Edgar Filing: SPLUNK INC

Fair Value

Useful Life (months)

Developed technology

Customer relationships

Total intangible assets acquired

Document

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2018

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.)

270 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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)

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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 145,002,842 shares of the registrant’s Common Stock issued and outstanding as of May 30, 2018.

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		Page No.

	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of April 30, 2018 and January 31, 2018	1
	Condensed Consolidated Statements of Operations for the Three Months Ended April 30, 2018 and 2017	2
	Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended April 30, 2018 and 2017	3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2018 and 2017	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33
Item 4.	Controls and Procedures	34
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 6.	Exhibits	60
	Signatures	62

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Splunk Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)



	April 30, 2018			January 31, 2018
				*As Adjusted
Assets
Current assets
Cash and cash equivalents	$	481,826		$	545,947
Investments, current	468,321			619,203
Accounts receivable, net	207,913			396,413
Prepaid expenses and other current assets	90,072			70,021
Deferred commissions, current	52,545			52,451
Total current assets	1,300,677			1,684,035
Investments, non-current	9,750			5,375
Property and equipment, net	155,674			160,880
Intangible assets, net	87,537			48,142
Goodwill	413,881			161,382
Deferred commissions, non-current	36,754			37,920
Other assets	46,009			41,711
Total assets	$	2,050,282		$	2,139,445
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	9,898		$	11,040
Accrued compensation	100,156			145,365
Accrued expenses and other liabilities	76,105			84,631
Deferred revenue, current	472,313			489,913
Total current liabilities	658,472			730,949
Deferred revenue, non-current	176,076			178,792
Other liabilities, non-current	97,194			98,383
Total non-current liabilities	273,270			277,175
Total liabilities	931,742			1,008,124
Commitments and contingencies (Note 3)
Stockholders’ equity
Common stock: $0.001 par value; 1,000,000,000 shares authorized; 144,985,870 shares issued and outstanding at April 30, 2018, and 142,835,123 shares issued and outstanding at January 31, 2018	144			143
Accumulated other comprehensive income (loss)	(1,538		)	156
Additional paid-in capital	2,194,900			2,086,893
Accumulated deficit	(1,074,966		)	(955,871		)
Total stockholders’ equity	1,118,540			1,131,321
Total liabilities and stockholders’ equity	$	2,050,282		$	2,139,445

* Prior-period information has been adjusted to reflect the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which we adopted on February 1, 2018. Refer to Note 1 for further details.

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,
	2018			2017
				*As Adjusted
Revenues
License	$	138,975		$	102,562
Maintenance and services	172,664			124,206
Total revenues	311,639			226,768
Cost of revenues⁽¹⁾
License	5,124			2,928
Maintenance and services	72,846			55,235
Total cost of revenues	77,970			58,163
Gross profit	233,669			168,605
Operating expenses⁽¹⁾
Research and development	86,357			71,298
Sales and marketing	218,036			173,461
General and administrative	50,742			36,496
Total operating expenses	355,135			281,255
Operating loss	(121,466		)	(112,650		)
Interest and other income (expense), net
Interest income (expense), net	1,114			(528		)
Other income (expense), net	(135		)	(608		)
Total interest and other income (expense), net	979			(1,136		)
Loss before income taxes	(120,487		)	(113,786		)
Income tax provision (benefit)	(1,988		)	1,338
Net loss	$	(118,499	)	$	(115,124	)

Basic and diluted net loss per share	$	(0.83	)	$	(0.84	)

Weighted-average shares used in computing basic and diluted net loss per share	143,548			137,785

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



Cost of revenues	$	8,804	$	8,192
Research and development	26,416		26,797
Sales and marketing	43,047		40,643
General and administrative	16,354		14,423

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,
	2018			2017
				*As Adjusted
Net loss	$	(118,499	)	$	(115,124	)
Other comprehensive loss
Net unrealized gain (loss) on investments (net of tax)	192			(482		)
Foreign currency translation adjustments	(1,886		)	(94		)
Total other comprehensive loss	(1,694		)	(576		)
Comprehensive loss	$	(120,193	)	$	(115,700	)

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,
	2018			2017
				*As Adjusted
Cash flows from operating activities
Net loss	$	(118,499	)	$	(115,124	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	11,416			9,103
Amortization of deferred commissions	15,788			10,317
Amortization of investment premiums (accretion of discounts)	(176		)	217
Stock-based compensation	94,621			90,055
Deferred income taxes	(239		)	101
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable, net	195,576			66,056
Prepaid expenses and other assets	(23,299		)	(7,057		)
Deferred commissions	(14,716		)	(10,276		)
Accounts payable	(1,078		)	714
Accrued compensation	(44,435		)	(10,988		)
Accrued expenses and other liabilities	(14,340		)	(7,905		)
Deferred revenue	(24,132		)	16,145
Net cash provided by operating activities	76,487			41,358
Cash flows from investing activities
Purchases of investments	(22,875		)	(122,473		)
Maturities of investments	174,125			163,065
Acquisition, net of cash acquired	(284,170		)	—
Purchases of property and equipment	(2,296		)	(5,605		)
Other investment activities	(4,375		)	—
Net cash provided by (used in) investing activities	(139,591		)	34,987
Cash flows from financing activities
Proceeds from the exercise of stock options	1,113			1,487
Taxes paid related to net share settlement of equity awards	(779		)	(32,462		)
Repayment of financing lease obligation	(589		)	(317		)
Net cash used in financing activities	(255		)	(31,292		)
Effect of exchange rate changes on cash and cash equivalents	(762		)	28
Net increase (decrease) in cash and cash equivalents	(64,121		)	45,081
Cash and cash equivalents at beginning of period	545,947			421,346
Cash and cash equivalents at end of period	$	481,826		$	466,427
Supplemental disclosures
Cash paid for income taxes	$	2,139		$	2,263
Cash paid for interest expense related to financing lease obligation	2,069			1,868
Non-cash investing and financing activities
Decrease in accrued purchases of property and equipment	(791		)	(232		)

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, correlate 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 across an organization and contains a definitive, time-stamped record of various activities, such as transactions, customer and user behavior, 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 2019 or fiscal year 2019, for example, refer to the fiscal year ending January 31, 2019.

Basis of Presentation

Effective February 1, 2018, we adopted the Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” as discussed in "Recently Adopted Accounting Standards" below. Disclosures in this Quarterly Report on Form 10-Q have been updated to comply with the new standards, as indicated by the "As Adjusted" reference in these condensed consolidated financial statements and related notes.

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, 2018 was derived from audited financial statements as adjusted to reflect the impact of the full retrospective adoption of Topic 606; 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, 2018, filed with the SEC on March 30, 2018.

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 2019.

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 stand-alone selling price for each distinct performance obligation included in customer contracts with multiple performance obligations, uncollectible accounts receivable, the assessment of the useful life and recoverability of long-lived assets (property and equipment, goodwill and identified intangibles), the period of benefit for deferred commissions, stock-based compensation expense, the fair value of assets acquired and liabilities assumed for business combinations, income taxes, leases and contingencies. Actual results could differ from those estimates.

Segments

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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.

Revenue Recognition

We generate revenues primarily in the form of software license and related maintenance fees, cloud services and other services fees. Licenses for on-premises software are either perpetual or term licenses and provide the customer with a right to use the software, upon delivery to the customer. Typically, when purchasing a perpetual license, a customer also purchases one year of maintenance for which we charge a percentage of the license fee. When a term license is purchased, maintenance is bundled with the license for the term of the license period. Cloud services are provided on a subscription basis and give our customers access to our cloud solutions, which include related customer support. Other services include training and professional services that are not integral to the functionality of the licenses or cloud services.

Revenue from on-premises licenses is recognized upfront upon transfer of control of the software, which occurs at delivery, or when the license term commences, if later. We recognize revenue from maintenance contracts ratably over the service period. Cloud services revenue is recognized ratably over the cloud service term. Training and professional services are provided either on a time and material basis, in which revenues are recognized as services are delivered, or over a contractual term, in which revenues are recognized ratably. With respect to contracts that include customer acceptance provisions, we recognize revenue upon customer acceptance. Our policy is to record revenues net of any applicable sales, use or excise taxes.

Our contracts with customers often contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price (“SSP”) basis. We determine the SSP based on an observable standalone selling price when it is available, as well as other factors, including, the price charged to customers, our discounting practices, and our overall pricing objectives, while maximizing observable inputs. In situations where pricing is highly variable or uncertain, we estimate the SSP using a residual approach.

A receivable is recorded in the period we deliver products or provide services, or when we have an unconditional right to payment. Some of our multi-year on-premises license contracts are invoiced annually and we recognize the license revenues upfront and record a corresponding receivable, as we have an unconditional right to receive payment. Current and non-current accounts receivable, net of allowance for doubtful accounts, was $213.8 million and $396.4 million as of April 30, 2018 and January 31, 2018, respectively.

Payment terms and conditions vary by contract type, although our terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of payment, we have determined our contracts do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing.

Deferred revenue is recorded when we invoice a contract prior to recognizing revenue. It is comprised mainly of balances related to maintenance and cloud services invoiced at the beginning of each service period. Deferred revenue also includes balances for training and professional services for which a payment has been received in advance of performance, as well as for licenses that we invoice and deliver prior to the license term commencing.

Deferred Sales Commissions

Sales commissions paid to our sales force and the related payroll taxes are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are capitalized and recorded in "Deferred commissions, current and non-current" in our condensed consolidated balance sheets. We generally amortize these costs over the remaining contractual term of our customer contracts, consistent with the pattern of revenue recognition of each performance obligation, for contracts in which the commissions paid on the initial and renewal contracts are commensurate. For certain contracts in which the

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commissions paid on the initial and renewal contracts are not commensurate, we amortize the commissions paid on the initial contract over an expected period of benefit, which we have determined to be approximately five years. We have determined the period of benefit by taking into consideration our customer contracts, the duration of our relationships with our customers and our technology. We include amortization of deferred commissions in "sales and marketing expense" in our condensed consolidated statements of operations. In capitalizing and amortizing deferred commissions, we have elected to apply a portfolio approach. There were no impairments to deferred commissions for all periods presented.

Equity Investments

Equity investments without readily determinable fair values are accounted for at cost, less impairment and adjusted for subsequent observable price changes obtained from transactions for identical or similar investments issued by the same issuer. Changes in the basis of the equity investment will be recognized in "Other income (expense), net."

Investments in entities where we have the ability to exercise significant influence, but not control, over the investee are accounted for using the equity method of accounting. Our results of operations will include, as a component of "Other income (expense), net," our share of the net income or loss of the equity investments accounted for under the equity method of accounting.

Stock-Based Compensation

We recognize compensation expense for all share-based payment awards, including stock options, restricted stock units (“RSUs”), performance units (“PSUs”) and restricted stock awards (“RSAs”), based on the estimated fair value of the award on the grant date in the consolidated statements of operations over the related vesting periods. The expense recorded is based on awards ultimately expected to vest and therefore is reduced by estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We calculate the fair value of options using the Black-Scholes method and expense using the straight-line attribution approach.

We account for equity awards issued to non-employees, such as consultants, in accordance with the guidance relating to equity instruments that are issued to other than employees for acquiring, or in conjunction with selling, goods or services, using the Black-Scholes method to determine the fair value of such instruments. Awards granted to non-employees are remeasured over the vesting period, and the resulting value is recorded as an expense over the period the services are received.

The fair value of each option grant and stock purchase right granted under the Employee Stock Purchase Plan (“ESPP”) was estimated on the date of grant using the Black-Scholes option pricing model. We recognize stock-based compensation expense related to our ESPP on a straight-line basis over the offering period, which is twelve months. Stock-based compensation expense is recognized net of estimated forfeiture activity.

The determination of the grant date fair value of options using an option-pricing model is affected by assumptions regarding a number of other complex and subjective variables, which include our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends.

The number of PSUs earned and eligible to vest are determined based on achievement of certain performance conditions and/or market conditions and the recipients' continued service with us. For awards subject to service and performance conditions, the number of shares of our stock issued pursuant to the award can range from 0% to 200% of the target amount. For awards subject to service and performance conditions that also include market conditions, the number of shares of our stock issued pursuant to the award can range from 0% to 300% of the target amount. Compensation expense for PSUs with performance conditions is measured using the fair value at the date of grant and recorded over the vesting period under the graded-vesting attribution method, and may be adjusted over the vesting period based on interim estimates of performance against the pre-set objectives. We use a Monte Carlo option-pricing model to determine the fair value of PSUs with market conditions.

Recently Adopted Accounting Standards

In May 2017, the FASB issued ASU No. 2017-09 (Topic 718), Scope of Modification Accounting. The new standard clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. We adopted this new standard as of February 1, 2018. The adoption of this new standard did not have an impact on our condensed consolidated financial statements.

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In January 2017, the FASB issued ASU No. 2017-01 (Topic 805), Business Combinations - Clarifying the Definition of a Business. The new standard narrows the application of when an integrated set of assets and activities is considered a business and provides a framework to assist entities in evaluating whether both an input and a substantive process are present to be considered a business. We adopted this new standard as of February 1, 2018, and anticipate that the adoption of the new guidance will result in more transactions being accounted for as asset acquisitions rather than business combinations and that the new standard will impact management's consideration of strategic investments. The adoption of this new standard did not have an impact on our condensed consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16 (Topic 740), Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, which includes a revision of the accounting for the income tax consequences of intra-entity transfers of assets other than inventory to reduce the complexity in accounting standards. We adopted this new standard as of February 1, 2018 with an immaterial cumulative effect adjustment recorded in accumulated deficit as of February 1, 2018.

In January 2016, the FASB issued ASU No. 2016-01 (Subtopic 825-10), Financial Instruments - Overall. The amendments in this update, and recent clarifications issued by the FASB through ASU No. 2018-03 and ASU No. 2018-04, address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, and require equity securities to be measured at fair value with changes in fair value recognized through net income. We adopted this new standard as of February 1, 2018 on a prospective basis. As part of the adoption, we elected to apply the measurement alternative for our non-marketable equity investments that do not have readily determinable fair values, measuring them at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The adoption of these standards did not result in an adjustment for our non-marketable equity investments.

In May 2014, the FASB issued ASU No. 2014-09 (Topic 606), Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition and establishes a new revenue standard. This new standard is based on the principle that revenue is recognized to depict the transfer of control of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The standard also requires additional disclosures 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. The FASB has also issued several amendments to the new standard which were designed to clarify and simplify the adoption process.

In preparation for adoption of the new standard, we updated our accounting policies, systems, internal controls and processes. We adopted Topic 606 as of February 1, 2018 using the full retrospective method, which requires us to adjust our historical financial information for fiscal years 2017 and 2018 to be consistent with the new standard. The most significant impacts of the standard relate to the timing of revenue recognition for arrangements involving term licenses, deferred revenue and sales commissions. Under the new revenue standard, we are required to recognize term license revenues upon the transfer of the license and the associated maintenance revenues over the contract period. Additionally, some deferred revenue, primarily from arrangements involving term licenses, was never recognized as revenue and instead is now a part of the cumulative effect adjustment within accumulated deficit. Finally, we are required to capitalize and amortize incremental costs of obtaining a contract, such as certain sales commission costs, over the remaining contractual term or over an expected period of benefit, which we have determined to be approximately five years.

For all reporting periods presented before the date of initial adoption, we have elected not to disclose the amount of the transaction price allocated to the remaining performance obligations or provide an explanation of when we expect to recognize that amount as revenue. Additionally, we have also elected not to separately evaluate each contract modification that occurred before the initial adoption date. We have elected not to assess whether a contract has a significant financing component if we expect at contract inception that the period between payment and the transfer of products or services will be one year or less.

The following tables present the impact of the new revenue standard to the reported results on our selected condensed consolidated statements of operations data and condensed consolidated balance sheet data and (in thousands, except per share data):

Selected Condensed Consolidated Statement of Operations Data

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	Three Month Ended April 30, 2017
	As Reported			Impact of Adoption			As Adjusted
Revenues
License	$	116,726		$	(14,164	)	$	102,562
Maintenance and services	125,722			(1,516		)	124,206
Total revenues	242,448			(15,680		)	226,768
Gross Profit	184,285			(15,680		)	168,605
Operating expenses
Sales and marketing	173,948			(487		)	173,461
Operating loss	(97,457		)	(15,193		)	(112,650		)
Net loss	$	(99,931	)	$	(15,193	)	$	(115,124	)

Basic and diluted net loss per share	$	(0.73	)	$	(0.11	)	$	(0.84	)

Selected Condensed Consolidated Balance Sheet Data



	January 31, 2018
	As Reported			Impact of Adoption			As Adjusted
Assets
Accounts receivable, net	$	391,799		$	4,614		$	396,413
Deferred commissions, current	—			52,451			52,451
Deferred commissions, non-current	—			37,920			37,920
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities	77,160			7,471			84,631
Deferred revenue, current	635,253			(145,340		)	489,913
Deferred revenue, non-current	269,954			(91,162		)	178,792
Accumulated deficit	(1,279,887		)	324,016			(955,871		)

The adoption of Topic 606 had no impact to cash provided by or used in operating, financing, or investing activities on our condensed consolidated statements of cash flows.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13 (Topic 326), Financial Instruments - Credit Losses. The amendments in this update require a financial asset (or a group of financial assets) measured at an amortized cost basis to be presented at the net amount expected to be collected. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans and held-to-maturity debt securities. The standard is effective for our first quarter of fiscal 2021, although early adoption is permitted. We are currently evaluating whether the adoption of 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 operating leases, initially measured at the present value of the lease payments on the condensed consolidated balance sheets. The impact of such leases on the condensed consolidated statements of operations and cash flows will continue to be treated 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 the impact of this standard on our condensed consolidated financial statements and related disclosures. We anticipate that most of our office leases will be recognized as lease liabilities and corresponding right-of-use assets, and will accordingly have a material impact on our condensed consolidated balance sheets upon adoption.

(2) Investments and Fair Value Measurements

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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, 2018 and January 31, 2018 (in thousands):



	April 30, 2018								January 31, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	432,658	$	—	$	—	$	432,658	$	341,687	$	—	$	—	$	341,687
U.S. treasury securities	—		468,321		—		468,321		—		619,203		—		619,203
Other	—		—		4,000		4,000		—		—		—		—
Reported as:
Assets:
Cash and cash equivalents							$	432,658							$	341,687
Investments, current							468,321								619,203
Investments, non-current							4,000								—
Total							$	904,979							$	960,890

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, 2018 (in thousands):



	April 30, 2018
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Investments, current:
U.S. treasury securities	$	469,271	$	—	$	(950	)	$	468,321
Total available-for-sale investments in U.S. treasury securities	$	469,271	$	—	$	(950	)	$	468,321

The following table represents our investments in U.S. treasury securities, which we have classified as available-for-sale investments as of January 31, 2018 (in thousands):

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	January 31, 2018
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Investments, current:
U.S. treasury securities	$	620,345	$	—	$	(1,142	)	$	619,203
Total available-for-sale investments in U.S. treasury securities	$	620,345	$	—	$	(1,142	)	$	619,203

As of April 30, 2018, and January 31, 2018, 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
April 30, 2018
U.S. treasury securities	$	468,321	$	(950	)	$	—	$	—	$	468,321	$	(950	)
January 31, 2018
U.S. treasury securities	$	619,203	$	(1,142	)	$	—	$	—	$	619,203	$	(1,142	)

As of April 30, 2018, we did not consider any of our investments to be other-than-temporarily impaired.

The contractual maturities of our investments are as follows (in thousands):



	April 30, 2018
Due within one year	$	468,321
Total	$	468,321

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.

Equity Investments

Our equity investments are reported in "Investments, non-current" on our condensed consolidated balance sheets. The

following table provides a summary of our equity investments as of April 30, 2018 and January 31, 2018 (in thousands):



	April 30, 2018		January 31, 2018
Equity investments without readily determinable fair values	$	5,000	$	5,000
Equity investments under the equity method of accounting	750		375
Total	$	5,750	$	5,375

(3) Commitments and Contingencies

Operating Lease Commitments

We lease our office spaces under non-cancelable leases. Rent expense, net of sublease income, for our operating leases was $6.1 million and $5.3 million for the three months ended April 30, 2018 and 2017, respectively.

The following summarizes our operating lease commitments as of April 30, 2018 (in thousands):



	Payments Due by Period
	Total		Less Than 1 year		1-3 years		3-5 years		More Than 5 years
Operating lease commitments ⁽¹⁾	$	159,581	$	24,510	$	42,642	$	35,245	$	57,184

_________________________

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⁽¹⁾ We have entered into sublease agreements for portions of our office space and the future rental income of $8.1 million from these agreements has been included as an offset to our future minimum rental payments.

Facility Exit Costs

In fiscal 2017, we relocated certain corporate offices in the San Francisco Bay Area and as a result, some of our leased office spaces are no longer in use. Accordingly, we calculated and recorded a liability at the "cease-use" date related to those operating leases based on the difference between the present value of the estimated future sublease rental income and the present value of our remaining lease obligations, adjusted for the effects of any prepaid or deferred items. We recorded a facility exit charge of approximately $8.6 million to "General and administrative" expenses in fiscal 2017 associated with the recognition of the liability. The short-term portion of the liability is recorded in "Accrued expenses and other liabilities" and the long-term portion of the liability is recorded in "Other liabilities, non-current," on the condensed consolidated balance sheets. Our cease-use liability was $0.3 million as of April 30, 2018.

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”). The Premises is allocated between the "Initial Premises" and "Additional Premises," which are each approximately 91,000 square feet of rentable space. The term of the Additional Premises begins one year after the term of the Initial Premises, which began in August 2015, and each have a term of 84 months. Our total obligation for the base rent is approximately $92.0 million. On May 13, 2014, we entered into an irrevocable, standby letter of credit with Silicon Valley Bank for $6.0 million to serve as a security deposit for the Lease.

As a result of our involvement during the construction period, whereby we 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 project construction costs incurred by the landlord as an asset and a corresponding long-term liability in “Property and equipment, net” and “Other liabilities, non-current,” respectively, on our condensed consolidated balance sheets. We moved into the Premises in February 2016. We have determined that the lease does not meet the criteria for “sale-leaseback” treatment, due to our continuing involvement in the construction project resulting from our standby letter of credit. Accordingly, the Lease will continue to be accounted for as a financing obligation.

As of April 30, 2018, future payments on the financing lease obligation are as follows (in thousands):



Fiscal Period:
Remaining nine months of fiscal 2019	$	9,432
Fiscal 2020	12,928
Fiscal 2021	13,316
Fiscal 2022	13,715
Fiscal 2023	14,127
Thereafter	8,142
Total future minimum lease payments	$	71,660

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

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During the ordinary course of business, we may indemnify, hold harmless and agree to reimburse for losses suffered or incurred, our customers, vendors and each of their affiliates for certain intellectual property infringement and other claims by third parties with respect to our 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, 2018. 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, 2018			January 31, 2018
Computer equipment and software	$	69,866		$	69,457
Furniture and fixtures	18,051			18,090
Leasehold and building improvements ⁽¹⁾	68,213			67,348
Building ⁽²⁾	82,250			82,250
Property and equipment, gross	238,380			237,145
Less: accumulated depreciation and amortization	(82,706		)	(76,265		)
Property and equipment, net	$	155,674		$	160,880

_________________________

⁽¹⁾ Includes costs related to assets not yet placed into service of $3.6 million and $2.8 million, as of April 30, 2018 and January 31, 2018, respectively.

⁽²⁾This relates to the capitalization of construction costs in connection with our financing lease obligation, where we are considered the owner of the asset, for accounting purposes only. There is a corresponding long-term liability for this obligation on our 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 $6.7 million and $6.4 million for the three months ended April 30, 2018 and 2017, respectively.

(5) Acquisitions, Goodwill and Intangible Assets

Phantom

On April 6, 2018, we acquired 100% of the voting equity interests of Phantom Cyber Corporation (“Phantom”), a privately-held Delaware company, which develops solutions for security orchestration, automation and response. This acquisition has been accounted for as a business combination. The purchase price of $303.8 million, paid in cash of $291.5 million and $12.3 million in fair value of replacement equity awards attributable to pre-acquisition service, was preliminarily allocated as follows: $44.1 million to identified intangible assets, $7.2 million to net assets acquired, with the excess $252.5 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. This goodwill is not deductible for income tax purposes. The results of operations of Phantom, which are not material, have been included in our condensed consolidated financial statements from the date of purchase. Additionally, we recognized $3.3 million of acquisition-related costs as general and administrative expense on our condensed consolidated statements of operations during the three months ended April 30, 2018.

Per terms of the merger agreement with Phantom, certain share-based compensation awards held by Phantom’s founders were canceled and exchanged for replacement equity awards consisting of unregistered restricted shares of our

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common stock subject to vesting. The portion of the fair value of partially vested awards associated with prior service of Phantom's founders represented a component of the total purchase consideration, as discussed above. The remaining fair value of $62.2 million of these issued awards, which are subject to the recipients' 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. Pro forma and historical results of operations of Phantom have not been presented as we do not consider the results to have had 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):

Rocana

On October 6, 2017, we acquired certain assets of Rocana, Inc. (“Rocana”), a privately-held Delaware corporation that develops analytics solutions for the IT market. This acquisition has been accounted for as a business combination. The purchase price of $30.2 million, paid in cash, was preliminarily allocated as follows: $10.1 million to identifiable intangible assets, with the excess $20.1 million of the purchase price over the fair value of net assets acquired recorded as goodwill. This goodwill is primarily attributable to the value expected from the synergies of the combination, including advancing the analytics and machine learning capabilities of our products, and is deductible for income tax purposes. The results of operations of the acquired entity, which are not material, have been included in our condensed consolidated financial statements from the date of purchase. Pro forma and historical results of operations of the acquired entity 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 currently 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):

SignalSense

On September 29, 2017, we acquired 100% of the voting equity interest of SignalSense Inc. (“SignalSense”), a privately held Washington corporation that develops cloud-based data collection and breach detection solutions that leverage machine learning. This acquisition has been accounted for as a business combination. The purchase price of $12.2 million, paid in cash, was preliminarily allocated as follows: $11.3 million to identifiable intangible assets acquired, $0.2 million in net assets and $2.0 million to net deferred tax liabilities, with the excess $2.7 million of the purchase price over the fair value of net assets acquired recorded as goodwill. This goodwill is primarily attributable to the value expected from the synergies of the combination, including developing more advanced cloud and machine learning capabilities for our products, and is not deductible for income tax purposes. The results of operations of the acquired entity, which are not material, have been included in our condensed consolidated financial statements from the date of purchase. Pro forma and historical results of operations of the acquired entity 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 currently finalizing the allocation of the purchase price, which may be subject to change as additional information becomes available to us.

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

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Drastin

On May 15, 2017, we acquired 100% of the voting equity interest of Drastin, Inc. ("Drastin"), a privately-held Delaware corporation that develops technology for search-driven analytics on enterprise data. This acquisition has been accounted for as a business combination. The purchase price of $17.3 million, paid in cash, was preliminarily allocated as follows: $3.8 million to identifiable intangible assets and $0.5 million to net deferred tax liability, with the excess $14.0 million of the purchase price over the fair value of net assets acquired recorded as goodwill. This goodwill is primarily attributable to the value expected from the synergies of the combination, including developing a more intuitive search experience for our products, and is not deductible for income tax purposes. The results of operations of the acquired entity, which are not material, have been included in our condensed consolidated financial statements from the date of purchase. Pro forma and historical results of operations of the acquired entity 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):

Goodwill

There were no impairments to goodwill during the three months ended April 30, 2018 or during prior periods. Goodwill balances are presented below (in thousands):



	Carrying Amount
Balance as of January 31, 2018	$	161,382
Goodwill acquired	252,499
Balance as of April 30, 2018	$	413,881

Intangible Assets

Intangible assets subject to amortization realized from acquisitions as of April 30, 2018 are as follows (in thousands, except useful life):



	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Remaining Useful Life (months)
Developed technology	$	116,900	$	(40,406	)	$	76,494	56
Customer relationships	11,510		(1,961		)	9,549		59
Other acquired intangible assets	3,270		(1,776		)	1,494		18
Total intangible assets subject to amortization	$	131,680	$	(44,143	)	$	87,537

Amortization expense from acquired intangible assets was $4.7 million and $2.7 million for the three months ended April 30, 2018 and 2017, respectively.

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The expected future amortization expense for acquired intangible assets as of April 30, 2018 is as follows (in thousands):



Fiscal Period:
Remaining nine months of fiscal 2019	$	17,466
Fiscal 2020	22,597
Fiscal 2021	19,500
Fiscal 2022	10,149
Fiscal 2023	6,854
Thereafter	10,971
Total amortization expense	$	87,537

(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 2018. As amended, the agreement provides for a revolving line of credit facility, which expires May 2019. 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 (4.75% in April 2018) or the LIBOR rate plus 2.75%. As of April 30, 2018, 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, 2018.

(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, 2018:



			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, 2018	14,658,992		623,120		$	8.22	3.68	$	52,435	13,016,473
Additional shares authorized	7,141,756
Options exercised	—		(129,709	)	8.58			12,207
RSUs and PSUs granted	(1,540,140	)								1,540,140
RSUs and PSUs vested	—									(1,257,859	)
Shares withheld related to net share settlement of RSUs and PSUs	39									—
RSUs and PSUs forfeited and canceled	251,726									(251,726	)
Balances as of April 30, 2018	20,512,373		493,411		$	8.13	3.48	$	46,639	13,047,028
Vested and expected to vest			493,397		$	8.13	3.48	$	46,637	12,639,139
Exercisable as of April 30, 2018			486,321		$	8.23	3.44	$	45,920

_________________________

⁽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, 2018.

Beginning in fiscal 2016, we have granted PSUs to certain executives under our 2012 Equity Incentive Plan. The number of PSUs earned and eligible to vest are determined based on achievement of certain performance conditions and/or market conditions and the recipients' continued service with us. For awards subject to service and performance conditions, the number of shares of our stock issued pursuant to the award can range from 0% to 200% of the target amount. For awards

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subject to service and performance conditions that also include market conditions, the number of shares of our stock issued pursuant to the award can range from 0% to300% of the target amount.

At April 30, 2018, total unrecognized compensation cost related to stock options was $0.4 million, adjusted for estimated forfeitures, which is expected to be recognized over a weighted-average period of 0.6 years. At April 30, 2018, total unrecognized compensation cost was $785.4 million related to RSUs, adjusted for estimated forfeitures, which is expected to be recognized over the next 2.8 years. At April 30, 2018, total unrecognized compensation cost was $61.6 million related to PSUs, adjusted for estimated forfeitures, which is expected to be recognized over the next 2.8 years. During fiscal 2016, we issued 671,782 restricted shares of our common stock (“RSAs”). Additionally, during the three months ended April 30, 2018, we issued 763,218 RSAs. At April 30, 2018, total unrecognized compensation cost related to RSAs was $64.7 million, adjusted for estimated forfeitures, which is expected to be recognized over the next 2.7 years. At April 30, 2018, 426,168 RSAs had vested, 186,003 RSAs were forfeited and canceled and 822,829 RSAs were outstanding.

The weighted-average grant date fair value of RSUs granted was $107.27 per share during the three months ended April 30, 2018. The weighted-average grant date fair value of PSUs granted was $108.04 per share during the three months ended April 30, 2018. The weighted-average grant date fair value of RSAs granted was $81.40 per share during the three months ended April 30, 2018.

(8) Deferred Revenue and Performance Obligations

Deferred Revenue

Changes in deferred revenue for the three months ended April 30, 2018 were as follows (in thousands):



	Carrying Amount
Balance as of January 31, 2018*	$	668,705
Additions to deferred revenue	127,234
Recognition of deferred revenue	(147,550		)
Balance as of April 30, 2018	$	648,389

Remaining Performance Obligations

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancelable amounts that will be invoiced and excludes performance obligations that are subject to cancellation terms. Our remaining performance obligations were $764.8 million as of April 30, 2018, of which we expect to recognize approximately 90% as revenue over the next 24 months and the remainder thereafter.

Disaggregation of Revenues

Refer to Note 9 "Geographic Information" for details regarding disclosures on the disaggregation of revenues.

(9) Geographic Information

Revenues

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



	Three Months Ended April 30,
	2018		2017*
United States	$	227,442	$	162,462
International	84,197		64,306
Total revenues	$	311,639	$	226,768

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*Prior-period information has been adjusted to reflect the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which we adopted on February 1, 2018. Refer to Note 1 for further details.

Other than the United States, no other individual country exceeded 10% of total revenues for the three months ended April 30, 2018 and 2017. One channel partner represented 29% of total revenues during the three months ended April 30, 2018 and 2017, respectively. A second channel partner represented approximately 15% and 16% of total revenues during the three months ended April 30, 2018 and 2017, 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, 2018 or 2017.

At April 30, 2018, one channel partner represented 39% and a second channel partner represented 28% of total current and non-current accounts receivable. At January 31, 2018, one channel partner represented 39% and a second channel partner represented 10% of total current and non-current accounts receivable.

Property and Equipment

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



	As of
	April 30, 2018		January 31, 2018
United States	$	148,021	$	153,335
International	7,653		7,545
Total property and equipment, net	$	155,674	$	160,880

Other than the United States, no other country represented 10% or more of our total property and equipment as of April 30, 2018 or January 31, 2018.

(10) Income Taxes

For the three months ended April 30, 2018 and 2017, we recorded a $2.0 million income tax benefit and $1.3 million of income tax expense, respectively. The decrease in income tax expense for the three months ended April 30, 2018 was primarily due to the partial release of the valuation allowance as a result of an acquisition.

During fiscal year 2018, we recorded an increase to unrecognized tax benefits with an offset to the valuation allowance for $6.0 million relating to a change in accounting method for tax purposes. During the period ended April 30, 2018, we filed an application to formally change the accounting method with the IRS and received audit protection. As such, a reversal of the unrecognized tax benefits of $6.0 million was recorded with an offset to the valuation allowance during the period ended April 30, 2018. We do not expect to have other significant changes to unrecognized tax benefits through the end of fiscal year 2019. Because of our history of tax losses, all years remain open to tax audit.

Tax Cuts and Jobs Act of 2017

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which allows us to record provisional amounts for the 2017 Tax Cuts and Jobs Act (the "Tax Act") during a measurement period not to extend beyond one year of the enactment date, with further clarifications made recently with the issuance of ASU No. 2018-05. Through April 30, 2018, we did not have any significant adjustments to our provisional amounts. We will continue our analysis of these provisional amounts, which are still subject to change during the measurement period. We anticipate further guidance on accounting interpretations from the FASB and application of the law from the Department of Treasury. We expect to reach a final determination within the measurement period described above.

The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income ("GILTI"), states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense. Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. At April 30, 2018, we have included GILTI related to current year operations only in our estimated annual effective tax rate and have not provided additional GILTI on deferred items.

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(11) Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase or forfeiture. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including preferred stock, stock options, RSUs, 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,
	2018			2017*
Numerator:
Net loss	$	(118,499	)	$	(115,124	)
Denominator:
Weighted-average common shares outstanding	143,609			137,861
Less: Weighted-average unvested common shares subject to repurchase or forfeiture	(61		)	(76		)
Weighted-average shares used to compute net loss per share, basic and diluted	143,548			137,785
Net loss per share, basic and diluted	$	(0.83	)	$	(0.84	)

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 potentially dilutive securities 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,
	2018	2017
Shares subject to outstanding common stock options	493	1,734
Shares subject to outstanding RSUs, PSUs and RSAs	13,870	13,069
Employee stock purchase plan	602	718
Total	14,965	15,521

(12) Related Party Transactions

Certain members of our board of directors 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 $2.4 million and $3.0 million for the three months ended April 30, 2018 and 2017, respectively. We recorded $0.7 million and $0.2 million in expenses related to purchases from these companies during the three months ended April 30, 2018 and 2017, respectively. We had $1.5 million and $2.0 million of current and non-current accounts receivable from these companies as of April 30, 2018 and January 31, 2018, respectively. We had $0.2 million and $0.3 million of accounts payable to these companies as of April 30, 2018 and January 31, 2018, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “predict,” “intend,” “may,” “might,” “plan,” “project,” “potential,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify

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forward-looking statements. Such statements include, but are not limited to, statements concerning our market opportunity, our future financial and operating results; our planned investments, particularly in our product development efforts; our planned expansion of our sales and marketing organization; our expectation that we will continue to use acquisitions to contribute to our growth objectives; our growth and product integration strategies; our continued efforts to market and sell both domestically and internationally; our expectations about seasonal trends; our expectations regarding our revenues mix; our expectations regarding our cost of revenues and gross margin; use of non-GAAP (as defined below) financial measures; our expectations regarding our operating expenses, including increases in research and development, sales and marketing, and general and administrative expenses; our expectations regarding our capital expenditures; sufficiency of cash to meet cash needs for at least the next 12 months; exposure to interest rate changes; inflation; anticipated income tax rates; our expectations regarding our leases; exposure to exchange rate fluctuations and our ability to manage such exposure; and our expected cash flows and liquidity.

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

Overview

Splunk provides innovative software solutions that enable organizations to gain real-time operational intelligence by harnessing the value of their data. Our offerings enable users to collect, index, search, explore, monitor, correlate 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 across an organization and contains a definitive, time-stamped record of various activities, such as transactions, customer and user behavior, and security threats. Beyond an organization's traditional information technology (“IT”) and security infrastructure, data from the Industrial Internet, including industrial control systems, sensors, supervisory control and data acquisition (“SCADA”) systems, networks, manufacturing systems, smart meters and the Internet of Things (“IoT”), which includes consumer-oriented systems, such as electronic wearables, mobile devices, automobiles and medical devices is also continuously generating machine data. Our offerings help organizations gain the value contained in machine data by delivering real-time information to enable operational decision making.

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. Prospective users can get started with our free online sandboxes that enable our customers to immediately try and experience Splunk offerings. Users that prefer to deploy the software on-premises can take advantage of our free 60-day trial of Splunk Enterprise, which converts into a limited free perpetual license of up to 500 megabytes of data per day. Paying users can sign up for Splunk Cloud and avoid the need to provision, deploy and manage internal infrastructure. Alternatively, they can simply download and install the software, typically in a matter of hours, to connect to their relevant machine data sources. Customers 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. In fiscal 2017, we introduced free development-test licenses for certain commercial customers, allowing users to explore new data and use cases in a non-production environment without incurring additional fees. 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. A substantial portion of our license revenues consist of revenues from perpetual and term licenses, whereby we generally recognize the license fee portion of these arrangements upfront. As a result, the timing of when we enter into large perpetual and term licenses may lead to fluctuations in our revenues and operating results because our expenses are largely fixed in the short-term. From time to time, we 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.

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Splunk Cloud delivers the core capabilities 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. Splunk Light provides log search and analysis that is designed, priced and packaged for small IT environments, where a single-server log analytics solution is sufficient. Splunk Enterprise Security ("ES") addresses emerging security threats and security information and event management ("SIEM") use cases through monitoring, alerts and analytics. Splunk IT Service Intelligence ("ITSI") monitors the health and key performance indicators of critical IT and business services. Splunk User Behavior Analytics ("UBA") detects cyber-attacks and insider threats using data science, machine learning and advanced correlation.

We intend to continue investing for long-term growth. We have invested and intend to continue to invest heavily in product development to deliver additional features and performance enhancements, deployment models and solutions that can address new end markets. For example, we released new versions of existing offerings such as Splunk ITSI and introduced new offerings for the IT market during the three months ended April 30, 2018. 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. During the first quarter of fiscal 2019, we completed the acquisition of Phantom Cyber Corporation, which develops solutions for security orchestration, automation and response.

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 offerings 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 original equipment manufacturer ("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 ("SDKs") and application programming interfaces ("APIs"); and successfully integrate acquired businesses and technologies.

New Accounting Standard

Prior period information presented in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and comparative references to prior periods have been adjusted to reflect the impact of the full retrospective adoption of Topic 606. Refer to Note 1 contained in the “Notes to Condensed Consolidated Financial Statements” included in Part I of this Quarterly Report on Form 10-Q for further information.

Financial Summary

For the three months ended April 30, 2018 and 2017, our total revenues were $311.6 million and $226.8 million, respectively. For the three months ended April 30, 2018 and 2017, approximately 27% and 28% 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, 2018, we had over 15,000 customers, including over 85 of the Fortune 100 companies.

For the three months ended April 30, 2018 and 2017, our GAAP operating loss was $121.5 million and $112.7 million, respectively. Our non-GAAP operating loss was $14.7 million and $18.0 million for the three months ended April 30, 2018 and 2017, respectively.

For the three months ended April 30, 2018 and 2017, our GAAP net loss was $118.5 million and $115.1 million, respectively. Our non-GAAP net loss was $9.4 million and $12.4 million for the three months ended April 30, 2018 and 2017, 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 income tax provision (benefit), 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): expenses related to stock-based compensation and related employer payroll tax, amortization of acquired intangible assets, adjustments related to a financing lease obligation and acquisition-related adjustments, including the partial release of the valuation allowance due to acquisitions. 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. The non-GAAP financial measures are also adjusted for our estimated tax rate on non-GAAP income (loss). To determine the annual non-GAAP tax rate, we evaluate a financial projection based on our non-GAAP results. The annual non-GAAP tax rate takes into account other factors including our current operating structure, our existing tax positions in various jurisdictions and key legislation in major jurisdictions where we operate. The non-GAAP tax rate applied to the three months ended April 30, 2018 was 20%. We will utilize this annual non-GAAP tax rate in fiscal 2019 and will provide updates to this rate on an annual basis, or more frequently if material changes occur. In addition, non-GAAP financial measures include free cash flow, which represents cash from operations less purchases of property and equipment. The presentation of the non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key metrics used by management in our financial and operational decision making. In addition, these non-GAAP financial measures facilitate comparisons to competitors’ operating results.

We exclude stock-based compensation expense because it is non-cash in nature and excluding this expense provides meaningful supplemental information regarding our operational performance and allows investors the ability to make more meaningful comparisons between our operating results and those of other companies. We exclude employer payroll tax expense related to employee stock plans in order for investors to see the full effect that excluding that stock-based compensation expense had on our operating results. These expenses are tied to the exercise or vesting of underlying equity awards and the price of our common stock at the time of vesting or exercise, which may vary from period to period independent of the operating performance of our business. We also exclude amortization of acquired intangible assets, acquisition-related costs, including the partial release of the valuation allowance due to acquisitions, and make adjustments related to a financing lease obligation from our non-GAAP financial measures because these are considered by management to be outside of our core operating results. Accordingly, we believe that excluding these expenses provides investors and management with greater visibility to the underlying performance of our business operations, facilitates comparison of our results with other periods and may also facilitate comparison with the results of other companies in our industry. We consider free cash flow to be a liquidity

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measure that provides useful information to management and investors about the amount of cash generated by the business that can be used for strategic opportunities, including investing in our business, making strategic acquisitions and strengthening our balance sheet.

There are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by our competitors and exclude expenses that may have a material impact upon our reported financial results. Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees. The non-GAAP financial measures are meant to supplement and be viewed in conjunction with GAAP financial measures.

The following table reconciles our net cash provided by operating activities to free cash flow for the three months ended April 30, 2018, and 2017 (in thousands):



	Three Months Ended
	April 30,			April 30,
	2018			2017
Net cash provided by operating activities	$	76,487		$	41,358
Less purchases of property and equipment	(2,296		)	(5,605		)
Free cash flow (non-GAAP)	$	74,191		$	35,753
Net cash provided by (used in) investing activities	$	(139,591	)	$	34,987
Net cash used in financing activities	$	(255	)	$	(31,292	)

The following table reconciles our GAAP to Non-GAAP Financial Measures for the three months ended April 30, 2018 (in thousands, except per share amounts):



	GAAP			Stock-based compensation and related employer payroll tax			Amortization of acquired intangible assets			Adjustments related to financing lease obligation				Acquisition-related adjustments			Income tax effects related to non-GAAP adjustments⁽³⁾			Non-GAAP
Cost of revenues	$	77,970		$	(9,549	)	$	(4,250	)	$	312			$	—		$	—		$	64,483
Gross margin	75.0		%	3.0		%	1.4		%	(0.1		)%		—		%	—		%	79.3		%
Research and development	86,357			(28,238		)	(278		)	489				—			—			58,330
Sales and marketing	218,036			(45,840		)	(178		)	1,170				—			—			173,188
General and administrative	50,742			(17,287		)	—			234				(3,304		)	—			30,385
Operating loss	(121,466		)	100,914			4,706			(2,205		)		3,304			—			(14,747		)
Operating margin	(39.0		)%	32.4		%	1.5		%	(0.7		)%		1.1		%	—		%	(4.7		)%
Income tax benefit	(1,988		)	—			—			—				3,313			(3,665		)	(2,340		)
Net loss	$	(118,499	)	$	100,914		$	4,706		$	(136	)	⁽²⁾	$	(9	)	$	3,665		$	(9,359	)
Net loss per share ⁽¹⁾	$	(0.83	)	$	0.70		$	0.03		$	—			$	—		$	0.03		$	(0.07	)

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⁽¹⁾Calculated based on 143,548 basic and diluted weighted-average shares of common stock.

⁽²⁾Includes $2.1 million of interest expense related to the financing lease obligation.

⁽³⁾ Represents the tax effect of the non-GAAP adjustments based on the estimated annual effective tax rate of 20%. Application of this annual effective tax rate to the non-GAAP pre-tax loss during the quarter resulted in a non-GAAP tax benefit, which is expected to be offset by future tax expense.

The following table reconciles our GAAP to non-GAAP Financial Measures for the three months ended April 30, 2017 (in thousands, except per share amounts):

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	GAAP			Stock-based compensation and related employer payroll tax			Amortization of acquired intangible assets			Adjustments related to financing lease obligation				Income tax effects related to non-GAAP adjustments ⁽³⁾			Non-GAAP
Cost of revenues	$	58,163		$	(8,633	)	$	(2,649	)	$	306			$	—		$	47,187
Gross margin	74.4		%	3.7		%	1.2		%	(0.1		)%		—		%	79.2		%
Research and development	71,298			(28,048		)	(28		)	531				—			43,753
Sales and marketing	173,461			(42,415		)	(16		)	1,170				—			132,200
General and administrative	36,496			(15,100		)	—			237				—			21,633
Operating loss	(112,650		)	94,196			2,693			(2,244		)		—			(18,005		)
Operating margin	(49.7		)%	41.6		%	1.2		%	(1.0		)%		—		%	(7.9		)%
Income tax provision (benefit)	1,338			—			—			—				(5,935		)	(4,597		)
Net loss	$	(115,124	)	$	94,196		$	2,693		$	(130	)	⁽²⁾	$	5,935		$	(12,430	)
Net loss per share ⁽¹⁾	$	(0.84	)	$	0.69		$	0.02		$	—			$	0.04		$	(0.09	)

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⁽¹⁾ Calculated based on 137,785 basic and diluted weighted-average shares of common stock.

⁽²⁾ Includes $2.1 million of interest expense related to the financing lease obligation.

⁽³⁾Represents the tax effect of the non-GAAP adjustments based on the estimated annual effective tax rate of 27%. Application of this annual effective tax rate to the non-GAAP pre-tax loss during the quarter resulted in a non-GAAP tax benefit, which was offset by future tax expense during fiscal 2018.

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, including sales from the renewal of term licenses. 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. Our license revenues consist of revenues from perpetual licenses and term licenses, under which we generally recognize the license fee portion of the arrangement upfront, assuming all revenue recognition criteria are satisfied. 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 our past results should not be relied upon as an indication of our future performance. Our historical methods of revenue recognition are materially affected by the adoption of a new revenue recognition standard. Refer to Note 1 contained in the “Notes to Condensed Consolidated Financial Statements” included in Part I of this Quarterly Report on Form 10-Q for further information.

Maintenance and services revenues. Maintenance and services revenues consist of revenues from maintenance agreements, cloud services and professional services and training.

•

Maintenance revenues. Typically, when purchasing a perpetual license, a customer also purchases one year of maintenance for which we charge a percentage of the license fee. When a term license is purchased, maintenance 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.


•	Cloud services revenues. Cloud services allow customers to use hosted software over the contract period without taking possession of the software. 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 services. We have a professional services organization focused on helping our customers deploy our software in highly complex operational environments and train their personnel. Training and

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professional services have stated billing rates per service hour or are provided on a subscription basis, accordingly, revenues are recognized as services are delivered or ratably over the subscription period. Professional services and training revenues, as a percentage of total revenues, were 10% and 11% for the three months ended April 30, 2018 and 2017, respectively. We have experienced continued growth in our professional services revenues primarily due to the deployment of our software with some customers that have large, highly complex IT environments.

Cost of Revenues

Cost of license revenues. Cost of license revenues includes all direct costs to deliver our products, 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 include costs for compensation of our facilities personnel, 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.

Income Tax Provision (Benefit)

The income tax provision (benefit) consists of federal, state and foreign income taxes. We recognize deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which we expect the differences to reverse. We record a valuation allowance to reduce the deferred tax assets to the amount that we are more-likely-than-not to realize. Because of our history of U.S. net operating losses, we have established, in prior years, a full valuation allowance against potential future benefits for U.S. deferred tax assets including loss carry-forwards and research and development and other tax credits. We regularly assess the likelihood that our deferred income tax assets will be realized based on the realization guidance available. To the extent that we believe any amounts are not more-likely-than-not to be realized, we record a valuation

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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.

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Results of Operations

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



	Three Months Ended April 30,
	2018			2017

	(in thousands)
Condensed Consolidated Statements of Operations Data:
Revenues
License	$	138,975		$	102,562
Maintenance and services	172,664			124,206
Total revenues	311,639			226,768
Cost of revenues
License	5,124			2,928
Maintenance and services	72,846			55,235
Total cost of revenues	77,970			58,163
Gross profit	233,669			168,605
Operating expenses
Research and development	86,357			71,298
Sales and marketing	218,036			173,461
General and administrative	50,742			36,496
Total operating expenses	355,135			281,255
Operating loss	(121,466		)	(112,650		)
Interest and other income (expense), net
Interest income (expense), net	1,114			(528		)
Other income (expense), net	(135		)	(608		)
Total interest and other income (expense), net	979			(1,136		)
Loss before income taxes	(120,487		)	(113,786		)
Income tax provision (benefit)	(1,988		)	1,338
Net loss	$	(118,499	)	$	(115,124	)

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	Three Months Ended April 30,
	2018		2017

	(as % of revenues)
Condensed Consolidated Statements of Operations Data:
Revenues
License	44.6	%	45.2	%
Maintenance and services	55.4		54.8
Total revenues	100.0		100.0
Cost of revenues
License ⁽¹⁾	3.7		2.9
Maintenance and services⁽¹⁾	42.2		44.5
Total cost of revenues	25.0		25.6
Gross profit	75.0		74.4
Operating expenses
Research and development	27.7		31.4
Sales and marketing	70.0		76.6
General and administrative	16.3		16.1
Total operating expenses	114.0		124.1
Operating loss	(39.0	)	(49.7	)
Interest and other income (expense), net
Interest income (expense), net	0.4		(0.2	)
Other income (expense), net	—		(0.3	)
Total interest and other income (expense), net	0.4		(0.5	)
Loss before income taxes	(38.6	)	(50.2	)
Income tax provision (benefit)	(0.6	)	0.6
Net loss	(38.0	)%	(50.8	)%

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

Comparison of the Three Months Ended April 30, 2018 and 2017

Revenues



	Three Months Ended April 30,
	2018			2017			% Change
	($ amounts in thousands)
Revenues
License	$	138,975		$	102,562		35.5	%
Maintenance and services	172,664			124,206			39.0	%
Total revenues	$	311,639		$	226,768		37.4	%
Percentage of revenues
License	44.6		%	45.2		%
Maintenance and services	55.4			54.8
Total	100.0		%	100.0		%

The increase in license revenues of $36.4 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 43 and 35 orders greater than $1.0 million for the three months ended April 30, 2018 and 2017, respectively. Our total number of customers increased from approximately 13,000 at April 30, 2017 to more than 15,000 at April 30, 2018. The increase in maintenance and services revenues of $48.5 million was due to increases in sales of maintenance agreements, increases in sales of our cloud services, as well as sales of professional services resulting from the growth of our installed customer base.

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Cost of Revenues and Gross Margin



	Three Months Ended April 30,
	2018			2017			% Change
	($ amounts in thousands)
Cost of revenues ⁽¹⁾
License	$	5,124		$	2,928		75.0	%
Maintenance and services	72,846			55,235			31.9	%
Total cost of revenues	$	77,970		$	58,163		34.1	%
Gross margin
License	96.3		%	97.1		%
Maintenance and services	57.8		%	55.5		%
Total gross margin	75.0		%	74.4		%

⁽¹⁾ Includes stock-based compensation expense:
Cost of revenues	$	8,804		$	8,192

Total cost of revenues increased $19.8 million primarily due to a $17.6 million increase in cost of maintenance and services revenues. The increase in cost of maintenance and services revenues was primarily related to an increase of $8.5 million in salaries and benefits expense due to increased headcount, a $6.3 million increase in expenses related to third-party consulting services and a $2.1 million increase related to third-party hosting fees to support our cloud services. The $2.2 million increase in cost of license revenues was primarily due to amortization expense related to acquired intangible assets. Total gross margin increased slightly primarily due to improved maintenance and services margins.

Operating Expenses



	Three Months Ended April 30,
	2018	2017	% Change
	($ amounts in thousands)
Operating expenses⁽¹⁾
Research and development