7.31.2013 10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 (MARK ONE)
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2013
 
OR
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM              TO
 
COMMISSION FILE NUMBER 001-35498
 ____________________________________________________

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

There were 105,800,351 shares of the registrant’s Common Stock issued and outstanding as of September 6, 2013.
 


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

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


Splunk Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
 
July 31, 2013
 
January 31, 2013
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
347,114

 
$
305,939

Accounts receivable, net
 
40,746

 
63,948

Prepaid expenses and other current assets
 
10,547

 
6,861

Total current assets
 
398,407

 
376,748

Property and equipment, net
 
13,855

 
13,205

Other assets
 
403

 
492

Total assets
 
$
412,665

 
$
390,445

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
1,805

 
$
1,632

Accrued payroll and compensation
 
21,888

 
28,123

Accrued expenses and other liabilities
 
12,224

 
7,636

Deferred revenue, current portion
 
96,908

 
79,568

Total current liabilities
 
132,825

 
116,959

Deferred revenue, non-current
 
30,727

 
35,144

Other liabilities, non-current
 
1,302

 
798

Total non-current liabilities
 
32,029

 
35,942

Total liabilities
 
164,854

 
152,901

Commitments and contingencies (Note 3)
 


 


Stockholders’ equity:
 
 

 
 

Common stock: $0.001 par value; 1,000,000,000 shares authorized; 105,237,779 shares issued and outstanding at July 31, 2013, and 100,920,350 shares issued and outstanding at January 31, 2013
 
105

 
101

Accumulated other comprehensive loss
 
(243
)
 
(135
)
Additional paid-in capital
 
368,475

 
328,277

Accumulated deficit
 
(120,526
)
 
(90,699
)
Total stockholders’ equity
 
247,811

 
237,544

Total liabilities and stockholders’ equity
 
$
412,665

 
$
390,445

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

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Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
 
2013
 
2012
 
2013
 
2012
Revenues
 
 

 
 

 
 

 
 

License
 
$
43,185

 
$
30,203

 
$
79,357

 
$
54,589

Maintenance and services
 
23,688

 
14,280

 
44,723

 
27,085

Total revenues
 
66,873

 
44,483

 
124,080

 
81,674

Cost of revenues (1)
 
 

 
 

 
 
 
 

License
 
76

 
92

 
145

 
221

Maintenance and services
 
7,345

 
4,553

 
13,957

 
8,689

Total cost of revenues
 
7,421

 
4,645

 
14,102

 
8,910

Gross profit
 
59,452

 
39,838

 
109,978

 
72,764

Operating expenses (1)
 
 

 
 

 
 
 
 

Research and development
 
16,210

 
9,391

 
30,674

 
17,494

Sales and marketing
 
44,634

 
27,740

 
85,947

 
51,906

General and administrative
 
11,912

 
7,247

 
22,358

 
14,093

Total operating expenses
 
72,756

 
44,378

 
138,979

 
83,493

Operating loss
 
(13,304
)
 
(4,540
)
 
(29,001
)
 
(10,729
)
Interest and other income (expense), net
 
 

 
 

 
 
 
 

Interest income (expense), net
 
58

 
101

 
119

 
82

Other income (expense), net
 
(82
)
 

 
(176
)
 
2

Change in fair value of preferred stock warrants
 

 

 

 
(14,087
)
Total interest and other income (expense), net
 
(24
)
 
101

 
(57
)
 
(14,003
)
Loss before income taxes
 
(13,328
)
 
(4,439
)
 
(29,058
)
 
(24,732
)
Provision for income taxes
 
365

 
136

 
769

 
313

Net loss
 
$
(13,693
)
 
$
(4,575
)
 
$
(29,827
)
 
$
(25,045
)
Net loss per share:
 
 

 
 

 
 

 
 

Basic and diluted
 
$
(0.13
)
 
$
(0.05
)
 
$
(0.29
)
 
$
(0.40
)
Weighted-average shares outstanding:
 
 

 
 

 
 

 
 

Basic and diluted
 
104,100

 
95,518

 
103,075

 
62,466

 
(1)      Amounts include stock-based compensation expense, as follows:  
Cost of revenues
 
$
865

 
$
267

 
$
1,570

 
$
375

Research and development
 
3,547

 
1,267

 
6,590

 
2,162

Sales and marketing
 
5,156

 
1,505

 
9,478

 
2,363

General and administrative
 
2,389

 
827

 
4,154

 
1,638


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

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Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
 
2013
 
2012
 
2013
 
2012
Net loss
 
$
(13,693
)
 
$
(4,575
)
 
$
(29,827
)
 
$
(25,045
)
Other comprehensive loss:
 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
(94
)
 
(19
)
 
(108
)
 
(12
)
Comprehensive loss
 
$
(13,787
)
 
$
(4,594
)
 
$
(29,935
)
 
$
(25,057
)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
 
Six Months Ended July 31,
 
 
2013
 
2012
Cash flows from operating activities
 
 

 
 

Net loss
 
$
(29,827
)
 
$
(25,045
)
Adjustments to reconcile net loss to net cash provided by operating activities
 
 
 
 
Depreciation and amortization
 
2,880

 
2,149

Change in fair value of preferred stock warrants
 

 
14,087

Stock-based compensation expense
 
21,792

 
6,538

Excess tax benefits from employee stock plans
 
(268
)
 

Changes in operating assets and liabilities
 
 
 
 
Accounts receivable, net
 
23,202

 
814

Prepaid expenses, other current and non-current assets
 
(3,597
)
 
(1,172
)
Accounts payable
 
(147
)
 
300

Accrued payroll and compensation
 
(6,235
)
 
2,563

Accrued expenses and other liabilities
 
5,379

 
167

Deferred revenue
 
12,923

 
15,003

Net cash provided by operating activities
 
26,102

 
15,404

Cash flows from investing activities
 
 

 
 

Purchases of property and equipment
 
(3,230
)
 
(3,474
)
Net cash used in investing activities
 
(3,230
)
 
(3,474
)
Cash flows from financing activities
 
 

 
 

Repayments of term debt
 

 
(2,289
)
Proceeds from initial public offering, net of offering costs
 

 
225,225

Proceeds from exercise of stock options
 
12,523

 
1,825

Excess tax benefits from employee stock plans
 
268

 

Proceeds from employee stock purchase plan
 
6,076

 

Taxes paid related to net share settlement of equity awards
 
(513
)
 

Net cash provided by financing activities
 
18,354

 
224,761

Effect of exchange rate changes on cash and cash equivalents
 
(51
)
 
(12
)
Net increase in cash and cash equivalents
 
41,175

 
236,679

Cash and cash equivalents
 
 

 
 

Beginning of period
 
305,939

 
31,599

End of period
 
$
347,114

 
$
268,278

Supplemental disclosures
 
 

 
 

Cash paid for interest
 
$

 
$
40

Cash paid for income taxes
 
246

 

Non-cash investing and financing activities
 
 

 
 

Accrued purchases of property and equipment
 
767

 
656

Vesting of early exercised options
 
55

 
754

Conversion of preferred stock to common stock
 

 
40,913

Deferred offering costs not yet paid
 

 
999

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
(1)  Description of the Business and Significant Accounting Policies
 
Business
 
Splunk Inc. (“we”) provides an innovative software platform that enables organizations to gain real-time operational intelligence by harnessing the value of their data. Our software collects and indexes data regardless of format or source, and enables users to search, correlate, analyze, monitor and report on this data. Our software addresses large and diverse data sets, commonly referred to as big data, and is specifically tailored for machine-generated data. Machine data is produced by nearly every software application and electronic device in an organization and contains a definitive, time-stamped record of various activities, such as transactions, customer and user activities, and security threats. Our software is designed to help users in various roles, including IT and business professionals, analyze machine data and realize real-time visibility into and intelligence about their organization’s operations. This operational intelligence enables organizations to improve service levels, reduce costs, mitigate security risks, demonstrate and maintain compliance, and gain new insights that enable them to drive better business decisions. We were incorporated in California in October 2003 and were reincorporated in Delaware in May 2006.
 
Fiscal Year
 
Our fiscal year ends on January 31. References to fiscal 2014 or fiscal year 2014, for example, refer to the fiscal year ending January 31, 2014.
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet data as of January 31, 2013 was derived from audited financial statements, but does not include all disclosures required by GAAP. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K for the fiscal year ended January 31, 2013, filed on April 1, 2013. There have been no changes in the significant accounting policies from those that were disclosed in the audited consolidated financial statements for the fiscal year ended January 31, 2013 included in the Annual Report on Form 10-K.
 
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to state fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year 2014.

Recently Issued Accounting Pronouncements
 
In February 2013, the Financial Accounting Standards Board ("FASB") issued updated authoritative guidance requiring entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. We adopted this guidance during the three months ended April 30, 2013. The adoption of this guidance did not impact our financial statements, as the guidance is related to disclosure only and we have not had any significant reclassifications out of accumulated other comprehensive loss.

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

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Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods covered by the financial statements and accompanying notes. In particular, we make estimates with respect to the fair value of multiple elements in revenue recognition, uncollectible accounts receivable, stock-based compensation expense, useful lives of intangible assets and property and equipment, income taxes and contingencies. Actual results could differ from those estimates.

Segments

We operate our business as one operating segment: the development and marketing of software solutions that enable our customers to gain real-time operational intelligence by harnessing the value of their data. Our chief operating decision maker is our Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources.

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

Foreign Currency

The functional currency of our foreign subsidiaries is the respective local currency. Translation adjustments arising from the use of differing exchange rates from period to period are included in Accumulated Other Comprehensive Loss within Stockholders' Equity. Foreign currency transaction gains and losses are included in Other Income (Expense), Net and were not material for the three and six months ended July 31, 2013 and 2012. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange rate during the period. Equity transactions are translated using historical exchange rates.

(2)  Fair Value Measurements
 
The carrying amounts of certain of our financial instruments including cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short-term maturities.
 
Assets and liabilities recorded at fair value in the financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels that are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:
 
Level 1—Observable inputs, such as quoted prices in active markets for identical assets or liabilities.
 
Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of July 31, 2013 and January 31, 2013 (in thousands):
 

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July 31, 2013
 
January 31, 2013
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Money market funds
 
$
325,913

 
$

 
$

 
$
325,913

 
$
250,810

 
$

 
$

 
$
250,810

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reported as:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
 

 
 

 
 

 
$
325,913

 
 

 
 

 
 

 
$
250,810

Total
 
 

 
 

 
 

 
$
325,913

 
 

 
 

 
 

 
$
250,810

 
During the six months ended July 31, 2013, we did not re-measure at fair value on a nonrecurring basis any nonfinancial assets and liabilities, such as intangible assets and property and equipment.
 
(3)  Commitments and Contingencies
 
Operating Lease Commitments
 
We lease our office spaces under non-cancelable operating leases with rent expense recognized on a straight-line basis over the lease term. Rent expense was $1.2 million and $0.9 million for the three months ended July 31, 2013 and 2012, respectively, and $2.4 million and $1.7 million for the six months ended July 31, 2013 and 2012, respectively.
 
Legal Proceedings
 
We are subject to certain routine legal proceedings, as well as demands and claims that arise in the normal course of our business. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. In our opinion, resolution of any pending claims (either individually or in the aggregate) is not expected to have a material adverse impact on our consolidated results of operations, cash flows or financial position, nor is it possible to provide an estimated amount of any such loss. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect our future results of operations or cash flows, or both, in a particular quarter.

Indemnification Arrangements
 
During the ordinary course of business, we may indemnify, hold harmless and agree to reimburse for losses suffered or incurred, our customers, vendors, and each of their affiliates for certain intellectual property infringement and other claims by third parties with respect to our products and services, in connection with our commercial license arrangements or related to general business dealings with those parties.

As permitted under Delaware law, we have entered into indemnification agreements with our officers, directors and certain employees, indemnifying them for certain events or occurrences while they serve as officers or directors of the company or the company's direct and indirect subsidiaries.
 
To date, there have not been any costs incurred in connection with such indemnification obligations; therefore, there is no accrual of such amounts at July 31, 2013.  We are unable to estimate the maximum potential impact of these indemnifications on our future results of operations.


(4)  Debt Financing Facilities

In May 2009, we entered into a Loan and Security Agreement with Silicon Valley Bank, which expired on April 30, 2013. The agreement included a revolving line of credit facility.
 
On May 9, 2013 we entered into a Loan Agreement with Silicon Valley Bank. The agreement provides for a revolving line of credit facility, which expires May 9, 2015. Under the agreement, we are able to borrow up to $25 million. Interest on any drawdown under the revolving line of credit accrues either at the prime rate (3.25% in July 2013) or the LIBOR rate plus

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2.75%. As of July 31, 2013, we had no balance outstanding under this agreement. The agreement contains customary financial covenants and other affirmative and negative covenants. We were in compliance with all covenants as of July 31, 2013.

(5)  Convertible Preferred Stock
 
Upon the closing of our initial public offering ("IPO") in April 2012, all outstanding shares of convertible preferred stock were converted into shares of common stock. Warrants to purchase convertible preferred stock were converted into warrants to purchase common stock.
 
Warrants to Purchase Convertible Preferred Stock

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

There were no preferred stock warrants outstanding during the six months ended July 31, 2013. The assumptions below were used to estimate the value of the preferred stock warrants during the three months ended April 30, 2012:
 
Expected volatility
 
49.7-53.2%

Risk-free rate
 
0.50-1.40%

Dividend yield
 
0.0
%
Expected term (in years)
 
3.38-6.30

 
(6)  Stock Compensation Plans
 
The following table summarizes the stock option and restricted stock unit ("RSU") award activity during the six months ended July 31, 2013:
 

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Options Outstanding
 
RSUs
Outstanding
 
 
Available
for Grant
 
Shares
 
Weighted-
Average
Exercise
Price
Per Share
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value (1)
 
Shares
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
Balances as of January 31, 2013
 
7,867,788

 
18,917,547

 
$
4.26

 

 

 
2,904,707

Additional Shares Authorized
 
5,046,017

 


 


 

 


 


Options exercised
 


 
(3,907,868
)
 
3.20

 

 


 


Options forfeited and expired
 
226,285

 
(226,285
)
 
6.46

 

 


 


RSUs granted
 
(1,055,713
)
 


 


 

 


 
1,055,713

RSUs vested
 


 


 


 

 


 
(37,151)

Shares withheld related to net share settlement of RSUs
 
11,618

 
 
 
 
 
 
 
 
 


RSUs forfeited and expired
 
114,713

 


 


 

 


 
(114,713
)
Balances as of July 31, 2013
 
12,210,708

 
14,783,394

 
$
4.50

 
7.18
 
$
672,760

 
3,808,556

Vested and expected to vest
 
 

 
14,411,462

 
$
4.44

 
7.16
 
$
656,716

 
3,618,128

Exercisable as of July 31, 2013
 
 

 
7,344,751

 
$
2.10

 
6.15
 
$
351,876

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 

(1) The intrinsic value is calculated as the difference between the exercise price of the underlying stock option award and the closing market price of our common stock as of July 31, 2013.

Under net settlement procedures currently applicable to our outstanding RSUs for current employees, upon each settlement date, RSUs are withheld to cover the required withholding tax, which is based on the value of the RSU on the settlement date as determined by the closing price of our common stock on the trading day of the applicable settlement date. The remaining shares are delivered to the recipient as shares of our common stock. The amount remitted to the tax authorities for the employees' tax obligation is reflected as a financing activity within our condensed consolidated statements of cash flows. These shares withheld by us as a result of the net settlement of RSUs are not considered issued and outstanding, thereby reducing our shares outstanding used to calculate earnings per share. These shares are returned to the reserves and are available for future issuance under the 2012 Plan.
 
During the six months ended July 31, 2013, $0.3 million of tax benefits have been realized from exercised stock options. At July 31, 2013, there was a total unrecognized compensation cost of $24.7 million related to these stock options, adjusted for estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.13 years. At July 31, 2013, there was a total unrecognized compensation cost of $99.4 million related to RSUs, adjusted for estimated forfeitures, which is expected to be recognized over the next 3.43 years.
 
The total intrinsic value of options exercised during the six months ended July 31, 2013 was $149.2 million. The weighted-average grant date fair value of RSUs granted was $41.41 per share for the six months ended July 31, 2013.

(7)  Geographic Information
 
Revenues

Revenues by geography are based on the shipping address of the customer. The following table presents our revenues by geographic region for the periods presented (in thousands):
 
 
 
Three Months
Ended July 31,
 
Six Months
Ended July 31,
 
 
2013
 
2012
 
2013
 
2012
United States
 
$
52,752

 
$
35,387

 
$
97,755

 
$
65,591

International
 
14,121

 
9,096

 
26,325

 
16,083

Total Revenues
 
$
66,873

 
$
44,483

 
$
124,080

 
$
81,674


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Other than the United States, no other individual country exceeded 10% of total revenues during any of the periods presented. No individual customer represented greater than 10% of total revenues during any of the periods presented. At July 31, 2013, there was one channel partner that represented approximately 11% of total accounts receivable. At January 31, 2013, there was one customer that represented approximately 31% of total accounts receivable.

Property and Equipment

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

 
 
As of
 
 
July 31, 2013
 
January 31, 2013
United States
 
$
12,381

 
$
11,471

International
 
1,474

 
1,734

Total property and equipment, net
 
$
13,855

 
$
13,205

 
As of July 31, 2013, our property and equipment in one country, the United Kingdom, represented approximately 10% of our total property and equipment.

(8)  Income Taxes
 
For the three months ended July 31, 2013 and 2012, we recorded $0.4 million and $0.1 million in income tax expense, respectively. The increase was primarily due to increase in taxable income in our international jurisdictions and federal alternative minimum tax. For the six months ended July 31, 2013 and 2012, we recorded $0.8 million and $0.3 million in income tax expense, respectively. The increase was primarily due to increase in taxable income in our international jurisdictions and federal alternative minimum tax.

There were no material changes to our unrecognized tax benefits in the six months ended July 31, 2013, and we do not expect to have any significant changes to unrecognized tax benefits through the end of the fiscal year. Because of our history of tax losses, all years remain open to tax audit.
 
(9)  Net Loss Per Share
 
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase or forfeiture. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including preferred stock, stock options, RSUs, and warrants, to the extent dilutive.
 
The following table sets forth the computation of historical basic and diluted net loss per share (in thousands, except per share data):
 
 
 
Three Months
Ended July 31,
 
Six Months
Ended July 31,
 
 
2013
 
2012
 
2013
 
2012
Numerator:
 
 

 
 

 
 

 
 

Net loss
 
$
(13,693
)
 
$
(4,575
)
 
$
(29,827
)
 
$
(25,045
)
Denominator:
 
 

 
 

 
 

 
 

Weighted-average common shares outstanding
 
104,181

 
95,798

 
103,160

 
62,798

Less: Weighted-average unvested common shares subject to repurchase or forfeiture
 
(81
)
 
(280
)
 
(85
)
 
(332
)
Weighted-average shares used to compute net loss per share, basic and diluted
 
104,100

 
95,518

 
103,075

 
62,466

Net loss per share, basic and diluted
 
$
(0.13
)
 
$
(0.05
)
 
$
(0.29
)
 
$
(0.40
)
 

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Since we were in a net loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows (in thousands):
 
 
 
As of July 31,
 
 
2013
 
2012
Shares subject to outstanding common stock options
 
14,783

 
22,177

Shares subject to outstanding RSUs
 
3,809

 
156

Employee stock purchase plan
 
277

 
568

Shares subject to common stock warrants
 

 
405

Total
 
18,869

 
23,306

 
(10)  Related Party Transactions
 
Certain members of our board of directors ("Board") serve on the board of directors of and/or are executive officers of, and, in some cases, are investors in, companies that are customers or vendors of ours. Certain of our executive officers also serve on the board of directors of companies that are customers or vendors of ours.  We believe the transactions between these companies and us were carried out on terms that are consistent with similar transactions with our other similarly situated customers or vendors. We recognized revenue from sales to these companies of $0.7 million and $0.7 million for the three months ended July 31, 2013 and 2012, respectively, and $1.2 million and $0.9 million for the six months ended July 31, 2013 and 2012, respectively. We also recorded $0.3 million and $0.2 million in expenses related to purchases from these companies during the three months ended July 31, 2013 and 2012, respectively, and $0.6 million and $0.4 million for the six months ended July 31, 2013 and 2012, respectively. There were no accounts receivable from these companies as of July 31, 2013 or January 31, 2013. There were no accounts payable to these companies as of July 31, 2013 or January 31, 2013.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. Such statements include, but are not limited to, statements concerning 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 continued efforts to market and sell both domestically and internationally; our expectations about seasonal trends; our expectations regarding our revenue mix; use of non-GAAP financial measures; our expectations regarding our operating expenses, including changes in research and development, sales and marketing, and general and administrative expenses; sufficiency of cash to meet cash needs for at least the next 12 months; exposure to interest rate changes; inflation; anticipated income tax rates; and our expected capital expenditures, cash flows and liquidity.

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

Overview

Splunk provides an innovative software platform that enables organizations to gain real-time operational intelligence by harnessing the value of their data. Our software collects and indexes data at massive scale, regardless of format or source

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and enables users to quickly and easily search, correlate, analyze, monitor and report on this data, all in real time. Our software addresses the risks, challenges and opportunities organizations face with increasingly large and diverse data sets, commonly referred to as big data and is specifically tailored for machine-generated data. Machine data is produced by nearly every software application and electronic device and contains a definitive, time-stamped record of various activities, such as transactions, customer and user activities and security threats. Our software is designed to help users in various roles, including IT and business professionals, quickly analyze their machine data and realize real-time visibility into and intelligence about their organization's operations. This operational intelligence enables organizations to improve service levels, reduce costs, mitigate security risks, demonstrate and maintain compliance and gain new insights that enable them to drive better business decisions.

 We believe the market for software that provides operational intelligence presents a substantial opportunity as data grows in volume and diversity, creating new risks, opportunities and challenges for organizations. Since our inception, we have invested and continue to invest a substantial amount of resources developing our products and technology to address this market, specifically with respect to machine data.

Our software architecture is designed to accelerate return-on-investment for our customers. It does not require customization, long deployment cycles or extensive professional services commonly associated with traditional enterprise software applications. Users can simply download and install the software, typically in a matter of hours, connect to their relevant machine data sources and begin realizing operational intelligence. We also offer customers with complex IT infrastructure the ability to leverage the expertise of our professional services organization to deploy our software. We base our license fees on the estimated peak daily data indexing capacity our customers require. Prospective customers can download a trial version of our software that provides a full set of features but limited data indexing capacity. Following the 60-day trial period, prospective customers can purchase a license for our product or continue using our product with reduced features and limited data indexing capacity. We primarily license our software under perpetual licenses whereby we generally recognize the license fee portion of these arrangements upfront. As a result, the timing of when we enter into large perpetual licenses may lead to fluctuations in our revenues and operating results because our expenses are largely fixed in the short-term.

We intend to continue investing for long-term growth. We have invested and expect to continue to invest heavily in our product development efforts to deliver additional compelling products and features, address customer needs and uses and enable solutions that can address new end markets. In addition, we expect to continue to aggressively expand our sales and marketing organizations to market and sell our software both in the United States and internationally.

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

Continue to expand our direct and indirect sales organization, including our channel relationships, to acquire new customers. 

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

Develop additional solutions in adjacent markets as well as products and services that enable organizations to use our software in different ways, such as our cloud-based service, Splunk Storm. 

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

Become the developer platform for machine data.
 
We believe the factors that will influence our ability to achieve our goals include, among other things, our ability to rapidly innovate and deliver compelling technology and additional functionality; create new delivery platforms; drive acquisition of new customers across geographies and industries; cultivate incremental sales from our existing customers by driving increased use of our software within organizations; provide additional solutions that leverage our core machine data engine to help organizations understand and unlock the value of their machine data in specific end markets and use cases; add additional OEM and strategic relationships to enable new sales channels for our software as well as extend our integration with third party products; and help software developers leverage the functionality of our machine data engine through software development kits (SDKs) and application programming interfaces (APIs).
 

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During the quarter we announced the beta version of Hunk: Splunk Analytics for Hadoop and the general availability of the latest version of the Splunk App for VMware to provide accelerated operational visibility into virtualized environments. Hunk (beta) is a new software product from Splunk that enables exploration, analysis and visualization of data in Hadoop.

For the three months ended July 31, 2013 and 2012, our revenues were $66.9 million and $44.5 million, respectively, representing year-over-year growth of approximately 50%. For the three months ended July 31, 2013, approximately 21% of our revenues were derived from customers located outside the United States. Our customers and end-users represent the public sector and a wide variety of industries, including financial services, manufacturing, retail and technology, among others. As of July 31, 2013, we had more than 6,000 customers.
 
For the three months ended July 31, 2013 and 2012, our operating loss prepared in accordance with generally accepted accounting principles in the United States ("GAAP") was $13.3 million and $4.5 million, respectively, and our non-GAAP operating loss was $0.8 million and $0.4 million, respectively.
 
Our quarterly results reflect seasonality in the sale of our products and services. Historically, a pattern of increased license sales in the fourth fiscal quarter as a result of industry buying patterns has positively impacted sales activity in that period, which can result in lower sequential revenues in the first fiscal quarter. Our gross margins and operating losses have been affected by these historical trends because the majority of our expenses are relatively fixed in the short term. The majority of our expenses are personnel-related and include salaries, stock-based compensation, benefits and incentive-based compensation plan expenses. As a result, we have not experienced significant seasonal fluctuations in the timing of expenses as a percentage of revenue, from period to period.

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 operating income (loss), non-GAAP net income (loss), non-GAAP operating margin and non-GAAP income (loss) per share (collectively the "non-GAAP financial measures"). These non-GAAP financial measures exclude stock-based compensation expense, employer payroll tax expense related to employee stock plans and in first quarter of fiscal 2013, the change in fair value of certain preferred stock warrants that were subsequently exercised. In addition, non-GAAP financial measures include free cash flow, which represents cash from operations less purchases of property and equipment. The presentation of the non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key metrics used by management in its financial and operational decision making. In addition, these non-GAAP financial measures facilitate comparisons to competitors' operating results.

We exclude stock-based compensation expense and employer payroll tax expense related to employee stock plans from our non-GAAP operating income (loss), non-GAAP net income (loss), non-GAAP operating margin and non-GAAP income (loss) per share. We exclude stock-based compensation expense because it is non-cash in nature and excluding this expense provides meaningful supplemental information regarding our operational performance. In particular, because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies can use under FASB ASC Topic 718, we believe that providing non-GAAP financial measures that exclude this expense allows investors the ability to make more meaningful comparisons between our operating results and those of other companies. We exclude employer payroll tax expense related to employee stock plans from our non-GAAP financial measures 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 expense attributable to the change in fair value of certain preferred stock warrants from our non-GAAP financial measures because it is a non-recurring, non-cash expense. Accordingly, we believe that excluding these expenses provides investors and management with greater visibility to the underlying performance of our business operations, facilitates comparison of our results with other periods and may also facilitate comparison with the results of other companies in our industry. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that can be used for strategic opportunities, including investing in our business, making strategic acquisitions and strengthening our balance sheet.

There are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by our competitors and exclude

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expenses that may have a material impact upon our reported financial results. Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees. The non-GAAP financial measures are meant to supplement and be viewed in conjunction with GAAP financial measures.
 
The following table reconciles GAAP operating loss to non-GAAP operating loss for the three and six months ended July 31, 2013 and 2012 (in thousands):
 
 
 
Three Months
Ended July 31,
 
Six Months
Ended July 31,
 
 
2013
 
2012
 
2013
 
2012
GAAP operating loss
 
$
(13,304
)
 
$
(4,540
)
 
$
(29,001
)
 
$
(10,729
)
Stock-based compensation expense
 
11,957

 
3,866

 
21,792

 
6,538

Employer payroll tax on employee stock plans
 
586

 
262

 
1,166

 
262

Non-GAAP operating loss
 
$
(761
)
 
$
(412
)
 
$
(6,043
)
 
$
(3,929
)
 
The following table reconciles GAAP operating margin to non-GAAP operating margin for the three and six months ended July 31, 2013 and 2012:
 
 
 
Three Months
Ended July 31,
 
Six Months
Ended July 31,
 
 
2013
 
2012
 
2013
 
2012
GAAP operating margin
 
(19.9
)%
 
(10.2
)%
 
(23.4
)%
 
(13.1
)%
Stock-based compensation expense
 
17.9

 
8.7

 
17.6
 %
 
8.0

Employer payroll tax on employee stock plans
 
0.9

 
0.6

 
0.9

 
0.3
 %
Non-GAAP operating margin
 
(1.1
)%
 
(0.9
)%
 
(4.9
)%
 
(4.8
)%
 
The following table reconciles GAAP net loss to non-GAAP net loss for the three and six months ended July 31, 2013 and 2012 (in thousands):
 
 
 
Three Months
Ended July 31,
 
Six Months
Ended July 31,
 
 
2013
 
2012
 
2013
 
2012
GAAP net loss
 
$
(13,693
)
 
$
(4,575
)
 
$
(29,827
)
 
$
(25,045
)
Stock-based compensation expense
 
11,957

 
3,866

 
21,792

 
6,538

Change in fair value of preferred stock warrants
 

 

 

 
14,087

Employer payroll tax on employee stock plans
 
586

 
262

 
1,166

 
262

Non-GAAP net loss
 
$
(1,150
)
 
$
(447
)
 
$
(6,869
)
 
$
(4,158
)
 
The following table reconciles shares used in computing net loss per share for the three and six months ended July 31, 2013 and 2012 (in thousands, except per share amounts):
 
 
Three Months
Ended July 31,
 
Six Months
Ended July 31,
 
 
2013
 
2012
 
2013
 
2012
GAAP net loss per share
 
$
(0.13
)
 
$
(0.05
)
 
$
(0.29
)
 
$
(0.40
)
Stock-based compensation expense
 
0.11

 
0.04

 
0.21

 
0.10

Change in fair value of preferred stock warrants
 

 

 

 
0.23

Employer payroll tax on employee stock plans
 
0.01

 

 
0.01

 

Non-GAAP basic and diluted net loss per share
 
$
(0.01
)
 
$
(0.01
)
 
$
(0.07
)
 
$
(0.07
)
 
 
 
 
 
 
 
 
 
Weighted-average shares used in computing Non-GAAP basic and diluted net loss per share
 
104,100

 
95,518

 
103,075

 
62,466

 

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The following table reconciles our net cash provided by operating activities to free cash flow for the three and six months ended July 31, 2013 and 2012 (in thousands):
 
 
 
Three Months
Ended July 31,
 
Six Months
Ended July 31,
 
 
2013
 
2012
 
2013
 
2012
Net cash provided by operating activities
 
$
6,251

 
$
3,836

 
$
26,102

 
$
15,404

Less purchases of property and equipment
 
(1,967
)
 
(1,597
)
 
(3,230
)
 
(3,474
)
Free cash flow (non-GAAP)
 
4,284

 
2,239

 
22,872

 
11,930

Net cash used in investing activities
 
(1,967
)
 
(1,597
)
 
(3,230
)
 
(3,474
)
Net cash provided by (used in) financing activities
 
$
11,636

 
$
(8
)
 
$
18,354

 
$
224,761

 
Components of Operating Results
 
Revenues
 
License revenues.  License revenues reflect the revenues recognized from sales of licenses to new customers and additional licenses to existing customers. We are focused on acquiring new customers and increasing revenues from our existing customers as they realize the value of our software by indexing higher volumes of machine data and expanding the use of our software through additional use cases and broader deployment within their organizations. A majority of our license revenues consists of revenues from perpetual licenses, under which we generally recognize the license fee portion of the arrangement upfront, assuming all revenue recognition criteria are satisfied. Customers can also purchase term license agreements, under which we recognize the license fee ratably, on a straight-line basis, over the term of the license. Due to the differing revenue recognition policies applicable to perpetual and term licenses, shifts in the mix between perpetual and term licenses from quarter to quarter could produce substantial variation in revenues recognized even if our sales remain consistent. In addition, seasonal trends that contribute to increased sales activity in the fourth fiscal quarter often result in lower sequential revenue in the first fiscal quarter, and we expect this trend to continue. Comparing our revenues on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance.
 
Maintenance and services revenues.  Maintenance and services revenues consist of revenues from maintenance agreements and, to a lesser extent, professional services and training. Typically, when purchasing a perpetual license, a customer also purchases one year of maintenance service for which we charge a percentage of the license fee. When a term license is purchased, maintenance service is typically bundled with the license for the term of the license period. Customers with maintenance agreements are entitled to receive support and unspecified upgrades and enhancements when and if they become available during the maintenance period. We recognize the revenues associated with maintenance agreements ratably, on a straight-line basis, over the associated maintenance period. In arrangements involving a term license, we recognize both the license and maintenance revenues over the contract period. We have a professional services organization focused on helping some of our largest customers deploy our software in highly complex operational environments and train their personnel. We recognize the revenues associated with these professional services on a time and materials basis as we deliver the services or provide the training.
 
Professional services and training revenues as a percentage of total revenues were 6% for the three months ended July 31, 2013 and 2012. 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.

We expect maintenance and services revenues to become a larger percentage of our total revenues as our installed customer base grows.
 
Cost of Revenues
 
Cost of license revenues.  Cost of license revenues includes all direct costs to deliver our product, including salaries, benefits, stock-based compensation 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, and

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allocated overhead for depreciation of equipment, facilities and IT. We recognize expenses related to our maintenance and services organization as they are incurred.
 
Operating Expenses
 
Our operating expenses are classified into three categories: research and development, sales and marketing, and general and administrative. For each category, the largest component is personnel costs, which include salaries, employee benefit costs, bonuses, commissions as applicable and stock-based compensation. Operating expenses also include allocated overhead costs for depreciation of equipment, facilities and IT. Allocated costs for facilities consist of leasehold improvements and rent. Our allocated costs for IT include costs for compensation of our IT personnel and costs associated with our IT infrastructure. Operating expenses are generally recognized as incurred.
 
Research and development.  Research and development expenses primarily consist of personnel and facility-related costs attributable to our research and development personnel. We have devoted our product development efforts primarily to enhancing the functionality and expanding the capabilities of our software. We expect that our research and development expenses will continue to increase, in absolute dollars, as we increase our research and development headcount to further strengthen and enhance our software and invest in the development of our solutions and apps.
 
Sales and marketing.  Sales and marketing expenses primarily consist of personnel and facility-related costs for our sales, marketing and business development personnel, commissions earned by our sales personnel, and the cost of marketing and business development programs. We expect that sales and marketing expenses will continue to increase, in absolute dollars, as we continue to hire additional personnel and invest in marketing programs.
 
General and administrative.  General and administrative expenses primarily consist of personnel and facility-related costs for our executive, finance, legal, human resources and administrative personnel; our legal, accounting and other professional services fees; and other corporate expenses. We have recently incurred additional expenses due to growing our operations and continue to incur additional expenses associated with being a publicly traded company, including higher legal, corporate insurance and accounting expenses and the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act and related regulations. We also expect that general and administrative expenses will continue to increase, in absolute dollars, as we expand our operations, including internationally.
 
Other Income (Expense), net
 
Other income (expense), net consists primarily of foreign exchange gains and losses, interest income on our cash and cash equivalents balances, and for fiscal 2013, changes in the fair value of preferred stock warrants and interest expense on outstanding debt.
 
Provision for Income Taxes

Provision for income taxes consists of federal, state and foreign income taxes. Because of our history of U.S. net operating losses, we have established a full valuation allowance against potential future benefits for deferred tax assets including loss carry-forwards and research and development and other tax credits.

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

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Three Months
Ended July 31,
 
Six Months
Ended July 31,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in thousands)
Condensed Consolidated Statement of Operations Data:
 
 

 
 

 
 
 
 
Revenues
 
 
 
 
 
 
 
 
License
 
$
43,185

 
$
30,203

 
$
79,357

 
$
54,589

Maintenance and services
 
23,688

 
14,280

 
44,723

 
27,085

Total revenues
 
66,873

 
44,483

 
124,080

 
81,674

Cost of revenues
 
 
 
 
 
 
 
 
License
 
76

 
92

 
145

 
221

Maintenance and services
 
7,345

 
4,553

 
13,957

 
8,689

Total cost of revenues
 
7,421

 
4,645

 
14,102

 
8,910

Gross profit
 
59,452

 
39,838

 
109,978

 
72,764

Operating expenses
 
 
 
 
 
 
 
 
Research and development
 
16,210

 
9,391

 
30,674

 
17,494

Sales and marketing
 
44,634

 
27,740

 
85,947

 
51,906

General and administrative
 
11,912

 
7,247

 
22,358

 
14,093

Total operating expenses
 
72,756

 
44,378

 
138,979

 
83,493

Operating loss
 
(13,304
)
 
(4,540
)
 
(29,001
)
 
(10,729
)
Interest and other income (expense), net
 
 
 
 
 
 
 
 
Interest income (expense), net
 
58

 
101

 
119

 
82

Other income (expense), net
 
(82
)
 

 
(176
)
 
2

Change in fair value of preferred stock warrants
 

 

 

 
(14,087
)
Total interest and other income (expense), net
 
(24
)
 
101

 
(57
)
 
(14,003
)
Loss before income taxes
 
(13,328
)
 
(4,439
)
 
(29,058
)
 
(24,732
)
Provision for income taxes
 
365

 
136

 
769

 
313

Net loss
 
$
(13,693
)
 
$
(4,575
)
 
$
(29,827
)
 
$
(25,045
)




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Table of Contents

 
 
Three Months
Ended July 31,
 
Six Months
Ended July 31,
 
 
2013
 
2012
 
2013
 
2012
 
 
(as % of revenues)
Condensed Consolidated Statement of Operations Data:
 
 

 
 

 
 
 
 
Revenues
 
 
 
 
 
 
 
 
License
 
64.6
 %
 
67.9
 %
 
64.0
 %
 
66.8
 %
Maintenance and services
 
35.4

 
32.1

 
36.0

 
33.2

Total revenues
 
100.0

 
100.0

 
100.0

 
100.0

Cost of revenues
 
 
 
 
 
 
 
 
License (1)
 
0.2

 
0.3

 
0.2

 
0.4

Maintenance and services (1)
 
31.0

 
31.9

 
31.2

 
32.1

Total cost of revenues
 
11.1

 
10.4

 
11.4

 
10.9

Gross profit
 
88.9

 
89.6

 
88.6

 
89.1

Operating expenses
 
 
 
 
 
 
 
 
Research and development
 
24.2

 
21.1

 
24.7

 
21.4

Sales and marketing
 
66.8

 
62.4

 
69.3

 
63.5

General and administrative
 
17.8

 
16.3

 
18.0

 
17.3

Total operating expenses
 
108.8

 
99.8

 
112.0

 
102.2

Operating loss
 
(19.9
)
 
(10.2
)
 
(23.4
)
 
(13.1
)
Interest and other income (expense), net
 
 
 
 
 
 
 
 
Interest income (expense), net
 
0.1

 
0.2

 
0.1

 
0.1

Other income (expense), net
 
(0.1
)
 

 
(0.1
)
 

Change in fair value of preferred stock warrants
 

 

 

 
(17.2
)
Total interest and other income (expense), net
 

 
0.2

 

 
(17.1
)
Loss before income taxes
 
(19.9
)
 
(10.0
)
 
(23.4
)
 
(30.2
)
Provision for income taxes
 
0.5

 
0.3

 
0.6

 
0.4

Net loss
 
(20.4
)%
 
(10.3
)%
 
(24.0
)%
 
(30.6
)%

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

Comparison of the Three Months Ended July 31, 2013 and 2012
 
Revenues
 
 
 
Three Months
Ended July 31,
 
 
 
 
2013
 
2012
 
% Change
 
 
($ amounts in thousands)
 
 
Revenues
 
 

 
 

 
 

License
 
$
43,185

 
$
30,203

 
43.0
%
Maintenance and services
 
23,688

 
14,280

 
65.9
%
Total revenues
 
$
66,873

 
$
44,483

 
50.3
%
Percentage of revenues
 
 

 
 

 
 

License
 
64.6
%
 
67.9
%
 
 

Maintenance and services
 
35.4

 
32.1

 
 

Total
 
100.0
%
 
100.0
%
 
 

 
Total revenues increased $22.4 million due to growth in license revenues, as well as maintenance and services revenues. The increase in license revenues was primarily driven by increases in our total number of customers, sales to existing customers and an increase in the number of larger orders. For example, we had 163 and 98 orders greater than $100,000 for the three months ended July 31, 2013 and 2012, respectively. Our total number of customers increased from approximately 4,400 at

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July 31, 2012 to approximately 6,000 at July 31, 2013. The increase in maintenance and services revenues was due to increases in sales of maintenance agreements resulting from the growth of our installed customer base as well as sales of our professional services.

Cost of Revenues and Gross Margin
 
 
 
Three Months
Ended July 31,
 
 
 
 
2013
 
2012
 
% Change
 
 
($ amounts in thousands)
 
 
Cost of revenues
 
 

 
 

 
 

License
 
$
76

 
$
92

 
(17.4
)%
Maintenance and services
 
7,345

 
4,553

 
61.3
 %
Total cost of revenues
 
$
7,421

 
$
4,645

 
59.8
 %
Gross margin
 


 


 


License
 
99.8
%
 
99.7
%
 
 

Maintenance and services
 
69.0
%
 
68.1
%
 
 

Total gross margin
 
88.9
%
 
89.6
%
 
 

 
Total cost of revenues increased $2.8 million due to the increase in cost of maintenance and services revenues. The increase in cost of maintenance and services revenues of $2.8 million was primarily related to an increase of $1.8 million in salaries and benefits expense due to increased headcount and $0.4 million related to consulting fees. Total gross margin remained relatively flat and in line with prior quarters.
 
Operating Expenses
 
 
 
Three Months
Ended July 31,
 
 
 
 
2013
 
2012
 
% Change
 
 
($ amounts in thousands)
 
 
Operating expenses
 
 

 
 

 
 

Research and development
 
$
16,210

 
$
9,391

 
72.6
%
Sales and marketing
 
44,634

 
27,740

 
60.9
%
General and administrative
 
11,912

 
7,247

 
64.4
%
Total operating expenses
 
$
72,756

 
$
44,378

 
63.9
%
Percentage of revenues
 


 
 

 


Research and development
 
24.2
%
 
21.1
%
 
 

Sales and marketing
 
66.8

 
62.4

 
 

General and administrative
 
17.8

 
16.3

 
 

Total
 
108.8
%
 
99.8
%
 
 

Includes stock-based compensation expense of:
 


 


 
 

Research and development
 
$
3,547

 
$
1,267

 
 

Sales and marketing
 
5,156

 
1,505

 
 

General and administrative
 
2,389

 
827

 
 

Total stock-based compensation expense
 
$
11,092

 
$
3,599

 
 

 
Research and development expense.  Research and development expense increased $6.8 million primarily due to a $5.5 million increase in salaries and benefits, which includes a $2.3 million increase in stock-based compensation expense, as we increased headcount as part of our focus on further developing and enhancing our products. We also had an increase of $0.8 million related to overhead costs.
 
Sales and marketing expense.  Sales and marketing expense increased $16.9 million primarily due to a $11.8 million increase in salaries and benefits, which includes a $3.7 million increase in stock-based compensation expense as we increased headcount to expand our field sales organization and experienced higher commission expense as a result of increased customer

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orders. We also incurred $1.3 million in marketing program fees and $0.5 million of consulting fees primarily due to marketing events and advertising. Finally, we experienced an increase of $1.9 million due to increased facilities and overhead expense and $0.9 million in travel expenses as a result of international expansion and increased headcount.

General and administrative expense.  General and administrative expense increased $4.7 million due primarily to an increase of $3.8 million related to salaries and benefits, which includes a $1.6 million increase in stock compensation expense, driven by an increase in headcount for accounting and legal activities to support the overall growth of the business. We also incurred an increase in accounting and legal expenses of $0.7 million primarily in connection with operating as a public company.
 
Other Income (Expense), net
 
 
 
Three Months
Ended July 31,
 
 
2013
 
2012
 
 
(in thousands)
Other income (expense), net
 
$
(24
)
 
$
101

 
Other income (expense), net reflects a net increase in expense of $0.1 million primarily due to foreign currency exchange losses compared to the same period last year.
 
Provision for Income Taxes
 
 
 
Three Months
Ended July 31,
 
 
2013
 
2012
 
 
(in thousands)
Provision for income taxes
 
$
365

 
$
136

 
For the three months ended July 31, 2013, we recorded income taxes that were principally attributable to foreign, federal and state taxes. The increase in tax expense is primarily due to increased activity in our foreign operations and federal alternative minimum tax.
 
Comparison of the Six Months Ended July 31, 2013 and 2012
 
Revenues
 
 
 
Six Months
Ended July 31,
 
 
 
 
2013
 
2012
 
% Change
 
 
($ amounts in thousands)
 
 
Revenues
 
 

 
 

 
 

License
 
$
79,357

 
$
54,589

 
45.4
%
Maintenance and services
 
44,723

 
27,085

 
65.1
%
Total revenues
 
$
124,080

 
$
81,674

 
51.9
%
Percentage of revenues
 
 

 
 

 
 

License
 
64.0
%
 
66.8
%
 
 

Maintenance and services
 
36.0

 
33.2

 
 

Total
 
100.0
%
 
100.0
%
 
 

 
Total revenues increased $42.4 million due to growth in license revenues, as well as maintenance and services revenues. The increase in license revenues was primarily driven by increases in our total number of customers, sales to existing customers and an increase in the number of larger orders. For example, we had 295 and 171 orders greater than $100,000 for the six months ended July 31, 2013 and 2012, respectively. Our total number of customers increased from approximately 4,400 at July 31, 2012 to approximately 6,000 at July 31, 2013. The increase in maintenance and services revenues was due to

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

Cost of Revenues and Gross Margin
 
 
 
Six Months
Ended July 31,
 
 
 
 
2013
 
2012
 
% Change
 
 
($ amounts in thousands)
 
 
Cost of revenues
 
 

 
 

 
 

License
 
$
145

 
$
221

 
(34.4
)%
Maintenance and services
 
13,957

 
8,689

 
60.6
 %
Total cost of revenues
 
$
14,102

 
$
8,910

 
58.3
 %
Gross margin
 


 


 


License
 
99.8
%
 
99.6
%
 
 

Maintenance and services
 
68.8
%
 
67.9
%
 
 

Total gross margin
 
88.6
%
 
89.1
%
 
 

 
Total cost of revenues increased $5.2 million due to the increase in cost of maintenance and services revenues. The increase in cost of maintenance and services revenues of $5.2 million was primarily related to an increase of $3.5 million in salaries and benefits expense due to increased headcount and $0.6 million related to consulting fees. Total gross margin remained flat and in line with prior quarters.
 
Operating Expenses
 
 
 
Six Months
Ended July 31,
 
 
 
 
2013
 
2012
 
% Change
 
 
($ amounts in thousands)
 
 
Operating expenses
 
 

 
 

 
 

Research and development
 
$
30,674

 
$
17,494

 
75.3
%
Sales and marketing
 
85,947

 
51,906

 
65.6
%
General and administrative
 
22,358

 
14,093

 
58.6
%
Total operating expenses
 
$
138,979

 
$
83,493

 
66.5
%
Percentage of revenues
 


 
 

 


Research and development
 
24.7
%
 
21.4
%
 
 

Sales and marketing
 
69.3

 
63.5

 
 

General and administrative
 
18.0

 
17.3

 
 

Total
 
112.0
%
 
102.2
%
 
 

Includes stock-based compensation expense of:
 


 


 
 

Research and development
 
$
6,590

 
$
2,162

 
 

Sales and marketing
 
9,478

 
2,363

 
 

General and administrative
 
4,154

 
1,638

 
 

Total stock-based compensation expense
 
$
20,222

 
$
6,163

 
 

 
Research and development expense.  Research and development expense increased $13.2 million primarily due to a $10.9 million increase in salaries and benefits, which includes a $4.4 million increase in stock-based compensation expense, as we increased headcount as part of our focus on further developing and enhancing our products. We also had an increase of $1.4 million related to overhead costs.
 
Sales and marketing expense.  Sales and marketing expense increased $34.0 million primarily due to a $23.3 million increase in salaries and benefits, which includes a $7.1 million increase in stock-based compensation expense as we increased headcount to expand our field sales organization and experienced higher commission expense as a result of increased customer orders. We also incurred $3.2 million due to marketing events and advertising and $3.0 million due to our annual sales kickoff.

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Finally, we experienced an increase of $2.1 million due to increased facilities and overhead expense and $1.9 million in travel expenses as a result of international expansion and increased headcount.

General and administrative expense.  General and administrative expense increased $8.3 million primarily due to an increase of $7.3 million related to salaries and benefits, which includes a $2.5 million increase in stock compensation expense, driven by an increase in headcount for accounting and legal activities to support the overall growth of the business. We also incurred an increase in accounting and legal expenses of $0.4 million primarily in connection with operating as a public company.
 
Other Income (Expense), net
 
 
 
Six Months
Ended July 31,
 
 
2013
 
2012
 
 
(in thousands)
Other income (expense), net
 
$
(57
)
 
$
(14,003
)
 
Other income (expense), net reflects a net decrease in expense due to the absence of any warrant re-measurement expense, as we recorded the final revaluation of our preferred stock warrants in conjunction with the completion of our IPO during the first fiscal quarter of 2013.

 
Provision for Income Taxes
 
 
 
Six Months
Ended July 31,
 
 
2013
 
2012
 
 
(in thousands)
Provision for income taxes
 
$
769

 
$
313

 
For the six months ended July 31, 2013, we recorded income taxes that were principally attributable to foreign, federal and state taxes. The increase in tax expense is primarily due to increased activity in our foreign operations and federal alternative minimum tax.

Liquidity and Capital Resources
 
 
 
July 31, 2013
 
January 31, 2013
 
 
(in thousands)
Cash and cash equivalents
 
$
347,114

 
$
305,939

 
 
 
 
 
 
 
Six Months
Ended July 31,
 
 
2013
 
2012
 
 
(in thousands)
Cash provided by operating activities
 
$
26,102

 
$
15,404

Cash used in investing activities
 
(3,230
)
 
(3,474
)
Cash provided by financing activities
 
18,354

 
224,761

 
Since fiscal 2010 we have funded our operations primarily through cash generated from operations. At July 31, 2013, our cash and cash equivalents of $347.1 million were held for working capital purposes, a majority of which was invested in money market funds. We intend to increase our capital expenditures for the remainder of fiscal 2014, consistent with the growth in our business and operations. We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced software and services offerings, the continuing market acceptance of our products and our

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planned investments, particularly in our product development efforts or acquisitions of complementary businesses, applications or technologies.

In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us if at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition could be adversely affected.
 
Operating Activities
 
In the six months ended July 31, 2013, cash inflows from our operating activities were $26.1 million, which reflects our net loss of $29.8 million, adjusted by non-cash charges of $24.4 million, consisting primarily of $21.8 million for stock-based compensation and $2.9 million for depreciation and amortization. Sources of cash inflows were from changes in our working capital, including a $23.2 million decrease in accounts receivable due primarily to the collection of a $20.0 million order booked in the fourth quarter of fiscal 2013, a $12.9 million increase in deferred revenue and a $5.4 million increase in accrued expenses and other liabilities. These cash inflows were partially offset by a $6.2 million decrease in accrued payroll and compensation and a $3.6 million increase in prepaid expense and other current and non-current assets.

In the six months ended July 31, 2012, cash inflows from our operating activities were $15.4 million, which reflects our net loss of $25.0 million, adjusted by non-cash charges of $22.8 million, consisting primarily of $14.1 million for the change in the fair value of the preferred stock warrants, $6.5 million for stock-based compensation, and $2.1 million for depreciation and amortization. Additional sources of cash inflows were from changes in our working capital, including a $15.0 million increase in deferred revenue, a $0.8 million decrease in accounts receivable due to increased collections, a $0.3 million increase in accounts payable, a $2.6 million increase in accrued payroll and compensation, and a $0.2 million increase in accrued expenses and other liabilities. These cash inflows were offset by cash outflows of $1.2 million related to an increase in prepaid expenses and other current assets.
 
Investing Activities
 
In the six months ended July 31, 2013, cash used in investing activities included $3.2 million of capital expenditures for technology and hardware to support the growth of our business.