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false--01-31Q320200001353283falseLarge Accelerated Filerfalse52222226000000.0010.001100000000010000000001491672981559008671491672981559008670.311030302020211900000199800000Amounts include stock-based compensation expense, as follows: Cost of revenues, $10,426 thousand and $8,867 thousand; Research and development, $45,003 thousand and $35,088 thousand; Sales and marketing, $50,743 thousand and $45,280 thousand; General and administrative, $26,680 thousand and $18,449 thousand for the three months ended October 31, 2019 and 2018, respectively. Amounts include stock-based compensation expense, as follows: Cost of revenues, $31,710 thousand and $26,618 thousand; Research and development, $126,722 thousand and $95,101 thousand; Sales and marketing, $150,018 thousand and $133,874 thousand; General and administrative, $70,478 thousand and $51,756 thousand for the nine months ended October 31, 2019 and 2018, respectively. 0001353283 2019-02-01 2019-10-31 0001353283 splk:VictorOpsMember 2019-02-01 2019-10-31 0001353283 splk:PhantomCyberCorporationMember 2019-02-01 2019-10-31 0001353283 splk:OmnitionMember 2019-02-01 2019-10-31 0001353283 2019-11-26 0001353283 2019-01-31 0001353283 2019-10-31 0001353283 2018-08-01 2018-10-31 0001353283 2019-08-01 2019-10-31 0001353283 2018-02-01 2018-10-31 0001353283 splk:MaintenanceAndServicesMember 2019-08-01 2019-10-31 0001353283 us-gaap:LicenseMember 2019-02-01 2019-10-31 0001353283 us-gaap:LicenseMember 2018-08-01 2018-10-31 0001353283 splk:MaintenanceAndServicesMember 2018-02-01 2018-10-31 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

 
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2019
 
OR
 
         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
 ____________________________________________________

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13239987&doc=66
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)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.001 per share
 
SPLK
 
The NASDAQ Global Select Market

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 No
 
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes No
 
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.
Large accelerated filer
Accelerated filer
 
 
 
 
Non-accelerated filer
Smaller reporting company
 
 
 
 
Emerging growth company
 
 
 

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.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

There were 155,969,418 shares of the Registrant’s Common Stock issued and outstanding as of November 26, 2019.
 



TABLE OF CONTENTS
 
 
 
 
Page No.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 6.
 
 
 



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Splunk Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In thousands, except share and per share amounts)
 
October 31, 2019

January 31, 2019
Assets
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
873,470

 
$
1,876,165

Investments, current
 
948,352

 
881,220

Accounts receivable, net
 
638,050

 
469,658

Prepaid expenses and other current assets
 
103,238

 
73,197

Deferred commissions, current
 
84,530

 
78,223

Total current assets
 
2,647,640

 
3,378,463

Investments, non-current
 
66,933

 
110,588

Operating lease right-of-use assets
 
278,261

 

Property and equipment, net
 
125,626

 
158,276

Intangible assets, net
 
248,997

 
91,622

Goodwill
 
1,278,456

 
503,388

Deferred commissions, non-current
 
67,842

 
64,766

Other assets
 
356,042

 
193,140

Total assets
 
$
5,069,797

 
$
4,500,243

Liabilities and Stockholders’ Equity
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable
 
$
28,026

 
$
20,418

Accrued compensation
 
215,224

 
226,061

Accrued expenses and other liabilities
 
203,521

 
125,641

Deferred revenue, current
 
689,877

 
673,018

Total current liabilities
 
1,136,648

 
1,045,138

Convertible senior notes, net
 
1,693,951

 
1,634,474

Operating lease liabilities
 
246,977

 

Deferred revenue, non-current
 
165,723

 
204,929

Other liabilities, non-current
 
381

 
95,245

Total non-current liabilities
 
2,107,032

 
1,934,648

Total liabilities
 
3,243,680

 
2,979,786

Commitments and contingencies (Note 3)
 


 


Stockholders’ equity
 
 

 
 

Common stock: $0.001 par value; 1,000,000,000 shares authorized; 155,900,867 shares issued and outstanding at October 31, 2019, and 149,167,298 shares issued and outstanding at January 31, 2019
 
155

 
149

Accumulated other comprehensive loss
 
(3,161
)
 
(2,506
)
Additional paid-in capital
 
3,367,866

 
2,754,858

Accumulated deficit
 
(1,538,743
)
 
(1,232,044
)
Total stockholders’ equity
 
1,826,117

 
1,520,457

Total liabilities and stockholders’ equity
 
$
5,069,797

 
$
4,500,243


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

1


Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
(In thousands, except per share amounts)
 
2019
 
2018
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
 
License
 
$
373,684

 
$
279,603

 
$
855,825

 
$
619,246

Maintenance and services
 
252,652

 
201,380

 
711,919

 
561,679

Total revenues
 
626,336

 
480,983

 
1,567,744

 
1,180,925

Cost of revenues (1)
 
 
 
 
 
 
 
 
License
 
5,796

 
5,922

 
17,414

 
16,717

Maintenance and services
 
102,023

 
83,303

 
284,536

 
234,226

Total cost of revenues
 
107,819

 
89,225

 
301,950

 
250,943

Gross profit
 
518,517

 
391,758

 
1,265,794

 
929,982

Operating expenses (1)
 
 
 
 
 
 
 
 
Research and development
 
158,887

 
117,722

 
422,287

 
310,818

Sales and marketing
 
319,023

 
264,223

 
896,757

 
726,089

General and administrative
 
88,092

 
59,819

 
226,118

 
168,405

Total operating expenses
 
566,002

 
441,764

 
1,545,162

 
1,205,312

Operating loss
 
(47,485
)
 
(50,006
)
 
(279,368
)
 
(275,330
)
Interest and other income (expense), net
 
 
 
 
 
 
 
 
Interest income
 
12,612

 
8,571

 
45,373

 
15,322

Interest expense
 
(24,406
)
 
(12,270
)
 
(71,527
)
 
(16,401
)
Other income (expense), net
 
(215
)
 
(186
)
 
(1,408
)
 
(657
)
Total interest and other income (expense), net
 
(12,009
)
 
(3,885
)
 
(27,562
)
 
(1,736
)
Loss before income taxes
 
(59,494
)
 
(53,891
)
 
(306,930
)
 
(277,066
)
Income tax provision (benefit)
 
(1,855
)
 
1,814

 
7,010

 
637

Net loss
 
$
(57,639
)
 
$
(55,705
)
 
$
(313,940
)
 
$
(277,703
)
 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share
 
$
(0.38
)
 
$
(0.38
)
 
$
(2.08
)
 
$
(1.91
)
 
 
 
 
 
 
 
 
 
Weighted-average shares used in computing basic and diluted net loss per share
 
152,404

 
146,391

 
150,659

 
145,015

 
_________________________
(1) 
Amounts include stock-based compensation expense, as follows:  
Cost of revenues
 
$
10,426


$
8,867


$
31,710

 
$
26,618

Research and development
 
45,003


35,088


126,722

 
95,101

Sales and marketing
 
50,743


45,280


150,018

 
133,874

General and administrative
 
26,680


18,449


70,478

 
51,756



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

2


Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
(In thousands)
 
2019
 
2018
 
2019
 
2018
Net loss
 
$
(57,639
)
 
$
(55,705
)
 
$
(313,940
)
 
$
(277,703
)
Other comprehensive gain (loss)
 
 
 
 
 
 
 
 
Net unrealized gain (loss) on investments (net of tax)
 
1,002

 
(265
)
 
2,044

 
442

Foreign currency translation adjustments
 
(679
)
 
(1,588
)
 
(2,699
)
 
(5,181
)
Total other comprehensive gain (loss)
 
323

 
(1,853
)
 
(655
)
 
(4,739
)
Comprehensive loss
 
$
(57,316
)
 
$
(57,558
)
 
$
(314,595
)
 
$
(282,442
)

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

3


Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
Nine Months Ended October 31,
(In thousands)
 
2019
 
2018
Cash flows from operating activities
 
 

 
 

Net loss
 
$
(313,940
)
 
$
(277,703
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
46,079

 
37,946

Amortization of deferred commissions
 
75,078

 
55,592

Amortization of investment premiums (accretion of discounts)
 
(7,969
)
 
(1,852
)
Amortization of debt discount and issuance costs
 
59,477

 
8,491

Stock-based compensation
 
378,928

 
307,345

Deferred income taxes
 
(398
)
 
(427
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
Accounts receivable, net
 
(165,735
)
 
100,873

Prepaid expenses and other assets
 
(190,037
)
 
(62,784
)
Deferred commissions
 
(84,461
)
 
(80,716
)
Accounts payable
 
(1,129
)
 
6,771

Accrued compensation
 
(12,821
)
 
36,577

Accrued expenses and other liabilities
 
18,966

 
10,498

Deferred revenue
 
(30,843
)
 
28,475

Net cash provided by (used in) operating activities
 
(228,805
)
 
169,086

Cash flows from investing activities
 
 
 
 
Purchases of investments
 
(815,685
)
 
(810,264
)
Maturities of investments
 
805,971

 
525,126

Acquisitions, net of cash acquired
 
(576,296
)
 
(394,910
)
Purchases of property and equipment
 
(53,524
)
 
(15,177
)
Other investment activities
 
(3,750
)
 
(5,119
)
Net cash used in investing activities
 
(643,284
)
 
(700,344
)
Cash flows from financing activities
 
 
 
 
Proceeds from the exercise of stock options
 
624

 
1,695

Proceeds from employee stock purchase plan
 
34,482

 
24,201

Proceeds from the issuance of convertible senior notes, net of issuance costs
 

 
2,106,225

Purchase of capped calls
 

 
(274,275
)
Taxes paid related to net share settlement of equity awards
 
(164,160
)
 
(779
)
Repayment of financing lease obligation
 

 
(1,862
)
Net cash provided by (used in) financing activities
 
(129,054
)
 
1,855,205

Effect of exchange rate changes on cash and cash equivalents
 
(1,552
)
 
(1,778
)
Net increase (decrease) in cash and cash equivalents
 
(1,002,695
)
 
1,322,169

Cash and cash equivalents at beginning of period
 
1,876,165

 
545,947

Cash and cash equivalents at end of period
 
$
873,470

 
$
1,868,116

 
 
 
 
 
Supplemental disclosures
 
 
 
 
Cash paid for income taxes
 
$
16,629

 
$
5,630

Cash paid for interest
 
15,761

 
6,161

Non-cash investing activities
 
 
 
 
Equity consideration for acquisitions
 
363,139

 

Increase (decrease) in accrued purchases of property and equipment
 
11,853

 
(295
)
Costs related to issuance of convertible senior notes included in accounts payable and accrued expenses and other liabilities
 

 
930



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

4


Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
(In thousands)
 
2019
 
2018
 
2019
 
2018
Common stock
 
 
 
 
 
 
 
 
Balance, beginning of period
 
$
151

 
$
146

 
$
149

 
$
143

Issuance of restricted stock awards
 
1

 

 
1

 
1

Vesting of restricted stock units
 

 
2

 
2

 
4

Issuance of common stock
 
3

 

 
3

 

Balance, end of period
 
$
155

 
$
148

 
$
155

 
$
148

Additional paid-in capital
 
 
 
 
 
 
 
 
Balance, beginning of period
 
$
2,918,277

 
$
2,327,885

 
$
2,754,858

 
$
2,086,893

Stock-based compensation
 
132,852

 
107,681

 
378,928

 
307,345

Issuance of common stock upon exercise of options
 
68

 
340

 
622

 
1,693

Issuance of common stock from acquisitions
 
344,569

 

 
344,569

 

Fair value of replacement equity awards attributable to pre-acquisition service
 
18,567

 

 
18,567

 
15,776

Taxes paid related to net share settlement of equity awards
 
(46,467
)
 

 
(164,160
)
 

Issuance of common stock upon ESPP purchase
 

 

 
34,482

 
24,199

Equity component of convertible senior notes, net
 

 
498,841

 

 
498,841

Purchase of capped calls
 

 
(274,275
)
 

 
(274,275
)
Balance, end of period
 
$
3,367,866

 
$
2,660,472

 
$
3,367,866

 
$
2,660,472

Accumulated other comprehensive loss
 
 
 
 
 
 
 
 
Balance, beginning of period
 
$
(3,484
)
 
$
(2,730
)
 
$
(2,506
)
 
$
156

Unrealized gain (loss) from investments
 
1,002

 
(265
)
 
2,044

 
442

Net change in cumulative translation adjustments
 
(679
)
 
(1,588
)
 
(2,699
)
 
(5,181
)
Balance, end of period
 
$
(3,161
)
 
$
(4,583
)
 
$
(3,161
)
 
$
(4,583
)
Accumulated deficit
 
 
 
 
 
 
 
 
Balance, beginning of period
 
$
(1,481,104
)
 
$
(1,178,465
)
 
$
(1,232,044
)
 
$
(955,871
)
Cumulative-effect adjustment from adoption of ASU 2016-02
 

 

 
7,241

 

Cumulative-effect adjustment from adoption of ASU 2016-16
 

 

 

 
(596
)
Net loss
 
(57,639
)
 
(55,705
)
 
(313,940
)
 
(277,703
)
Balance, end of period
 
$
(1,538,743
)
 
$
(1,234,170
)
 
$
(1,538,743
)
 
$
(1,234,170
)
 
 
 
 
 
 
 
 
 
Total stockholders’ equity
 
$
1,826,117

 
$
1,421,867

 
$
1,826,117

 
$
1,421,867



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



5


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 investigate, monitor, analyze and act on data at any scale. Our offerings address large and diverse data sets commonly referred to as big data. Data is produced by nearly every software application and electronic device across an organization and contains a real-time record of various activities, such as transactions, customer and user behavior, and security threats. Our offerings help users derive new insights from 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 2020, for example, refer to the fiscal year ending January 31, 2020.
 
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, 2019 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, 2019, filed with the SEC on March 27, 2019.
 
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 2020.
    
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments 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, the discount rate used for operating leases, 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

6


 
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.

Leases

We determine if an arrangement contains a lease and the classification of that lease, if applicable, at the inception of a contract. We primarily lease our facilities under operating leases. Operating lease right-of-use assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. We calculate the operating lease right-of-use assets based on the corresponding lease liability adjusted for (i) payments made at or before the commencement date, (ii) initial direct costs we incur and (iii) tenant incentives under the lease. We do not account for renewals or early terminations unless we are reasonably certain to exercise these options at commencement. Operating lease expense is recognized on a straight-line basis over the lease term. We account for lease and non-lease components as a single lease component for our operating leases. We do not record leases with terms of 12 months or less on our condensed consolidated balance sheets.

As the implicit rate for our operating leases is generally not determinable, we use our incremental borrowing rate as our discount rate at the lease commencement date to determine the present value of lease payments. We determine the discount rate of our leases by considering various factors, such as our credit rating, interest rates of similar debt instruments of entities with comparable credit ratings, the lease term and the currency in which the lease is denominated. Our discount rate was determined using a portfolio approach.

Our operating lease assets are included in “Operating lease right-of-use assets” and the current and non-current portions of our operating lease liabilities are included in “Accrued expenses and other liabilities” and “Operating lease liabilities,” respectively, on our condensed consolidated balance sheets. As of October 31, 2019, we had no finance leases. Refer to Note 4 “Leases” for details.

Foreign Currency

The functional currency of our foreign subsidiaries is their respective local currency, with the exception of our United Kingdom subsidiary, in which the functional currency is the U.S. dollar. Translation adjustments arising from the use of differing exchange rates from period to period are included in “Accumulated other comprehensive income (loss)” within the condensed consolidated statements of stockholders’ equity. Foreign currency transaction gains and losses are included in “Other income (expense), net.” All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Expenses are translated at the average exchange rate during the period. Equity transactions are translated using historical exchange rates.

Revenue Recognition

We generate revenues primarily in the form of software license and related maintenance fees, cloud services and other service fees. Licenses for on-premises software are either term or perpetual licenses and provide the customer with a right to use the software. When a term license is purchased, maintenance is bundled with the license for the term of the license period. Typically, when purchasing a perpetual license, a customer also purchases one year of maintenance for which we charge a percentage of the license fee. 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 generally 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

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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, we estimate the SSP using the residual approach.

A receivable is recorded in the period we deliver products or provide services, or when we have an unconditional right to payment. Most of our multi-year on-premises term license contracts are invoiced annually and we generally recognize the total amount of the license revenues upfront and record a corresponding receivable, if we have an unconditional right to receive payment.

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 or deliver a license prior to recognizing revenue. It is comprised of balances related to maintenance, cloud services, training and professional services invoiced at the beginning of each service period, as well as for licenses that we delivered prior to the license term commencing.

Recently Adopted Accounting Standards

8


Standard
 
Description
 
Effective Date
 
Effect on the Condensed Consolidated Financial Statements (or Other Significant Matters)
Accounting Standards Update (“ASU”) No. 2018-15 (Subtopic 350-40), Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
 
The standard aligns the requirements for capitalizing implementation costs in a cloud computing arrangement with the requirements for capitalizing implementation costs incurred for an internal-use software license.
 
We early adopted this new standard as of May 1, 2019.
 
The adoption of this new standard did not have a material impact on our condensed consolidated financial statements.
ASU No. 2018-13 (Topic 820), Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
 
The new standard no longer requires disclosure of the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted-average used to develop significant unobservable inputs for Level 3 fair value measurements.
 
We adopted this new standard as of February 1, 2019.
 
The adoption of this new standard did not have a material impact on our condensed consolidated financial statements.
ASU No. 2016-02 (Topic 842), Leases
 
The new standard supersedes the lease recognition requirements in Accounting Standards Codification (“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. In July 2018, ASU No. 2018-10, Codification Improvements to Topic 842, Leases, was issued which clarifies the codification or corrects unintended application of the guidance.
 
We adopted this new standard as of February 1, 2019, using the cumulative-effect transition method recognized as of the date of initial application, as amended by ASU No. 2018-11. Under this method, we are not required to restate or disclose the effects of applying Topic 842 for comparative periods.


 
As the result of our adoption, we recognized Operating lease right-of-use assets of $199.8 million and current and non-current Operating lease liabilities of $211.9 million on our condensed consolidated balance sheets at February 1, 2019. Additionally, we recorded a decrease to our opening accumulated deficit of approximately $7.2 million related to the derecognition of build-to-suit lease assets and liabilities.

We have updated our accounting policies, systems, processes and internal controls, and have allocated internal and external resources to assist us during our implementation efforts.

We applied the following practical expedients as permitted under Topic 842: (i) we elected to account for lease and non-lease components as a single lease component, and (ii) we elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward (1) our historical lease classification, (2) our assessment on whether a contract was or contains a lease, and (3) our initial direct costs for leases that existed prior to January 31, 2019.


Recently Issued Accounting Pronouncements

9


Standard
 
Description
 
Effective Date
 
Effect on the Condensed Consolidated Financial Statements (or Other Significant Matters)
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.
 
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.



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

The following table sets forth the fair value of our financial assets that were measured on a recurring basis: 
 
 
October 31, 2019
 
January 31, 2019
(In thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Money market funds
 
$
136,491

 
$

 
$

 
$
136,491

 
$
46,311

 
$

 
$

 
$
46,311

U.S. treasury securities
 

 
846,169

 

 
846,169

 

 
980,940

 

 
980,940

Corporate bonds
 

 
142,033

 

 
142,033

 

 

 

 

Commercial paper
 

 
12,464

 

 
12,464

 

 

 

 

Other
 

 

 
4,500

 
4,500

 

 

 
4,744

 
4,744

Reported as:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
 

 
 

 
 

 
$
136,491

 
 

 
 

 
 

 
$
46,311

Investments, current
 
 
 
 
 
 
 
948,352

 
 
 
 
 
 
 
881,220

Investments, non-current
 
 
 
 
 
 
 
56,814

 
 
 
 
 
 
 
104,463

Total
 
 

 
 

 
 

 
$
1,141,657

 
 

 
 

 
 

 
$
1,031,994




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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.

We invest in U.S. treasury securities, corporate bonds and commercial paper, which we have classified as available-for-sale investments. The following table presents our available-for-sale investments as of October 31, 2019
(In thousands)
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Investments, current:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
844,801

 
$
1,382

 
$
(14
)
 
$
846,169

Corporate bonds
 
89,383

 
338

 
(2
)
 
89,719

Commercial paper
 
12,447

 
17

 

 
12,464

Investments, non-current:
 
 
 
 
 
 
 
 
Corporate bonds
 
51,855

 
459

 

 
52,314

Total available-for-sale investments
 
$
998,486

 
$
2,196

 
$
(16
)
 
$
1,000,666



The following table presents our available-for-sale investments as of January 31, 2019
(In thousands)
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Investments, current:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
881,206

 
$
131

 
$
(117
)
 
$
881,220

Investments, non-current:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
99,597

 
134

 
(11
)
 
99,720

Total available-for-sale investments
 
$
980,803

 
$
265

 
$
(128
)
 
$
980,940



The following table presents the fair values and unrealized losses of our available-for-sale investments, classified by length of time that the securities have been in a continuous unrealized loss position:
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
(In thousands)
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
October 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
35,116

 
$
(14
)
 
$

 
$

 
$
35,116

 
$
(14
)
Corporate bonds
 
7,505

 
(2
)
 

 

 
7,505

 
(2
)
January 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
582,761

 
$
(128
)
 
$

 
$

 
$
582,761

 
$
(128
)


As of October 31, 2019 and January 31, 2019, 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)
 
October 31, 2019
Due within one year
 
$
948,352

Due within one to two years
 
52,314

Total
 
$
1,000,666



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.

Convertible Senior Notes

Refer to Note 7 “Convertible Senior Notes” for details regarding the fair value of our convertible senior notes.

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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:
(In thousands)
 
October 31, 2019
 
January 31, 2019
Equity investments without readily determinable fair values
 
$
8,244

 
$
5,000

Equity investments under the equity method of accounting
 
1,875

 
1,125

Total
 
$
10,119

 
$
6,125



(3)    Commitments and Contingencies
 
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 financial position, results of operations or cash flows, or all, in a particular period.

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 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 as of October 31, 2019. We are unable to estimate the maximum potential impact of these indemnifications on our future results of operations.

(4)    Leases

We have operating leases for office space and data centers. We use the office space for our business operations, sales, support and product development.

Operating lease costs were $12.6 million and $35.0 million, excluding short-term leases and sublease income, which were immaterial, during the three and nine months ended October 31, 2019, respectively. Rent expense recognized prior to our adoption of Topic 842 was $6.3 million and $18.5 million during the three and nine months ended October 31, 2018, respectively.

Our lease term and the discount rate related to our operating lease right-of-use assets and related lease liabilities are as follows:
 
 
October 31, 2019
Weighted-average remaining lease term (in years)
 
8.18

Weighted-average discount rate
 
5.98
%


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As of October 31, 2019, the maturity of lease liabilities under our non-cancelable operating leases were as follows:
Fiscal Period (In thousands)
 
Future Payments (1)
Remaining fiscal 2020
 
$
12,469

Fiscal 2021
 
54,971

Fiscal 2022
 
54,599

Fiscal 2023
 
47,639

Fiscal 2024
 
36,659

Thereafter
 
175,752

Total lease payments
 
382,089

Less imputed interest
 
(84,173
)
Total current and non-current operating lease liabilities (2)
 
$
297,916

_________________________
(1) 
Amounts based on Topic 842, Leases, which we adopted on February 1, 2019.
(2) 
The current portion of our operating lease liabilities is included in “Accrued expenses and other liabilities” on our condensed consolidated balance sheets.

As of October 31, 2019, we have entered into leases, primarily for office space that have not yet commenced, with future lease payments of $190.9 million that are not reflected in the above. These leases will commence between fiscal 2020 to 2021 with non-cancelable lease terms of 3 to 11 years.

Prior to our adoption of Topic 842, we entered into a lease which was accounted for under build-to-suit lease accounting. As of January 31, 2019, $76.2 million of our build-to-suit lease asset was included in “Property and equipment, net” and the related $83.4 million financing lease obligation was included in “Other liabilities, non-current” on our condensed consolidated balance sheets. Upon the adoption of Topic 842, we derecognized our build-to-suit asset and related liabilities and recorded the difference of $7.2 million as a decrease to accumulated deficit at February 1, 2019. Under Topic 842, this lease was classified as an operating lease and was included within the operating lease right-of-use assets and liabilities on our condensed consolidated balance sheets as of October 31, 2019.

As of January 31, 2019, future minimum rental payments under our non-cancelable operating leases obligation were as follows:
Fiscal Period (In thousands)
 
Future Payments (1)
Fiscal 2020
 
$
30,976

Fiscal 2021
 
48,195

Fiscal 2022
 
48,126

Fiscal 2023
 
44,018

Fiscal 2024
 
40,636

Thereafter
 
253,856

Total future minimum lease payments (2)
 
$
465,807

_________________________
(1) 
Amounts based on Topic 840, Leases.
(2) 
We entered into sublease agreements for portions of our office space and the future rental income of $2.3 million from these agreements have been included as an offset to our future minimum rental payments.

Supplemental Disclosures
 
 
Nine Months Ended
(In thousands)
 
October 31, 2019
Cash paid for operating lease liabilities
 
$
29,208

Operating lease liabilities arising from obtaining right-of-use assets