4.30.2014 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 APRIL 30, 2014
 
OR
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM              TO
 
COMMISSION FILE NUMBER 001-35498
 ____________________________________________________

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

There were 118,569,400 shares of the registrant’s Common Stock issued and outstanding as of June 3, 2014.
 


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

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


Splunk Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
 
April 30, 2014

January 31, 2014
ASSETS
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
667,747

 
$
897,453

Investments, current portion
 
159,245

 

Accounts receivable, net
 
52,113

 
83,348

Prepaid expenses and other current assets
 
11,297

 
12,019

Total current assets
 
890,402

 
992,820

Investments, non-current
 
91,638

 

Property and equipment, net
 
18,003

 
15,505

Intangible assets, net
 
11,391

 
12,294

Goodwill
 
19,070

 
19,070

Other assets
 
1,125

 
642

Total assets
 
$
1,031,629

 
$
1,040,331

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable
 
$
2,234

 
$
2,079

Accrued payroll and compensation
 
30,119

 
43,876

Accrued expenses and other liabilities
 
17,031

 
12,743

Deferred revenue, current portion
 
153,538

 
149,156

Total current liabilities
 
202,922

 
207,854

Deferred revenue, non-current
 
40,474

 
43,165

Other liabilities, non-current
 
4,463

 
4,404

Total non-current liabilities
 
44,937

 
47,569

Total liabilities
 
247,859

 
255,423

Commitments and contingencies (Note 3)
 


 


Stockholders’ equity
 
 

 
 

Common stock: $0.001 par value; 1,000,000,000 shares authorized; 118,277,178 shares issued and outstanding at April 30, 2014, and 116,099,516 shares issued and outstanding at January 31, 2014
 
118

 
116

Accumulated other comprehensive income
 
93

 
58

Additional paid-in capital
 
1,004,021

 
954,441

Accumulated deficit
 
(220,462
)
 
(169,707
)
Total stockholders’ equity
 
783,770

 
784,908

Total liabilities and stockholders’ equity
 
$
1,031,629

 
$
1,040,331

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

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Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended April 30,
 
 
2014
 
2013
Revenues
 
 

 
 

License
 
$
51,274

 
$
36,172

Maintenance and services
 
34,633

 
21,035

Total revenues
 
85,907

 
57,207

Cost of revenues (1)
 
 

 
 

License
 
78

 
69

Maintenance and services
 
14,109

 
6,612

Total cost of revenues
 
14,187

 
6,681

Gross profit
 
71,720

 
50,526

Operating expenses (1)
 
 

 
 

Research and development
 
29,742

 
14,464

Sales and marketing
 
71,078

 
41,313

General and administrative
 
21,003

 
10,446

Total operating expenses
 
121,823

 
66,223

Operating loss
 
(50,103
)
 
(15,697
)
Interest and other income (expense), net
 
 

 
 

Interest income
 
130

 
61

Other income (expense), net
 
(220
)
 
(94
)
Total interest and other income (expense), net
 
(90
)
 
(33
)
Loss before income taxes
 
(50,193
)
 
(15,730
)
Income tax provision
 
562

 
404

Net loss
 
$
(50,755
)
 
$
(16,134
)
 
 
 

 
 

Basic and diluted net loss per share
 
$
(0.43
)
 
$
(0.16
)
 
 
 

 
 

Weighted-average shares used in computing basic and diluted net loss per share
 
117,290

 
102,015

 
(1)      Amounts include stock-based compensation expense, as follows:  
Cost of revenues
 
$
3,806

 
$
705

Research and development
 
12,587

 
3,043

Sales and marketing
 
19,120

 
4,322

General and administrative
 
7,726

 
1,765


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

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Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
 
Three Months Ended April 30,
 
 
2014
 
2013
Net loss
 
$
(50,755
)
 
$
(16,134
)
Other comprehensive income (loss):
 
 

 
 

Net unrealized gain on investments
 
6

 

Foreign currency translation adjustments
 
29

 
(14
)
Comprehensive loss
 
$
(50,720
)
 
$
(16,148
)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
 
Three Months Ended April 30,
 
 
2014
 
2013
Cash flows from operating activities
 
 

 
 

Net loss
 
$
(50,755
)
 
$
(16,134
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
2,651

 
1,425

Stock-based compensation
 
43,239

 
9,835

Deferred income taxes
 
(285
)
 
(88
)
Excess tax benefits from employee stock plans
 
(479
)
 
(111
)
Changes in operating assets and liabilities
 
 
 
 
Accounts receivable, net
 
31,235

 
26,032

Prepaid expenses, other current and non-current assets
 
524

 
(210
)
Accounts payable
 
386

 
918

Accrued payroll and compensation
 
(13,757
)
 
(6,932
)
Accrued expenses and other liabilities
 
4,461

 
2,491

Deferred revenue
 
1,691

 
2,625

Net cash provided by operating activities
 
18,911

 
19,851

Cash flows from investing activities
 
 
 
 

Purchases of investments
 
(250,883
)
 

Purchases of property and equipment
 
(4,238
)
 
(1,263
)
Net cash used in investing activities
 
(255,121
)

(1,263
)
Cash flows from financing activities
 
 

 
 

Issuance of common stock from exercise of stock options
 
5,836

 
6,607

Excess tax benefits from employee stock plans
 
479

 
111

Net cash provided by financing activities
 
6,315


6,718

Effect of exchange rate changes on cash and cash equivalents
 
189

 
7

Net increase (decrease) in cash and cash equivalents
 
(229,706
)
 
25,313

Cash and cash equivalents
 
 

 
 

Beginning of period
 
897,453

 
305,939

End of period
 
$
667,747

 
$
331,252

Supplemental disclosures
 
 

 
 

Cash paid for income taxes
 
482

 
181

Non-cash investing and financing activities
 
 

 
 

Accrued purchases of property and equipment
 
1,239

 
119

Vesting of early exercised options
 
28

 
28

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
(1)  Description of the Business and Significant Accounting Policies
 
Business
 
Splunk Inc. (“we,” "us," "our") provides innovative software products that enable organizations to gain real-time operational intelligence by harnessing the value of their data. Our products enable users to collect, index, search, explore, monitor and analyze data regardless of format or source. Our products address large and diverse data sets, commonly referred to as big data, and are 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 products help users derive new insights from machine data that can be used to, among other things, improve service levels, reduce operational costs, mitigate security risks, demonstrate and maintain compliance, and drive better business decisions. Splunk was incorporated in California in October 2003 and was reincorporated in Delaware in May 2006.
 
Fiscal Year
 
Our fiscal year ends on January 31. References to fiscal 2015 or fiscal year 2015, for example, refer to the fiscal year ending January 31, 2015.
 
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, 2014 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, 2014, filed on March 31, 2014. 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, 2014 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 2015.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date will be the first quarter of fiscal year 2018 using one of two retrospective application methods. We have not determined the potential effects on our condensed consolidated financial statements.

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. The adoption of this guidance did not have an impact on our condensed consolidated financial statements.

Use of Estimates
 

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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, the assessment of the useful life and recoverability of long-lived assets (property and equipment, goodwill and identified intangibles), stock-based compensation expense, the fair value of assets acquired and liabilities assumed for business combinations, income taxes and contingencies. Actual results could differ from those estimates.

Segments

We operate our business as one operating segment: the development and marketing of software products 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 months ended April 30, 2014. 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.

Investments

We determine the appropriate classification of our investments at the time of purchase and reevaluate such determination at each balance sheet date. Securities are classified as available-for-sale and are carried at fair value, with the change in unrealized gains and losses, net of tax, reported as a separate component on the consolidated statements of comprehensive loss. Fair value is determined based on quoted market rates when observable or utilizing data points that are observable, such as quoted prices, interest rates and yield curves. Declines in fair value judged to be other-than-temporary on securities available for sale are included as a component of investment income. In order to determine whether a decline in value is other-than-temporary, we evaluate, among other factors: the duration and extent to which the fair value has been less than the carrying value and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. The cost of securities sold is based on the specific-identification method. Interest on securities classified as available-for-sale is included as a component of interest income.

(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.
 

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Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of April 30, 2014 and January 31, 2014 (in thousands):
 
 
 
April 30, 2014
 
January 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Money market funds
 
$
595,120

 
$

 
$

 
$
595,120

 
$
864,012

 
$

 
$

 
$
864,012

U.S. treasury securities
 
$

 
$
268,883

 
$

 
$
268,883

 
$

 
$

 
$

 
$

Reported as:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
 

 
 

 
 

 
$
613,120

 
 

 
 

 
 

 
$
864,012

Investments, current portion
 
 
 
 
 
 
 
159,245

 
 
 
 
 
 
 

Investments, non-current
 
 
 
 
 
 
 
91,638

 
 
 
 
 
 
 

Total
 
 

 
 

 
 

 
$
864,003

 
 

 
 

 
 

 
$
864,012


We invested in U.S. treasury securities during the three months ended April 30, 2014, which we have classified as available-for-sale securities. The following table presents our available-for-sale investments as of April 30, 2014 (in thousands): 

 
 
April 30, 2014
 
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Cash and cash equivalents:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
18,000

 
$

 
$

 
$
18,000

Investments, current portion:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
159,234

 
31

 
(20
)
 
159,245

Investments, non-current:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
91,643

 
11

 
(16
)
 
91,638

Total available-for-sale investments
 
$
268,877

 
$
42

 
$
(36
)
 
$
268,883


As of April 30, 2014, we did not consider any of our investments to be other-than-temporarily impaired.

The contractual maturities of our investments are as follows (in thousands):
 
 
April 30, 2014
Due within one year
 
$
177,245

Due within one to two years
 
91,638

Total
 
$
268,883


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.

 
(3)  Commitments and Contingencies
 
Operating Lease Commitments
 

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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 $2.2 million and $1.2 million for the three months ended April 30, 2014 and 2013, respectively.

On April 29, 2014, we entered into an office lease for approximately 182,000 square feet located at 270 Brannan Street, San Francisco, California. The lease premises of approximately 182,000 square feet will be allocated to approximately 95,000 square feet of rentable space which we expect to occupy on January 1, 2016 and approximately 87,000 square feet of rentable space which we expect to occupy one year thereafter, for a term of 84 months, subject to the completion of certain pre-occupancy improvements by our landlord. Our total obligation for the base rent is approximately $92.0 million.

The following summarizes our contractual commitments and obligations as of April 30, 2014:
 
 
Payments Due by Period*
 
 
Total
 
Less Than 1
year
 
1-3 years
 
3-5 years
 
More Than 5
years
 
 
(in thousands)
Operating lease obligations
 
$
140,593

 
$
9,088

 
$
28,030

 
$
41,195

 
$
62,280

 _________________________
*We entered into a sublease agreement on November 16, 2012 for a portion of our office space in the United Kingdom, and the future sublease rental income of $1.1 million has been included as an offset to our future minimum rental payments.

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 our officers or directors or those of our direct and indirect subsidiaries.
 
To date, there have not been any costs incurred in connection with such indemnification obligations; therefore, there is no accrual of such amounts at April 30, 2014.  We are unable to estimate the maximum potential impact of these indemnifications on our future results of operations.

(4)  Property and Equipment
 
Property and equipment are stated at cost, net of accumulated depreciation and amortization. These assets are depreciated and amortized using the straight-line method over their estimated useful lives. Property and equipment consisted of the following (in thousands):
 

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As of
 
 
April 30, 2014
 
January 31, 2014
Computer equipment and software
 
$
22,910

 
$
20,451

Furniture and fixtures
 
6,329

 
5,364

Leasehold improvements
 
7,954

 
7,128

 
 
37,193

 
32,943

Less: accumulated depreciation and amortization
 
(19,190
)
 
(17,438
)
Property and equipment, net
 
$
18,003

 
$
15,505

 
Depreciation and amortization expense was $1.7 million and $1.4 million for the three months ended April 30, 2014 and 2013, respectively.

(5)  Acquisitions, Goodwill and Intangible Assets
 
BugSense

On September 25, 2013, we acquired BugSense, a privately-held Delaware corporation, which developed and offered as a service an analytics solution for machine data generated by mobile devices. This acquisition has been accounted for as a business combination. The purchase price of $9.0 million paid in cash was preliminarily allocated as follows: $4.7 million to identifiable intangible assets, $0.7 million to net deferred tax liability recorded and $0.7 million to net liabilities assumed, and the excess $5.7 million of the purchase price over the fair value of net assets acquired was recorded as goodwill allocated to our one operating segment. Goodwill is primarily attributable to our ability to further improve the overall performance of our mobile data gathering capabilities, expand our visibility into machine data generated by mobile devices and the value of acquired personnel. This goodwill is not deductible for U.S. income tax purposes. Pro forma results of operations of the acquired business have not been presented as we do not consider the results to have a material effect during any of the periods presented on our Condensed Consolidated Statement of Operations. We are still finalizing the allocation of the purchase price to the individual tax liabilities assumed, which may be subject to change as additional information becomes available to us.

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

 
 
Fair value
 
Useful Life (months)
Developed Technology
 
$
2,940

 
36
Customer Relationships
 
1,460

 
36
Other acquired intangible assets
 
330

 
24
Total intangible assets subject to amortization
 
$
4,730

 
 

Cloudmeter

On December 6, 2013, we acquired Cloudmeter, a privately-held Delaware corporation, which developed technology that enables users to capture machine data directly from network traffic. This acquisition has been accounted for as a business combination. The purchase price of $21.0 million paid in cash was preliminarily allocated as follows: $8.5 million to identifiable intangible assets, $0.6 million to net deferred tax liability recorded and $0.2 million to net liabilities assumed, and the excess $13.3 million of the purchase price over the fair value of net assets acquired was recorded as goodwill allocated to our one operating segment. Goodwill is primarily attributable to enhancing the ability of our customers to analyze machine data directly from their networks and correlate it with other machine-generated data to gain insights across our core use cases in application and infrastructure management, IT operations, security and business analytics. This goodwill is not deductible for U.S. income tax purposes. Pro forma results of operations of the acquired business have not been presented as we do not consider the results to have a material effect on any of the periods presented in our Consolidated Statements of Operations. We are still finalizing the allocation of the purchase price to the individual tax liabilities assumed, which may be subject to change as additional information becomes available to us.

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

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Fair value
 
Useful Life (months)
Developed technology
 
$
7,330

 
48
In-process research and development
 
500

 
Indefinite
Customer relationships
 
160

 
36
Other acquired intangible assets
 
480

 
24-36
Total intangible assets subject to amortization
 
$
8,470

 
 

Intangible Assets

Intangible assets subject to amortization obtained from acquisitions as of April 30, 2014 are as follows (in thousands, except Useful Life):
 
 
Gross Fair Value
 
Accumulated Amortization
 
Net Book Value
 
Weighted Average Remaining Useful Life
(months)
Developed technology
 
$
10,270

 
$
(1,335
)
 
$
8,935

 
39
Customer relationships
 
1,620

 
(306
)
 
1,314

 
29
Other acquired intangible assets
 
810

 
(168
)
 
642

 
25
Total intangible assets subject to amortization
 
$
12,700

 
$
(1,809
)
 
$
10,891

 
 

Additionally, we obtained $0.5 million of in-process research and development upon the acquisition of Cloudmeter, which has an indefinite useful life. We will assess the carrying value and useful life of the asset once the associated research and development efforts are completed.

The expected future amortization expense for acquired intangible assets as of April 30, 2014 is as follows (in thousands):
Fiscal Period:
 
 
Remaining nine months of fiscal 2015
 
$
2,767

Fiscal 2016
 
3,628

Fiscal 2017
 
2,969

Fiscal 2018
 
1,527

Total amortization expense
 
$
10,891


(6)  Debt Financing Facilities

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 April 2014) or the LIBOR rate plus 2.75%. As of April 30, 2014, we had no balance outstanding under this agreement. The agreement contains customary financial covenants and other affirmative and negative covenants. We were in compliance with all covenants as of April 30, 2014.

(7)  Stock Compensation Plans
 
The following table summarizes the stock option and restricted stock unit ("RSU") award activity during the three months ended April 30, 2014:
 

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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, 2014
 
5,918,773

 
11,094,438

 
$
4.84

 
6.42
 
$
800,933

 
9,993,688

Additional Shares Authorized
 
5,804,975

 


 


 

 


 


Options granted
 
(40,000
)
 
40,000

 
88.64

 
 
 
 
 
 
Options exercised
 

 
(1,823,540
)
 
3.20

 

 


 


Options forfeited and expired
 
82,344

 
(82,344
)
 
8.79

 

 


 


RSUs granted
 
(612,000
)
 


 


 

 


 
612,000

RSUs vested
 

 


 


 

 


 
(354,122)

RSUs forfeited
 
115,875

 


 


 

 


 
(115,875
)
Balances as of April 30, 2014
 
11,269,967

 
9,228,554

 
$
5.49

 
6.56
 
$
454,507

 
10,135,691

Vested and expected to vest
 
 
 
9,016,444

 
$
5.42

 
6.54
 
$
444,548

 
9,625,581

Exercisable as of April 30, 2014
 
 
 
4,895,932

 
$
2.92

 
5.64
 
$
252,897

 
 

(1) The intrinsic value is calculated as the difference between the exercise price of the underlying stock option award and the closing market price of our common stock as of April 30, 2014.

During the three months ended April 30, 2014, we began requiring that employees sell a portion of the shares that they receive upon the vesting of RSUs in order to cover any required withholding taxes, rather than our previous approach of net share settlement.
 
During the three months ended April 30, 2014, $0.5 million of tax benefits have been realized from exercised stock options. At April 30, 2014, there was a total unrecognized compensation cost of $16.8 million related to these stock options, adjusted for estimated forfeitures, which is expected to be recognized over a weighted-average period of 1.52 years. At April 30, 2014, total unrecognized compensation cost was $499.4 million related to RSUs, adjusted for estimated forfeitures, which is expected to be recognized over the next 3.32 years.
 
The total intrinsic value of options exercised during the three months ended April 30, 2014 was $148.1 million. The weighted-average grant date fair value of RSUs granted was $88.46 per share for the three months ended April 30, 2014.

(8)  Geographic Information
 
Revenues

Revenues by geography are based on the shipping address of the customer. The following table presents our revenues by geographic region for the periods presented (in thousands):
 
 
 
Three Months Ended April 30,
 
 
2014
 
2013
United States
 
$
64,679

 
$
45,003

International
 
21,228

 
12,204

Total Revenues
 
$
85,907

 
$
57,207

 
Other than the United States, no other individual country exceeded 10% of total revenues during any of the periods presented. At April 30, 2014, there was one channel partner that represented approximately 12% of total accounts receivable and approximately 10% of total revenues during the three months ended April 30, 2014. The accounts receivable and revenues from this channel partner is comprised of a number of customer transactions, none of which were individually greater than 10% of total accounts receivable at April 30, 2014 or total revenues for the three months ended April 30, 2014. At January 31, 2014, no customer or channel partner represented greater than 10% of total accounts receivable.


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Property and Equipment

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

 
 
As of
 
 
April 30, 2014
 
January 31, 2014
United States
 
$
16,454

 
$
14,005

International
 
1,549

 
1,500

Total property and equipment, net
 
$
18,003

 
$
15,505


Other than the United States, no other country represented 10% or more of our total property and equipment as of April 30, 2014 and January 31, 2014, respectively.

(9)  Income Taxes
 
For the three months ended April 30, 2014 and 2013, we recorded $0.6 million and $0.4 million in income tax expense, respectively. The increase in income tax expense was primarily due to an increase in taxable income in our international jurisdictions and state franchise tax.

There were no material changes to our unrecognized tax benefits in the three months ended April 30, 2014, and we do not expect to have any significant changes to unrecognized tax benefits through the end of the fiscal year. Because of our history of tax losses, all years remain open to tax audit.

(10)  Net Loss Per Share
 
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase or forfeiture. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including preferred stock, stock options, RSUs, 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 April 30,
 
 
2014
 
2013
Numerator:
 
 

 
 

Net loss
 
$
(50,755
)
 
$
(16,134
)
Denominator:
 
 

 
 

Weighted-average common shares outstanding
 
117,343

 
102,105

Less: Weighted-average unvested common shares subject to repurchase or forfeiture
 
(53
)
 
(90
)
Weighted-average shares used to compute net loss per share, basic and diluted
 
117,290

 
102,015

Net loss per share, basic and diluted
 
$
(0.43
)
 
$
(0.16
)
 
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):
 

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As of April 30,
 
 
2014
 
2013
Shares subject to outstanding common stock options
 
9,229

 
16,669

Shares subject to outstanding RSUs
 
10,136

 
3,227

Employee stock purchase plan
 
250

 
410

Total
 
19,615

 
20,306

 
(11)  Related Party Transactions
 
Certain members of our board of directors ("Board") serve on the board of directors of and/or are executive officers of, and, in some cases, are investors in, companies that are customers or vendors of ours. Certain of our executive officers also serve on the board of directors of companies that are customers or vendors of ours.  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 revenues from sales to these companies of $0.7 million and $0.6 million for the three months ended April 30, 2014 and 2013, respectively. We also recorded $0.5 million and $0.3 million in expenses related to purchases from these companies during the three months ended April 30, 2014 and 2013, respectively. We had $0.5 million and $0 of accounts receivable from these companies as of April 30, 2014 and January 31, 2014, respectively. There were no accounts payable to these companies as of April 30, 2014 or January 31, 2014.
 
(12)  Subsequent Event
 
On May 13, 2014, we entered into an irrevocable, standby letter of credit with Silicon Valley Bank for $5.97 million to serve as a security deposit for our office lease with 270 Brannan Street, LLC, San Francisco, California.

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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,” “might,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. Such statements include, but are not limited to, statements concerning our market opportunity, our future financial and operating results; our planned investments, particularly in our product development efforts; our planned expansion of our sales and marketing organization; our growth strategies; our continued efforts to market and sell both domestically and internationally; our expectations about seasonal trends; our expectations regarding our revenues mix; use of non-GAAP 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 innovative software products that enable organizations to gain real-time operational intelligence by harnessing the value of their data. Our products enable users to collect, index, search, explore, monitor and analyze data regardless of format or source. Our products address large and diverse data sets, commonly referred to as big data, and are 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. Outside of an organization's traditional IT and security infrastructure, every processor-based system, including HVAC controllers, smart electrical meters, GPS devices and radio-frequency identification tags, and many consumer-oriented systems, such as mobile devices, automobiles and medical devices that contain embedded electronic devices, are also continuously generating machine data.

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 a substantial amount of resources developing our products and technology to address this market, specifically with respect to machine data.
 
Our products are designed to accelerate return-on-investment for our customers. They generally do not require customization, long deployment cycles or extensive professional services commonly associated with traditional enterprise software applications. Users can simply download and install the software, typically in a matter of hours, to connect to their relevant machine data sources. Alternatively, they can sign up for our Splunk Cloud service and avoid the need to provision, deploy and manage internal infrastructure. They can also provision a computing instance on Amazon Web Services and use Splunk Enterprise as an Amazon Machine Image. We also offer support, training and professional services to our customers to assist in the deployment of our software.

For Splunk Enterprise, we base our license fees on the estimated daily data indexing capacity our customers require. Prospective customers can download a 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

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fixed in the short-term. Additionally, we license our software under term licenses which are generally recognized ratably over the contract term. From time to time, we enter into transactions that are designed to enable broad adoption of our software within an enterprise, referred to as enterprise adoption agreements. These agreements typically include provisions that require revenue deferral and recognition over time.

Our products include Splunk Cloud, which delivers the core functionalities of Splunk Enterprise as a scalable, reliable cloud service. We also introduced Hunk: Splunk Analytics for Hadoop during fiscal 2014, which is a new software product that enables exploration, analysis and visualization of data in Hadoop. We intend to continue investing for long-term growth. We have invested and expect to continue to invest heavily in our product development efforts to deliver additional compelling features, address customer needs and enable solutions that can address new end markets. 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.

Build premium apps on our core platforms that enable organizations to realize additional value from our software and to use our products in different ways.

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

Continue to deliver a rich developer environment to enable rapid development of enterprise applications that leverage machine data and the Splunk platform.
 
We believe the factors that will influence our ability to achieve our goals include, among other things, our ability to deliver additional functionality; acquire new customers across geographies and industries; cultivate incremental sales from our existing customers by driving increased use of our software within organizations; provide additional solutions that leverage our core machine data engine to help organizations understand and realize the value of their machine data in specific end markets and use cases; add additional OEM and strategic relationships to enable new sales channels for our software as well as extend our integration with third party products; and help software developers leverage the functionality of our machine data engine through SDKs and APIs.
 
For the three months ended April 30, 2014 and 2013, our total revenues were $85.9 million and $57.2 million, respectively, representing year-over-year growth of approximately 50%. For the three months ended April 30, 2014 and 2013, approximately 25% and 21% of our total revenues were derived from customers located outside the United States, respectively. 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 April 30, 2014, we had over 7,400 customers.

For the three months ended April 30, 2014 and 2013, our GAAP operating loss was $50.1 million and $15.7 million, respectively, and our non-GAAP operating loss was $3.6 million and $5.3 million, respectively.

For the three months ended April 30, 2014 and 2013, our GAAP net loss was $50.8 million and $16.1 million, respectively, and our non-GAAP net loss was $4.2 million and $5.7 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 from period to period.

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Table of Contents



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 gross margin, non-GAAP operating income (loss), non-GAAP net income (loss), non-GAAP operating margin and non-GAAP net 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 amortization of acquired intangible assets. 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 our management in its financial and operational decision making. In addition, these non-GAAP financial measures facilitate comparisons to competitors’ operating results.

We exclude stock-based compensation expense because it is non-cash in nature and excluding this expense provides meaningful supplemental information regarding our operational performance. In particular, because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies can use under FASB ASC Topic 718, we believe that providing non-GAAP financial measures that exclude this expense allows investors the ability to make more meaningful comparisons between our operating results and those of other companies. We exclude employer payroll tax expense related to employee stock plans in order for investors to see the full effect that excluding that stock-based compensation expense had on our operating results. These expenses are tied to the exercise or vesting of underlying equity awards and the price of our common stock at the time of vesting or exercise, which may vary from period to period independent of the operating performance of our business. We exclude amortization of acquired intangible assets from our non-GAAP financial measures because they are considered by management to be outside of our core operating results. Accordingly, we believe that excluding these expenses provides investors and management with greater visibility to the underlying performance of our business operations, facilitates comparison of our results with other periods and may also facilitate comparison with the results of other companies in our industry. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that can be used for strategic opportunities, including investing in our business, making strategic acquisitions and strengthening our balance sheet.
    
There are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by our competitors and exclude expenses that may have a material impact upon our reported financial results. Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees. The non-GAAP financial measures are meant to supplement and be viewed in conjunction with GAAP financial measures.

The following table reconciles cash provided by operating activities to free cash flow for the three months ended April 30, 2014 and 2013 (in thousands):
 
 
 
Three Months
Ended April 30,
 
 
2014
 
2013
Net cash provided by operating activities
 
$
18,911

 
$
19,851

Less purchases of property and equipment
 
(4,238
)
 
(1,263
)
Free cash flow (Non-GAAP)
 
$
14,673

 
$
18,588

Net cash used in investing activities
 
$
(255,121
)
 
$
(1,263
)
Net cash provided by financing activities
 
$
6,315

 
$
6,718


The following table reconciles GAAP gross margin to non-GAAP gross margin for the three months ended April 30, 2014 and 2013:
 

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Three Months
Ended April 30,
 
 
2014
 
2013
GAAP gross margin
 
83.5
%
 
88.3
%
Stock-based compensation expense
 
4.4

 
1.2

Employer payroll tax on employee stock plans
 
0.2

 

  Amortization of acquired intangible assets
 
0.8

 

Non-GAAP gross margin
 
88.9
%
 
89.5
%

The following table reconciles GAAP operating loss to non-GAAP operating loss for the three months ended April 30, 2014 and 2013 (in thousands):
 
 
 
Three Months
Ended April 30,
 
 
2014
 
2013
GAAP operating loss
 
$
(50,103
)
 
$
(15,697
)
Stock-based compensation expense
 
43,239

 
9,835

Employer payroll tax on employee stock plans
 
2,388

 
580

Amortization of acquired intangible assets
 
903

 

Non-GAAP operating loss
 
$
(3,573
)
 
$
(5,282
)

The following table reconciles GAAP operating margin to non-GAAP operating margin for the three months ended April 30, 2014 and 2013:
 
 
 
Three Months
Ended April 30,
 
 
2014
 
2013
GAAP operating margin
 
(58.3
)%
 
(27.4
)%
Stock-based compensation expense
 
50.3

 
17.2

Employer payroll tax on employee stock plans
 
2.7

 
1.0

  Amortization of acquired intangible assets
 
1.1

 

Non-GAAP operating margin
 
(4.2
)%
 
(9.2
)%
 
The following table reconciles GAAP net loss to non-GAAP net loss for the three months ended April 30, 2014 and 2013 (in thousands):
 
 
 
Three Months
Ended April 30,
 
 
2014
 
2013
GAAP net loss
 
$
(50,755
)
 
$
(16,134
)
Stock-based compensation expense
 
43,239

 
9,835

Employer payroll tax on employee stock plans
 
2,388

 
580

  Amortization of acquired intangible assets
 
903

 

Non-GAAP net loss
 
$
(4,225
)
 
$
(5,719
)
 
The following table reconciles the GAAP basic and diluted net loss per share to the non-GAAP basic and diluted net loss per share for the three months ended April 30, 2014 and 2013 (in thousands, except per share amounts):


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Table of Contents

 
 
Three Months
Ended April 30,
 
 
2014
 
2013
GAAP basic and diluted net loss per share
 
$
(0.43
)
 
$
(0.16
)
Stock-based compensation expense
 
0.36

 
0.09

Employer payroll tax on employee stock plans
 
0.02

 
0.01

  Amortization of acquired intangible assets
 
0.01

 

Non-GAAP basic and diluted net loss per share
 
$
(0.04
)
 
$
(0.06
)
 
 
 
 
 
Weighted-average shares used in computing Non-GAAP basic and diluted net loss per share
 
117,290

 
102,015


Components of Operating Results
 
Revenues
 
License revenues.  License revenues reflect the revenues recognized from sales of licenses to new customers and additional licenses to existing customers. We are focused on acquiring new customers and increasing revenues from our existing customers as they realize the value of our software by indexing higher volumes of machine data and expanding the use of our software through additional use cases and broader deployment within their organizations. A majority of our license revenues consists of revenues from perpetual licenses, under which we generally recognize the license fee portion of the arrangement upfront, assuming all revenue recognition criteria are satisfied. Customers can also purchase term license agreements, under which we recognize the license fee ratably, on a straight-line basis, over the term of the license. Due to the differing revenue recognition policies applicable to perpetual and term licenses, shifts in the mix between perpetual and term licenses from quarter to quarter could produce substantial variation in revenues recognized even if our sales remain consistent. In addition, seasonal trends that contribute to increased sales activity in the fourth fiscal quarter often result in lower sequential revenues in the first fiscal quarter, and we expect this trend to continue. Comparing our revenues on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance.
 
Maintenance and services revenues.  Maintenance and services revenues consist of revenues from maintenance agreements and, to a lesser extent, professional services and training. Typically, when purchasing a perpetual license, a customer also purchases one year of maintenance service for which we charge a percentage of the license fee. When a term license is purchased, maintenance service is typically bundled with the license for the term of the license period. Customers with maintenance agreements are entitled to receive support and unspecified upgrades and enhancements when and if they become available during the maintenance period. We recognize the revenues associated with maintenance agreements ratably, on a straight-line basis, over the associated maintenance period. In arrangements involving a term license, we recognize both the license and maintenance revenues over the contract period. We have a professional services organization focused on helping some of our largest customers deploy our software in highly complex operational environments and train their personnel. We recognize the revenues associated with these professional services on a time and materials basis as we deliver the services or provide the training. We expect maintenance and services revenues to become a larger percentage of our total revenues as our installed customer base grows.
 
Professional services and training revenues as a percentage of total revenues were 8% and 6% for the three months ended April 30, 2014 and 2013, respectively. We have experienced continued growth in our professional services revenues primarily due to the deployment of our software with some customers that have large, highly complex IT environments.
 
Cost of Revenues
 
Cost of license revenues.  Cost of license revenues includes all direct costs to deliver our product, including salaries, benefits, stock-based compensation and related expenses such as employer taxes, allocated overhead for facilities and IT and amortization of acquired intangible assets. We recognize these expenses as they are incurred.

Cost of maintenance and services revenues.  Cost of maintenance and services revenues includes salaries, benefits, stock-based compensation and related expenses such as employer taxes for our maintenance and services organization, allocated overhead for depreciation of equipment, facilities and IT, and amortization. We recognize expenses related to our maintenance and services organization as they are incurred.
 

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Operating Expenses

Our operating expenses are classified into three categories: research and development, sales and marketing and general and administrative. For each category, the largest component is personnel costs, which include salaries, employee benefit costs, bonuses, commissions as applicable, stock-based compensation and related expenses such as employer taxes. Operating expenses also include allocated overhead costs for depreciation of equipment, facilities and IT. Allocated costs for facilities consist of leasehold improvements and rent. Our allocated costs for IT include costs for compensation of our IT personnel and costs associated with our IT infrastructure. Operating expenses are generally recognized as incurred.
 
Research and development.  Research and development expenses primarily consist of personnel and facility-related costs attributable to our research and development personnel. We have devoted our product development efforts primarily to enhancing the functionality and expanding the capabilities of our software and services. We expect that our research and development expenses will continue to increase, in absolute dollars, as we increase our research and development headcount to further strengthen and enhance our software and services and invest in the development of our solutions and apps.

Sales and marketing.  Sales and marketing expenses primarily consist of personnel and facility-related costs for our sales, marketing and business development personnel, commissions earned by our sales personnel, and the cost of marketing and business development programs. We expect that sales and marketing expenses will continue to increase, in absolute dollars, as we continue to hire additional personnel and invest in marketing programs.
 
General and administrative.  General and administrative expenses primarily consist of personnel and facility-related costs for our executive, finance, legal, human resources and administrative personnel; our legal, accounting and other professional services fees; and other corporate expenses. We anticipate continuing to incur additional expenses due to growing our operations and being a publicly traded company, including higher legal, corporate insurance and accounting expenses and costs related to maintaining compliance with Section 404 of the Sarbanes-Oxley Act and related regulations.
 
Interest and other income (expense), net
 
Interest and other income (expense), net consists primarily of foreign exchange gains and losses, interest income on our investments and cash and cash equivalents balances, and interest expense on outstanding debt.
 
Provision for income taxes

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

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

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Three Months
Ended April 30, 2014
 
Three Months
Ended April 30, 2013
 
 
Amount
 
% of Revenue
 
Amount
 
% of Revenue
 
 
($ amounts in thousands)
Condensed Consolidated Statement of Operations Data:
 
 

 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
License
 
$
51,274

 
59.7
 %
 
$
36,172

 
63.2
 %
Maintenance and services
 
34,633

 
40.3

 
21,035

 
36.8

Total revenues
 
85,907

 
100.0

 
57,207

 
100.0

Cost of revenues
 
 
 
 
 
 

 
 
License (1)
 
78

 
0.2

 
69

 
0.2

Maintenance and services (1)
 
14,109

 
40.7

 
6,612

 
31.4

Total cost of revenues
 
14,187

 
16.5

 
6,681

 
11.7

Gross profit
 
71,720

 
83.5

 
50,526

 
88.3

Operating expenses
 
 

 
 
 
 

 
 
Research and development
 
29,742

 
34.6

 
14,464

 
25.3

Sales and marketing
 
71,078

 
82.7

 
41,313

 
72.1

General and administrative
 
21,003

 
24.4

 
10,446

 
18.3

Total operating expenses
 
121,823

 
141.8

 
66,223

 
115.7

Operating loss
 
(50,103
)
 
(58.3
)
 
(15,697
)
 
(27.4
)
Interest and other income (expense), net
 
 
 
 
 


 
 
Interest income
 
130

 
0.2

 
61

 
0.1

Other income (expense), net
 
(220
)
 
(0.3
)
 
(94
)
 
(0.2
)
Total interest and other income (expense), net
 
(90
)
 
(0.1
)
 
(33
)
 
(0.1
)
Loss before income taxes
 
(50,193
)
 
(58.4
)
 
(15,730
)
 
(27.5
)
Income tax provision
 
562

 
0.7

 
404

 
0.7

Net loss
 
$
(50,755
)
 
(59.1
)%
 
$
(16,134
)
 
(28.2
)%

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

Comparison of the Three Months Ended April 30, 2014 and 2013
 
Revenues
 
 
 
Three Months
Ended April 30,
 
 
 
 
2014

2013
 
% Change
 
 
($ amounts in thousands)
 
 
Revenues
 
 

 
 

 
 

License
 
$
51,274

 
$
36,172

 
41.8
%
Maintenance and services
 
34,633

 
21,035

 
64.6
%
Total revenues
 
$
85,907

 
$
57,207

 
50.2
%
Percentage of revenues
 
 

 
 

 
 

License
 
59.7
%
 
63.2
%
 
 

Maintenance and services
 
40.3

 
36.8

 
 

Total
 
100.0
%
 
100.0
%
 
 

 
Total revenues increased $28.7 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 167 and 132 orders greater than $100,000 for the three months ended April 30, 2014 and 2013, respectively. Our total number of customers increased from approximately 5,600 at April 30, 2013 to more than 7,400 at April 30, 2014. The increase in maintenance and services revenues was due to

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

Cost of Revenues and Gross Margin
 
 
 
Three Months
Ended April 30,
 
 
 
 
2014

2013
 
% Change
 
 
($ amounts in thousands)
 
 
Cost of revenues
 
 

 
 

 
 

License
 
$
78

 
69

 
13.0
%
Maintenance and services
 
14,109

 
6,612

 
113.4
%
Total cost of revenues
 
$
14,187

 
6,681

 
112.3
%
Gross margin
 
 
 


 
 
License
 
99.8
%
 
99.8
%
 
 

Maintenance and services
 
59.3
%
 
68.6
%
 
 

Total gross margin
 
83.5
%
 
88.3
%
 
 

 
Total cost of revenues increased $7.5 million primarily due to the increase in cost of maintenance and services revenues. The increase in cost of maintenance and services revenues was primarily related to an increase of $4.8 million in salaries and benefits expense, which includes a $3.1 million increase in stock-based compensation expense, due to increased headcount, an increase of $1.4 million of consulting fees and an increase of $0.5 million related to overhead costs.

Operating Expenses
 
 
 
Three Months
Ended April 30,
 
 
 
 
2014

2013
 
% Change
 
 
($ amounts in thousands)
 
 
Operating expenses (1)
 
 

 
 

 
 

Research and development
 
$
29,742

 
14,464

 
105.6
%
Sales and marketing
 
71,078

 
41,313

 
72.0
%
General and administrative
 
21,003

 
10,446

 
101.1
%
Total operating expenses
 
$
121,823

 
66,223

 
84.0
%
Percentage of revenues
 
 
 
 

 
 
Research and development
 
34.6
%
 
25.3
%
 
 

Sales and marketing
 
82.7

 
72.2

 
 

General and administrative
 
24.4

 
18.3

 
 

Total
 
141.8
%
 
115.8
%
 
 

 
 
 
 
 
 
 
(1) Includes stock-based compensation expense:
 
 

Research and development
 
$
12,587

 
$
3,043

 
 

Sales and marketing
 
19,120

 
4,322

 
 

General and administrative
 
7,726

 
1,765

 
 

Total stock-based compensation expense
 
$
39,433

 
$
9,130

 
 

 
Research and development expense.  Research and development expense increased $15.3 million primarily due to a $13.5 million increase in salaries and benefits, which includes a $9.5 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 $1.5 million related to overhead costs.
 
Sales and marketing expense.  Sales and marketing expense increased $29.8 million primarily due to a $23.7 million increase in salaries and benefits, which includes a $14.8 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 experienced an increase of $2.2 million in expenses due to increased facilities and overhead expense and an increase of $1.2 million in travel expenses as a result of international expansion and increased headcount. Finally, we also incurred a $1.6 million increase in marketing program fees in conjunction with increased marketing and advertising efforts and $0.5 million related to our sales kickoff.

General and administrative expense.  General and administrative expense increased $10.6 million due primarily to an increase of $9.7 million related to salaries and benefits, which includes a $6.0 million increase in stock compensation expense, as we increased headcount. Additionally, we incurred an increase of $1.5 million for accounting and legal activities to support the overall growth of the business.
 
Interest and Other Income (Expense), net
 
 
 
Three Months
Ended April 30,
 
 
2014

2013
 
 
(in thousands)
Interest and other income (expense), net:
 
 
 
 
Interest income
 
$
130

 
61

Other income (expense), net
 
(220
)
 
(94
)
Total interest and other income (expense), net
 
$
(90
)
 
$
(33
)
 
Interest and other income (expense), net reflects a net increase in expense primarily due to higher foreign currency exchange losses compared to the same period last year.
 
Income Tax Provision
 
 
 
Three Months
Ended April 30,
 
 
2014
 
2013
 
 
(in thousands)
Income tax provision
 
$
562

 
$
404

 
For the three months ended April 30, 2014, we recorded an income tax expense that was primarily attributable to an increase in tax expense from our increased activity in our foreign operations and state franchise tax.

Liquidity and Capital Resources
 
 
 
April 30, 2014
 
January 31, 2014
 
 
(in thousands)
Cash and cash equivalents
 
$
667,747

 
$
897,453

 
 
 
 
 
 
 
Three Months
Ended April 30,
 
 
2014
 
2013
 
 
(in thousands)
Cash provided by operating activities
 
$
18,911

 
$
19,851

Cash used in investing activities
 
(255,121
)
 
(1,263
)
Cash provided by financing activities
 
6,315

 
6,718

 
Since fiscal 2010 we have funded our operations primarily through cash generated from operations. At April 30, 2014, our cash and cash equivalents of $667.7 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 2015, 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 three months ended April 30, 2014, cash inflows from our operating activities were $18.9 million, which reflects our net loss of $50.8 million, adjusted by non-cash charges of $45.1 million, consisting primarily of $43.2 million for stock-based compensation, $2.7 million for depreciation and amortization, partially offset by $0.3 million for deferred income taxes and $0.5 million for excess tax benefits from employee stock plans. Sources of cash inflows were from changes in our working capital, including a $31.2 million decrease in accounts receivable due to strong collections, a $1.7 million increase in deferred revenue, a $4.5 million increase in accrued expenses and other liabilities, $0.5 million decrease in prepaid expense and other current and non-current assets and $0.4 million increase in accounts payable. These cash inflows were offset by a $13.8 million decrease in accrued payroll and compensation.

In the three months ended April 30, 2013, cash inflows from our operating activities were $19.9 million, which reflects our net loss of $16.1 million, adjusted by non-cash charges of $11.1 million, consisting primarily of $9.8 million for stock-based compensation and $1.4 million for depreciation and amortization. Sources of cash inflows were from changes in our working capital, including a $26.0 million decrease in accounts receivable due primarily to the collection of a $20.0 million order booked in the prior quarter, $2.6 million increase in deferred revenue, a $2.4 million increase in accrued expenses and other liabilities and a $1.0 million increase in accounts payable. These cash inflows were partially offset by a $6.9 million decrease in accrued payroll and compensation.
 
Investing Activities
 
In the three months ended April 30, 2014, cash used in investing activities of $255.1 million was primarily attributable to $250.9 million of investments in U.S. treasury securities and $4.2 million of capital expenditures for the purchase of technology and hardware as well as purchases related to our facilities and infrastructure.

In the three months ended April 30, 2013, cash used in investing activities included $1.3 million of capital expenditures for technology and hardware to support the growth of our business.

Financing Activities
 
In the three months ended April 30, 2014, cash provided by financing activities of $6.3 million consisted primarily of $5.8 million of proceeds from the exercise of stock options and $0.5 million of proceeds from excess tax benefits from employee stock plans.

In the three months ended April 30, 2013, cash provided by financing activities of $6.7 million consisted primarily of proceeds from the exercise of stock options.
 
Loan and Security Agreement

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 April 2014) or the LIBOR rate plus 2.75%. As of April 30, 2014, we had no balance outstanding under this agreement. The agreement contains customary financial covenants and other affirmative and negative covenants. We were in compliance with all covenants as of April 30, 2014.

Contractual Payment Obligations
 
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 $2.2 million and $1.2 million for the three months ended April 30, 2014 and 2013, respectively.


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On April 29, 2014, we entered into an office lease for approximately 182,000 square feet located at 270 Brannan Street, San Francisco, California. The lease premises of approximately 182,000 square feet will be allocated to approximately 95,000 square feet of rentable space which we expect to occupy on January 1, 2016 and approximately 87,000 square feet of rentable space which we expect to occupy one year thereafter, for a term of 84 months, subject to the completion of certain pre-occupancy improvements by our landlord. Our total obligation for the base rent is approximately $92.0 million.

The following summarizes our contractual commitments and obligations as of April 30, 2014:
 
 
Payments Due by Period*
 
 
Total
 
Less Than 1
year
 
1-3 years
 
3-5 years
 
More Than 5
years
 
 
(in thousands)
Operating lease obligations
 
$
140,593

 
$
9,088

 
$
28,030

 
$
41,195

 
$
62,280

 _________________________
*We entered into a sublease agreement on November 16, 2012 for a portion of our office space in the United Kingdom, and the future sublease rental income of $1.1 million has been included as an offset to our future minimum rental payments.

Off-Balance Sheet Arrangements
 
During the three months ended April 30, 2014 and 2013, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 Indemnification Arrangements
 
During the ordinary course of business, we may indemnify, hold harmless and agree to reimburse for losses suffered or incurred, our customers, channel partners, 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 our officers or directors.
 
To date, there have not been any costs incurred in connection with such indemnification obligations; therefore, there is no accrual of any amounts at April 30, 2014.  We are unable to estimate the maximum potential impact of these indemnifications on our future results of operations.

Critical Accounting Policies and Estimates
 
We prepare our condensed consolidated financial statements in accordance with U.S. GAAP. The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
 
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K, filed with the SEC on March 31, 2014.
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
We are exposed to financial market risks, primarily changes in interest rates and foreign currency exchange rates.

Interest Rate Risk


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We hold our cash, cash equivalents and investments for working capital purposes. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we maintain our portfolio of cash, cash equivalents and investments in a variety of securities, including money market funds and government debt securities. The risk associated with fluctuating interest rates is limited to our investment portfolio. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income.
        
The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This objective is accomplished by making diversified investments, consisting only of investment grade securities. The effect of a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our operating results or the total fair value of the portfolio.

Any draws under our revolving credit facility bear interest at a variable rate tied to the prime rate or the LIBOR rate. As of April 30, 2014, we had no balance outstanding under this agreement.

Foreign Currency Exchange Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. All of our revenues are generated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States and to a lesser extent in Europe and Asia. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements. To date, we have not engaged in any hedging strategies. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates.

Inflation

We do not believe that inflation had a material effect on our business, financial condition or results of operations in the three months ended April 30, 2014 and 2013. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations. 

Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of April 30, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of April 30, 2014, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting
 
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Inherent Limitations on Effectiveness of Controls
 

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Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
 
The information set forth above under Legal Proceedings in Note 3 contained in the “Notes to Condensed Consolidated Financial Statements” is incorporated herein by reference.

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

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

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

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

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the timing of our sales during the quarter, particularly because a large portion of our sales occur toward the end of the quarter, or the loss or delay of a few large contracts;

the mix of revenues attributable to larger transactions as opposed to smaller transactions and the impact that a change in mix may have on the overall average selling price of our products;
 
the mix of revenues attributable to perpetual and term licenses, subscription, maintenance and professional services and training, which may impact our gross margins and operating income;

the renewal and usage rates of our customers;
 
changes in the competitive dynamics of our market;
 
changes in customers’ budgets and in the timing of their purchasing decisions;
 
customers delaying purchasing decisions in anticipation of new products or software enhancements by us or our competitors;
 
customer acceptance of and willingness to pay for new versions of our products or new solutions for specific product and end markets;
 
our ability to successfully introduce and monetize new products and licensing and service models for our new products, such as Hunk: Splunk Analytics for Hadoop (“Hunk”) and Splunk Cloud;
 
our ability to control costs, including our operating expenses;

the timing of satisfying revenue recognition criteria;

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

successfully develop, introduce and expand adoption of new products, such as Hunk;

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


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successfully expand our business domestically and internationally;

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

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

respond timely and effectively to competitor offerings and pricing models;

generate leads and convert users of the trial version of our software to paying customers;

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

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

maintain and enhance our website and cloud services infrastructure to minimize interruptions when accessing our software or cloud services;

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

hire, integrate and retain world-class professional and technical talent.
 
If we fail to address the risks and difficulties we face, including those described elsewhere in this “Risk Factors” section, our business will be adversely affected and our business operations and financial results will suffer.

If we fail to effectively manage our growth, our business and operating results could be adversely affected.
 
Although our business has experienced significant growth, we cannot provide any assurance that our business will continue to grow at the same rate or at all. We have experienced and may continue to experience rapid growth in our headcount and operations, which has placed and will continue to place significant demands on our management and our operational and financial infrastructure. As of April 30, 2014, approximately 37% of our employees had been with us for less than one year. As we continue to grow, we must effectively integrate, develop and motivate a large number of new employees, while maintaining the effectiveness of our business execution and the beneficial aspects of our corporate culture. In particular, we intend to continue to make directed and substantial investments to expand our research and development, sales and marketing, and general and administrative organizations, as well as our international operations.

To effectively manage growth, we must continue to improve our operational, financial and management controls, and our reporting systems and procedures by, among other things:
 
improving our key business applications, processes and IT infrastructure to support our business needs;
 
enhancing information and communication systems to ensure that our employees and offices around the world are well-coordinated and can effectively communicate with each other and our growing base of customers and channel partners;
 
enhancing our internal controls to ensure timely and accurate reporting of all of our operations and financial results; and
 
appropriately documenting our IT systems and our business processes.
 
These systems enhancements and improvements will require significant capital expenditures and allocation of valuable management and employee resources. If we fail to implement these improvements effectively, our ability to manage our expected growth, ensure uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public reporting companies will be impaired. Additionally, if we do not effectively manage the growth of our

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business and operations, the quality of our products could suffer, which could negatively affect our brand, financial results and overall business.

We face intense competition in our markets, and we may be unable to compete effectively for sales opportunities.
 
Although our products target the new and emerging market for software and cloud services that provide operational intelligence, we compete against a variety of large software vendors and smaller specialized companies, open source projects and custom development efforts, which provide solutions in the specific markets we address. Our principal competitors include:
 
IT departments of potential customers which have undertaken custom software development efforts to analyze and manage their machine data;

security, systems management and other IT vendors, including BMC Software, CA, Compuware, HP, IBM, Intel, Microsoft, Quest Software, TIBCO and VMware;
 
web analytics vendors, including Adobe Systems, Google, IBM and Webtrends;
 
business intelligence vendors, including IBM, Oracle and SAP;
 
companies targeting the big data market by commercializing open source software, such as the various Hadoop distributions and NoSQL data stores; and
 
small-specialized vendors, which provide complementary and competitive solutions in enterprise data analytics, data warehousing and big data technologies that may compete with our products.
 
The principal competitive factors in our markets include product features, performance and support, product scalability and flexibility, ease of deployment and use, total cost of ownership and time to value. Some of our actual and potential competitors have advantages over us, such as longer operating histories, significantly greater financial, technical, marketing or other resources, stronger brand and business user recognition, larger intellectual property portfolios and broader global distribution and presence. Further, competitors may be able to offer products or functionality similar to ours at a more attractive price than we can, such as by integrating or bundling their software products with their other product offerings. In addition, our industry is evolving rapidly and is becoming increasingly competitive. Larger and more established companies may focus on operational intelligence and could directly compete with us. For example, companies may commercialize open source software, such as Hadoop, in a manner that competes with our products or causes potential customers to believe that such product and our products perform the same function. If companies move a greater proportion of their data and computational needs to the cloud, new competitors may emerge that offer services comparable to ours or that are better suited for cloud-based data, and the demand for our products may decrease. Smaller companies could also launch new products and services that we do not offer and that could gain market acceptance quickly.
 
In recent years, there have been significant acquisitions and consolidation by and among our actual and potential competitors. We anticipate this trend of consolidation will continue, which will present heightened competitive challenges to our business. In particular, consolidation in our industry increases the likelihood of our competitors offering bundled or integrated products, and we believe that it may increase the competitive pressures we face with respect to our products. If we are unable to differentiate our products from the integrated or bundled products of our competitors, such as by offering enhanced functionality, performance or value, we may see decreased demand for those products, which would adversely affect our business operations, financial results and growth prospects. Further, it is possible that continued industry consolidation may impact customers’ perceptions of the viability of smaller or even medium-sized software firms and consequently their willingness to use software solutions from such firms. Similarly, if customers seek to concentrate their software license purchases in the product portfolios of a few large providers, we may be at a competitive disadvantage regardless of the performance and features of our products. We believe that in order to remain competitive at the large enterprise level, we will need to develop and expand relationships with resellers and large system integrators that provide a broad range of products and services. If we are unable to compete effectively, our business operations and financial results could be materially and adversely affected.

Because we derive substantially all of our revenues and cash flows from sales of licenses of one software product, failure of this product to satisfy customer demands or to achieve increased market acceptance would adversely affect our business, results of operations, financial condition and growth prospects.
 

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Although we have recently introduced several new product offerings, we derive and expect to continue to derive substantially all of our revenues and cash flows from sales of licenses and maintenance of our Splunk Enterprise product. As such, the market acceptance of Splunk Enterprise is critical to our continued success. Demand for licenses to Splunk Enterprise is affected by a number of factors beyond our control, including continued market acceptance of Splunk Enterprise by referenceable accounts for existing and new use cases, the timing of development and release of new products by our competitors, technological change, and growth or contraction in our market. In addition, users of software that provides operational intelligence may seek a cloud-based service, and only recently we began to offer a cloud service with the features and functionality of our Splunk Enterprise software. Our cloud-based services currently represent a de minimis percentage of our overall revenues. We expect the proliferation of machine data to lead to an increase in the data analysis demands of our customers, and our products may not be able to scale and perform to meet those demands or may not be chosen by users for those needs. If we are unable to continue to meet customer demands or to achieve more widespread market acceptance of Splunk Enterprise, our business operations, financial results and growth prospects will be materially and adversely affected.
 
We have a history of losses, and we may not be profitable in the future.
 
We have incurred net losses in each year since our inception, including net losses of $50.8 million and $16.1 million in the three months ended April 30, 2014 and 2013 respectively. As a result, we had an accumulated deficit of $220.5 million at April 30, 2014. Because the market for our products is rapidly evolving and has not yet reached widespread adoption, it is difficult for us to predict our future operating results. We expect our operating expenses to increase over the next several years as we hire additional personnel, expand and improve the effectiveness of our distribution channels, and continue to develop features and functionality for our products. In addition, as we grow as a public company, we have incurred and will continue to incur significant legal, accounting and other operating expenses, including compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. If our revenues do not increase to offset these increases in our operating expenses, we may not be profitable in future periods. Our historical revenue growth has been inconsistent and should not be considered indicative of our future performance. Further, in future periods, our revenue growth could slow or our revenues could decline for a number of reasons, including slowing demand for our products, increasing competition, a decrease in the growth of our overall market, or our failure, for any reason, to continue to capitalize on growth opportunities. Any failure by us to achieve, sustain or increase profitability on a consistent basis could cause the value of our common stock to decline.
 
If customers do not expand their use of our products beyond the current predominant use cases, or if they react adversely to our pricing model as the amount of their indexed data grows, our ability to grow our business and operating results may be adversely affected.
 
Most of our customers currently use our products to support application management, IT operations, security and compliance functions. Our ability to grow our business depends in part on our ability to persuade current and future customers to expand their use of our products to additional use cases, such as facilities management, supply chain management, business analytics and customer usage analytics. If we fail to achieve market acceptance of our products for these applications, or if a competitor establishes a more widely adopted solution for these applications, our ability to grow our business and financial results will be adversely affected. In addition, as the amount of data indexed or Hadoop data nodes covered by our products for a given customer grows, that customer must agree to higher license fees for our products or limit the amount of data indexed in order to stay within the limits of its existing license. If their fees grow significantly, customers may react adversely to this pricing model, particularly if they perceive that the value of our products has become eclipsed by such fees or otherwise. If customers react adversely to our pricing models, our ability to grow our business and operating results could be adversely affected.
 
If we do not effectively expand and train our sales force, we may be unable to add new customers or increase sales to our existing customers and our business will be adversely affected.
 
We continue to be substantially dependent on our sales force to obtain new customers and to drive additional use cases and adoption among our existing customers. We believe that there is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth. New hires require significant training and may take significant time before they achieve full productivity. Our recent hires and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. In addition, as we continue to grow rapidly, a large percentage of our sales force is new to the company and our products. Our growth creates additional challenges and risks with respect to attracting, integrating and retaining qualified employees, particularly sales personnel. If we are unable to hire and train sufficient numbers of effective sales personnel, or the sales personnel are not successful in obtaining new customers or increasing sales to our existing customer base, our business will be adversely affected.

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Our sales cycle is long and unpredictable, particularly with respect to large customers, and our sales efforts require considerable time and expense.
 
Our operating results may fluctuate, in part, because of the resource intensive nature of our sales efforts, the length and variability of the sales cycle of our software licensing offerings and the short-term difficulty in adjusting our operating expenses. Our operating results depend in part on sales to large customers and conversions of users that have downloaded the trial version of our software into paying customers. The length of our sales cycle, from initial evaluation to delivery of and payment for the software license, varies substantially from customer to customer. In addition, the introduction of our cloud-based service Splunk Cloud has generated interest from our customers who are also considering purchasing and deploying Splunk Enterprise, our on-premise solution. In some cases, our customers may wish to consider a combination of these products, potentially further slowing our sales cycle. Our sales cycle can extend to more than a year for certain customers, particularly large customers. It is difficult to predict exactly when, or even if, we will make a sale with a potential customer or if a user that has downloaded the trial version of our software will upgrade to the paid version of our software license. As a result, large individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. The loss or delay of one or more large transactions in a quarter could impact our operating results for that quarter and any future quarters for which revenue from that transaction is delayed. As a result of these factors, it is difficult for us to forecast our revenues accurately in any quarter. Because a substantial portion of our expenses are relatively fixed in the short-term, our operating results will suffer if revenues fall below our expectations in a particular quarter, which could cause the price of our common stock to decline.
 
Our business and growth depend substantially on customers renewing their term licenses and maintenance agreements with us. Any decline in our customer renewals could adversely affect our future operating results.
 
While much of our software is sold under perpetual license agreements, all of our maintenance and support agreements are sold on a term basis. In addition, we also enter into term license agreements for our software and cloud services. In order for us to improve our operating results, it is important that our existing customers renew their term licenses, if applicable, and maintenance and support agreements when the initial contract term expires. Our customers have no obligation to renew their term licenses or maintenance and support contracts with us after the initial terms have expired. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our software, our cloud services, our pricing, the effects of economic conditions, competitive offerings or alterations or reductions in our customers’ spending levels. If our customers do not renew their agreements with us or renew on terms less favorable to us, our revenues may decline.
 
Our international sales and operations subject us to additional risks that can adversely affect our business operations and financial results.
 
During the three months ended April 30, 2014, we derived approximately 25% of our total revenues from customers outside the United States, and we are continuing to expand our international operations as part of our growth strategy. We currently have sales personnel and sales and support operations in the United States and certain countries across Europe and Asia. However, our sales organization outside the United States is substantially smaller than our sales organization in the United States, and we rely heavily on our sales channel for non-U.S. sales. Our ability to convince customers to expand their use of our products or renew their maintenance agreements with us is directly correlated to our direct engagement with the customer. To the extent we are unable to engage with non-U.S. customers effectively with our limited sales force capacity or our indirect sales model, we may be unable to grow sales to existing customers to the same degree we have experienced in the United States.
 
Our international operations subject us to a variety of risks and challenges, including:
 
increased management, travel, infrastructure and legal compliance costs associated with having multiple international operations;
 
reliance on channel partners;
 
longer payment cycles and difficulties in collecting accounts receivable or satisfying revenue recognition criteria, especially in emerging markets;
 
increased financial accounting and reporting burdens and complexities;


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general economic conditions in each country or region;
 
economic and political uncertainty around the world;
 
compliance with multiple and changing foreign laws and regulations, including those governing employment, tax, privacy and data protection, and the risks and costs of non-compliance with such laws and regulations;
 
compliance with laws and regulations for foreign operations, including the United States Foreign Corrupt Practices Act, the United Kingdom Bribery Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our products in certain foreign markets, and the risks and costs of non-compliance;
 
heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of financial statements and irregularities in financial statements;
 
fluctuations in currency exchange rates and the related effect on our financial results;
 
difficulties in repatriating or transferring funds from or converting currencies in certain countries;
 
the need for localized software and licensing programs;
 
reduced protection for intellectual property rights in some countries and practical difficulties of enforcing intellectual property and contract rights abroad; and
 
compliance with the laws of numerous foreign taxing jurisdictions and overlapping of different tax regimes.
 
Any of these risks could adversely affect our international operations, reduce our international revenues or increase our operating costs, adversely affecting our business operations, financial results and growth prospects.
 
In addition, compliance with laws and regulations applicable to our international operations increases our cost of doing business in foreign jurisdictions. We may be unable to keep current with changes in foreign government requirements and laws as they change from time to time. Failure to comply with these regulations could have adverse effects on our business. In many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or United States regulations applicable to us. Although we have implemented policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of our employees, contractors, channel partners and agents will comply with these laws and policies. Violations of laws or key control policies by our employees, contractors, channel partners or agents could result in delays in revenue recognition, financial reporting misstatements, fines, penalties, or the prohibition of the importation or exportation of our products and cloud services and could have a material adverse effect on our business operations and financial results.

If we are unable to maintain successful relationships with our channel partners, our business operations, financial results and growth prospects could be adversely affected.
 
In addition to our direct sales force, we use indirect channel partners, such as distributors and resellers, to license and support our products. We derive a portion of our revenues from sales of our products through our channel, particularly in the Europe, Middle East and Africa, or EMEA, and Asia Pacific, or APAC, regions and for sales to government agencies. We expect that sales through channel partners in all regions will continue to grow as a portion of our revenues for the foreseeable future.
 
Our agreements with our channel partners are generally non-exclusive, meaning our channel partners may offer customers the products of several different companies, including products that compete with ours. If our channel partners do not effectively market and sell our products, choose to use greater efforts to market and sell their own products or those of our competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our products may be adversely affected. Our channel partners may cease marketing our products with limited or no notice and with little or no penalty. The loss of a substantial number of our channel partners, our possible inability to replace them, or the failure to recruit additional channel partners could materially and adversely affect our results of operations. In addition, sales by channel partners are more likely than direct sales to involve collectability concerns, in particular sales by our channel partners in developing markets, and

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accordingly, variations in the mix between revenues attributable to sales by channel partners and revenues attributable to direct sales may result in fluctuations in our operating results.
 
Our ability to achieve revenue growth in the future will depend in part on our success in maintaining successful relationships with our channel partners, and to help our channel partners enhance their ability to independently sell and deploy our products. If we are unable to maintain our relationships with these channel partners, or otherwise develop and expand our indirect distribution channel, our business, results of operations, financial condition or cash flows could be adversely affected.

We employ unique pricing models, which subject us to various pricing and licensing challenges that could make it difficult for us to derive value from our customers.
 
We employ unique and evolving pricing models for our products. For example, we generally charge our customers for their use of our Splunk Enterprise software based on their estimated peak daily indexing capacity. In addition, our Splunk Cloud service is generally priced based on peak daily indexing capacity and length of data retention, and our Hunk software is priced based on the number of Hadoop data nodes. Our pricing methods may ultimately result in a higher total cost to users generally as data volumes increase over time, making it more difficult for us to compete in our markets. As the amount of machine data within our customers’ organizations grows, we may face downward pressure from our customers regarding our pricing, which could adversely affect our revenues and operating margins. In addition, our unique pricing models may allow competitors with different pricing models to attract customers unfamiliar or uncomfortable with our pricing models, which would cause us to lose business or modify our pricing models, both of which could adversely affect our revenues and operating margins.

Furthermore, while our products can measure and limit customer usage, such limitations may be improperly circumvented or otherwise bypassed by certain users. Similarly, we provide our customers with an encrypted key for enabling their use of our products. There is no guarantee that users of our products will abide by the terms of these encrypted keys, and if they do not, we may not be able to capture the full value for the use of our products. For example, our enterprise license is generally meant for our customers’ internal use only. If our internal use customers improperly make our products available to their customers, for example, through a cloud or managed service offering, it may displace our end user sales or commoditize our products in the market. Additionally, if an internal use customer that has received a volume discount from us improperly makes available our products to its end customers, we may experience price erosion and be unable to capture the appropriate value from those end customers.

We recently increased the license capacity of our entry-level licenses for Splunk Enterprise. Although we believe that this price reduction will enable our customers to more rapidly increase their ability to adopt Splunk Enterprise, there is no guarantee this will occur. It is possible that such price reduction will not be offset by an increase in sales of additional license capacity, which would have the effect of lowering our revenue and negatively impacting our financial results.
 
Our license agreements generally provide that we can audit our customers’ use of our products to ensure compliance with the terms of our license agreement. However, a customer may resist or refuse to allow us to audit their usage, in which case we may have to pursue legal recourse to enforce our rights under the license agreement, which would require us to spend money, distract management and potentially adversely affect our relationship with our customers and users.

Incorrect or improper implementation or use of our software could result in customer dissatisfaction and negatively affect our business, operations, financial results and growth prospects.
 
Our software is deployed in a wide variety of technology environments. Increasingly, our software has been deployed in large scale, complex technology environments, and we believe our future success will depend on our ability to increase sales of our software licenses for use in such deployments. We often must assist our customers in achieving successful implementations for large, complex deployments. If we or our customers are unable to implement our software successfully, or are unable to do so in a timely manner, customer perceptions of our company may be impaired, our reputation and brand may suffer, and customers may choose not to increase their use of our products. In addition, our software imposes server load and index storage requirements for implementation. If our customers do not have the server load capacity or the storage capacity required, they may not be able to effectively implement and use our software and, therefore, may not choose to increase their use of our products.
 
Our customers and third-party partners may need training in the proper use of and the variety of benefits that can be derived from our software to maximize its potential. If our software is not implemented or used correctly or as intended, inadequate performance may result. Because our customers rely on our software and maintenance support to manage a wide range of operations, the incorrect or improper implementation or use of our software, our failure to train customers on how to

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efficiently and effectively use our software, or our failure to provide maintenance services to our customers, may result in negative publicity or legal claims against us. Also, as we continue to expand our customer base, any failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our software and services.

Interruptions or performance problems associated with our technology and infrastructure, and our reliance on Software-as-a-Service, or SaaS, technologies from third parties, may adversely affect our business operations and financial results.
 
Our continued growth depends in part on the ability of our existing and potential customers to access our cloud services or our website in order to download our on-premise software or encrypted access keys for our software within an acceptable amount of time. We have experienced, and may in the future experience, website and service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors, capacity constraints due to an overwhelming number of users accessing our website and services simultaneously and denial of service or fraud or security attacks. In some instances, we may not be able to identify the cause or causes of these website and service performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our website and service performance, especially during peak usage times and as our products become more complex and our user traffic increases. If our website or services are unavailable or if our users are unable to download our software or encrypted access keys within a reasonable amount of time or at all, our business would be negatively affected. We expect to continue to make significant investments to maintain and improve website and service performance and to enable rapid releases of new features and apps for our software and cloud services. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and operating results may be adversely affected.
 
In addition, we rely heavily on hosted SaaS technologies from third parties in order to operate critical functions of our business, including enterprise resource planning services and customer relationship management services.  Further, our cloud-based services, such as Splunk Cloud, are hosted exclusively by third parties. If any of these services fail or become unavailable due to extended outages, interruptions or because they are no longer available on commercially reasonable terms or prices, our revenue could be reduced, our reputation could be damaged, we could be exposed to legal liability, expenses could increase, our ability to manage our finances could be interrupted and our processes for managing sales of our products and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business.
 
Our systems and third-party systems upon which we rely are also vulnerable to damage or interruption from catastrophic occurrences such as earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, geopolitical events and similar events. Our United States corporate offices and certain of the facilities we lease to house our computer and telecommunications equipment are located in the San Francisco Bay Area, a region known for seismic activity. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at our and third parties’ hosting facilities could result in interruptions, performance problems or failure of our infrastructure.

We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls.
 
Our products are subject to United States export controls, and we incorporate encryption technology into certain of our products. These encryption products and the underlying technology may be exported outside of the United States only with the required export authorizations, including by license, a license exception or other appropriate government authorizations, including the filing of an encryption registration. We shipped our encryption products prior to obtaining the required export authorizations. Accordingly, we have not fully complied with applicable encryption controls in the Export Administration Regulations. We have taken a number of actions to prevent such violations from recurring and continue to review and make enhancements to our export compliance procedures that are designed to further strengthen compliance with the laws.
 
Furthermore, our products are subject to United States export controls that prohibit the shipment of certain products and services without the required export authorizations or export to countries, governments, and persons targeted by United States sanctions. While we have taken precautions to prevent our products and services from being exported in violation of these laws, in certain instances we shipped our encryption products prior to obtaining the required export authorizations and certain of our products that are available at no cost have been downloaded by persons in countries that are the subject of United States embargoes. These exports were likely made in violation of United States export control and sanction laws.  As a result, in March 2012, we filed Final Voluntary Self Disclosures with the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”), and the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”), concerning these potential violations. On July 3, 2012, OFAC notified us that it had completed its review of these matters and closed its review with the issuance of a Cautionary Letter, and on November 15, 2012, BIS notified us that it had completed its review of these

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matters and closed its review with the issuance of a Warning Letter.  No monetary penalties were assessed against us by either OFAC or BIS.
 
Based upon our internal review, we believe that we have not had any paying customers in countries sanctioned by the United States Government, and have instituted procedures, including IP blocking, that are intended to prevent any downloads from being made into sanctioned countries in the future. In addition, we had not been screening our customers against the United States Government lists of prohibited persons, including the Treasury Department’s List of Specially Designated Nationals and the Commerce Department’s List of Denied Persons. Based upon our internal review, we believe that we do not have any paying or non-paying customers on any United States Government lists of prohibited persons. We have instituted a process for screening all paying and non-paying customers against United States Government lists of prohibited persons going forward.
 
In the future, if we are found to be in violation of United States sanctions or export control laws, it could result in fines or penalties for us and for individuals, including civil penalties of up to $250,000 or twice the value of the transaction, whichever is greater, per violation, and in the event of conviction for a criminal violation, fines of up to $1 million and possible incarceration for responsible employees and managers for willful and knowing violations.
 
We also note that if our channel partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm as well as other negative consequences including government investigations and penalties. We presently incorporate export control compliance requirements in our channel partner agreements. Complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities.
 
In addition, various countries regulate the import and export of certain encryption and other technology, including import and export permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries. Changes in our products or future changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products globally or, in some cases, prevent the export or import of our products to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business operations and financial results.

If our new products and product enhancements do not achieve sufficient market acceptance, our financial results and competitive position will suffer.
 
We spend substantial amounts of time and money to research and develop new product offerings and enhanced versions of our existing products to incorporate additional features, improve functionality or other enhancements in order to meet our customers’ rapidly evolving demands. In addition, we continue to invest in solutions that can be deployed on top of our core platform to target specific use cases and to cultivate our community of application developers and users. When we develop a new or enhanced version of an existing product, we typically incur expenses and expend resources upfront to market, promote and sell the new offering. Therefore, when we develop and introduce new or enhanced products, they must achieve high levels of market acceptance in order to justify the amount of our investment in developing and bringing them to market. For example, if our cloud-based services such as Splunk Cloud do not garner widespread market adoption and implementation, our financial results and competitive position could suffer.
 
Further, we may make changes to our products that our customers do not like, find useful or agree with. We may also discontinue certain features, begin to charge for certain features that are currently free or increase fees for any of our features or usage of our products.

Our new products or product enhancements and changes to our existing products could fail to attain sufficient market acceptance for many reasons, including:
 
our failure to predict market demand accurately in terms of product functionality and to supply products that meet this demand in a timely fashion;
 
defects, errors or failures;
 

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negative publicity about their performance or effectiveness;
 
delays in releasing to the market our new products or enhancements to our existing products to the market;
 
introduction or anticipated introduction of competing products by our competitors;
 
poor business conditions for our end-customers, causing them to delay IT purchases; and
 
reluctance of customers to purchase products incorporating open source software.
 
If our new products or enhancements and changes do not achieve adequate acceptance in the market, our competitive position will be impaired, and our revenues will be diminished. The adverse effect on our financial results may be particularly acute because of the significant research, development, marketing, sales and other expenses we will have incurred in connection with the new products or enhancements.
 
Our business depends, in part, on sales to the public sector, and significant changes in the contracting or fiscal policies of the public sector could have a material adverse effect on our business.
 
We derive a portion of our revenues from contracts with federal, state, local and foreign governments, and we believe that the success and growth of our business will continue to depend on our successful procurement of government contracts. Factors that could impede our ability to maintain or increase the amount of revenues derived from government contracts, include:
 
changes in fiscal or contracting policies;
 
decreases in available government funding;
 
changes in government programs or applicable requirements;

the adoption of new laws or regulations or changes to existing laws or regulations;
 
potential delays or changes in the government appropriations or other funding authorization processes; and
 
delays in the payment of our invoices by government payment offices.
 
The occurrence of any of the foregoing could cause governments and governmental agencies to delay or refrain from purchasing licenses of our products in the future or otherwise have an adverse effect on our business operations and financial results.
 
Failure to comply with laws or regulations applicable to our business could cause us to lose customers in the public sector or negatively impact our ability to contract with the public sector.
 
We must comply with laws and regulations relating to the formation, administration and performance of contracts with the public sector, including United States federal, state and local governmental bodies, which affect how our channel partners and we do business with governmental agencies. These laws and regulations may impose added costs on our business, and failure to comply with these or other applicable regulations and requirements, including non-compliance in the past, could lead to claims for damages from our channel partners, penalties, termination of contracts, loss of exclusive rights in our intellectual property, and temporary suspension or permanent debarment from government contracting. Any such damages, penalties, disruptions or limitations in our ability to do business with the public sector could have a material adverse effect on our business operations and financial results.

The SaaS version of our Splunk Enterprise product, Splunk Cloud, is a nascent product offering, and a lack of market adoption of this SaaS offering could adversely affect our business.
 
SaaS is a model of software deployment in which a software provider typically licenses an application to customers for use as a service on demand through web browser technologies. In October 2013, we released Splunk Cloud, our cloud-based service that provides a fully functional version of Splunk Enterprise. In recent years, companies have begun to expect that key software, such as customer relationship management and enterprise resource planning systems, be provided through a SaaS model. In order to provide Splunk Cloud via a SaaS deployment, we have made and will continue to make capital

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investments to implement this alternative business model, which could negatively affect our financial results.  Even with these investments, the SaaS business model for Splunk Cloud may not be successful. Moreover, sales of Splunk Cloud could displace sales of our Splunk Enterprise software licenses. In addition, the change to a SaaS model results in changes in the manner in which we recognize revenues. Changes in revenue recognition would affect our operating results and could have an adverse effect on our business operations and financial results.

Real or perceived errors, failures or bugs in our products could adversely affect our financial results and growth prospects.
 
Because our products are complex, undetected errors, failures or bugs may occur, especially when new products, versions or updates are released. Our on-premise software is often installed and used in large-scale computing environments with different operating systems, system management software, and equipment and networking configurations, which may cause errors or failures of our software or other aspects of the computing environment into which it is deployed. In addition, deployment of our software into complicated, large-scale computing environments may expose undetected errors, failures or bugs in our software. Despite testing by us, errors, failures or bugs may not be found in our products until they are released to our customers. In the past, we have discovered errors, failures and bugs in some of our offerings after their introduction. Real or perceived errors, failures or bugs in our products could result in negative publicity, loss of or delay in market acceptance of our products, loss of competitive position or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem.
 
In addition, if an actual or perceived failure of our on-premise software occurs in a customer’s deployment, regardless of whether the failure is attributable to our software, the market perception of the effectiveness of our products could be adversely affected. Alleviating any of these problems could require significant expenditures of our capital and other resources and could cause interruptions, delays or cessation of our licensing, which could cause us to lose existing or potential customers and could adversely affect our financial results and growth prospects.

Failure to protect our intellectual property rights could adversely affect our business.
 
Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop under patent and other intellectual property laws of the United States and other jurisdictions outside of the United States so that we can prevent others from using our inventions and proprietary information. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology, and our business might be adversely affected. However, defending our intellectual property rights might entail significant expenses. Any of our patent rights, copyrights, trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Our issued patents and any patents issued in the future may not provide us with any competitive advantages, and our patent applications may never be granted. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications, or we may not be able to do so at a reasonable cost or in a timely manner. Even if issued, there can be no assurance that these patents will adequately protect our intellectual property, as the legal standards relating to the infringement, validity, enforceability and scope of protection of patent and other intellectual property rights are complex and often uncertain.
 
Any patents that are issued may subsequently be invalidated or otherwise limited, allowing other companies to develop offerings that compete with ours, which could adversely affect our competitive business position, business prospects and financial condition. In addition, issuance of a patent does not guarantee that we have a right to practice the patented invention. Patent applications in the United States are typically not published until 18 months after filing or, in some cases, not at all, and publications of discoveries in industry-related literature lag behind actual discoveries. We cannot be certain that we were the first to use the inventions claimed in our issued patents or pending patent applications or otherwise used in our products, that we were the first to file patent applications, or that third parties do not have blocking patents that could be used to prevent us from marketing or practicing our products or technology. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our products are available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States (in particular, some foreign jurisdictions do not permit patent protection for software), and mechanisms for enforcement of intellectual property rights may be inadequate. Additional uncertainty may result from recent and future changes to intellectual property legislation in the United States (including the “America Invents Act”) and other countries and from interpretations of the intellectual property laws of the United States and other countries by applicable courts and agencies. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.

We rely in part on trade secrets, proprietary know-how and other confidential information to maintain our competitive position. We generally enter into confidentiality agreements with our employees, consultants, vendors and customers, and

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generally limit access to and distribution of our proprietary information. Although we endeavor to enter into non-disclosure agreements with our employees, licensees and others who may have access to this information, we cannot assure you that these agreements or other steps we have taken will prevent unauthorized use, disclosure or reverse engineering of our technology. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States. Moreover, third parties may independently develop technologies or products that compete with ours, and we may be unable to prevent this competition.
 
We might be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation also puts our patents at risk of being invalidated or interpreted narrowly. Additionally, we may provoke third parties to assert counterclaims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be adequate to compensate us for the harm suffered. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may adversely affect our business operations or financial results.
 
We have been, and may in the future be, subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.
 
Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. The litigation may involve patent holding companies or other adverse patent owners that have no relevant product revenues and against which our patents may therefore provide little or no deterrence. From time-to-time, third parties, including certain of these leading companies, have asserted and may assert patent, copyright, trademark or other intellectual property rights against us, our channel partners, our technology partners or our customers. We have received, and may in the future receive, notices that claim we have misappropriated, misused, or infringed other parties’ intellectual property rights, and, to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property infringement claims, which is not uncommon with respect to the enterprise software market. In this regard, we have in the past settled a dispute with respect to the Splunk trademark in the European Union.

There may be third-party intellectual property rights, including issued or pending patents, that cover significant aspects of our technologies or business methods.   We may be exposed to increased risk of being the subject of intellectual property infringement claims as a result of acquisitions, as, among other things, we have a lower level of visibility into the development process with respect to such technology or the care taken to safeguard against infringement risks. Any intellectual property claims, with or without merit, could be very time-consuming, could be expensive to settle or litigate and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also result in our having to stop using technology found to be in violation of a third party’s rights. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of our products and may be unable to compete effectively. Any of these results would adversely affect our business operations and financial results.
  
One of our marketing strategies is to offer trial versions of our on-premise software, and we may not be able to realize the benefits of this strategy.
 
We offer trial version licenses of certain of our products, including Splunk Enterprise, to users free of charge as part of our overall strategy of developing the market for products that provides operational intelligence and promoting additional penetration of our products in the markets in which we compete. Some users never convert from the trial version license to the paid version license. To the extent that these users do not become paying customers, we will not realize the intended benefits of this marketing strategy and our ability to grow our revenues will be adversely affected.
 
If we are not able to maintain and enhance our brand, our business and operating results may be adversely affected.
 
We believe that maintaining and enhancing the “Splunk” brand identity is critical to our relationships with our customers and channel partners and to our ability to attract new customers and channel partners. The successful promotion of

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our brand will depend largely upon our marketing efforts, our ability to continue to offer high-quality products and our ability to successfully differentiate our products from those of our competitors. Our brand promotion activities may not be successful or yield increased revenues. In addition, independent industry analysts often provide reviews of our products, as well as those of our competitors, and perception of our products in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or less positive as compared to those of our competitors’ products and services, our brand may be adversely affected.
 
Moreover, it may be difficult to maintain and enhance our brand in connection with sales through channel or strategic partners. The promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive, as we expand into new markets and as more sales are generated through our channel partners. To the extent that these activities yield increased revenues, these revenues may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand, our business may not grow, we may have reduced pricing power relative to competitors with stronger brands, and we could lose customers and channel partners, all of which would adversely affect our business operations and financial results.

Our future performance depends in part on proper use of our community website, Splunk Apps, and support from third-party software developers.
 
Our products enable third-party software developers to build apps on top of our platform. We operate a community website, Splunk Apps, for sharing these third-party apps, including add-ons and extensions. While we expect our community website, Splunk Apps, to support our sales and marketing efforts, it also presents certain risks to our business, including:
 
third-party developers may not continue developing or supporting the software apps that they share on our community website, Splunk Apps;
 
we cannot provide any assurance that these apps meet the same quality standards that we apply to our own development efforts, and, to the extent they contain bugs or defects, they may create disruptions in our customers’ use of our products or negatively affect our brand;
 
we do not currently provide support for software apps developed by third-party software developers, and users may be left without support and potentially cease using our products if the third-party software developers do not provide support for these apps;

these third-party software developers may not possess the appropriate intellectual property rights to develop and share their apps; and
 
some of these developers may use the insight they gain using our products and from documentation publicly available on our website to develop competing products.
 
Many of these risks are not within our control to prevent, and our brand may be damaged if these apps, add-ons and extensions do not perform to our customers’ satisfaction and that dissatisfaction is attributed to us.

If poor advice or misinformation is spread through our community site, Splunk Answers, users of our products may experience unsatisfactory results from using our products, which could adversely affect our reputation and our ability to grow our business.
 
We host Splunk Answers for sharing knowledge about how to perform certain functions with our products. Our users are increasingly turning to our Splunk Answers community site for support in connection with their use of our products. We do not review or test the information that non-Splunk employees post on our Splunk Answers community site to ensure its accuracy or efficacy in resolving technical issues. Therefore, we cannot ensure that all the information listed on our Splunk Answers community site is accurate or that it will not adversely affect the performance of our products. Furthermore, users who post such information on our Splunk Answers community site may not have adequate rights to the information to share it publicly, and we could be the subject of intellectual property claims based on our hosting of such information. If poor advice or misinformation is spread among users of our Splunk Answers community site, our customers or other users of our products may experience unsatisfactory results from using our products, which could adversely affect our reputation and our ability to grow our business.
 
Our use of “open source” software could negatively affect our ability to sell our products and subject us to possible litigation.

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We use open source software in our products and expect to continue to use open source software in the future. We may face claims from others claiming ownership of, or seeking to enforce the terms of, an open source license, including by demanding release of the open source software, derivative works or our proprietary source code that was developed using such software. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our products, any of which would have a negative effect on our business and operating results. In addition, if the license terms for the open source code change, we may be forced to re-engineer our products or incur additional costs. Finally, we cannot assure that we have not incorporated additional open source software in our products in a manner that is inconsistent with our current policies and procedures.
 
If our security measures are breached or unauthorized access to customer data is otherwise obtained, our products may be perceived as not being secure, customers may reduce the use of or stop using our products, and we may incur significant liabilities.
 
Our software and cloud services involve the storage and transmission of data, and security breaches could result in the loss of this information, litigation, indemnity obligations and other liability. While we have taken steps to protect the confidential information that we have access to, including confidential information we may obtain through our customer support services or customer usage of our cloud-based services, our security measures could be breached.  In addition, we do not have the ability to monitor or review the content that customers of Splunk Enterprise store, and therefore, we have no direct control over the substance of that content. Therefore, if customers use our products for the transmission or storage of personally identifiable information and our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, our reputation could be damaged, our business may suffer, and we could incur significant liability. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any or all of these issues could negatively impact our ability to attract new customers and increase engagement by existing customers, cause existing customers to elect to not renew their subscriptions, or subject us to third-party lawsuits, regulatory fines or other action or liability, thereby adversely affecting our financial results.

We use third-party technology and systems for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, content delivery to customers, back-office support and other functions. Although we have developed systems and processes that are designed to protect customer information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach at a third-party vendor, such measures cannot provide absolute security.
 
Because our products could be used to collect and store personal information, domestic and international privacy concerns could result in additional costs and liabilities to us or inhibit sales of our products.
 
Privacy and data information security have become a significant issue in the United States and in many other countries where we offer licenses of our software and subscriptions of our cloud services. The regulatory framework for privacy and personal information security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information. In the United States, these include rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act (HIPAA) of 1996 and state breach notification laws. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply, including the Data Protection Directive established in the European Union and the Federal Data Protection Act recently implemented in Germany.
 
In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our software and cloud services. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our products, which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business.
 
Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our

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products. Privacy and personal information security concerns, whether valid or not valid, may inhibit market adoption of our products particularly in certain industries and foreign countries.
 
Federal, state and industry regulations as well as self-regulation related to privacy and data security concerns pose the threat of lawsuits and other liability.
 
We may collect and utilize demographic and other information, including personally identifiable information, from and about users (such as customers, potential customers, and others) as they interact with Splunk over the internet and otherwise provide us with information whether via our website, through email, or through other means. Users may provide personal information to us in many contexts such as when signing up for certain services, registering for seminars, participating in a survey, when answering questions on our Splunk Answers community site, when posting reviews or otherwise commenting on Splunk apps, when using other community or social networking features, when participating in polls or when signing up to receive e-mail newsletters.
 
Within the United States, various federal and state laws and regulations govern the collection, use, retention, sharing and security of the data we receive from and about users. Outside of the United States, various jurisdictions actively regulate and enforce laws regarding the collection, retention, transfer, and use (including loss and unauthorized access) of personal information. Privacy advocates and government bodies have increasingly scrutinized the ways in which companies link personal identities and data associated with particular users or devices with data collected through the internet, and we expect such scrutiny to continue to increase. Loss, retention or misuse of certain information and alleged violations of laws and regulations relating to privacy and data security, and any relevant claims, may expose us to potential liability and may require us to expend significant resources on data security and in responding to and defending such allegations and claims.
 
If we are unable to attract and retain key personnel, our business could be adversely affected.
 
We depend on the continued contributions of our senior management and other key personnel, the loss of whom could adversely affect our business. All of our executive officers and key employees are at-will employees, which means they may terminate their employment relationship with us at any time. We do not maintain a key-person life insurance policy on any of our officers or other employees.
 
Our future success also depends on our ability to identify, attract and retain highly skilled technical, managerial, finance and other personnel, particularly in our sales and marketing, research and development, general and administrative, and professional service departments. We face intense competition for qualified individuals from numerous software and other technology companies.

In addition, competition for qualified personnel, particularly software engineers, is particularly intense in the San Francisco Bay Area, where our headquarters are located. We may incur significant cos