Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 (MARK ONE)
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2016
 
OR
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM              TO
 
COMMISSION FILE NUMBER 001-35498
 ____________________________________________________

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

There were 132,879,875 shares of the registrant’s Common Stock issued and outstanding as of June 2, 2016.
 

Table of Contents

TABLE OF CONTENTS
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

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


Splunk Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
 
April 30, 2016

January 31, 2016
Assets
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
428,245

 
$
424,541

Investments, current portion
 
594,246

 
584,498

Accounts receivable, net
 
98,607

 
181,665

Prepaid expenses and other current assets
 
30,599

 
26,565

Total current assets
 
1,151,697

 
1,217,269

Investments, non-current
 
1,500

 
1,500

Property and equipment, net
 
144,655

 
134,995

Intangible assets, net
 
46,504

 
49,482

Goodwill
 
124,642

 
123,318

Other assets
 
14,866

 
10,275

Total assets
 
$
1,483,864

 
$
1,536,839

Liabilities and Stockholders' Equity
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable
 
$
4,885

 
$
4,868

Accrued payroll and compensation
 
62,171

 
95,898

Accrued expenses and other liabilities
 
43,192

 
49,879

Deferred revenue, current portion
 
354,888

 
347,121

Total current liabilities
 
465,136

 
497,766

Deferred revenue, non-current
 
95,889

 
102,382

Other liabilities, non-current
 
89,789

 
77,277

Total non-current liabilities
 
185,678

 
179,659

Total liabilities
 
650,814

 
677,425

Commitments and contingencies (Note 3)
 


 


Stockholders’ equity
 
 

 
 

Common stock: $0.001 par value; 1,000,000,000 shares authorized; 132,676,092 shares issued and outstanding at April 30, 2016, and 131,543,467 shares issued and outstanding at January 31, 2016
 
133

 
132

Accumulated other comprehensive loss
 
(1,233
)
 
(3,770
)
Additional paid-in capital
 
1,600,641

 
1,528,647

Accumulated deficit
 
(766,491
)
 
(665,595
)
Total stockholders’ equity
 
833,050

 
859,414

Total liabilities and stockholders’ equity
 
$
1,483,864

 
$
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 April 30,
 
 
2016
 
2015
Revenues
 
 

 
 

License
 
$
100,992

 
$
71,872

Maintenance and services
 
84,960

 
53,793

Total revenues
 
185,952

 
125,665

Cost of revenues (1)
 
 

 
 

License
 
2,962

 
1,161

Maintenance and services
 
36,538

 
21,924

Total cost of revenues
 
39,500

 
23,085

Gross profit
 
146,452

 
102,580

Operating expenses (1)
 
 

 
 

Research and development
 
67,371

 
44,698

Sales and marketing
 
145,151

 
101,989

General and administrative
 
32,073

 
26,872

Total operating expenses
 
244,595

 
173,559

Operating loss
 
(98,143
)
 
(70,979
)
Interest and other income (expense), net
 
 

 
 

Interest income (expense), net
 
(403
)
 
360

Other income (expense), net
 
(1,125
)
 
89

Total interest and other income (expense), net
 
(1,528
)
 
449

Loss before income taxes
 
(99,671
)
 
(70,530
)
Income tax provision
 
1,225

 
656

Net loss
 
$
(100,896
)
 
$
(71,186
)
 
 
 

 
 

Basic and diluted net loss per share
 
$
(0.77
)
 
$
(0.57
)
 
 
 

 
 

Weighted-average shares used in computing basic and diluted net loss per share
 
131,494

 
124,548

 
(1)      Amounts include stock-based compensation expense, as follows:  
Cost of revenues
 
$
7,555


$
6,532

Research and development
 
29,206


20,075

Sales and marketing
 
40,233


29,610

General and administrative
 
14,376


9,892


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 April 30,
 
 
2016
 
2015
Net loss
 
$
(100,896
)
 
$
(71,186
)
Other comprehensive loss
 
 

 
 

Net unrealized gain (loss) on investments
 
339

 
(25
)
Foreign currency translation adjustments
 
2,198

 
15

Total other comprehensive gain (loss)
 
2,537

 
(10
)
Comprehensive loss
 
$
(98,359
)
 
$
(71,196
)
 
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)
 
 
 
Three Months Ended April 30,
 
 
2016
 
2015
Cash flows from operating activities
 
 

 
 

Net loss
 
$
(100,896
)

$
(71,186
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
6,461


3,466

Amortization of investment premiums
 
258

 
361

Stock-based compensation
 
91,370


66,109

Deferred income taxes
 
(506
)

(319
)
Excess tax benefits from employee stock plans
 
(692
)

(466
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
Accounts receivable, net
 
83,058


47,072

Prepaid expenses, other current and non-current assets
 
(8,119
)

(327
)
Accounts payable
 
99


402

Accrued payroll and compensation
 
(33,727
)

(18,355
)
Accrued expenses and other liabilities
 
(2,891
)

640

Deferred revenue
 
1,274


1,218

Net cash provided by operating activities
 
35,689


28,615

Cash flows from investing activities
 
 
 
 

Purchases of investments
 
(142,787
)
 
(160,514
)
Maturities of investments
 
133,120


160,000

Purchases of property and equipment
 
(3,709
)

(6,415
)
Other investment activities
 
—

 
(1,500
)
Net cash used in investing activities
 
(13,376
)

(8,429
)
Cash flows from financing activities
 
 
 
 
Proceeds from the exercise of stock options
 
1,664

 
5,366

Taxes paid related to net share settlement of equity awards
 
(21,731
)
 
—

Excess tax benefits from employee stock plans
 
692

 
466

Net cash provided by (used in) financing activities
 
(19,375
)

5,832

Effect of exchange rate changes on cash and cash equivalents
 
766


174

Net increase in cash and cash equivalents
 
3,704


26,192

Beginning of period
 
424,541


387,315

End of period
 
$
428,245


$
413,507

Supplemental disclosures
 
 

 
 

Cash paid for income taxes
 
$
990

 
$
489

Non-cash investing and financing activities
 
 

 
 

Change in accrued purchases of property and equipment
 
821

 
647

Vesting of early exercised options
 
—

 
28

Change in capitalized construction costs related to build-to-suit lease
 
10,065

 
8,508

 
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 March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.

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.


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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. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenues and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, which provides a one-year deferral in the effective date of ASU No. 2014-09. Early adoption will be permitted, but not earlier than the original effective date for annual and interim periods. In accordance with the deferral, the effective date applicable to us will be the first quarter of fiscal 2019. We are currently evaluating adoption methods and the effect that the updated standard will have on our condensed consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-08 (Topic 606), Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net). In April 2016, the FASB issued ASU No. 2016-10 (Topic 606), Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. These amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations and identifying performance obligations and licensing by amending certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance. Both ASU 2016-08 and ASU 2016-10 will have the same effective date and transition requirements as the new revenue standard issued in ASU 2014-09. 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 months ended April 30, 2016. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Expenses are translated at the average exchange rate during the period. Equity transactions are translated using historical exchange rates.

Foreign Currency Contracts

In the first quarter of fiscal 2016, we began to use foreign currency forward contracts as a part of our strategy to manage exposure related to foreign currency denominated monetary assets and liabilities. These contracts typically have

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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.
 
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 April 30, 2016 and January 31, 2016 (in thousands):
 

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April 30, 2016
 
January 31, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Money market funds
 
$
383,875

 
$
—

 
$
—

 
$
383,875

 
$
374,571

 
$
—

 
$
—

 
$
374,571

U.S. treasury securities
 
—

 
594,246

 
—

 
594,246

 
—

 
607,892

 
—

 
607,892

Other
 
—

 
—

 
1,500

 
1,500

 
—

 
—

 
1,500

 
1,500

Reported as:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
 

 
 

 
 

 
$
383,875

 
 

 
 

 
 

 
$
397,965

Investments, current portion
 
 
 
 
 
 
 
594,246

 
 
 
 
 
 
 
584,498

Investments, non-current
 
 
 
 
 
 
 
1,500

 
 
 
 
 
 
 
1,500

Total
 
 

 
 

 
 

 
$
979,621

 
 

 
 

 
 

 
$
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 April 30, 2016 (in thousands): 

 
 
April 30, 2016
 
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Investments, current portion:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
593,964

 
$
322

 
$
(40
)
 
$
594,246

Total available-for-sale investments in U.S. treasury securities
 
$
593,964

 
$
322

 
$
(40
)
 
$
594,246


As of April 30, 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
 
$
69,694

 
$
(27
)
 
$
97,473

 
$
(13
)
 
$
167,167

 
$
(40
)

As of April 30, 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):
 
 
April 30, 2016
Due within one year
 
$
594,246

Total
 
$
594,246


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

During fiscal year 2016, we invested in a two-year convertible promissory note of a privately-held company that we have classified as an available-for-sale investment and is included in investments, non-current, on our condensed consolidated balance sheets. This investment is recorded at fair value using significant unobservable inputs or data in an inactive market and

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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 investment are excluded from earnings and reported, net of tax, as a separate component on the condensed consolidated statements of comprehensive income (loss). During the three months ended April 30, 2016, we have not recognized any unrealized gains or losses or an other-than-temporary impairment charge on our investment. The carrying value of our convertible promissory note investment was $1.5 million as of April 30, 2016.

(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 $4.7 million and $2.9 million for the three months ended April 30, 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 fourth quarter of fiscal 2017 for a term of 10 years and nine months, subject to the completion of certain pre-occupancy improvements by our landlord. Our total obligation for the base rent is approximately $120.5 million.

The following summarizes our operating lease commitments as of April 30, 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*
 
$
172,580

 
$
13,513

 
$
45,331

 
$
32,148

 
$
81,588

 _________________________
*We entered into sublease agreements for portions of our office space and the future rental income of $1.8 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 continued to be accounted for as a financing obligation at lease commencement during our first fiscal quarter of 2017.

As of April 30, 2016, future payments on the financing lease obligation are as follows (in thousands):
Fiscal Period:
 
 
Remaining nine months of fiscal 2017
 
$
4,703

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
 
$
90,701



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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 April 30, 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
 
 
April 30, 2016
 
January 31, 2016
Computer equipment and software
 
$
45,682

 
$
43,883

Furniture and fixtures
 
14,094

 
13,398

Leasehold and building improvements (1)
 
41,422

 
41,028

Building (2)
 
82,250

 
72,186

 
 
183,448

 
170,495

Less: accumulated depreciation and amortization
 
(38,793
)
 
(35,500
)
Property and equipment, net
 
$
144,655

 
$
134,995

 _________________________ 
(1) Includes costs related to assets not yet placed into service of $28.0 million and $28.9 million, as of April 30, 2016 and January 31, 2016, respectively.

(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 $3.3 million and $2.3 million for the three months ended April 30, 2016 and 2015, respectively.

(5)  Acquisitions, Goodwill and Intangible Assets
 

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

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands, except useful life):
 
 
Fair Value
 
 Useful Life (months)
Developed technology
 
$
2,300

 
48
Other acquired intangible assets
 
370

 
36
Total intangible assets acquired
 
$
2,670

 
 

Caspida

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

Per the terms of the merger agreement with Caspida, certain unvested shares of stock and unvested stock options held by Caspida employees were 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, will be recognized ratably as stock-based compensation expense over the required service period.

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

 
72
In-process research and development
 
1,300

 
Indefinite*
Customer relationships
 
190

 
36
Total intangible assets acquired
 
$
45,790

 
 

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 ______________________
*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 April 30,
 
 
2015
Revenues
 
$
125,665

Net loss
 
$
(77,646
)
Basic and diluted net loss per share
 
$
(0.62
)

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 April 30, 2016
 
$
124,642


Intangible Assets

Intangible assets subject to amortization obtained from acquisitions as of April 30, 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

 
$
(14,873
)
 
$
44,497

 
56
Customer relationships
 
1,810

 
(1,439
)
 
371

 
13
Other acquired intangible assets
 
1,180

 
(844
)
 
336

 
22
Total intangible assets subject to amortization
 
$
62,360

 
$
(17,156
)
 
$
45,204

 
 

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 $1.1 million for the three months ended April 30, 2016 and 2015, respectively.
    

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The expected future amortization expense for acquired intangible assets as of April 30, 2016 is as follows (in thousands):
Fiscal Period:
 
 
Remaining nine months of fiscal 2017
 
$
8,819

Fiscal 2018
 
10,283

Fiscal 2019
 
8,024

Fiscal 2020
 
7,619

Fiscal 2021
 
7,383

Thereafter
 
3,076

Total amortization expense
 
$
45,204


(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 April 2016) or the LIBOR rate plus 2.75%. As of April 30, 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 April 30, 2016.

(7)  Stock Compensation Plans
 
The following table summarizes the stock option, restricted stock unit (“RSU”) and performance unit (“PSU”) award activity during the three months ended April 30, 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
 


 
(360,275
)
 
4.62

 

 


 


 
Options forfeited and expired
 
10,392

 
(10,392
)
 
1.36

 

 


 


 
RSUs and PSUs granted
 
(1,607,790
)
 


 


 

 


 
1,607,790

 
RSUs vested
 


 
 
 
 
 
 
 
 
 
(1,239,699
)
 
Shares withheld related to net share settlement of RSUs
 
467,349

 
 
 
 
 
 
 
 
 


 
RSUs forfeited and canceled
 
390,407

 


 


 

 


 
(390,407
)
 
Balances as of April 30, 2016
 
12,390,675

 
3,345,332

 
$
4.74

 
3.84
 
$
158,222

 
14,729,937

 
Vested and expected to vest
 
 
 
3,345,141

 
$
4.74

 
3.84
 
$
158,214

 
14,278,462

 
Exercisable as of April 30, 2016
 
 
 
3,264,406

 
$
4.57

 
3.74
 
$
154,852

 
 
 
 _________________________ 
(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 April 30, 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

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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 three months ended April 30, 2016, $0.7 million of tax benefits have been realized from exercised stock options. At April 30, 2016, total unrecognized compensation cost related to these stock options was $3.9 million, adjusted for estimated forfeitures, which is expected to be recognized over a weighted-average period of 1.8 years. At April 30, 2016, total unrecognized compensation cost was $661.9 million related to RSUs, adjusted for estimated forfeitures, which is expected to be recognized over the next 2.8 years. At April 30, 2016, total unrecognized compensation cost was $27.3 million related to PSUs, adjusted for estimated forfeitures, which is expected to be recognized over the next 3.5 years. Additionally, during fiscal 2016, we issued 671,782 restricted shares of our common stock (“RSAs”) and at April 30, 2016, total unrecognized compensation cost was $34.6 million related to RSAs, adjusted for estimated forfeitures, which is expected to be recognized over the next 2.7 years. At April 30, 2016, 74,828 RSAs were vested and 596,954 RSAs were outstanding.
 
The total intrinsic value of options exercised during the three months ended April 30, 2016 was $15.5 million. The weighted-average grant date fair value of RSUs granted was $45.87 per share for the three months ended April 30, 2016. The weighted-average grant date fair value of PSUs granted was $46.66 per share for the three months ended April 30, 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 three months ended April 30, 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 April 30,
 
 
2016

2015
United States
 
$
137,805

 
$
95,187

International
 
48,147

 
30,478

Total revenues
 
$
185,952

 
$
125,665

 
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 23% of total revenues during the three months ended April 30, 2016. A second channel partner represented approximately 14% and 11% of total revenues during the three months ended April 30, 2016 and 2015, respectively. 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 ended April 30, 2016 or 2015. At April 30, 2016, one channel partner represented approximately 21% of total accounts receivable and a second channel partner represented approximately 18% 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):

 
 
As of
 
 
April 30, 2016
 
January 31, 2016
United States
 
$
139,086

 
$
129,268

International
 
5,569

 
5,727

Total property and equipment, net
 
$
144,655

 
$
134,995


Other than the United States, no other country represented 10% or more of our total property and equipment as of April 30, 2016 or January 31, 2016.

(9)  Income Taxes

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For the three months ended April 30, 2016 and 2015, we recorded $1.2 million and $0.7 million in income tax expense, respectively. The increase in income tax expense was primarily due to an increase in taxable income in our international jurisdictions.

During the three months ended April 30, 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 April 30,
 
 
2016
 
2015
Numerator:
 
 

 
 

Net loss
 
$
(100,896
)
 
$
(71,186
)
Denominator:
 
 

 
 

Weighted-average common shares outstanding
 
132,101

 
124,563

Less: Weighted-average unvested common shares subject to repurchase or forfeiture
 
(607
)
 
(15
)
Weighted-average shares used to compute net loss per share, basic and diluted
 
131,494

 
124,548

Net loss per share, basic and diluted
 
$
(0.77
)
 
$
(0.57
)
 
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 April 30,
 
 
2016
 
2015
Shares subject to outstanding common stock options
 
3,345

 
5,487

Shares subject to outstanding RSUs, PSUs and RSAs
 
15,327

 
12,162

Employee stock purchase plan
 
606

 
316

Total
 
19,278

 
17,965

 
(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 $1.1 million for the three months ended April 30, 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 April 30, 2016 and 2015, respectively. We had $0 and $0.5 million of accounts receivable from these companies as of April 30, 2016 and January 31, 2016, respectively. There were no accounts payable to these companies as of April 30, 2016 or January 31, 2016.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 

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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; 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 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

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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 2016, we released new versions of existing products such as Splunk Enterprise, and introduced new products for the security and IT 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. 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.
 
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 April 30, 2016 and 2015, our total revenues were $186.0 million and $125.7 million, respectively. For the three months ended April 30, 2016 and 2015, approximately 26% and 24% of our total revenues, respectively, were derived from customers located outside the United States. Our customers and end-users represent the public

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sector and a wide variety of industries, including financial services, manufacturing, retail and technology, among others. As of April 30, 2016, we had over 11,000 customers, including over 85 of the Fortune 100 companies.

For the three months ended April 30, 2016 and 2015, our GAAP operating loss was $98.1 million and $71.0 million, respectively. Our non-GAAP operating loss was $1.4 million and $0.7 million for the three months ended April 30, 2016 and 2015, respectively.

For the three months ended April 30, 2016 and 2015, our GAAP net loss was $100.9 million and $71.2 million, respectively. Our non-GAAP net loss was $2.6 million and $0.9 million for the three months ended April 30, 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 and adjustments related to a financing lease obligation. 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 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 also exclude amortization of acquired intangible assets and make adjustments related to a financing lease obligation from its 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 its business operations, facilitates comparison of its results with other periods and may also facilitate comparison with the results of other companies in its 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 its business, making strategic acquisitions and strengthening its 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

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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 months ended April 30, 2016, and 2015 (in thousands):
 
Three Months Ended
 
April 30,
 
April 30,
 
2016
 
2015
Net cash provided by operating activities
$
35,689

 
$
28,615

Less purchases of property and equipment
(3,709
)
 
(6,415
)
Free cash flow (Non-GAAP)
$
31,980

 
$
22,200

Net cash used in investing activities
$
(13,376
)
 
$
(8,429
)
Net cash provided by (used in) financing activities
$
(19,375
)
 
$
5,832


The following table reconciles our GAAP to Non-GAAP Financial Measures for the three months ended April 30, 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
 
$
39,500

 
$
(7,555
)
 
$
(262
)
 
$
(2,912
)
 
$
26

 
$
28,797

Gross Margin
 
78.8
 %
 
4.0
%
 
0.1
%
 
1.6
%
 
—
 %
 
84.5
 %
Research and development
 
67,371

 
(29,206
)
 
(756
)
 
(71
)
 
58

 
37,396

Sales and marketing
 
145,151

 
(40,233
)
 
(1,026
)
 
(151
)
 
118

 
103,859

General and administrative
 
32,073

 
(14,376
)
 
(441
)
 
—

 
26

 
17,282

Operating loss
 
(98,143
)
 
91,370

 
2,485

 
3,134

 
(228
)
 
(1,382
)
Operating margin
 
(52.8
)%
 
49.2
%
 
1.3
%
 
1.7
%
 
(0.1
)%
 
(0.7
)%
Net loss
 
$
(100,896
)
 
$
91,370

 
$
2,485

 
$
3,134

 
$
1,263

(2) 
$
(2,644
)
Net loss per share(1)
 
$
(0.77
)
 
$
0.70

 
$
0.02

 
$
0.02

 
$
0.01

 
$
(0.02
)
_________________________
(1) Calculated based on 131,494 basic and diluted weighted-average shares of common stock.
(2) Includes $1.5 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 April 30, 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
 
Adjustments related to financing lease obligation
 
Non-GAAP
Cost of revenues
 
$
23,085

 
$
(6,532
)
 
$
(263
)
 
$
(911
)
 
$
—

 
$
15,379

Gross Margin
 
81.6
 %
 
5.2
%
 
0.2
%
 
0.8
%
 
—
%
 
87.8
 %
Research and development
 
44,698

 
(20,075
)
 
(903
)
 
(69
)
 
—

 
23,651

Sales and marketing
 
101,989

 
(29,610
)
 
(1,076
)
 
(150
)
 
—

 
71,153

General and administrative
 
26,872

 
(9,892
)
 
(580
)
 
—

 
(222
)
 
16,178

Operating loss
 
(70,979
)
 
66,109

 
2,822

 
1,130

 
222

 
(696
)
Operating margin
 
(56.5
)%
 
52.6
%
 
2.2
%
 
0.9
%
 
0.2
%
 
(0.6
)%
Net loss
 
$
(71,186
)
 
$
66,109

 
$
2,822

 
$
1,130

 
$
222

 
$
(903
)
Net loss per share(1)
 
$
(0.57
)
 
$
0.53

 
$
0.02

 
$
0.01

 
$
—

 
$
(0.01
)
_________________________
(1) Calculated based on 124,548 basic and diluted weighted-average shares of common stock.

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 8% for the three months ended April 30, 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.
 
Cost of Revenues
 

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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
 
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.

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Three Months
Ended April 30,
 
 
2016
 
2015
 
 
(in thousands)
Condensed Consolidated Statement of Operations Data:
 
 

 
 
Revenues
 
 
 
 
License
 
$
100,992

 
$
71,872

Maintenance and services
 
84,960

 
53,793

Total revenues
 
185,952

 
125,665

Cost of revenues
 
 
 
 

License
 
2,962

 
1,161

Maintenance and services
 
36,538

 
21,924

Total cost of revenues
 
39,500

 
23,085

Gross profit
 
146,452

 
102,580

Operating expenses
 
 

 
 

Research and development
 
67,371

 
44,698

Sales and marketing
 
145,151

 
101,989

General and administrative
 
32,073

 
26,872

Total operating expenses
 
244,595

 
173,559

Operating loss
 
(98,143
)
 
(70,979
)
Interest and other income (expense), net
 
 
 
 
Interest income (expense), net
 
(403
)
 
360

Other income (expense), net
 
(1,125
)
 
89

Total interest and other income (expense), net
 
(1,528
)
 
449

Loss before income taxes
 
(99,671
)
 
(70,530
)
Income tax provision
 
1,225

 
656

Net loss
 
$
(100,896
)
 
$
(71,186
)


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Three Months
Ended April 30,
 
 
2016
 
2015
 
 
(as % of revenues)
Condensed Consolidated Statement of Operations Data:
 
 

 
 
Revenues
 
 
 
 
License
 
54.3
 %
 
57.2
 %
Maintenance and services
 
45.7

 
42.8

Total revenues
 
100.0

 
100.0

Cost of revenues
 
 
 
 
License (1)
 
2.9

 
1.6

Maintenance and services (1)
 
43.0

 
40.8

Total cost of revenues
 
21.2

 
18.4

Gross profit
 
78.8

 
81.6

Operating expenses
 
 
 
 
Research and development
 
36.2

 
35.6

Sales and marketing
 
78.1

 
81.2

General and administrative
 
17.3

 
21.3

Total operating expenses
 
131.6

 
138.1

Operating loss
 
(52.8
)
 
(56.5
)
Interest and other income (expense), net
 
 
 
 
Interest income (expense), net
 
(0.2
)
 
0.3

Other income (expense), net
 
(0.6
)
 
0.1

Total interest and other income (expense), net
 
(0.8
)
 
0.4

Loss before income taxes
 
(53.6
)
 
(56.1
)
Income tax provision
 
0.7

 
0.5

Net loss
 
(54.3
)%
 
(56.6
)%
 _________________________ 
(1) Calculated as a percentage of the associated revenues.

Comparison of the Three Months Ended April 30, 2016 and 2015
 
Revenues
 
 
 
Three Months
Ended April 30,
 
 
 
 
2016

2015
 
% Change
 
 
($ amounts in thousands)
 
 
Revenues
 
 
 
 

 
 

License
 
$
100,992

 
$
71,872

 
40.5
%
Maintenance and services
 
84,960

 
53,793

 
57.9
%
Total revenues
 
$
185,952

 
$
125,665

 
48.0
%
Percentage of revenues
 
 

 


 
 

License
 
54.3
%
 
57.2
%
 
 
Maintenance and services
 
45.7

 
42.8

 
 
Total
 
100.0
%
 
100.0
%
 
 
 
The increase in license revenues of $29.1 million was primarily driven by increases in our total number of customers, sales to existing customers and the number of large orders. For example, we had 318 and 226 orders greater than $100,000 for the three months ended April 30, 2016 and 2015, respectively. Our total number of customers increased from approximately 9,500 at April 30, 2015 to more than 11,000 at April 30, 2016. The increase in maintenance and services revenues of $31.2

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

Cost of Revenues and Gross Margin
 
 
 
Three Months
Ended April 30,
 
 
 
 
2016

2015
 
% Change
 
 
($ amounts in thousands)
 
 
Cost of revenues
 
 

 
 

 
 

License
 
$
2,962

 
$
1,161

 
155.1
%
Maintenance and services
 
36,538

 
21,924

 
66.7
%
Total cost of revenues
 
$
39,500

 
$
23,085

 
71.1
%
Gross margin
 
 
 

 
 
License
 
97.1
%
 
98.4
%
 


Maintenance and services
 
57.0
%
 
59.2
%
 
 

Total gross margin
 
78.8
%
 
81.6
%
 
 


Total cost of revenues increased $16.4 million primarily due to a $14.6 million increase in cost of maintenance and services revenues. The $1.8 million increase in cost of license revenues was primarily due to amortization expense related to acquired intangible assets. The increase in cost of maintenance and services revenues was primarily related to an increase of $6.5 million related to third-party hosting fees to support our cloud services and a $5.0 million increase in salaries and benefits expense, which includes a $1.0 million increase in stock-based compensation expense due to increased headcount. Total gross margin decreased slightly primarily due to maintenance and services revenues being a greater percentage of the overall revenue mix.

Operating Expenses
 
 
 
Three Months
Ended April 30,
 
 
 
 
2016
 
2015
 
% Change
 
 
($ amounts in thousands)
 
 
Operating expenses (1)
 
 

 
 

 
 

Research and development
 
$
67,371

 
$
44,698

 
50.7
%
Sales and marketing
 
145,151

 
101,989

 
42.3
%
General and administrative
 
32,073

 
26,872

 
19.4
%
Total operating expenses
 
$
244,595

 
$
173,559

 
40.9
%
Percentage of revenues
 
 
 


 
 
Research and development
 
36.2
%
 
35.6
%
 


Sales and marketing
 
78.1

 
81.1

 
 
General and administrative
 
17.3

 
21.4

 
 
Total
 
131.6
%
 
138.1
%
 
 
 
 
 
 
 
 
 
(1) Includes stock-based compensation expense:
 
 

Research and development
 
$
29,206

 
$
20,075

 
 

Sales and marketing
 
40,233

 
29,610

 
 

General and administrative
 
14,376

 
9,892

 
 

Total stock-based compensation expense
 
$
83,815

 
$
59,577

 
 

 
Research and development expense.  Research and development expense increased $22.7 million primarily due to a $18.7 million increase in salaries and benefits, which includes a $9.1 million increase in stock-based compensation expense, as we increased headcount as part of our focus on further developing and enhancing our products. We also had an increase of $2.0 million related to overhead costs.
 

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Sales and marketing expense.  Sales and marketing expense increased $43.2 million primarily due to a $33.5 million increase in salaries and benefits, which includes a $10.6 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 $5.2 million in expenses due to increased facilities and overhead, and an increase of $2.5 million due to our sales kickoff meeting held in February 2016, and other sales-related events.

General and administrative expense.  General and administrative expense increased $5.2 million due primarily to an increase of $6.7 million related to salaries and benefits, which includes a $4.5 million increase in stock-based compensation expense, as we increased headcount. These increases were offset by a $1.0 million reduction in accounting and legal expenses, primarily due to legal fees related to patent filings.

Interest and Other Income (Expense), net
 
 
 
Three Months
Ended April 30,
 
 
2016
 
2015
 
 
(in thousands)
Interest and other income (expense), net:
 
 
 
 
Interest income (expense), net
 
$
(403
)
 
$
360

Other income (expense), net
 
(1,125
)
 
89

Total interest and other income (expense), net
 
$
(1,528
)
 
$
449

 
Interest and other income (expense), net reflects a net decrease primarily due to an increase in foreign exchange losses and interest expense related to our financing lease obligation, offset by an increase in interest income from our investments.
 
Income Tax Provision
 
 
 
Three Months
Ended April 30,
 
 
2016
 
2015
 
 
(in thousands)
Income tax provision
 
$
1,225

 
$
656

 
For the three months ended April 30, 2016, we recorded an increase in income tax expense that was primarily attributable to an increase in taxable income in our international jurisdictions.

Liquidity and Capital Resources
 
 
April 30, 2016
 
January 31, 2016
 
 
(in thousands)
Cash and cash equivalents
 
$
428,245

 
$
424,541

 
 
 
 
 
 
 
Three Months
Ended April 30,
 
 
2016
 
2015
 
 
(in thousands)
Cash provided by operating activities
 
$
35,689

 
$
28,615

Cash used in investing activities
 
(13,376
)
 
(8,429
)
Cash provided by (used in) financing activities
 
(19,375
)
 
5,832

 
Since fiscal 2010 we have funded our operations primarily through cash generated from operations. At April 30, 2016, our cash and cash equivalents of $428.2 million were held for working capital purposes, a majority of which was invested in money market funds. We intend to continue to focus our capital expenditures in fiscal 2017 to support our global facilities expansions and make additional investments in our infrastructure to scale our operations. We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development

25
Table of Contents

efforts, the expansion of sales and marketing activities, the introduction of new and enhanced software and services offerings, the continuing market acceptance of our offerings and our planned investments, particularly in our product development efforts or acquisitions of complementary businesses, applications or technologies.

In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us if at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition could be adversely affected.
 
Operating Activities
 
In the three months ended April 30, 2016, cash inflows from our operating activities were $35.7 million, which reflects our net loss of $100.9 million, adjusted by non-cash charges of $96.9 million, consisting primarily of $91.4 million for stock-based compensation, $6.5 million for depreciation and amortization and $0.3 million for amortization of investment premiums, partially offset by $0.5 million for deferred income taxes and $0.7 million for excess tax benefits from employee stock plans. Sources of cash inflows were from changes in our working capital, including a $83.1 million decrease in accounts receivable due to strong collections and a $1.3 million increase in deferred revenue due to increased sales of our product and services and the related support agreements. These cash inflows were offset by a $33.7 million decrease in accrued payroll and compensation, a $8.1 million increase in prepaid expenses, and other current and non-current assets and a $2.9 million decrease in accrued expenses and other liabilities.

In the three months ended April 30, 2015, cash inflows from our operating activities were $28.6 million, which reflects our net loss of $71.2 million, adjusted by non-cash charges of $69.2 million, consisting primarily of $66.1 million for stock-based compensation, $3.5 million for depreciation and amortization and $0.4 million for amortization of investment premiums, partially offset by $0.5 million for excess tax benefits from employee stock plans and $0.3 million for deferred income taxes. Sources of cash inflows were from changes in our working capital, including a $47.1 million decrease in accounts receivable due to strong collections, a $1.2 million increase in deferred revenue due to increased sales of our license and subscription products and the related product support agreements, a $0.6 million increase in accrued expenses and other liabilities due to the overall growth of our business and a $0.4 million increase in accounts payable. These cash inflows were offset by an $18.4 million decrease in accrued payroll and compensation and a $0.3 million increase in prepaid expense and other current and non-current assets.

Investing Activities
 
In the three months ended April 30, 2016, cash used in investing activities of $13.4 million was primarily attributable to $142.8 million of investments in U.S. treasury securities and $3.7 million of capital expenditures for the purchase of technology and hardware as well as purchases related to our facilities and infrastructure. These cash outflows were partially offset by $133.1 million cash inflow due to the maturities of our investments.

In the three months ended April 30, 2015, cash used in investing activities of $8.4 million was primarily attributable to $160.5 million of investments in U.S. treasury securities, $6.4 million of capital expenditures for the purchase of technology and hardware as well as purchases related to our facilities and infrastructure and $1.5 million related to other investment activities. These cash outflows were partially offset by a $160.0 million cash inflow due to the maturities of our investments.

Financing Activities
 
In the three months ended April 30, 2016, cash used in financing activities of $19.4 million consisted primarily of $21.7 million of taxes paid related to net share settlement of equity awards. This cash outflow was partially offset by $1.7 million of proceeds from the issuance of common stock and $0.7 million of proceeds from excess tax benefits from employee stock plans.

In the three months ended April 30, 2015, cash provided by financing activities of $5.8 million consisted primarily of $5.4 million of proceeds from the exercise of stock options and $0.5 million of proceeds from excess tax benefits from employee stock plans.

Loan and Security Agreement

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 on 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

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at the prime rate (3.50% in April 2016) or the LIBOR rate plus 2.75%. As of April 30, 2016, we had no balance outstanding under this agreement. The agreement includes restrictive covenants, in each case subject to certain exceptions, that limit our ability to: sell or otherwise dispose of our business or property; change our business, liquidate or dissolve or undergo a change in control; enter into mergers, consolidations and acquisitions; incur indebtedness; create liens; pay dividends or make distributions; make investments; enter into material transactions with affiliates; pay any subordinated debt or amend certain terms thereof; or become an investment company.

In addition, the agreement contains customary financial covenants and other affirmative and negative covenants. We were in compliance with all covenants as of April 30, 2016.

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 $4.7 million and $2.9 million for the three months ended April 30, 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 fourth quarter of fiscal 2017 for a term of 10 years and nine months, subject to the completion of certain pre-occupancy improvements by our landlord. Our total obligation for the base rent is approximately $120.5 million.

The following summarizes our operating lease commitments as of April 30, 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*
 
$
172,580

 
$
13,513

 
$
45,331

 
$
32,148

 
$
81,588

 _________________________
*We entered into sublease agreements for portions of our office space and the future rental income of $1.8 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 was accounted for as a financing obligation at lease commencement during our first fiscal quarter of 2017.

As of April 30, 2016, future payments on the financing lease obligation are as follows (in thousands):

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Fiscal Period:
 
 
Remaining nine months of fiscal 2017
 
$
4,703

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
 
$
90,701


Off-Balance Sheet Arrangements
 
During the three months ended April 30, 2016 and 2015, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 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 April 30, 2016. We are unable to estimate the maximum potential impact of these indemnifications on our future results of operations.

Critical Accounting Policies and Estimates
 
We prepare our condensed consolidated financial statements in accordance with U.S. GAAP. The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
 
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K, filed with the SEC on March 30, 2016.
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We had cash and cash equivalents of $428.2 million as of April 30, 2016. We hold our cash and cash equivalents for working capital purposes. Our cash and cash equivalents are held in cash deposits and money market funds. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This objective is accomplished by making diversified investments, consisting only of investment grade securities. The effect of a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our interest income.

Any draws under our revolving credit facility bear interest at a variable rate tied to the prime rate or the LIBOR rate. As of April 30, 2016, we had no balance outstanding under this agreement.


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Foreign Currency Exchange Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. All of our revenues are generated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States and to a lesser extent in Europe and Asia. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. We seek to minimize the impact of certain foreign currency fluctuations by hedging certain balance sheet exposures with foreign currency forward contracts. Any gain or loss from settling these contracts is offset by the loss or gain derived from the underlying balance sheet exposures. We do not enter into any hedging contracts for trading or speculative purposes. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates.

Inflation

We do not believe that inflation had a material effect on our business, financial condition or results of operations in the three months ended April 30, 2016 and 2015. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations. 

Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of April 30, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of April 30, 2016, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting
 
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Inherent Limitations on Effectiveness of Controls
 
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because

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of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
 
The information set forth above under Legal Proceedings in Note 3 contained in the “Notes to Condensed Consolidated Financial Statements” is incorporated herein by reference.

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Item 1A. Risk Factors
 
Our operations and financial results are subject to various risks and uncertainties including those described below. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks or others not specified below materialize, our business, financial condition and results of operations could be materially adversely affected. In that case, the trading price of our common stock could decline.
 
The market for our offerings is new and unproven and may not grow.

We believe our future success will depend in large part on the growth, if any, in the market for offerings that provide operational intelligence, particularly from machine data. We market our offerings as targeted solutions for specific use cases and as an enterprise solution for machine data. In order to grow our business, we intend to expand the functionality of our offerings to increase their acceptance and use by the broader market as well as develop new offerings. It is difficult to predict customer adoption and renewal rates, customer demand for our offerings, the size and growth rate of this market, the entry of competitive products or the success of existing competitive products. Any expansion in our market depends on a number of factors, including the cost, performance and perceived value associated with our offerings. If our offerings do not achieve widespread adoption or there is a reduction in demand for products in our market caused by a lack of customer acceptance or expansion, technological challenges, decreases in accessible machine data, competing technologies and products, pricing pressure, decreases in corporate or information technology spending, weakening economic conditions, or otherwise, it could result in reduced customer orders, early terminations, reduced renewal rates or decreased revenues, any of which would adversely affect our business operations and financial results. We believe that these are inherent risks and difficulties in this new and unproven market.

Our future operating results may fluctuate significantly, and our recent operating results may not be a good indication of our future performance.
 
Our revenues and operating results could vary significantly from period to period as a result of various factors, many of which are outside of our control. For example, we have historically generated a majority of our revenues from perpetual license agreements, whereby we generally recognize the license fee portion of the arrangement upfront, assuming all revenue recognition criteria are satisfied. Our customers also have the choice of entering into agreements for term licenses and/or our cloud services for use of our software, whereby the fee is recognized ratably over the term of the agreement, and, in combination with our introduction of enterprise adoption agreements, or transactions that are designed to enable broad adoption of our software within an enterprise, we have seen the proportion of our customer orders where revenues will be recognized ratably increase steadily as a percentage of total orders. At the beginning of each quarter, we do not know the ratio between perpetual licenses and ratably recognized agreements that we will enter into during the quarter. In the first quarter of fiscal 2017, the percentage of license and cloud orders that will be recognized ratably was 51%. As a result, our operating results could be significantly impacted by unexpected shifts in the ratio between perpetual licenses and ratably recognized agreements. In addition, the size of our licenses varies greatly, and a single, large perpetual license in a given period could distort our operating results. The timing and size of large transactions are often hard to predict in any particular period. Further, a portion of revenue recognized in any given quarter is a result of ratably recognized agreements entered into during previous quarters, including maintenance and support agreements. Consequently, a decline in business from ratably recognized agreements or maintenance and support agreements in any quarter may not be reflected in our revenue results for that quarter. Any such decline, however, will negatively affect our revenues in future quarters.  Accordingly, the effect of downturns in sales and market acceptance of our offerings may not be fully reflected in our results of operations until future periods. Comparing our revenues and operating results 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.

We may not be able to accurately predict our future revenues or results of operations. In particular, approximately half of the revenues we currently recognize each quarter has been attributable to sales made in that same quarter with the balance of the revenues being attributable to sales made in prior quarters in which the related revenues were not recognized upfront. As a result, our ability to forecast revenues on a quarterly or longer-term basis is extremely limited. We base our current and future expense levels on our operating plans and sales forecasts, and our operating costs are expected to be relatively fixed in the short-term. As a result, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues, and even a small shortfall in revenues could disproportionately and adversely affect our financial results for that quarter.
 

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In addition to other risk factors described elsewhere in this “Risk Factors” section, factors that may cause our financial results to fluctuate from quarter to quarter include:
 
•
the timing of our sales during the quarter, particularly because a large portion of our sales occur toward the end of the quarter, or the loss or delay of a few large contracts;

•
the mix of revenues attributable to larger transactions as opposed to smaller transactions and the impact that a change in mix may have on the overall average selling price of our offerings;
 
•
the mix of revenues attributable to perpetual licenses and term licenses, subscriptions, enterprise adoption agreements, maintenance and professional services and training, which may impact our revenue, deferred revenue, gross margins and operating income;

•
the renewal and usage rates of our customers;
 
•
changes in the competitive dynamics of our market;
 
•
changes in customers’ budgets and in the timing of their purchasing decisions;
 
•
customers delaying purchasing decisions in anticipation of new offerings or software enhancements by us or our competitors;
 
•
customer acceptance of and willingness to pay for new versions of our offerings or new solutions for specific product and end markets;
 
•
our ability to successfully introduce and monetize new offerings and licensing and service models for our new offerings;
 
•
our ability to control costs, including our operating expenses;

•
the amount and timing of our stock-based compensation expenses;

•
the timing of satisfying revenue recognition criteria;

•
our ability to qualify and successfully compete for government contracts;
 
•
the collectability of receivables from customers and resellers, which may be hindered or delayed; and
 
•
general economic conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers participate.
 
Many of these factors are outside our control, and the variability and unpredictability of such factors could result in our failing to meet or exceed our financial expectations for a given period. We believe that quarter-to-quarter comparisons of our revenues, operating results and cash flows may not necessarily be indicative of our future performance.
  
We have a short operating history, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.
 
We have a short operating history, which limits our ability to forecast our future operating results and subjects us to a number of uncertainties, including our ability to plan for and model future growth. We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in developing industries. If our assumptions regarding these uncertainties, which we use to plan our business, are incorrect or change in reaction to changes in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer. Moreover, although we have experienced rapid growth historically, we may not continue to grow as rapidly in the future. Any success that we may experience in the future will depend in large part on our ability to, among other things:
 
•
improve the performance and capabilities of our offerings and technology through research and development;
 

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•
continue to develop, enhance, expand adoption of and globally deliver our cloud services, including Splunk Cloud, and comply with applicable laws in each jurisdiction in which we offer such services;

•
successfully develop, introduce and expand adoption of new offerings;

•
increase revenues from existing customers through increased or broader use of our offerings within their organizations;

•
successfully expand our business domestically and internationally;

•
maintain and expand our customer base and the ways in which our customers use our offerings;
 
•
successfully compete with other companies, open source projects and custom development efforts that are currently in, or may in the future enter, the markets for our offerings;

•
successfully provide our customers a compelling business case to purchase our offerings in a time frame that matches our and our customers’ sales and purchase cycles and at a compelling price point;

•respond timely and effectively to competitor offerings and pricing models;

•appropriately price our offerings;

•
generate leads and convert users of the trial versions of our offerings to paying customers;

•
prevent users from circumventing the terms of their licenses and subscriptions;

•
continue to invest in our application development platform to deliver additional content for our offerings and to foster an ecosystem of developers and users to expand the use cases of our offerings;

•
maintain and enhance our website and cloud services infrastructure to minimize interruptions when accessing our offerings;

•
process, store and use our customers’ data in compliance with applicable governmental regulations and other legal obligations related to data privacy, data protection, data transfer, data residency, encryption and security;

•
hire, integrate and retain world-class professional and technical talent; and