin	86.6	%	88.7	%	87.9	%	88.9	%
Stock-based compensation expense	1.5		0.6		1.3		0.5
Employer payroll tax on employee stock plans	0.1		—		—		—
Amortization of acquired intangible assets	0.1		—		—		—
Impairment of long-lived asset	2.7		—		1.0		—
Non-GAAP gross margin	91.0	%	89.3	%	90.2	%	89.4	%

The following table reconciles GAAP operating loss to non-GAAP operating income (loss) for the three and nine months ended October 31, 2013 and 2012 (in thousands):



	Three Months Ended October 31,						Nine Months Ended October 31,
	2013			2012			2013			2012
GAAP operating loss	$	(16,822	)	$	(5,380	)	$	(45,823	)	$	(16,109	)
Stock-based compensation expense	14,332			4,685			36,124			11,223
Employer payroll tax on employee stock plans	691			—			1,857			262
Amortization of acquired intangible assets	136			—			136			—
Impairment of long-lived asset	2,128			—			2,128			—
Acquisition-related costs	408			—			408			—
Non-GAAP operating income (loss)	$	873		$	(695	)	$	(5,170	)	$	(4,624	)

The following table reconciles GAAP operating margin to non-GAAP operating margin for the three and nine months ended October 31, 2013 and 2012:



	Three Months Ended October 31,				Nine Months Ended October 31,
	2013		2012		2013		2012
GAAP operating margin	(21.4	)%	(10.3	)%	(22.6	)%	(12.0	)%
Stock-based compensation expense	18.2		9.0		17.8		8.4
Employer payroll tax on employee stock plans	0.9		—		0.9		0.2
Amortization of acquired intangible assets	0.2		—		0.1		—
Impairment of long-lived asset	2.7		—		1.0		—
Acquisition-related costs	0.5		—		0.2		—
Non-GAAP operating margin	1.1	%	(1.3	)%	(2.6	)%	(3.4	)%

The following table reconciles GAAP net loss to non-GAAP net income (loss) for the three and nine months ended October 31, 2013 and 2012 (in thousands):

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	Three Months Ended October 31,						Nine Months Ended October 31,
	2013			2012			2013			2012
GAAP net loss	$	(16,550	)	$	(5,474	)	$	(46,377	)	$	(30,519	)
Stock-based compensation expense	14,332			4,685			36,124			11,223
Change in fair value of preferred stock warrants	—			—			—			14,087
Employer payroll tax on employee stock plans	691			—			1,857			262
Amortization of acquired intangible assets	136			—			136			—
Impairment of long-lived asset	2,128			—			2,128			—
Acquisition-related costs	408			—			408			—
Partial release of the valuation allowance due to acquisition	(747		)	—			(747		)	—
Non-GAAP net income (loss)	$	398		$	(789	)	$	(6,471	)	$	(4,947	)

The following table reconciles shares used in computing basic and diluted net income (loss) per share for the three and nine months ended October 31, 2013 and 2012 (in thousands, except per share amounts):



	Three Months Ended October 31,						Nine Months Ended October 31,
	2013			2012			2013			2012
Weighted-average shares used in computing GAAP basic net loss per share	106,008			96,671			104,063			73,951
Effect of dilutive securities: Employee stock awards and ESPP	12,117			—			—			—
Weighted-average shares used in computing Non-GAAP basic and diluted net income (loss) per share	118,125			96,671			104,063			73,951

GAAP basic and diluted net loss per share	$	(0.16	)	$	(0.06	)	$	(0.45	)	$	(0.41	)
Non-GAAP basic and diluted net income (loss) per share	$	0.00		$	(0.01	)	$	(0.06	)	$	(0.07	)

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 revenue 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. 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

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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.

Professional services and training revenues as a percentage of total revenues were 7% and 9% for the three months ended October 31, 2013 and 2012, 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.

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, and amortization and write-offs of intangible assets. 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 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 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.

Interest and other income (expense), net

Interest and other income (expense), net consists primarily of foreign exchange gains and losses, interest income on our cash and cash equivalents balances, and for fiscal 2013, changes in the fair value of preferred stock warrants and interest expense on outstanding debt.

Income tax provision (benefit)

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Income tax provision (benefit) 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 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 October 31,						Nine Months Ended October 31,
	2013			2012			2013			2012
	(in thousands)
Condensed Consolidated Statement of Operations Data:
Revenues
License	$	50,873		$	34,557		$	130,230		$	89,146
Maintenance and services	27,760			17,488			72,483			44,573
Total revenues	78,633			52,045			202,713			133,719
Cost of revenues
License	84			62			229			283
Maintenance and services	10,441			5,817			24,398			14,506
Total cost of revenues	10,525			5,879			24,627			14,789
Gross profit	68,108			46,166			178,086			118,930
Operating expenses
Research and development	18,961			11,074			49,635			28,568
Sales and marketing	53,052			32,847			138,999			84,753
General and administrative	12,917			7,625			35,275			21,718
Total operating expenses	84,930			51,546			223,909			135,039
Operating loss	(16,822		)	(5,380		)	(45,823		)	(16,109		)
Interest and other income (expense), net
Interest income	55			31			174			115
Other income (expense), net	(283		)	—			(459		)	—
Change in fair value of preferred stock warrants	—			—			—			(14,087		)
Total interest and other income (expense), net	(228		)	31			(285		)	(13,972		)
Loss before income taxes	(17,050		)	(5,349		)	(46,108		)	(30,081		)
Income tax provision (benefit)	(500		)	125			269			438
Net loss	$	(16,550	)	$	(5,474	)	$	(46,377	)	$	(30,519	)

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	Three Months Ended October 31,				Nine Months Ended October 31,
	2013		2012		2013		2012
	(as % of revenues)
Condensed Consolidated Statement of Operations Data:
Revenues
License	64.7	%	66.4	%	64.2	%	66.7	%
Maintenance and services	35.3		33.6		35.8		33.3
Total revenues	100.0		100.0		100.0		100.0
Cost of revenues
License (1)	0.2		0.2		0.2		0.3
Maintenance and services (1)	37.6		33.3		33.7		32.5
Total cost of revenues	13.4		11.3		12.1		11.1
Gross profit	86.6		88.7		87.9		88.9
Operating expenses
Research and development	24.1		21.3		24.5		21.4
Sales and marketing	67.5		63.1		68.6		63.4
General and administrative	16.4		14.7		17.4		16.2
Total operating expenses	108.0		99.1		110.5		101.0
Operating loss	(21.4	)	(10.4	)	(22.6	)	(12.1	)
Interest and other income (expense), net
Interest income	0.1		0.1		0.1		0.1
Other income (expense), net	(0.4	)	—		(0.2	)	—
Change in fair value of preferred stock warrants	—		—		—		(10.5	)
Total interest and other income (expense), net	(0.3	)	0.1		(0.1	)	(10.4	)
Loss before income taxes	(21.7	)	(10.3	)	(22.7	)	(22.5	)
Income tax provision (benefit)	(0.6	)	0.2		0.1		0.3
Net loss	(21.1	)%	(10.5	)%	(22.8	)%	(22.8	)%

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

Comparison of the Three Months Ended October 31, 2013 and 2012

Revenues



	Three Months Ended October 31,
	2013			2012			% Change
	($ amounts in thousands)
Revenues
License	$	50,873		$	34,557		47.2	%
Maintenance and services	27,760			17,488			58.7	%
Total revenues	$	78,633		$	52,045		51.1	%
Percentage of revenues
License	64.7		%	66.4		%
Maintenance and services	35.3			33.6
Total	100.0		%	100.0		%

Total revenues increased $26.6 million due to growth in license revenues, as well as maintenance and services 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 207 and 125 orders greater than $100,000 for the three months ended October 31, 2013 and 2012, respectively. Our total number of customers increased from approximately

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4,800 at October 31, 2012 to more than 6,400 at October 31, 2013. 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



	Three Months Ended October 31,
	2013			2012			% Change
	($ amounts in thousands)
Cost of revenues
License	$	84		$	62		35.5	%
Maintenance and services	10,441			5,817			79.5	%
Total cost of revenues	$	10,525		$	5,879		79.0	%
Gross margin
License	99.8		%	99.8		%
Maintenance and services	62.4		%	66.7		%
Total gross margin	86.6		%	88.7		%

Total cost of revenues increased $4.6 million primarily due to the increase in cost of maintenance and services revenues. The increase in cost of maintenance and services revenues was primarily related to an increase of $2.2 million in salaries and benefits expense, which includes a $0.8 million increase in stock-based compensation expense, due to increased headcount, and a $2.1 million impairment charge of a long-lived asset for previously capitalized Storm software development costs as a result of our decision to make Storm available to customers at no cost. We also had an increase of $0.3 million related to overhead costs. Total gross margin decreased slightly due to the $2.1 million impairment charge related to Storm, as discussed above.

Operating Expenses



	Three Months Ended October 31,
	2013			2012			% Change
	($ amounts in thousands)
Operating expenses
Research and development	$	18,961		$	11,074		71.2	%
Sales and marketing	53,052			32,847			61.5	%
General and administrative	12,917			7,625			69.4	%
Total operating expenses	$	84,930		$	51,546		64.8	%
Percentage of revenues
Research and development	24.1		%	21.3		%
Sales and marketing	67.5			63.1
General and administrative	16.4			14.7
Total	108.0		%	99.1		%
Includes stock-based compensation expense of:
Research and development	$	4,405		$	1,560
Sales and marketing	5,947			2,093
General and administrative	2,815			710
Total stock-based compensation expense	$	13,167		$	4,363

Research and development expense. Research and development expense increased $7.9 million primarily due to a $5.8 million increase in salaries and benefits, which includes a $2.8 million increase in stock-based compensation expense, as we increased headcount as part of our focus on further developing and enhancing our products and $0.6 million related to consulting fees. We also had an increase of $1.0 million related to overhead costs.

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Sales and marketing expense. Sales and marketing expense increased $20.2 million primarily due to a $15.7 million increase in salaries and benefits, which includes a $3.9 million increase in stock-based compensation expense as we increased headcount to expand our field sales organization and experienced higher commission expense as a result of increased customer orders. We experienced an increase of $1.8 million due to increased facilities and overhead expense and an increase of $1.4 million in travel expenses as a result of international expansion and increased headcount. Finally, we also incurred a $1.0 million increase in marketing program fees in conjunction with increased marketing and advertising efforts.

General and administrative expense. General and administrative expense increased $5.3 million due primarily to an increase of $5.3 million related to salaries and benefits, which includes a $2.1 million increase in stock compensation expense, as we increased headcount for accounting and legal activities to support the overall growth of the business.

Interest and Other Income (Expense), net



	Three Months Ended October 31,
	2013			2012
	(in thousands)
Interest and other income (expense), net:
Interest income	$	55		$	31
Other income (expense), net	(283		)	—
Total interest and other income (expense), net	$	(228	)	$	31

Interest and other income (expense), net reflects a net increase in expense primarily due to foreign currency exchange losses compared to the same period last year.

Income Tax Provision (Benefit)



	Three Months Ended October 31,
	2013			2012
	(in thousands)
Income tax provision (benefit)	$	(500	)	$	125

For the three months ended October 31, 2013, we recorded an income tax benefit that was primarily attributable to the partial release of our deferred tax asset valuation allowance related to the acquisition, partially offset by an increase in tax expense from our increased activity in our foreign operations and federal alternative minimum tax.

Comparison of the Nine Months Ended October 31, 2013 and 2012

Revenues



	Nine Months Ended October 31,
	2013			2012			% Change
	($ amounts in thousands)
Revenues
License	$	130,230		$	89,146		46.1	%
Maintenance and services	72,483			44,573			62.6	%
Total revenues	$	202,713		$	133,719		51.6	%
Percentage of revenues
License	64.2		%	66.7		%
Maintenance and services	35.8			33.3
Total	100.0		%	100.0		%

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Total revenues increased $69.0 million due to growth in license revenues, as well as maintenance and services 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 502 and 296 orders greater than $100,000 for the nine months ended October 31, 2013 and 2012, respectively. Our total number of customers increased from approximately 4,800 at October 31, 2012 to more than 6,400 at October 31, 2013. 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,
	2013		2012		% Change
	($ amounts in thousands)
Cost of revenues
License	$	229	$	283	(19.1	)%
Maintenance and services	24,398		14,506		68.2	%
Total cost of revenues	$	24,627	$	14,789