Edgar Filing: SPLUNK INC

Fair Value

Useful Life (months)

Developed technology

Other acquired intangible assets

Total intangible assets acquired

Document

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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 JULY 31, 2016

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 001-35498

____________________________________________________

SPLUNK INC.

(Exact name of registrant as specified in its charter)

_____________________________________________________



Delaware		86-1106510
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

250 Brannan Street

San Francisco, California 94107

(Address of principal executive offices)

(Zip Code)

(415) 848-8400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý

There were 134,543,363 shares of the registrant’s Common Stock issued and outstanding as of September 1, 2016.

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TABLE OF CONTENTS



		Page No.

	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of July 31, 2016 and January 31, 2016	1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 31, 2016 and 2015	2
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended July 31, 2016 and 2015	3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2016 and 2015	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.	Controls and Procedures	32
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 6.	Exhibits	54
	Signatures	55

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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)



	July 31, 2016			January 31, 2016
Assets
Current assets
Cash and cash equivalents	$	409,949		$	424,541
Investments, current portion	610,660			584,498
Accounts receivable, net	131,262			181,665
Prepaid expenses and other current assets	26,882			26,565
Total current assets	1,178,753			1,217,269
Investments, non-current	5,000			1,500
Property and equipment, net	151,953			134,995
Intangible assets, net	43,410			49,482
Goodwill	124,642			123,318
Other assets	13,833			10,275
Total assets	$	1,517,591		$	1,536,839
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	5,429		$	4,868
Accrued payroll and compensation	64,913			95,898
Accrued expenses and other liabilities	60,273			49,879
Deferred revenue, current portion	367,834			347,121
Total current liabilities	498,449			497,766
Deferred revenue, non-current	99,525			102,382
Other liabilities, non-current	90,476			77,277
Total non-current liabilities	190,001			179,659
Total liabilities	688,450			677,425
Commitments and contingencies (Note 3)
Stockholders’ equity
Common stock: $0.001 par value; 1,000,000,000 shares authorized; 134,448,442 shares issued and outstanding at July 31, 2016, and 131,543,467 shares issued and outstanding at January 31, 2016	134			132
Accumulated other comprehensive loss	(1,774		)	(3,770		)
Additional paid-in capital	1,683,869			1,528,647
Accumulated deficit	(853,088		)	(665,595		)
Total stockholders’ equity	829,141			859,414
Total liabilities and stockholders’ equity	$	1,517,591		$	1,536,839

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

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Splunk Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



	Three Months Ended July 31,						Six Months Ended July 31,
	2016			2015			2016			2015
Revenues
License	$	115,695		$	87,960		$	216,687		$	159,832
Maintenance and services	97,058			60,366			182,018			114,159
Total revenues	212,753			148,326			398,705			273,991
Cost of revenues⁽¹⁾
License	2,868			1,813			5,830			2,974
Maintenance and services	41,748			23,227			78,286			45,151
Total cost of revenues	44,616			25,040			84,116			48,125
Gross profit	168,137			123,286			314,589			225,866
Operating expenses⁽¹⁾
Research and development	67,224			48,308			134,595			93,006
Sales and marketing	150,228			111,786			295,379			213,775
General and administrative	34,312			28,760			66,385			55,632
Total operating expenses	251,764			188,854			496,359			362,413
Operating loss	(83,627		)	(65,568		)	(181,770		)	(136,547		)
Interest and other income (expense), net
Interest income (expense), net	(797		)	425			(1,200		)	785
Other income (expense), net	(1,063		)	(295		)	(2,188		)	(206		)
Total interest and other income (expense), net	(1,860		)	130			(3,388		)	579
Loss before income taxes	(85,487		)	(65,438		)	(185,158		)	(135,968		)
Income tax provision (benefit)	1,110			(10,149		)	2,335			(9,493		)
Net loss	$	(86,597	)	$	(55,289	)	$	(187,493	)	$	(126,475	)

Basic and diluted net loss per share	$	(0.65	)	$	(0.44	)	$	(1.42	)	$	(1.01	)

Weighted-average shares used in computing basic and diluted net loss per share	133,041			126,621			132,310			125,602

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



Cost of revenues	$	7,310	$	5,662	$	14,865	$	12,194
Research and development	27,742		19,301		56,948		39,376
Sales and marketing	39,371		28,210		79,604		57,820
General and administrative	14,440		10,436		28,816		20,328

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

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Splunk Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)



	Three Months Ended July 31,						Six Months Ended July 31,
	2016			2015			2016			2015
Net loss	$	(86,597	)	$	(55,289	)	$	(187,493	)	$	(126,475	)
Other comprehensive loss
Net unrealized gain (loss) on investments	17			(20		)	356			(45		)
Foreign currency translation adjustments	(558		)	(1,297		)	1,640			(1,282		)
Total other comprehensive gain (loss)	(541		)	(1,317		)	1,996			(1,327		)
Comprehensive loss	$	(87,138	)	$	(56,606	)	$	(185,497	)	$	(127,802	)

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

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Splunk Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended July 31,
	2016			2015
Cash flows from operating activities
Net loss	$	(187,493	)	$	(126,475	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	14,635			7,776
Amortization of investment premiums	447			722
Stock-based compensation	180,233			129,718
Deferred income taxes	(698		)	(11,305		)
Excess tax benefits from employee stock plans	(1,027		)	(652		)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net	50,403			28,719
Prepaid expenses, other current and non-current assets	(3,177		)	12,468
Accounts payable	265			(100		)
Accrued payroll and compensation	(30,985		)	(8,698		)
Accrued expenses and other liabilities	13,579			(7,085		)
Deferred revenue	17,856			17,165
Net cash provided by operating activities	54,038			42,253
Cash flows from investing activities
Purchases of investments	(316,528		)	(219,195		)
Maturities of investments	290,275			247,000
Acquisitions, net of cash acquired	—			(142,693		)
Purchases of property and equipment	(14,250		)	(9,224		)
Other investment activities	(3,500		)	(1,500		)
Net cash used in investing activities	(44,003		)	(125,612		)
Cash flows from financing activities
Proceeds from the exercise of stock options	5,603			10,736
Excess tax benefits from employee stock plans	1,027			652
Proceeds from employee stock purchase plan	15,183			10,906
Taxes paid related to net share settlement of equity awards	(46,822		)	—
Net cash provided by (used in) financing activities	(25,009		)	22,294
Effect of exchange rate changes on cash and cash equivalents	382			(50		)
Net decrease in cash and cash equivalents	(14,592		)	(61,115		)
Beginning of period	424,541			387,315
End of period	$	409,949		$	326,200
Supplemental disclosures
Cash paid for income taxes	$	1,726		$	706
Cash paid for interest expense related to build-to-suit lease	1,920			—
Non-cash investing and financing activities
Accrued purchases of property and equipment	(1,016		)	(145		)
Vesting of early exercised options	—			56
Capitalized construction costs related to build-to-suit lease	10,065			22,109

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Description of the Business and Significant Accounting Policies

Business

Splunk Inc. (“we,” “us,” “our”) provides innovative software solutions that enable organizations to gain real-time operational intelligence by harnessing the value of their data. Our offerings enable users to collect, index, search, explore, monitor and analyze data regardless of format or source. Our offerings address large and diverse data sets, commonly referred to as big data, and are specifically tailored for machine data. Machine data is produced by nearly every software application and electronic device and contains a definitive, time-stamped record of various activities, such as transactions, customer and user activities and security threats. Our offerings help users derive new insights from machine data that can be used to, among other things, improve service levels, reduce operational costs, mitigate security risks, demonstrate and maintain compliance, and drive better business decisions. We were incorporated in California in October 2003 and reincorporated in Delaware in May 2006.

Fiscal Year

Our fiscal year ends on January 31. References to fiscal 2017 or fiscal year 2017, for example, refer to the fiscal year ending January 31, 2017.

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, 2016 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, 2016, filed with the SEC on March 30, 2016. 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, 2016 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 2017.

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13 (Topic 326), Financial Instruments - Credit Losses. The amendments in this update require a financial asset (or a group of financial assets) measured at an amortized cost basis to be presented at the net amount expected to be collected. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans and held-to-maturity debt securities. The standard is effective for our first quarter of fiscal 2021, although early adoption is permitted. We are currently evaluating adoption methods and whether this standard will have a material impact on our condensed consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09 (Topic 718), Compensation - Stock Compensation, which has been issued as part of its Simplification Initiative. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The standard is effective for our first quarter of fiscal 2018, although early adoption is permitted. We are currently evaluating adoption methods and whether this standard will have a material impact on our condensed consolidated financial statements.

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In February 2016, the FASB issued ASU No. 2016-02 (Topic 842), Leases, which supersedes the lease recognition requirements in ASC Topic 840, Leases. The standard requires an entity to recognize right-of-use assets and lease liabilities arising from a lease, for both financing and operating leases, in the condensed consolidated balance sheets but recognize the impact of such leases on the condensed consolidated statement of operations and cash flows in a similar manner under current GAAP. The standard also requires additional qualitative and quantitative disclosures. The standard is effective for our first quarter of fiscal 2020, although early adoption is permitted. We are currently evaluating adoption methods and whether this standard will have a material impact on our condensed consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09 (Topic 606), Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition and establishes a new revenue standard. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenues and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, which clarifies the guidance in the new revenue standard on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity reports revenue on a gross or net basis. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the guidance in the new revenue standard regarding an entity’s identification of its performance obligations in a contract. In May 2016, the FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, which amends the guidance in the new revenue standard on collectibility, non-cash consideration, presentation of sales tax, and transition. The standard permits the use of either the retrospective or cumulative effect transition method. This new revenue standard, as amended by ASU No. 2015-14, is effective in the first quarter of fiscal year 2019. Early adoption is permitted, but not earlier than the original effective date for annual and interim periods. We are currently evaluating adoption methods and the effect that the updated standard will have on our condensed consolidated financial statements and related disclosures.

Use of Estimates

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

Segments

We operate our business as one operating segment: the development and marketing of software 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 currencies of our foreign subsidiaries are their respective local currencies. Translation adjustments arising from the use of differing exchange rates from period to period are included in Accumulated other comprehensive loss within the condensed consolidated statement of stockholders’ equity. Foreign currency transaction gains and losses are included in Other income (expense), net and were not material for the three and six months ended July 31, 2016 and 2015. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date.

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Expenses are translated at the average exchange rate during the period. Equity transactions are translated using historical exchange rates.

Foreign Currency Contracts

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

Investments

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

Business Combinations

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

(2) Investments and Fair Value Measurements

The carrying amounts of certain of our financial instruments including cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short-term maturities.

Assets and liabilities recorded at fair value in the financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels that are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:

Level 1—Observable inputs, such as quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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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 July 31, 2016 and January 31, 2016 (in thousands):



	July 31, 2016								January 31, 2016
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	346,910	$	—	$	—	$	346,910	$	374,571	$	—	$	—	$	374,571
U.S. treasury securities	—		610,660		—		610,660		—		607,892		—		607,892
Other	—		—		3,000		3,000		—		—		1,500		1,500
Reported as:
Assets:
Cash and cash equivalents							$	346,910							$	397,965
Investments, current portion							610,660								584,498
Investments, non-current							3,000								1,500
Total							$	960,570							$	983,963

Our investments in money market funds are measured at fair value on a recurring basis. These money market funds are actively traded and reported daily through a variety of sources. The fair value of the money market fund investments is classified as Level 1.

The following table represents our investments in U.S. treasury securities, which we have classified as available-for-sale investments as of July 31, 2016 (in thousands):



	July 31, 2016
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Investments, current portion:
U.S. treasury securities	$	610,361	$	364	$	(65	)	$	610,660
Total available-for-sale investments in U.S. treasury securities	$	610,361	$	364	$	(65	)	$	610,660

As of July 31, 2016, the following marketable securities were in an unrealized loss position (in thousands):



	Less than 12 Months					12 Months or Greater				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. treasury securities	$	119,072	$	(65	)	$	—	$	—	$	119,072	$	(65	)

As of July 31, 2016, we did not consider any of our investments to be other-than-temporarily impaired.

The contractual maturities of our investments in U.S. treasury securities are as follows (in thousands):



	July 31, 2016
Due within one year	$	610,660
Total	$	610,660

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

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

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During fiscal 2016, we made an investment in the form of a convertible promissory note in a privately-held company that we have classified as an available-for-sale investment, which is included in investments, non-current, on our condensed consolidated balance sheets. During fiscal 2017, we made an additional $1.5 million convertible promissory note investment in this privately-held company. These investments are recorded at fair value using significant unobservable inputs or data in an inactive market and the valuation requires our judgment due to the absence of quoted prices in active markets and inherent lack of liquidity. Unrealized gains and losses on our available-for-sale investments are excluded from earnings and reported, net of tax, as a separate component on the condensed consolidated statements of comprehensive income (loss). During the six months ended July 31, 2016, we have not recognized any unrealized gains or losses or an other-than-temporary impairment charge on these investments. The carrying value of these investments were $3.0 million and $1.5 million as of July 31, 2016 and January 31, 2016, respectively.

(3) Commitments and Contingencies

Operating Lease Commitments

We lease our office spaces under non-cancelable leases and rent expense associated with our operating leases is recognized on a straight-line basis over the lease term. Rent expense was $3.9 million and $3.4 million for the three months ended July 31, 2016 and 2015, respectively, and $8.6 million and $6.3 million for the six months ended July 31, 2016 and 2015, respectively.

On August 24, 2015, we entered into an office lease for approximately 235,000 square feet located at 500 Santana Row, San Jose, California. This lease is expected to commence in the third quarter of fiscal 2017, subject to the completion of certain pre-occupancy improvements. Our total obligation for the base rent is approximately $120.5 million.

The following summarizes our operating lease commitments as of July 31, 2016 (in thousands):



	Payments Due by Period
	Total		Less Than 1 year		1-3 years		3-5 years		More Than 5 years
Operating lease commitments ⁽¹⁾	$	183,596	$	18,426	$	48,264	$	37,048	$	79,858

_________________________

⁽¹⁾ We entered into sublease agreements for portions of our office space and the future rental income of $1.5 million from these agreements has been included as an offset to our future minimum rental payments.

Financing Lease Obligation

On April 29, 2014, we entered into an office lease (the “Lease”) for approximately 182,000 square feet located at 270 Brannan Street, San Francisco, California (the “Premises”) for a term of 84 months. Our total obligation for the base rent is approximately $92.0 million. On May 13, 2014, we entered into an irrevocable, standby letter of credit with Silicon Valley Bank for $6.0 million to serve as a security deposit for the Lease.

As a result of our involvement during the construction period, whereby we had certain indemnification obligations related to the construction, we were considered for accounting purposes only, the owner of the construction project under build-to-suit lease accounting. We have recorded estimated project construction costs incurred by the landlord as an asset and a corresponding long term liability in “Property and equipment, net” and “Other liabilities, non-current,” respectively, on our condensed consolidated balance sheets. During the construction period, we increased the asset and corresponding long term liability as additional building costs were incurred by the landlord. The landlord completed the construction of the Premises in February 2016 and we have determined that the lease does not meet the criteria for “sale-leaseback” treatment, due to our continuing involvement in the project resulting from our standby letter of credit. Accordingly, the Lease will continue to be accounted for as a financing obligation.

As of July 31, 2016, future payments on the financing lease obligation are as follows (in thousands):

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Fiscal Period:
Remaining six months of fiscal 2017	$	3,135
Fiscal 2018	11,683
Fiscal 2019	12,510
Fiscal 2020	12,886
Fiscal 2021	13,272
Fiscal 2022	13,670
Thereafter	21,977
Total future minimum lease payments	$	89,133

Legal Proceedings

We are subject to certain routine legal and regulatory proceedings, as well as demands and claims that arise in the normal course of our business. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. In our opinion, resolution of any pending claims (either individually or in the aggregate) is not expected to have a material adverse impact on our 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, vendors and their affiliates for certain intellectual property infringement and other claims by third parties with respect to our offerings, 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 our officers or directors or those of our direct and indirect subsidiaries.

To date, there have not been any costs incurred in connection with such indemnification obligations; therefore, there is no accrual of such amounts at July 31, 2016. We are unable to estimate the maximum potential impact of these indemnifications on our future results of operations.

(4) Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. These assets are depreciated and amortized using the straight-line method over their estimated useful lives. Property and equipment consisted of the following (in thousands):



	As of
	July 31, 2016			January 31, 2016
Computer equipment and software	$	49,356		$	43,883
Furniture and fixtures	14,953			13,398
Leasehold and building improvements ⁽¹⁾	49,266			41,028
Building ⁽²⁾	82,250			72,186
	195,825			170,495
Less: accumulated depreciation and amortization	(43,872		)	(35,500		)
Property and equipment, net	$	151,953		$	134,995

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⁽¹⁾ Includes costs related to assets not yet placed into service of $9.6 million and $28.9 million, as of July 31, 2016 and January 31, 2016, respectively.

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⁽²⁾ This relates to the capitalization of construction costs in connection with our build-to-suit lease obligation, where we are considered the owner of the asset, for accounting purposes only. There is a corresponding long-term liability for this asset on our condensed consolidated balance sheets under “Other liabilities, non-current.” Refer to Note 3 “Commitments and Contingencies” for details.

Depreciation and amortization expense on Property and Equipment, net was $5.1 million and $2.5 million for the three months ended July 31, 2016 and 2015, respectively, and $8.4 million and $4.8 million for the six months ended July 31, 2016 and 2015, respectively.

(5) Acquisitions, Goodwill and Intangible Assets

Metafor Software

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

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

Caspida

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

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

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

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	Fair Value		Useful Life (months)
Developed technology	$	44,300	72
In-process research and development	1,300		Indefinite ⁽¹⁾
Customer relationships	190		36
Total intangible assets acquired	$	45,790

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⁽¹⁾ The in-process research and development is considered an indefinite-lived intangible asset until the completion or abandonment of the associated research and development efforts.

Unaudited Pro Forma Financial Information

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

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



	Three Months Ended July 31, 2015			Six Months Ended July 31, 2015
Revenues	$	148,326		$	273,991
Net loss	$	(71,916	)	$	(149,562	)
Basic and diluted net loss per share	$	(0.57	)	$	(1.19	)

Goodwill

Goodwill balances are presented below (in thousands):



	Carrying amount
Balance as of January 31, 2016	$	123,318
Foreign currency translation adjustments	1,324
Balance as of July 31, 2016	$	124,642

Intangible Assets

Intangible assets subject to amortization obtained from acquisitions as of July 31, 2016 are as follows (in thousands, except useful life):



	Gross Fair Value		Accumulated Amortization			Net Book Value		Weighted Average Remaining Useful Life (months)
Developed technology	$	59,370	$	(17,758	)	$	41,612	54
Customer relationships	1,810		(1,590		)	220		14
Other acquired intangible assets	1,180		(902		)	278		20
Total intangible assets subject to amortization	$	62,360	$	(20,250	)	$	42,110

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

Amortization expense from acquired intangible assets was $3.1 million and $1.8 million for the three months ended July 31, 2016 and 2015, respectively, and $6.2 million and $2.9 million for the six months ended July 31, 2016 and 2015.

The expected future amortization expense for acquired intangible assets as of July 31, 2016 is as follows (in thousands):



Fiscal Period:
Remaining six months of fiscal 2017	$	5,710
Fiscal 2018	10,290
Fiscal 2019	8,030
Fiscal 2020	7,621
Fiscal 2021	7,383
Thereafter	3,076
Total amortization expense	$	42,110

(6) Debt Financing Facilities

On May 9, 2013 we entered into a Loan Agreement with Silicon Valley Bank, which was most recently amended in May 2015. As amended, the agreement provides for a revolving line of credit facility, which expires May 9, 2017. Under the 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 (3.50% in July 2016) or the LIBOR rate plus 2.75%. As of July 31, 2016, we had no balance outstanding under this agreement. The agreement contains customary financial covenants and other affirmative and negative covenants. We were in compliance with all covenants as of July 31, 2016.

(7) Stock Compensation Plans

The following table summarizes the stock option, restricted stock unit (“RSU”) and performance unit (“PSU”) award activity during the six months ended July 31, 2016:



			Options Outstanding							RSUs and PSUs Outstanding
	Shares Available for Grant		Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value⁽¹⁾		Shares
							(in years)	(in thousands)
Balances as of January 31, 2016	6,553,144		3,715,999		$	4.72	4.24	$	154,696	14,752,253
Additional shares authorized	6,577,173
Options exercised			(994,023	)	5.64
Options forfeited and expired	13,273		(13,273	)	2.57
RSUs and PSUs granted	(2,344,484	)								2,344,484
RSUs and PSUs vested										(2,493,633	)
Shares withheld related to net share settlement of RSUs and PSUs	914,342
RSUs and PSUs forfeited and canceled	788,949									(788,949	)
Balances as of July 31, 2016	12,502,397		2,708,703		$	4.39	3.63	$	157,640	13,814,155
Vested and expected to vest			2,708,561		$	4.39	3.63	$	157,631	13,391,056
Exercisable as of July 31, 2016			2,652,562		$	4.35	3.53	$	154,420

_________________________

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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 July 31, 2016.

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

During the six months ended July 31, 2016, $1.0 million of tax benefits have been realized from exercised stock options. At July 31, 2016, total unrecognized compensation cost related to these stock options was $3.1 million, adjusted for estimated forfeitures, which is expected to be recognized over a weighted-average period of 1.9 years. At July 31, 2016, total unrecognized compensation cost was $602.8 million related to RSUs, adjusted for estimated forfeitures, which is expected to be recognized over the next 2.7 years. At July 31, 2016, total unrecognized compensation cost was $27.4 million related to PSUs, adjusted for estimated forfeitures, which is expected to be recognized over the next 3.3 years. Additionally, during fiscal 2016, we issued 671,782 restricted shares of our common stock (“RSAs”) and at July 31, 2016, total unrecognized compensation cost was $33.0 million related to RSAs, adjusted for estimated forfeitures, which is expected to be recognized over the next 2.4 years. At July 31, 2016, 99,769 RSAs were vested and 572,013 RSAs were outstanding.

The total intrinsic value of options exercised during the six months ended July 31, 2016 was $47.7 million. The weighted-average grant date fair value of RSUs granted was $50.14 per share for the six months ended July 31, 2016. The weighted-average grant date fair value of PSUs granted was $49.25 per share for the six months ended July 31, 2016. The weighted-average grant date fair value of RSAs granted was $69.00 per share during fiscal 2016. No RSAs were granted during the six months ended July 31, 2016.

(8) Geographic Information

Revenues

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



	Three Months Ended July 31,				Six Months Ended July 31,
	2016		2015		2016		2015
United States	$	165,073	$	114,273	$	302,878	$	209,460
International	47,680		34,053		95,827		64,531
Total revenues	$	212,753	$	148,326	$	398,705	$	273,991

Other than the United States, no other individual country exceeded 10% of total revenues during any of the periods presented. One channel partner represented approximately 25% of total revenues during the three months ended July 31, 2016, and approximately 24% of total revenues during the six months ended July 31, 2016. A second channel partner represented approximately 17% and 13% of total revenues during the three months ended July 31, 2016 and 2015, respectively, and approximately 16% and 12% of total revenues during the six months ended July 31, 2016 and 2015. The revenues from these channel partners are comprised of a number of customer transactions, none of which were individually greater than 10% of total revenues for the three months or six months ended July 31, 2016 and 2015. At July 31, 2016, one channel partner represented approximately 26% of total accounts receivable. At January 31, 2016, one channel partner represented 26% and one customer represented 16% of total accounts receivable.

Property and Equipment

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

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	As of
	July 31, 2016		January 31, 2016
United States	$	145,015	$	129,268
International	6,938		5,727
Total property and equipment, net	$	151,953	$	134,995

Other than the United States, no other country represented 10% or more of our total property and equipment as of July 31, 2016 or January 31, 2016.

(9) Income Taxes

For the three months ended July 31, 2016 and 2015, we recorded $1.1 million in income tax expense and $10.1 million in income tax benefit, respectively. For the six months ended July 31, 2016 and 2015, we recorded $2.3 million in income tax expense and $9.5 million in income tax benefit, respectively. The increase in income tax expense was primarily attributable to the absence of the partial release of the valuation allowance as a result of a prior year acquisition and an increase in taxable income in our international jurisdictions. We recorded income taxes that were principally attributable to foreign and state taxes.

During the three months ended July 31, 2016, there were no material changes to our unrecognized tax benefits, 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.

(10) Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase or forfeiture. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including preferred stock, stock options, RSUs, PSUs and RSAs to the extent dilutive.

The following table sets forth the computation of historical basic and diluted net loss per share (in thousands, except per share data):



	Three Months Ended July 31,						Six Months Ended July 31,
	2016			2015			2016			2015
Numerator:
Net loss	$	(86,597	)	$	(55,289	)	$	(187,493	)	$	(126,475	)
Denominator:
Weighted-average common shares outstanding	133,624			126,627			132,873			125,612
Less: Weighted-average unvested common shares subject to repurchase or forfeiture	(583		)	(6		)	(563		)	(10		)
Weighted-average shares used to compute net loss per share, basic and diluted	133,041			126,621			132,310			125,602
Net loss per share, basic and diluted	$	(0.65	)	$	(0.44	)	$	(1.42	)	$	(1.01	)

Since we were in a net loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows (in thousands):



	As of July 31,
	2016	2015
Shares subject to outstanding common stock options	2,709	4,432
Shares subject to outstanding RSUs, PSUs and RSAs	14,386	12,482
Employee stock purchase plan	323	319
Total	17,418	17,233

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(11) Related Party Transactions

Certain members of our board of directors (“Board”) serve on the board of directors of and/or are executive officers of, and, in some cases, are investors in, companies that are customers or vendors of ours. Certain of our executive officers also serve on the board of directors of companies that are customers or vendors of ours. All contracts with related parties are executed in the ordinary course of business. We recognized revenues from sales to these companies of $1.2 million and $1.4 million for the three months ended July 31, 2016 and 2015, respectively, and $2.4 million and $2.5 million for the six months ended July 31, 2016 and 2015, respectively. We also recorded $0.1 million and $0.5 million in expenses related to purchases from these companies during the three months ended July 31, 2016 and 2015, respectively, and $0.2 million and $1.1 million for the six months ended July 31, 2016 and 2015, respectively. We had $2.6 million and $0.5 million of accounts receivable from these companies as of July 31, 2016 and January 31, 2016, respectively. There were no accounts payable to these companies as of July 31, 2016 or January 31, 2016.

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 market opportunity, our future financial and operating results; our planned investments, particularly in our product development efforts; our planned expansion of our sales and marketing organization; our expectation that we will continue to use acquisitions to contribute to our growth objectives; our growth and product integration strategies; our continued efforts to market and sell both domestically and internationally; our expectations about seasonal trends; our expectations regarding our revenues mix; our expectations regarding our cost of revenues and gross margin; use of non-GAAP (as defined below) financial measures; our expectations regarding our operating expenses, including increases in research and development, sales and marketing, and general and administrative expenses; our expectations regarding our capital expenditures; sufficiency of cash to meet cash needs for at least the next 12 months; exposure to interest rate changes; inflation; anticipated income tax rates; our expectations regarding our leases; exposure to exchange rate fluctuations and our ability to manage such exposure; and our expected cash flows and liquidity.

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

Overview

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

We believe the market for products that provide operational intelligence presents a substantial opportunity as data grows in volume and diversity, creating new risks, opportunities and challenges for organizations. Since our inception, we have

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invested a substantial amount of resources developing our offerings to address this market, specifically with respect to machine data.

Our offerings are designed to deliver rapid return-on-investment for our customers. They generally do not require customization, long deployment cycles or extensive professional services commonly associated with traditional enterprise software applications. For Splunk Enterprise, users can simply download and install the software, typically in a matter of hours, to connect to their relevant machine data sources. Alternatively, they can sign up for our Splunk Cloud service and avoid the need to provision, deploy and manage internal infrastructure. They can also provision a compute instance on Amazon Web Services via a pre-built Amazon Machine Image, which delivers a pre-configured virtual machine instance with our Splunk Enterprise software. We also offer support, training and professional services to our customers to assist in the deployment of our software.

For Splunk Enterprise, we base our license fees on the estimated daily data indexing capacity our customers require. Prospective customers can download a free 60-day trial of Splunk Enterprise, which converts into a limited free perpetual license of up to 500 megabytes of data per day. A majority of our license revenues consist of revenues from perpetual licenses, whereby we generally recognize the license fee portion of these arrangements upfront. As a result, the timing of when we enter into large perpetual licenses may lead to fluctuations in our revenues and operating results because our expenses are largely fixed in the short-term. Additionally, we license our software under term licenses, which are generally recognized ratably over the contract term. From time to time, we also enter into transactions that are designed to enable broad adoption of our software within an enterprise, referred to as enterprise adoption agreements. These agreements often include provisions that require revenue deferral and recognition over time.

Our Splunk Cloud service delivers the core functionalities of Splunk Enterprise as a scalable, reliable cloud service. Splunk Cloud customers pay an annual subscription fee based on the combination of the volume of data indexed per day and the length of the data retention period. Our product, Hunk: Splunk Analytics for Hadoop, is a software product that enables exploration, analysis and visualization of data in Hadoop. Splunk Light provides log search and analysis that is designed and priced and packaged for small IT environments. Splunk Enterprise Security addresses emerging security threats and SIEM use cases through monitoring, alerts and analytics. Splunk User Behavior Analytics detects cyber-attacks and insider threats using data science, machine learning and advanced correlation. Splunk IT Service Intelligence monitors the health and key performance indicators of critical IT services.

We intend to continue investing for long-term growth. We have invested and expect to continue to invest heavily in our product development efforts to deliver additional compelling features, address customer needs and enable solutions that can address new end markets. For example, during fiscal 2017, we released new versions of our existing products such as Splunk Enterprise and Splunk Enterprise Security. In addition, we expect to continue to aggressively expand our sales and marketing organizations to market and sell our software both in the United States and internationally. We have utilized and expect to continue to utilize acquisitions to contribute to our long-term growth objectives. In June 2015, we acquired Metafor Software, a privately-held British Columbia corporation, which developed technology that provides anomaly detection and behavioral analytics for IT operations. In July 2015, we acquired Caspida, a privately-held Delaware corporation, which developed technology that provides behavioral analytics to help detect, respond to and mitigate advanced security and insider security threats.

Our goal is to make our software the platform for delivering operational intelligence and real-time business insights from machine data. The key elements of our growth strategy are to:


•	Extend our technological capabilities.


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


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


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


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


•	Continue to deliver a rich developer environment to enable rapid development of enterprise applications that leverage machine data and the Splunk platform.

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

Financial Summary

For the three months ended July 31, 2016 and 2015, our total revenues were $212.8 million and $148.3 million, respectively. For the three months ended July 31, 2016 and 2015, approximately 22% and 23% of our total revenues, respectively, were derived from customers located outside the United States. Our customers and end-users represent the public sector and a wide variety of industries, including financial services, manufacturing, retail and technology, among others. As of July 31, 2016, we had over 12,000 customers, including 85 or more of the Fortune 100 companies.

For the three months ended July 31, 2016 and 2015, our GAAP operating loss was $83.6 million and $65.6 million, respectively. Our non-GAAP operating income was $8.2 million and $4.8 million for the three months ended July 31, 2016 and 2015, respectively.

For the three months ended July 31, 2016 and 2015, our GAAP net loss was $86.6 million and $55.3 million, respectively. Our non-GAAP net income was $7.3 million and $4.1 million for the three months ended July 31, 2016 and 2015, respectively.

Our quarterly results reflect seasonality in the sale of our offerings. Historically, a pattern of increased license sales in the fourth fiscal quarter as a result of industry buying patterns has positively impacted sales activity in that period, which can result in lower sequential revenues in the following first fiscal quarter. Our gross margins and operating losses have been affected by these historical trends because the majority of our expenses are relatively fixed in the short-term. The majority of our expenses are personnel-related and include salaries, stock-based compensation, benefits and incentive-based compensation plan expenses. As a result, we have not experienced significant seasonal fluctuations in the timing of expenses from period to period.

Non-GAAP Financial Results

To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP cost of revenues, non-GAAP gross margin, non-GAAP research and development expense, non-GAAP sales and marketing expense, non-GAAP general and administrative expense, non-GAAP operating income (loss), non-GAAP operating margin, non-GAAP net income (loss) and non-GAAP net income (loss) per share (collectively the “non-GAAP financial measures”). These non-GAAP financial measures exclude all or a combination of the following (as reflected in the following reconciliation tables): stock-based compensation expense, employer payroll tax expense related to employee stock plans, amortization of acquired intangible assets, acquisition-related costs, adjustments related to a financing lease obligation and the partial release of the valuation allowance due to acquisition. The adjustments for the financing lease obligation are to reflect the expense we would have recorded if our build-to-suit lease arrangement had been deemed an operating lease instead of a financing lease and is calculated as the net of actual ground lease expense, depreciation and interest expense over estimated straight-line rent expense. 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 management in our 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

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Topic 718, we believe that providing non-GAAP financial measures that exclude this expense allows investors the ability to make more meaningful comparisons between our operating results and those of other companies. We exclude employer payroll tax expense related to employee stock plans in order for investors to see the full effect that excluding that stock-based compensation expense had on our operating results. These expenses are tied to the exercise or vesting of underlying equity awards and the price of our common stock at the time of vesting or exercise, which may vary from period to period independent of the operating performance of our business. We also exclude amortization of acquired intangible assets, acquisition-related costs, the partial release of the valuation allowance due to acquisition and make adjustments related to a financing lease obligation from our non-GAAP financial measures because these are considered by management to be outside of our core operating results. Accordingly, we believe that excluding these expenses provides investors and management with greater visibility 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 our net cash provided by operating activities to free cash flow for the three and six months ended July 31, 2016, and 2015 (in thousands):



	Three Months Ended						Six Months Ended
	July 31,			July 31,			July 31,			July 31,
	2016			2015			2016			2015
Net cash provided by operating activities	$	18,349		$	13,638		$	54,038		$	42,253
Less purchases of property and equipment	(10,541		)	(2,809		)	(14,250		)	(9,224		)
Free cash flow (Non-GAAP)	$	7,808		$	10,829		$	39,788		$	33,029
Net cash used in investing activities	$	(30,627	)	$	(117,183	)	$	(44,003	)	$	(125,612	)
Net cash provided by (used in) financing activities	$	(5,634	)	$	16,462		$	(25,009	)	$	22,294

The following table reconciles our GAAP to Non-GAAP Financial Measures for the three months ended July 31, 2016 (in thousands, except per share amounts):



	GAAP			Stock-based compensation			Employer payroll tax on employee stock plans			Amortization of acquired intangible assets			Adjustments related to financing lease obligation				Non-GAAP
Cost of revenues	$	44,616		$	(7,310	)	$	(208	)	$	(2,886	)	$	259			$	34,471
Gross Margin	79.0		%	3.4		%	0.1		%	1.4		%	(0.1		)%		83.8		%
Research and development	67,224			(27,742		)	(676		)	(59		)	555				39,302
Sales and marketing	150,228			(39,371		)	(791		)	(151		)	1,131				111,046
General and administrative	34,312			(14,440		)	(388		)	—			251				19,735
Operating income (loss)	(83,627		)	88,863			2,063			3,096			(2,196		)		8,199
Operating margin	(39.3		)%	41.7		%	1.0		%	1.5		%	(1.0		)%		3.9		%
Net income (loss)	$	(86,597	)	$	88,863		$	2,063		$	3,096		$	(147	)	⁽²⁾	$	7,278
Net income (loss) per share⁽¹⁾	$	(0.65	)														$	0.05

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⁽¹⁾GAAP net loss per share calculated based on 133,041 weighted-average shares of common stock. Non-GAAP net income per share calculated based on 136,430 diluted weighted-average shares of common stock, which includes 3,389 potentially dilutive shares related to employee stock awards. GAAP to Non-GAAP net income (loss) per share is not reconciled due to the difference in the number of shares used to calculate basic and diluted weighted-average shares of common stock.

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⁽²⁾Includes $2.0 million of interest expense related to the financing lease obligation.

The following table reconciles our GAAP to Non-GAAP Financial Measures for the three months ended July 31, 2015 (in thousands, except per share amounts):



	GAAP			Stock-based compensation			Employer payroll tax on employee stock plans			Amortization of acquired intangible assets			Acquisition-related costs				Adjustments related to financing lease obligation			Non-GAAP
Cost of revenues	$	25,040		$	(5,662	)	$	(398	)	$	(1,572	)	$	—			$	—		$	17,408
Gross Margin	83.1		%	3.8		%	0.3		%	1.1		%	—		%		—		%	88.3		%
Research and development	48,308			(19,301		)	(732		)	(79		)	—				—			28,196
Sales and marketing	111,786			(28,210		)	(985		)	(155		)	—				—			82,436
General and administrative	28,760			(10,436		)	(602		)	—			(1,993		)		(222		)	15,507
Operating income (loss)	(65,568		)	63,609			2,717			1,806			1,993				222			4,779
Operating margin	(44.2		)%	43.0		%	1.8		%	1.2		%	1.3		%		0.1		%	3.2		%
Net income (loss)	$	(55,289	)	$	63,609		$	2,717		$	1,806		$	(8,931	)	⁽²⁾	$	222		$	4,134
Net income (loss) per share⁽¹⁾	$	(0.44	)																	$	0.03

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⁽¹⁾GAAP net loss per share calculated based on 126,621 weighted-average shares of common stock. Non-GAAP net income per share calculated based on 132,001 diluted weighted-average shares of common stock, which includes 5,380 potentially dilutive shares related to employee stock awards. GAAP to Non-GAAP net income (loss) per share is not reconciled due to the difference in the number of shares used to calculate basic and diluted weighted-average shares of common stock.

⁽²⁾Includes $10.9 million related to the partial release of the valuation allowance due to acquisition.

The following table reconciles our GAAP to Non-GAAP Financial Measures for the six months ended July 31, 2016 (in thousands, except per share amounts):



	GAAP			Stock-based compensation			Employer payroll tax on employee stock plans			Amortization of acquired intangible assets			Adjustments related to financing lease obligation				Non-GAAP
Cost of revenues	$	84,116		$	(14,865	)	$	(470	)	$	(5,798	)	$	285			$	63,268
Gross Margin	78.9		%	3.7		%	0.1		%	1.5		%	(0.1		)%		84.1		%
Research and development	134,595			(56,948		)	(1,432		)	(130		)	613				76,698
Sales and marketing	295,379			(79,604		)	(1,817		)	(302		)	1,249				214,905
General and administrative	66,385			(28,816		)	(829		)	—			277				37,017
Operating income (loss)	(181,770		)	180,233			4,548			6,230			(2,424		)		6,817
Operating margin	(45.6		)%	45.2		%	1.1		%	1.6		%	(0.6		)%		1.7		%
Net income (loss)	$	(187,493	)	$	180,233		$	4,548		$	6,230		$	1,117		⁽²⁾	$	4,635
Net income (loss) per share⁽¹⁾	$	(1.42	)														$	0.03

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⁽¹⁾GAAP net loss per share calculated based on 132,310 weighted-average shares of common stock. Non-GAAP net income per share calculated based on 135,348 diluted weighted-average shares of common stock, which includes 3,038 potentially dilutive shares related to employee stock awards. GAAP to Non-GAAP net income (loss) per share is not reconciled due to the difference in the number of shares used to calculate basic and diluted weighted-average shares of common stock.

⁽²⁾Includes $3.5 million of interest expense related to the financing lease obligation.

The following table reconciles our GAAP to Non-GAAP Financial Measures for the six months ended July 31, 2015 (in thousands, except per share amounts):

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	GAAP			Stock-based compensation			Employer payroll tax on employee stock plans			Amortization of acquired intangible assets			Acquisition-related costs				Adjustments related to financing lease obligation			Non-GAAP
Cost of revenues	$	48,125		$	(12,194	)	$	(661	)	$	(2,483	)	$	—			$	—		$	32,787
Gross Margin	82.4		%	4.5		%	0.2		%	0.9		%	—		%		—		%	88.0		%
Research and development	93,006			(39,376		)	(1,635		)	(148		)	—				—			51,847
Sales and marketing	213,775			(57,820		)	(2,061		)	(305		)	—				—			153,589
General and administrative	55,632			(20,328		)	(1,182		)	—			(1,993		)		(444		)	31,685
Operating income (loss)	(136,547		)	129,718			5,539			2,936			1,993				444			4,083
Operating margin	(49.8		)%	47.3		%	2.0		%	1.1		%	0.7		%		0.2		%	1.5		%
Net income (loss)	$	(126,475	)	$	129,718		$	5,539		$	2,936		$	(8,931	)	⁽²⁾	$	444		$	3,231
Net income (loss) per share⁽¹⁾	$	(1.01	)																	$	0.02

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⁽¹⁾GAAP net loss per share calculated based on 125,602 weighted-average shares of common stock. Non-GAAP net income per share calculated based on 131,153 diluted weighted-average shares of common stock, which includes 5,551 potentially dilutive shares related to employee stock awards. GAAP to Non-GAAP net income (loss) per share is not reconciled due to the difference in the number of shares used to calculate basic and diluted weighted-average shares of common stock.

⁽²⁾Includes $10.9 million related to the partial release of the valuation allowance due to acquisition.

Components of Operating Results

Revenues

License revenues. License revenues reflect the revenues recognized from sales of licenses to new customers and additional licenses to existing customers. We are focused on acquiring new customers and increasing revenues from our existing customers as they realize the value of our software by indexing higher volumes of machine data and expanding the use of our software through additional use cases and broader deployment within their organizations. A majority of our license revenues consists of revenues from perpetual licenses, under which we generally recognize the license fee portion of the arrangement upfront, assuming all revenue recognition criteria are satisfied. Customers can also purchase term license agreements, under which we recognize the license fee ratably, on a straight-line basis, over the term of the license. Due to the differing revenue recognition policies applicable to perpetual and term licenses, shifts in the mix between perpetual and term licenses from quarter to quarter could produce substantial variation in revenues recognized even if our sales remain consistent. In addition, seasonal trends that contribute to increased sales activity in the fourth fiscal quarter often result in lower sequential revenues in the first fiscal quarter, and we expect this trend to continue. Comparing our revenues on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance.

Maintenance and services revenues. Maintenance and services revenues consist of revenues from maintenance agreements and, to a lesser extent, professional services and training, as well as revenues from our cloud services. Typically, when purchasing a perpetual license, a customer also purchases one year of maintenance service for which we charge a percentage of the license fee. When a term license is purchased, maintenance service is typically bundled with the license for the term of the license period. Customers with maintenance agreements are entitled to receive support and unspecified upgrades and enhancements when and if they become available during the maintenance period. We recognize the revenues associated with maintenance agreements ratably, on a straight-line basis, over the associated maintenance period. In arrangements involving a term license, we recognize both the license and maintenance revenues over the contract period. We have a professional services organization focused on helping some of our largest customers deploy our software in highly complex operational environments and train their personnel. We recognize the revenues associated with these professional services on a time and materials basis as we deliver the services or provide the training. We expect maintenance and services revenues to become a larger percentage of our total revenues as our installed customer base grows. We generally recognize the revenues associated with our cloud services ratably, on a straight-line basis, over the associated subscription term.

Professional services and training revenues, as a percentage of total revenues, were 9% and 7% for the three months ended July 31, 2016 and 2015, 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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Cost of Revenues

Cost of license revenues. Cost of license revenues includes all direct costs to deliver our product, including salaries, benefits, stock-based compensation and related expenses such as employer taxes, allocated overhead for facilities and IT and amortization of acquired intangible assets. We recognize these expenses as they are incurred.

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

Operating Expenses

Our operating expenses are classified into three categories: research and development, sales and marketing and general and administrative. For each category, the largest component is personnel costs, which include salaries, employee benefit costs, bonuses, commissions as applicable, stock-based compensation and related expenses such as employer taxes. Operating expenses also include allocated overhead costs for depreciation of equipment, facilities and IT. Allocated costs for facilities consist of leasehold improvements and rent. Our allocated costs for IT include costs for compensation of our IT personnel and costs associated with our IT infrastructure. Operating expenses are generally recognized as incurred.

Research and development. Research and development expenses primarily consist of personnel and facility-related costs attributable to our research and development personnel. We have devoted our product development efforts primarily to enhancing the functionality and expanding the capabilities of our software and services. We expect that our research and development expenses will continue to increase, in absolute dollars, as we increase our research and development headcount to further strengthen and enhance our software and services and invest in the development of our solutions and apps.

Sales and marketing. Sales and marketing expenses primarily consist of personnel and facility-related costs for our sales, marketing and business development personnel, commissions earned by our sales personnel, and the cost of marketing and business development programs. We expect that sales and marketing expenses will continue to increase, in absolute dollars, as we continue to hire additional personnel and invest in marketing programs.

General and administrative. General and administrative expenses primarily consist of personnel and facility-related costs for our executive, finance, legal, human resources and administrative personnel; our legal, accounting and other professional services fees; and other corporate expenses. We anticipate continuing to incur additional expenses due to growing our operations, including higher legal, corporate insurance and accounting expenses.

Interest and other income (expense), net

Interest and other income (expense), net consists primarily of foreign exchange gains and losses, interest income on our investments and cash and cash equivalents balances, and changes in the fair value of forward exchange contracts.

Provision for income taxes

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

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The following tables set forth our results of operations for the periods presented and as a percentage of our total revenues for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.



	Three Months Ended July 31,						Six Months Ended July 31,
	2016			2015			2016			2015
	(in thousands)
Condensed Consolidated Statement of Operations Data:
Revenues
License	$	115,695		$	87,960		$	216,687		$	159,832
Maintenance and services	97,058			60,366			182,018			114,159
Total revenues	212,753			148,326			398,705			273,991
Cost of revenues
License	2,868			1,813			5,830			2,974
Maintenance and services	41,748			23,227			78,286			45,151
Total cost of revenues	44,616			25,040			84,116			48,125
Gross profit	168,137			123,286			314,589			225,866
Operating expenses
Research and development	67,224			48,308			134,595			93,006
Sales and marketing	150,228			111,786			295,379			213,775
General and administrative	34,312			28,760			66,385			55,632
Total operating expenses	251,764			188,854			496,359			362,413
Operating loss	(83,627		)	(65,568		)	(181,770		)	(136,547		)
Interest and other income (expense), net
Interest income (expense), net	(797		)	425			(1,200		)	785
Other income (expense), net	(1,063		)	(295		)	(2,188		)	(206		)
Total interest and other income (expense), net	(1,860		)	130			(3,388		)	579
Loss before income taxes	(85,487		)	(65,438		)	(185,158		)	(135,968		)
Income tax provision (benefit)	1,110			(10,149		)	2,335			(9,493		)
Net loss	$	(86,597	)	$	(55,289	)	$	(187,493	)	$	(126,475	)

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	Three Months Ended July 31,				Six Months Ended July 31,
	2016		2015		2016		2015
	(as % of revenues)
Condensed Consolidated Statement of Operations Data:
Revenues
License	54.4	%	59.3	%	54.3	%	58.3	%
Maintenance and services	45.6		40.7		45.7		41.7
Total revenues	100.0		100.0		100.0		100.0
Cost of revenues
License ⁽¹⁾	2.5		2.1		2.7