UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2020
OR
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-35498
____________________________________________________
(Exact name of registrant as specified in its charter)
_____________________________________________________
| (State or other jurisdiction of | (I.R.S. Employer | |||||||
| incorporation or organization) | Identification No.) | |||||||
(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 | ||||||||||||
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.
| ☒ | 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 161,720,841 shares of the Registrant’s Common Stock issued and outstanding as of December 1, 2020.
TABLE OF CONTENTS
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| Item 1. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 6. | |||||||||||
1
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, 2020 | January 31, 2020 | ||||||||||||
| Assets | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Investments, current | ||||||||||||||
| Accounts receivable, net | ||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| Deferred commissions, current | ||||||||||||||
| Total current assets | ||||||||||||||
| Investments, non-current | ||||||||||||||
| Accounts receivable, non-current | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Property and equipment, net | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Deferred commissions, non-current | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||
| Current liabilities | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued compensation | ||||||||||||||
| Accrued expenses and other liabilities | ||||||||||||||
| Deferred revenue, current | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Convertible senior notes, net | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Deferred revenue, non-current | ||||||||||||||
| Other liabilities, non-current | ||||||||||||||
| Total non-current liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies (Note 3 and 4) | ||||||||||||||
| Stockholders’ equity | ||||||||||||||
Common stock: $ | ||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Additional paid-in capital | ||||||||||||||
| Accumulated deficit | ( | ( | ||||||||||||
| Total stockholders’ equity | ||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||||||||
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) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||
| License | $ | $ | $ | $ | ||||||||||||||||||||||
| Cloud services | ||||||||||||||||||||||||||
| Maintenance and services | ||||||||||||||||||||||||||
| Total revenues | ||||||||||||||||||||||||||
Cost of revenues (1) | ||||||||||||||||||||||||||
| License | ||||||||||||||||||||||||||
| Cloud services | ||||||||||||||||||||||||||
| Maintenance and services | ||||||||||||||||||||||||||
| Total cost of revenues | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
Operating expenses (1) | ||||||||||||||||||||||||||
| Research and development | ||||||||||||||||||||||||||
| Sales and marketing | ||||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||||
| Total operating expenses | ||||||||||||||||||||||||||
| Operating loss | ( | ( | ( | ( | ||||||||||||||||||||||
| Interest and other income (expense), net | ||||||||||||||||||||||||||
| Interest income | ||||||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Other income (expense), net | ( | ( | ( | |||||||||||||||||||||||
| Total interest and other income (expense), net | ( | ( | ( | ( | ||||||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | ||||||||||||||||||||||
| Income tax provision (benefit) | ( | |||||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Basic and diluted net loss per share | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Weighted-average shares used in computing basic and diluted net loss per share | ||||||||||||||||||||||||||
_________________________
(1) Amounts include stock-based compensation expense, as follows:
| Cost of revenues | $ | $ | $ | $ | ||||||||||||||||||||||
| Research and development | ||||||||||||||||||||||||||
| Sales and marketing | ||||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||||
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) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Other comprehensive income (loss) | ||||||||||||||||||||||||||
| Net unrealized gain (loss) on investments (net of tax) | ( | ( | ||||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ||||||||||||||||||||||||
| Total other comprehensive income (loss) | ( | |||||||||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
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) | 2020 | 2019 | ||||||||||||
| Cash flows from operating activities | ||||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Amortization of deferred commissions | ||||||||||||||
| Amortization of investment premiums (accretion of discounts), net | ( | ( | ||||||||||||
| Amortization of debt discount and issuance costs | ||||||||||||||
| Gain on extinguishment of convertible senior notes | ( | |||||||||||||
Repurchase of convertible senior notes attributable to the accreted interest related to debt discount | ( | |||||||||||||
| Non-cash operating lease costs | ||||||||||||||
| Stock-based compensation | ||||||||||||||
| Disposal of property and equipment | ||||||||||||||
| Deferred income taxes | ( | ( | ||||||||||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||||
| Accounts receivable, net | ( | |||||||||||||
| Prepaid expenses and other assets | ( | ( | ||||||||||||
| Deferred commissions | ( | ( | ||||||||||||
| Accounts payable | ( | ( | ||||||||||||
| Accrued compensation | ( | |||||||||||||
| Accrued expenses and other liabilities | ( | |||||||||||||
| Deferred revenue | ( | ( | ||||||||||||
| Net cash used in operating activities | ( | ( | ||||||||||||
| Cash flows from investing activities | ||||||||||||||
| Purchases of investments | ( | ( | ||||||||||||
| Maturities of investments | ||||||||||||||
| Acquisitions, net of cash acquired | ( | ( | ||||||||||||
| Purchases of property and equipment | ( | ( | ||||||||||||
| Capitalized software development costs | ( | |||||||||||||
| Other investment activities | ( | ( | ||||||||||||
| Net cash provided by (used in) investing activities | ( | |||||||||||||
| Cash flows from financing activities | ||||||||||||||
| Proceeds from the exercise of stock options | ||||||||||||||
| Proceeds from employee stock purchase plan | ||||||||||||||
| Proceeds from the issuance of convertible senior notes, net of issuance costs | ||||||||||||||
| Purchase of capped calls | ( | |||||||||||||
| Partial repurchase of convertible senior notes | ( | |||||||||||||
| Taxes paid related to net share settlement of equity awards | ( | ( | ||||||||||||
| Net cash provided by (used in) financing activities | ( | |||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | |||||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | |||||||||||||
| Cash and cash equivalents at beginning of period | ||||||||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||||||||
| Supplemental disclosures | ||||||||||||||
| Cash paid for income taxes | $ | $ | ||||||||||||
| Cash paid for interest | ||||||||||||||
| Non-cash investing activities | ||||||||||||||
| Increase in accrued purchases of property and equipment | ||||||||||||||
| Equity consideration for acquisitions | ||||||||||||||
| Vesting of early exercised options | ||||||||||||||
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) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Common stock | ||||||||||||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||||||||||||
| Issuance of restricted stock awards | ||||||||||||||||||||||||||
| Vesting of restricted stock units | ||||||||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||||
| Issuance of common stock upon ESPP purchase | ||||||||||||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||||||||||||||
| Additional paid-in capital | ||||||||||||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||
| Capitalized software development costs | ||||||||||||||||||||||||||
| Issuance of common stock upon exercise of options | ||||||||||||||||||||||||||
| Issuance of common stock from acquisitions | ||||||||||||||||||||||||||
| Fair value of replacement equity awards attributable to pre-acquisition service | ||||||||||||||||||||||||||
| Vesting of early exercised options | ||||||||||||||||||||||||||
| Taxes paid related to net share settlement of equity awards | ( | ( | ( | ( | ||||||||||||||||||||||
| Issuance of common stock upon ESPP purchase | ||||||||||||||||||||||||||
| Equity component of convertible senior notes, net | ||||||||||||||||||||||||||
| Purchase of capped calls | ( | |||||||||||||||||||||||||
| Partial repurchase of convertible senior notes | ( | |||||||||||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||||||||||||||
| Accumulated other comprehensive loss | ||||||||||||||||||||||||||
| Balance, beginning of period | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Unrealized gain (loss) from investments (net of tax) | ( | ( | ||||||||||||||||||||||||
| Net change in cumulative translation adjustments | ( | ( | ||||||||||||||||||||||||
| Balance, end of period | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Accumulated deficit | ||||||||||||||||||||||||||
| Balance, beginning of period | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Cumulative-effect adjustment from adoption of ASU 2016-02 | ||||||||||||||||||||||||||
| Net loss | ( | ( | ( | ( | ||||||||||||||||||||||
| Balance, end of period | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Total stockholders’ equity | $ | $ | $ | $ | ||||||||||||||||||||||
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 ingest data from different sources including systems, devices and interactions, and turn that data into meaningful business insights across the organization. Our Data-to-Everything platform enables users to investigate, monitor, analyze and act on data regardless of format or source. 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 business transactions, customer and user behavior, and security threats. Our Data-to-Everything platform helps organizations gain the value contained in data by delivering real-time information to enable operational decision making. 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 2021, for example, refer to the fiscal year ending January 31, 2021.
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, 2020 was derived from audited financial statements, but does not include all disclosures required by GAAP. Therefore, these unaudited 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, 2020, filed with the SEC on March 26, 2020.
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 2021.
Reclassifications
Certain reclassifications have been made to prior period balances in order to conform to the current period presentation. “Cloud services” revenues have been reclassified from “Maintenance and services” revenues on our condensed consolidated statements of operations and “Non-cash operating lease costs” have been reclassified from “Accrued expenses and other liabilities” in our condensed consolidated statement of cash flows. These reclassifications had no impact on our previously reported total revenues and net cash flows from operating, investing, or financing activities.
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 the liability component of the convertible debt, 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.
6
COVID-19
The worldwide spread of COVID-19 has created significant global economic uncertainty and resulted in a global slowdown of economic activity which has decreased demand for a broad variety of goods and services, while also disrupting sales channels, marketing activities and general business operations for an unknown period of time until the disease is contained. At this point, the extent to which COVID-19 may impact our future financial condition or results of operations is uncertain, and as of the date of issuance of these condensed consolidated financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments or adjust the carrying value of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and will be recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our condensed consolidated financial statements.
Segments
We operate our business as one operating segment: the development and marketing of software solutions that enable our customers to gain real-time business insights 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 their respective local currency, with the exception of our United Kingdom and Singapore subsidiaries, for 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.
Our contracts with customers often contain multiple performance obligations, which may include a combination of on-premise software licenses, related maintenance and support services, cloud services and professional services including training. We apply significant judgment in identifying and accounting for each performance obligation, as a result of evaluating the terms and conditions in contracts. For these contracts, we account for on-premise licenses, maintenance and support, cloud services and other services as separate performance obligations as they are each distinct. Revenue is recognized when the performance obligations are satisfied. We satisfy our obligation and recognize revenue for on-premise licenses upon transfer of control of the software, which occurs at delivery of the license key to customers, or when the license term commences, if later. We satisfy our cloud service performance obligation over the associated contract term and recognize the associated revenue ratably over the term of the contract once access is provided to the customer, consistent with the pattern of benefit to the customer of such services. We satisfy our maintenance and support performance obligations and recognize revenue ratably over the maintenance and support term, consistent with the pattern of benefit to the customer of such services. Professional services and training are either provided on a time and material basis or over a contract term. We satisfy our professional services and training performance obligations and recognize the associated revenue as services are delivered. With respect to contracts that
7
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.
Customers can purchase our products under different pricing options. Regardless of the pricing option selected, the consideration for our license and cloud contracts is fixed and does not result in variable consideration. The transaction price is allocated to the separate performance obligations on a relative standalone selling price (“SSP”) basis. We determine the SSP based on an observable standalone selling price when it is available, as well as other factors, including the price charged to customers, our discounting practices, and our overall pricing objectives, while maximizing observable inputs. In situations where pricing is highly variable, we estimate the SSP using the residual approach.
A receivable is recorded when we have an unconditional right to payment, either because we satisfied a performance obligation prior to receiving payment from the customer or we have a non-cancelable contract that has been invoiced in advance in accordance with our standard payment terms. Most of our multi-year on-premises term license and cloud services contracts are invoiced annually. A receivable for multi-year cloud services is generally recorded upon invoicing. A receivable for multi-year on-premises term licenses is recorded upon delivery, whether or not invoiced, to the extent we have an unconditional right to receive payment in the future related to those licenses. The non-current portion of these receivables, primarily consisting of unbilled receivables from on-premises term licenses, is included in “Accounts receivable, non-current” on our condensed consolidated balance sheets.
Payment terms and conditions vary by contract type, although our standard payment terms generally require 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 generally 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 licenses that we delivered prior to the license term commencing.
8
Recently Adopted Accounting Standards
| Standard | Description | Effective Date | Effect on the Condensed Consolidated Financial Statements (or Other Significant Matters) | |||||||||||||||||
| Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes | The amendments in this ASU simplify the accounting for incomes taxes by removing certain exceptions to the general principles in Topic 740 and clarifying and amending existing guidance to improve consistent application. Most amendments within this standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. | We adopted this standard as of August 1, 2020. | The adoption of this new standard did not have a material impact on our condensed consolidated financial statements. | |||||||||||||||||
| 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 available-for-sale securities. | We adopted this new standard as of February 1, 2020, using the modified prospective method recognized as of the date of initial application. Under this method, we are not required to restate or disclose the effects of applying Topic 326 for comparative periods. | The adoption of this new standard did not have a material impact on our condensed consolidated financial statements. Under the new standard, we assess credit losses on accounts receivable by taking into consideration past collection experience, credit quality of the customer, age of the receivable balance, current economic conditions, and forecasts that affect the collectability of the reported amount. With respect to available-for-sale debt securities, when the fair value of a security is below its amortized cost, the amortized cost will be written down to its fair value if it is more likely than not that management is required to sell the impaired security before recovery of its amortized basis, or management has the intention to sell the security. If neither of these conditions are met, we determine whether the impairment is due to credit losses by comparing the present value of the expected cash flows of the security with its amortized cost basis. The amount of impairment recognized is limited to the excess of the amortized cost over the fair value of the security. An allowance for credit losses for the excess of amortized cost over the expected cash flows is recorded in Other income (expense), net on our condensed consolidated statements of operations. Non-credit related impairment losses are reported as a separate component on our consolidated statements of comprehensive income (loss). | |||||||||||||||||
9
Recently Issued Accounting Pronouncements
| Standard | Description | Effective Date | Effect on the Condensed Consolidated Financial Statements (or Other Significant Matters) | |||||||||||||||||
| ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815 - 40) | This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity's own equity, which reduces the number of accounting models for convertible debt instruments and convertible preferred stock. Convertible instruments will no longer have to be separated into debt and equity components. Convertible debt instruments will be reported as a single liability and convertible preferred stock will be reported as a single equity instrument. Similarly, the embedded conversion feature will no longer be amortized as interest expense over the life of the instrument. Instead, a convertible debt instrument will be accounted for wholly as debt unless 1) a convertible instrument contains features that require bifurcation as a derivative, or 2) a convertible debt instrument was issued at a substantive premium. Among other potential impacts, this ASU is expected to reduce reported interest expense, decrease reported net loss, and result in a reclassification of certain conversion feature balance sheet amounts from stockholder’s equity to liabilities as it relates to the convertible senior notes. This ASU also amends the related EPS guidance for both Subtopics and is part of the FASB's simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. | First quarter of fiscal 2023. Early adoption is permitted beginning in fiscal 2022. | We are currently evaluating the impact of this standard 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 condensed consolidated 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.
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The following table sets forth the fair value of our financial assets that were measured on a recurring basis:
| October 31, 2020 | January 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| U.S. treasury securities | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial paper | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Reported as: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Investments, current | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Investments, non-current | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
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, 2020:
| (In thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||||
| Investments, current: | ||||||||||||||||||||||||||
| U.S. treasury securities | $ | $ | $ | $ | ||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||
| Total available-for-sale investments | $ | $ | $ | $ | ||||||||||||||||||||||
The following table presents our available-for-sale investments as of January 31, 2020:
| (In thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||||||||
| U.S. treasury securities | $ | $ | $ | $ | ||||||||||||||||||||||
| Investments, current: | ||||||||||||||||||||||||||
| U.S. treasury securities | ( | |||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||
| Commercial paper | ||||||||||||||||||||||||||
| Investments, non-current: | ||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||
| Total available-for-sale investments | $ | $ | $ | ( | $ | |||||||||||||||||||||
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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 | ||||||||||||||||||||||||||||||||
| January 31, 2020 | ||||||||||||||||||||||||||||||||||||||
| U.S. treasury securities | $ | $ | ( | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||||||
As of October 31, 2020, we did not have any available-for-sale investments in an unrealized loss position.
The contractual maturities of our investments are as follows:
| (In thousands) | October 31, 2020 | |||||||
| Due within one year | $ | |||||||
| Total | $ | |||||||
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.
Equity Investments
Our equity investments are included in “Investments, non-current” on our condensed consolidated balance sheets. The following table provides a summary of our equity investments:
| (In thousands) | October 31, 2020 | January 31, 2020 | ||||||||||||
| Equity investments without readily determinable fair values | $ | $ | ||||||||||||
| Equity investments under the equity method of accounting | ||||||||||||||
| Total | $ | $ | ||||||||||||
As of October 31, 2020 and January 31, 2020, we did not consider any of our investments to be impaired.
(3) Commitments and Contingencies
Legal Proceedings
A putative class action lawsuit alleging violations of the federal securities laws was filed on December 4, 2020 in the U.S. District Court for the Northern District of California against us, our CEO and our CFO. The lawsuit alleges violations of the Securities Exchange Act of 1934, as amended, for allegedly making materially false and misleading statements regarding our financial guidance. The complaint asserts a putative class period stemming from October 21, 2020 to December 2, 2020. The plaintiff seeks unspecified monetary damages and other relief.
We are also 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
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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, 2020. 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, used for our business operations and sales support, and data centers, used primarily for product development.
Operating lease costs were $18.9 million and $57.3 million, excluding variable lease costs of $2.6 million and $9.9 million for the three and nine months ended October 31, 2020, respectively. Operating lease costs also exclude short-term leases and sublease income which were immaterial for the three and nine months ended October 31, 2020. Operating lease costs were $12.6 million and $35.0 million, excluding short-term leases, variable lease costs and sublease income, which were immaterial, for the three and nine months ended October 31, 2019, respectively.
Our lease term and the discount rate related to our operating lease right-of-use assets and related lease liabilities were as follows:
| October 31, 2020 | ||||||||
| Weighted-average remaining lease term (in years) | ||||||||
| Weighted-average discount rate | % | |||||||
As of October 31, 2020, the maturity of lease liabilities under our non-cancelable operating leases were as follows:
| Fiscal Period (In thousands) | Future Payments | |||||||
| Remaining fiscal 2021 | $ | |||||||
| Fiscal 2022 | ||||||||
| Fiscal 2023 | ||||||||
| Fiscal 2024 | ||||||||
| Fiscal 2025 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less imputed interest | ( | |||||||
Total current and non-current operating lease liabilities (1) | $ | |||||||
_________________________
(1) The current portion of our operating lease liabilities is included in “Accrued expenses and other liabilities” on our condensed consolidated balance sheets.
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As of October 31, 2020, we have entered into a lease, primarily for office space that has not yet commenced, with future lease payments of $8.3 million that are not reflected in the above. This lease will commence in fiscal 2022 with a non-cancelable lease term of 11 years.
Supplemental Disclosures
| Nine Months Ended October 31, | ||||||||||||||
| (In thousands) | 2020 | 2019 | ||||||||||||
| Cash paid for operating lease liabilities | $ | $ | ||||||||||||
| Operating lease liabilities arising from obtaining right-of-use assets | ||||||||||||||
(5) Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. These assets are depreciated and amortized using the straight-line method over their estimated useful lives. Property and equipment consisted of the following:
| (In thousands) | October 31, 2020 | January 31, 2020 | ||||||||||||
| Computer equipment and software | $ | $ | ||||||||||||
| Furniture and fixtures | ||||||||||||||
Leasehold and building improvements (1) | ||||||||||||||
| Property and equipment, gross | ||||||||||||||
| Less: accumulated depreciation and amortization | ( | ( | ||||||||||||
| Property and equipment, net | $ | $ | ||||||||||||
_________________________
Depreciation and amortization expense of Property and equipment, net was $9.8 million and $8.6 million for the three months ended October 31, 2020 and 2019, respectively, and $23.3 million and $21.5 million for the nine months ended October 31, 2020 and 2019, respectively.
Geographic Information
The following table presents our long-lived assets, which consist of property and equipment, net of depreciation and amortization, and operating lease right-of-use assets by geographic region:
| (In thousands) | October 31, 2020 | January 31, 2020 | ||||||||||||
| United States | $ | $ | ||||||||||||
| International | ||||||||||||||
| Total long-lived assets | $ | $ | ||||||||||||
(6) Acquisitions, Goodwill and Intangible Assets
Fiscal 2021 Acquisition
Plumbr
On October 5, 2020, we acquired 100 % of the voting equity interest of OÜ Plumbr (“Plumbr”), a privately-held Estonian corporation that offers auto-instrumentation, real user monitoring and application performance monitoring capabilities. This acquisition has been accounted for as a business combination. The purchase price of $11.8 million, paid in cash, was
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allocated as follows: $3.9 million to identifiable intangible assets, $0.3 million to net liabilities acquired, with the excess $8.2 million of the purchase price over the fair value of net assets acquired recorded as goodwill. Goodwill is allocated to our one operating segment, is not deductible for income tax purposes and is primarily attributable to the value expected from the synergies of the combination, including combined selling opportunities with our products. The identifiable intangible assets, which primarily consisted of developed technology, has an estimated useful life of 3 years. We also entered into holdback agreements for equity awards with a fair value of $4.6 million with certain employees which are subject to the recipients’ continued service with us and thus excluded from the purchase price and will be recognized ratably as stock-based compensation expense over the required service period. The results of operations of Plumbr have been included in our condensed consolidated financial statements from the date of purchase.
Fiscal 2020 Acquisitions
SignalFx
On October 1, 2019, we acquired 100 % of the voting equity interest of SignalFx, Inc. (“SignalFx”), a privately-held Delaware corporation that develops real-time monitoring solutions for cloud infrastructure, microservices and applications. This acquisition has been accounted for as a business combination. The total fair value of consideration transferred for this acquisition was $961.4 million, which consisted of $619.1 million in cash, $324.5 million for the fair value of 2,771,482 shares of our common stock issued and $17.8 million in fair value of replacement equity awards attributable to pre-acquisition service. The purchase price was allocated as follows: $173.7 million to identified intangible assets, $62.1 million to net assets acquired and $3.3 million to net deferred tax liabilities, with the excess $728.9 million of the purchase price over the fair value of net tangible and intangible assets acquired recorded as goodwill, allocated to our one operating segment. Goodwill is primarily attributable to the value expected from the synergies of the combination, including combined selling opportunities with our products. This goodwill is not deductible for income tax purposes. The results of operations of SignalFx have been included in our condensed consolidated financial statements from the date of purchase.
Per the terms of the merger agreement with SignalFx, certain unvested stock options, restricted stock units and restricted stock awards held by SignalFx employees were canceled and exchanged for replacement equity awards under our 2012 Equity Incentive Plan. Additionally, certain shares of stock issued pursuant to share-based compensation awards held by key employees of SignalFx were canceled and exchanged for replacement equity awards consisting of unregistered restricted shares of our common stock subject to vesting. The portion of the fair value of the replacement equity awards associated with pre-acquisition service of SignalFx’s employees represented a component of the total purchase consideration, as discussed above. The remaining fair value of $104.7 million of these issued awards, which are subject to the recipients’ continued service with us and thus excluded from the purchase price, will be recognized ratably as stock-based compensation expense over the required service period.
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition:
| (In thousands, except useful life) | Fair Value | Useful Life (in months) | ||||||||||||
| Developed technology | $ | |||||||||||||