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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

 

 

FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2012

 

OR

 

 

FOR THE TRANSITION PERIOD FROM              TO

 

COMMISSION FILE NUMBER 001-35498

 

 

SPLUNK INC.

(Exact name of registrant as specified in its charter)

 

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Delaware (State or other jurisdiction of incorporation or organization)

86-1106510 (I.R.S. Employer Identification Number)

 

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 o NO x

 

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 x NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o		Accelerated filer o
Non-accelerated filer x		Smaller reporting company o
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

There were 95,644,103 shares of the registrant’s Common Stock issued and outstanding as of June 1, 2012.

 

 

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TABLE OF CONTENTS

 

			Page No.
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		1
	Condensed Consolidated Balance Sheets as of April 30, 2012 and January 31, 2012		1
	Condensed Consolidated Statements of Operations for the Three Months Ended April 30, 2012 and 2011		2
	Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended April 30, 2012 and 2011		3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2012 and 2011		4
	Notes to Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		25
Item 4	Controls and Procedures		25
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		27
Item1A	Risk Factors		27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		55
Item 6.	Exhibits		55
	Signatures		56

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Splunk Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

		April 30, 2012			January 31, 2012
ASSETS
Current assets:
Cash and cash equivalents		$	266,077		$	31,599
Accounts receivable, net		23,480			34,495
Prepaid expenses and other current assets		4,353			4,261
Total current assets		293,910			70,355
Restricted cash		514			514
Property and equipment, net		9,700			8,919
Other assets		330			2,435
Total assets		$	304,454		$	82,223
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	2,558		$	1,455
Accrued payroll and compensation		11,685			16,142
Accrued expenses and other liabilities		6,699			7,711
Deferred revenue, current portion		46,676			42,923
Term debt, current portion		—			982
Total current liabilities		67,618			69,213
Deferred revenue, non-current		12,466			9,742
Preferred stock warrant liability		—			2,133
Other liabilities, non-current		424			561
Term debt, non-current		—			1,307
Total non-current liabilities		12,890			13,743
Total liabilities		80,508			82,956
Commitments and contingencies (Note 4)
Convertible preferred stock
Convertible preferred stock, $0.001 par value; no shares authorized, issued or outstanding at April 30, 2012, and 57,904,560 shares authorized; 56,930,194 issued and outstanding at January 31, 2012		—			40,913
Stockholders’ equity (deficit):
Preferred stock: $0.001 par value; 20,000,000 shares authorized; no shares issued or outstanding at April 30, 2012; and no shares authorized, issued or outstanding at January 31, 2012		—			—
Common stock: $0.001 par value; 1,000,000,000 shares authorized; 95,619,042 and 23,092,407 shares issued and outstanding at April 30, 2012 and January 31, 2012, respectively		95			23
Accumulated other comprehensive loss		(17		)	(24		)
Additional paid-in capital		298,356			12,373
Accumulated deficit		(74,488		)	(54,018		)
Total stockholders’ equity (deficit)		223,946			(41,646		)
Total liabilities and stockholders’ equity (deficit)		$	304,454		$	82,223

 

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,
		2012			2011
Revenues
License		$	24,386		$	14,546
Maintenance and services		12,805			6,093
Total revenues		37,191			20,639
Cost of revenues (1)
License		129			136
Maintenance and services		4,136			1,868
Total cost of revenues		4,265			2,004
Gross profit		32,926			18,635
Operating expenses (1)
Research and development		8,103			4,338
Sales and marketing		24,166			12,768
General and administrative		6,846			3,292
Total operating expenses		39,115			20,398
Operating loss		(6,189		)	(1,763		)
Other income (expense), net
Interest income (expense), net		(17		)	(10		)
Change in fair value of preferred stock warrants		(14,087		)	(473		)
Total other income (expense), net		(14,104		)	(483		)
Loss before income taxes		(20,293		)	(2,246		)
Provision for income taxes		177			—
Net loss		$	(20,470	)	$	(2,246	)
Net loss per share:
Basic and diluted		$	(0.71	)	$	(0.12	)
Weighted-average shares outstanding:
Basic and diluted		28,679			19,185

 

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

 

Cost of revenues		$	108		$	19
Research and development		895			121
Sales and marketing		858			179
General and administrative		811			191

 

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,
		2012			2011
Net loss		$	(20,470	)	$	(2,246	)
Other comprehensive loss:
Foreign currency translation adjustments		7			—
Comprehensive loss		$	(20,463	)	$	(2,246	)

 

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,
		2012			2011
Cash flows from operating activities
Net loss		$	(20,470	)	$	(2,246	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization		931			348
Change in fair value of preferred stock warrants		14,087			473
Stock-based compensation expense		2,672			510
Changes in operating assets and liabilities
Accounts receivable, net		11,015			(1,406		)
Prepaid expenses, other current and non-current assets		12			(1,374		)
Accounts payable		1,006			895
Accrued compensation		(4,457		)	(2,244		)
Accrued expenses and other liabilities		313			(426		)
Deferred revenue		6,477			2,571
Net cash provided by (used in) operating activities		11,586			(2,899		)
Cash flows from investing activities
Purchases of property and equipment		(1,877		)	(1,085		)
Net cash used in investing activities		(1,877		)	(1,085		)
Cash flows from financing activities
Payments of financing obligation under sale leaseback		—			(61		)
Repayments of term debt		(2,289		)	(58		)
Proceeds from term debt		—			2,000
Proceeds from initial public offering, net of offering costs		226,512			—
Proceeds from early exercise of employee stock options		—			235
Proceeds from exercise of stock options		546			257
Net cash provided by financing activities		224,769			2,373
Net increase (decrease) in cash and cash equivalents		234,478			(1,611		)
Cash and cash equivalents
Beginning of period		31,599			19,736
End of period		$	266,077		$	18,125
Supplemental disclosures
Cash paid for interest		$	40		$	7
Non-cash investing and financing activities
Accrued purchases of property and equipment		419			411
Deferred offering costs not yet paid		999			—

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1)  Description of the Business and Significant Accounting Policies

 

Business

 

Splunk Inc. (“we”) provides an innovative software platform that enables organizations to gain real-time operational intelligence by harnessing the value of their data. Our software collects and indexes data regardless of format or source, and enables users to search, correlate, analyze, monitor and report on this data. Our software addresses large and diverse data sets, commonly referred to as big data, and is specifically tailored for machine-generated data. Machine data is produced by nearly every software application and electronic device in an organization and contains a definitive, time-stamped record of various activities, such as transactions, customer and user activities, and security threats. Our software is designed to help users in various roles, including IT and business professionals, analyze machine data and realize real-time visibility into and intelligence about their organization’s operations. This operational intelligence enables organizations to improve service levels, reduce costs, mitigate security risks, demonstrate and maintain compliance, and gain new insights that enable them to drive better business decisions. Splunk was incorporated in California in October 2003 and was reincorporated in Delaware in May 2006.

 

Fiscal Year

 

The Company’s fiscal year ends on January 31. References to fiscal 2012, for example, refer to the fiscal year ending January 31, 2012.

 

Initial Public Offering

 

On April 24, 2012, we closed our initial public offering (“IPO”) whereby 15,525,000 shares of common stock were sold to the public (inclusive of 2,025,000 shares of common stock from the full exercise of the overallotment option of shares granted to the underwriters and 992,722 shares of common stock sold by selling stockholders). The public offering price of the shares sold in the offering was $17.00 per share. We did not receive any proceeds from the sales of shares by the selling stockholders. The total gross proceeds from the offering were $247.2 million. After deducting underwriting discounts and commissions and offering expenses payable by us, the aggregate net proceeds received totaled approximately $225.5 million, net of $1.0 million of unpaid offering costs, which are expected to be paid by the end of our second fiscal quarter. Upon the closing of the IPO, all shares of our outstanding convertible preferred stock automatically converted into 56,930,194 shares of common stock, and outstanding warrants to purchase convertible preferred stock automatically converted into warrants to purchase 469,557 shares of common stock.  At April 30, 2012, we had 95,619,042 shares of common stock issued and outstanding.

 

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, 2012 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 prospectus filed with the SEC on April 20, 2012 pursuant to Rule 424(b) under the Securities Act of 1933 (“the IPO prospectus”). 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, 2012 included in the IPO prospectus filed with the SEC.

 

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 2013.

 

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Recently Issued Accounting Pronouncements

 

On June 16, 2011, the FASB issued new authoritative guidance on comprehensive income (loss) that eliminates the option to present the components of other comprehensive income (loss) as part of the statement of shareholders’ equity. Instead, we must report comprehensive income (loss) in either a single continuous statement of comprehensive income (loss) which contains two sections, net income and other comprehensive income (loss), or in two separate but consecutive statements. We adopted this authoritative guidance in our first fiscal quarter ended April 30, 2012.

 

Principles of Consolidation

 

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

 

Use of Estimates

 

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

 

(2)  Fair Value Measurements

 

The carrying amounts of certain of our financial instruments including cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short-term maturities. Based on borrowing rates currently available to us for financing obligations with similar terms and considering our credit risks, the carrying value of the financing obligation approximates fair value.

 

Assets and liabilities recorded at fair value in the financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels that are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:

 

Level 1—Observable inputs, such as quoted prices in active markets for identical assets or liabilities.

 

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

 

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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, 2012 and January 31, 2012 (in thousands):

 

		Level 1			Level 2			Level 3			Total
April 30, 2012:
Money market funds (1)		$	249,916		$	—		$	—		$	249,916
Preferred stock warrants		$	—		$	—		$	—		$	—
January 31, 2012:
Money market funds (1)		$	31,599		$	—		$	—		$	31,599
Preferred stock warrants		$	—		$	—		$	(2,133	)	$	(2,133	)

 

(1)          Included in cash and cash equivalents on our condensed consolidated balance sheets as of April 30, 2012 and January 31, 2012.

 

Our investments in money market funds are measured at fair value on a recurring basis. Our money market funds are targeted to be priced and have a value of $1 net asset value per share. These money market funds are actively traded and reported daily through a variety of sources. The fair value of the money market fund investments are classified as Level 1.

 

During the quarter ended April 30, 2012, we did not remeasure any nonfinancial assets and liabilities measured at fair value on a nonrecurring basis, such as intangible assets, property and equipment, and nonfinancial assets and liabilities initially measured at fair value in a business combination.

 

Our preferred stock warrants were categorized as Level 3 because they were valued based on unobservable inputs and management’s judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such financial instruments. These assumptions are inherently subjective and involve significant management judgment.

 

We performed a fair value assessment of the preferred stock warrant inputs at the end of each reporting period. The fair value of the preferred stock warrant liability was estimated using the Black-Scholes pricing model. See Note 7 for further information.

 

(3)  Property and Equipment

 

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

 

		As of
		April 30, 2012			January 31, 2012
Computer equipment and software		$	12,177		$	10,712
Furniture and fixtures		2,180			1,964
Leasehold improvements		1,934			1,903
		16,291			14,579
Less: accumulated depreciation and amortization		(6,591		)	(5,660		)
		$	9,700		$	8,919

 

Depreciation and amortization expense was $0.9 million and $0.3 million for the three months ended April 30, 2012 and 2011, respectively.

 

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(4)  Commitments and Contingencies

 

Operating Lease Commitments

 

We lease our office spaces under non-cancelable operating leases with rent expense recognized on a straight-line basis over the lease term. Rent expense for the three months ended April 30, 2012 and 2011 was $0.8 million and $0.5 million, respectively. Future minimum rental payments required under the operating lease agreements as of April 30, 2012 are as follows:

 

		Payments Due by Period
		Total			Less Than 1 year			1-3 years			3-5 years			More Than 5 years
		(in thousands)
Operating lease obligations		$	6,294		$	3,472		$	2,467		$	355		$	—

 

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 impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. In our opinion, resolution of any pending claims (either individually or in the aggregate) is not expected to have a material adverse impact on our condensed consolidated results of operations, cash flows or financial position or it is not 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, of 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 and their affiliates for certain intellectual property infringement and other claims by third parties with respect to our products and services and in connection with our commercial end-user license arrangements.

 

As permitted under Delaware law, we have entered into indemnification agreement with our officers and directors, indemnifying them for certain events or occurrences while they serve as officers or directors of the company.

 

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, 2012.

 

Export Contingency

 

Our products are subject to U.S. 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 U.S. sanctions. 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. Additionally, while we are taking precautions to prevent our products and services from being shipped to U.S. sanctions targets, we believe that certain of our products that are available at no cost have been downloaded by persons in countries that are the subject of these embargoes. March 2012, we filed our Final Voluntary Self Disclosures with the U.S. Department of Commerce’s Bureau of Industry and Security, or BIS, and the U.S. Department of Treasury’s Office of Foreign Assets Control, or OFAC, concerning these potential violations. At this time, these agencies have not completed their review of these matters. If we are found to be in violation of U.S. 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 cannot predict when OFAC and BIS will complete their reviews or what enforcement action, if any, they will take. It is reasonably possible that our business, financial position, results of operations, or cash flows could be negatively affected by an unfavorable resolution to this matter and that imposed fines, if any, could be material to our financial statements. However, we cannot make any predictions of the outcome of these violations or estimate the potential liability, if any, that will be incurred.

 

(5)  Debt Financing Facilities

 

In May 2009, we entered into a Loan and Security Agreement with Silicon Valley Bank, which was most recently amended in February 2011. The agreement included a revolving line of credit facility and a term loan facility

 

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described below. The agreement contained financial covenants and other customary affirmative and negative covenants. As part of the agreement, we granted the lender a security interest in our personal property, excluding intellectual property and other intangible assets.

 

The agreement provided for a revolving line of credit facility and a term loan facility, with each advance amortized over a period of 36 months with equal monthly payments of principal and interest. We were able to borrow up to $10.0 million under the revolving line of credit facility, subject to a borrowing base determined on eligible accounts receivable and subject to a total maximum outstanding of $10.0 million. As of April 30, 2012, we had no balance outstanding on the revolving line of credit. Interest on any drawdown under the revolving line of credit accrues at the greater of prime rate plus 0.75% (4.00% at April 30, 2012) and 4.75%.

 

In addition to the line of credit facility, a $3.0 million term loan facility was available for draw through June 30, 2011. We had $0 and $2.3 million outstanding in the term loan facility as of April 30, 2012 and January 31, 2012, respectively. As of April 30, 2012, the term loan facility was paid in full.

 

(6)  Common Stock

 

Our certificate of incorporation, as amended and restated, authorizes us to issue 1,000,000,000 shares of common stock, $0.001 par value per share. At April 30, 2012 and January 31, 2012, 95,619,042 shares and 23,092,407 shares of common stock were issued and outstanding, respectively.

 

Early Exercise of Employee Options

 

Stock options granted under our stock option plan provide certain employee option holders the right to exercise unvested options for shares of restricted common stock. Shares of restricted common stock, in the amounts of 325,353 and 411,318 at April 30, 2012 and January 31, 2012, respectively, were subject to a repurchase right held by us at the original issuance price in the event the optionees’ employment is terminated either voluntarily or involuntarily. For early exercises of employee options, this repurchase right generally lapses as to 1/4th of the shares subject to the option on the first anniversary of the vesting start date and as to 1/48th of the shares monthly thereafter.

 

These repurchase terms are considered to be a forfeiture provision and do not result in variable accounting. The restricted shares issued upon early exercise of stock options are legally issued and outstanding. However, these restricted shares are only deemed outstanding for basic earnings per share computation purposes upon the respective repurchase rights lapsing. We treat cash received from employees for the exercise of unvested options as a refundable deposit shown as a liability in our condensed consolidated balance sheets.

 

(7)  Convertible Preferred Stock

 

Upon the closing of our IPO, all outstanding shares of convertible preferred stock were converted into shares of common stock. Warrants to purchase convertible preferred stock were converted into warrants to purchase common stock.

 

Warrants to Purchase Convertible Preferred Stock

 

Prior to the closing of our IPO, we remeasured the fair value of the preferred stock warrants at each balance sheet date. The fair value of the outstanding warrants was classified within non-current liabilities on the condensed consolidated balance sheets, and any changes in fair value were recognized as a component of Other income (expense), net in our condensed consolidated statements of operations. We performed the final remeasurement of the warrants at the closing date of our IPO and recorded an expense of $14.1 million arising from the revaluation during the quarter. The fair value of the outstanding warrants was determined using the Black-Scholes option-pricing model. We determined the fair value of each warrant on the issuance date and subsequent reporting dates using the Black-Scholes pricing model utilizing the assumptions noted below. The expected term of the warrant is based on the remaining contractual expiration period. The expected stock price volatility for our stock was determined by examining the historical

 

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volatilities of a group of our industry peers as we did not have any trading history of our common stock. The risk-free interest rate was calculated using the average of the published interest rates for U.S. Treasury zero-coupon issues with maturities that approximate the expected term. The dividend yield assumption is zero as we did not have any history of, nor plans for, dividend payments.

 

The following assumptions were used to estimate the value of the preferred stock warrants:

 

		As of
		April 30, 2012		January 31, 2012
Expected volatility		49.7-53.2%		49.4-57.1%
Risk-free rate		0.50-1.40%		0.39-1.09%
Dividend yield		0.0%		0.0%
Expected term (in years)		3.38-6.30		3.55-7.46

 

The change in the fair value of the preferred stock warrant liability is summarized below:

 

		Warrant Liability
(in thousands)		Balance at beginning of period			Change in fair value of preferred stock warrants			Exercises			Conversion of preferred stock warrants to common stock warrants			Balance at end of period
January 31, 2012		$	1,013		$	2,034		$	(914	)	$	—		$	2,133
April 30, 2012		$	2,133		$	14,087		$	—		$	(16,220	)	$	—

 

(8)  Stock Compensation Plans

 

Equity Incentive Plans

 

In April 2003, our board adopted the 2003 Equity Incentive Plan (the “2003 Plan”). The 2003 Plan authorizes the granting of common stock options and restricted stock awards to employees, directors and consultants.

 

In March 2012, our board approved the 2012 Equity Incentive Plan (the “2012 Plan”), which became effective upon the effectiveness of our registration statement on Form S-1, on April 18, 2012. The 2012 Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Code, to our employees and any parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to our employees, directors and consultants and our parent and subsidiary corporations’ employees and consultants. Upon our IPO, all shares that were reserved but not issued under the 2003 Plan were assumed by the 2012 Plan and no further shares will be granted pursuant to the 2003 Plan.  Cancelled or forfeited stock options grants under the 2003 Plan will also be assumed by the 2012 Plan.

 

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Common stock option activity for the three months ended April 30, 2012, was as follows:

 

				Options Outstanding
		Available for Grant		Shares		Weighted- Average Exercise Price Per Share			Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
											(in thousands)
Balances at January 31, 2012		3,315,989		21,905,290		$	1.92
Additional Shares Authorized		10,000,000		—		—
Options granted		(2,813,500	)	2,813,500		8.12
Options exercised		—		(1,002,100	)	0.67
Options forfeited		379,121		(379,121	)	2.70
Balances at April 30, 2012		10,881,610		23,337,569		$	2.70		8.21		$	729,206
Vested and expected to vest at April 30, 2012				21,902,413		$	2.64		8.17		$	685,679
Vested and exercisable at April 30, 2012				8,427,816		$	0.75		6.76		$	279,775

 

No income tax benefit has been recognized relating to stock-based compensation expenses and no tax benefits have been realized from exercised stock options. At April 30, 2012, there was a total unrecognized compensation cost of $29.5 million related to these stock options, which is expected to be recognized over a weighted-average period of 3.46 years.

 

The total intrinsic value of options exercised during the three months ended April 30, 2012 was $10.2 million. The weighted-average grant date fair value of options granted was $5.32 for the three months ended April 30, 2012.

 

Employee Stock Purchase Plan

 

Concurrent with the effectiveness of our registration statement on Form S-1, on April 18, 2012, we adopted our 2012 Employee Stock Purchase Plan (the “ESPP”). The ESPP allows eligible employees to purchase shares of our common stock at a discount through payroll deductions of up to 15% of their eligible compensation, at not less than 85% of the fair market value, as defined in the ESPP, subject to any plan limitations. The ESPP provides for consecutive 12-month offering periods, starting on the first trading day on or after June 15 and December 15 of each year.  The first offering period began on the first trading day after the effective date of our registration statement and will end on June 15, 2013.

 

Stock-Based Compensation Expense

 

The stock-based compensation expense related to our stock-based awards and employee stock purchases was allocated as follows:

 

		Three Months Ended April 30,
(in thousands)		2012			2011
Cost of revenues		$	108		$	19
Research and development		895			121
Sales and marketing		858			179
General and administrative		811			191
Total stock-based compensation expense		$	2,672		$	510

 

Valuation Assumptions

 

We estimated the fair values of each option awarded on the date of grant using the Black-Scholes option pricing model utilizing the assumptions noted below. The expected term of the options is based on the average period the stock options are expected to remain outstanding calculated as the midpoint of the options vesting term and contractual expiration period, as we did not have sufficient historical information to develop reasonable expectations

 

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about future exercise patterns and post-vesting employment termination behavior. The expected stock price volatility for our stock was determined by examining the historical volatilities of a group of our industry peers as we did not have any trading history of our common stock. The risk-free interest rate was calculated using the average of the published interest rates U.S. Treasury zero-coupon issues with maturities that approximate the expected term. The dividend yield assumption is zero as we did not have any history of, nor plans to make, dividend payments.

 

The following assumptions were used to estimate the fair value of options granted to employees:

 

		Three Months Ended April 30,
		2012		2011
Expected volatility		50.1-50.5%		48.7-56.5%
Risk-free rate		1.12-1.41%		2.23-2.47%
Dividend yield		0.0%		0.0%
Expected term (in years)		5.90-6.08		5.98-6.09

 

Forfeitures were estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates. Forfeitures were estimated based on historical experience.

 

The following assumptions were used to estimate the fair value of nonemployee options:

 

		Three Months Ended April 30,
		2012		2011
Expected volatility		51.0-57.9%		62.4-64.9%
Risk-free rate		1.66-2.19%		3.23-3.41%
Dividend yield		0.0%		0.0%
Expected term (in years)		8.81-9.97		9.73-9.90

 

The following table presents the weighted-average assumptions used to estimate the fair value of the ESPP during the periods presented:

 

		Three Months Ended
		April 30, 2012
Expected volatility		48.3-49.1%
Risk-free rate		0.14-0.19%
Dividend yield		0.0%
Expected term (in years)		0.67-1.16

 

(9)  Information About Revenues by Geographic Areas

 

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

 

		Three Months Ended April 30,
		2012			2011
United States		$	30,204		$	15,322
International		6,987			5,317
		$	37,191		$	20,639

 

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No other individual country exceeded 10% of total revenues during any of the periods presented. No individual customer represented greater than 10% of total revenues during any of the periods presented. At April 30, 2012, there were no customers that individually represented greater than 10% of total accounts receivable. At January 31, 2012, there was one customer that represented approximately 17% of total accounts receivable.

 

(10)  Income Taxes

 

For the three months ended April 30, 2012 and 2011, we recorded $0.2 million and $0 in income tax expense, respectively. The effective tax rates for the three months ended April 30, 2012 and 2011 were less than one percent primarily due to continued losses in the U.S. for which a full valuation has been established to offset any benefit from being recognized as well as benefits associated with the differential in tax rates for certain foreign operations and minimal state taxes.

 

Realization of our deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance we consider our historical, as well as future, projected taxable income along with other objectively verifiable evidence.

 

There were no material changes to our unrecognized tax benefits in the three months ended April 30, 2012, 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.

 

(11)  Net Loss Per Share

 

Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase or forfeiture. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including preferred stock, stock options, 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,
		2012			2011
Numerator:
Net loss		$	(20,470	)	$	(2,246	)
Denominator:
Weighted-average common shares outstanding		29,064			19,346
Less: Weighted-average unvested common shares subject to repurchase or forfeiture		(385		)	(161		)
Weighted-average shares used to compute net loss per share, basic and diluted		28,679			19,185
Net loss per share, basic and diluted		$	(0.71	)	$	(0.12	)

 

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):

 

		Three Months Ended April 30,
		2012			2011
Shares subject to outstanding common stock options		23,338			16,771
Series A convertible preferred stock		—			20,400
Series B Convertible preferred stock		—			20,305
Series C Convertible preferred stock		—			16,026
Employee stock purchase plan		552			—
Shares subject to common stock warrants		405			—
Shares subject to preferred stock warrants		—			670
Total		24,295			74,172

 

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(12)  Related Party Transactions

 

Certain members of our Board of Directors serve on the board of directors and/or are executive officers and, in some cases, 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 an arm’s-length basis on terms that are consistent with similar transactions with our other similarly situated customers. We recognized revenue from sales to these companies of $0.2 million and $0.2 million for the three months ended April 30, 2012 and 2011, respectively. In addition, we had $0.1 million of accounts receivable from these companies as of April 30, 2011. We also recorded $0.2 million in expenses related to purchases from these companies during the three months ended April 30, 2012. There were no accounts payable to these companies as of April 30, 2012 or 2011.

 

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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 and our IPO Prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”) with the SEC on April 20, 2012. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. Such statements include, but are not limited to, statements concerning market opportunity, our future financial and operating results, investment strategy, sales and marketing strategy, management’s plans, beliefs and objectives for future operations, research and development, economic and industry trends or trend analysis, expectations about seasonality, use of non-GAAP financial measures, operating expenses, anticipated income tax rates, 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 after the date of such statements.

 

Overview

 

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

 

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

 

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

 

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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 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.

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

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

·       Become the developer platform for machine data.

 

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

 

On April 24, 2012, we closed our IPO whereby 15,525,000 shares of common stock were sold to the public (inclusive of 2,025,000 shares of common stock pursuant to the full exercise of an overallotment option granted to the underwriters and 992,722 shares of common stock sold by selling stockholders). The public offering price of the shares sold in the offering was $17.00 per share. The total gross proceeds from the offering were $247.2 million. After deducting underwriting discounts and commissions and offering expenses payable by us, the aggregate net proceeds received by us totaled approximately $225.5 million.

 

For the three months ended April 30, 2012 and 2011, our revenues were $37.2 million and $20.6 million, respectively, representing year-over-year growth of 80%. For the three months ended April 30, 2012, 19% of our revenues were derived from customers located outside the United States. Our customers represent a wide variety of industries, including financial services, manufacturing, retail and technology, among others. As of April 30, 2012, we had over 4,000 customers, including a majority of the Fortune 100.

 

For the fiscal quarter ended April 30, 2012 and 2011, our GAAP operating loss was $6.2 million and $1.8 million, respectively, and our non-GAAP operating loss was $3.5 million and $1.3 million, respectively.

 

For the fiscal quarter ended April 30, 2012 and 2011, our GAAP net loss was $20.5 million and $2.2 million, respectively, and our non-GAAP net loss was $3.7 million and $1.3 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 revenue in the first fiscal quarter. We expect this seasonality to continue for the remainder of fiscal 2013 and beyond. Our gross margins and operating losses have been affected by these historical trends because the majority of our expenses are relatively fixed in the short term. The majority of our expenses are personnel-related and include salaries, stock-based compensation, benefits and incentive-based compensation plan expenses. As a result, we have not experienced significant seasonal fluctuations in the timing of expenses from period to period.

 

Non-GAAP Financial Results

 

In addition to our results determined under U.S. generally accepted accounting principles (“GAAP”) discussed above, we believe the following non-GAAP financial measures are useful to investors in evaluating our operating performance. We provide investors with certain non-GAAP financial measures, including non-GAAP operating loss, non-GAAP operating margin, non-GAAP net loss and non-GAAP loss per share (collectively the “non-GAAP financial measures”). These non-GAAP financial measures exclude stock-based compensation expense and the change in fair value of certain previously issued preferred stock warrants.  In addition, non-GAAP financial measures include free cash flow, which represents cash from operations less purchases of property and equipment.

 

We exclude stock-based compensation expense from our non-GAAP operating loss, non-GAAP operating margin, non-GAAP net loss and non-GAAP loss per share because such expense is non-cash in nature.  We exclude expense attributable to the change in fair value of certain preferred stock warrants from our non-GAAP financial measures because it is a non-recurring, non-cash expense. 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. 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 believe these non-GAAP financial measures are useful to investors in that they provide meaningful supplemental information regarding our operational performance, provide greater transparency to certain line items in our financial statements, enhance an overall understanding of our past financial performance and future prospects, help with period to period comparisons and facilitate comparisons to competitors’ operating results.

 

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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 other companies, and exclude expenses that may have a material impact on 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 presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. We urge our investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.

 

The following table reconciles GAAP operating loss to non-GAAP operating loss for the three months ended April 30, 2012 and 2011.

 

		Three Months Ended April 30,
		2012			2011
		(in thousands)
GAAP operating loss		$	(6,189	)	$	(1,763	)
Non-GAAP adjustments
Stock-based compensation expense		2,672			510
Non-GAAP operating loss		$	(3,517	)	$	(1,253	)

 

The following table reconciles GAAP operating margin to non-GAAP operating margin for the three months ended April 30, 2012 and 2011.

 

		Three Months Ended April 30,
		2012		2011
GAAP operating margin		(16.6	)%	(8.5	)%
Stock-based compensation expense		7.1		2.4
Non-GAAP operating margin		(9.5	)%	(6.1	)%

 

The following table reconciles GAAP net loss to non-GAAP net loss for the three months ended April 30, 2012 and 2011.

 

		Three Months Ended April 30,
		2012			2011
		(in thousands)
GAAP net loss		$	(20,470	)	$	(2,246	)
Non-GAAP adjustments
Stock-based compensation expense		2,672			510
Change in fair value of preferred stock warrants		14,087			473
Non-GAAP net loss		$	(3,711	)	$	(1,263	)

 

The following table reconciles our non-GAAP basic and diluted net loss and the shares used in computing non-GAAP net loss per share for the three months ended April 30, 2012 and 2011.

 

		Three Months Ended April 30,
		2012			2011
		(in thousands, except per share data)
Non-GAAP basic and diluted net loss per share		$	(0.04	)	$	(0.02	)
Weighted-average shares used in computing basic and diluted GAAP net loss per share		28,679			19,185
Conversion of convertible preferred stock upon initial public offering		52,502			56,730
Securities issued in connection with initial public offering		13,402			—
Shares used in computing non-GAAP basic and diluted net loss per share		94,583			75,915

 

The following table reconciles our net cash provided by (used-in) operating activities to free cash flow for the three months ended April 30, 2012 and 2011.

 

		Three Months Ended April 30,
		2012			2011
		(in thousands)
Net cash provided by (used in) operating activities		$	11,586		$	(2,756	)
Less purchases of property and equipment		(1,877		)	(1,228		)
Free cash flow (non-GAAP)		9,709			3,984
Net cash used in investing activities		(1,877		)	(1,228		)
Net cash provided by financing activities		224,769			2,373

 

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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 substantial 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 activity remains consistent. In addition, seasonal trends that contribute to increased sales activity in our fourth fiscal quarter often result in lower sequential revenue in our 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 ratably, on a straight-line basis, over the contract period. We have a professional services organization focused on helping some of our largest customers deploy our software in highly complex operational environments and train their personnel. We recognize the revenues associated with these professional services on a time and materials basis as we deliver the services or provide the training.

 

Professional services and training revenues as a percentage of total revenues were 7% and 6% for the three months ended April 30, 2012 and April 30, 2011, 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.

 

We expect maintenance and services revenues to become a larger percentage of our total revenues as our installed customer base grows.

 

Cost of Revenues

 

Cost of license revenues.   Cost of license revenues includes all direct costs to deliver our product, including salaries, benefits, stock-based compensation, allocated overhead for facilities and IT, and amortization of acquired intangible assets. We recognize these expenses as they are incurred.

 

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

 

Operating Expenses

 

Our operating expenses are classified into three categories: research and development, sales and marketing, and general and administrative. For each category, the largest component is personnel costs, which include salaries, employee benefit costs, bonuses, commissions as applicable, and stock-based compensation. Operating expenses also include allocated overhead costs for depreciation of equipment, facilities and IT. Allocated costs for facilities consist of leasehold improvements and rent. Our allocated costs for IT include costs for compensation of our IT personnel and costs associated with our IT infrastructure. Operating expenses are generally recognized as incurred.

 

Research and development.   Research and development expenses primarily consist of personnel and facility-related costs attributable to our research and development personnel. We have devoted our product development efforts primarily to enhancing the functionality and expanding the capabilities of our software. We expect that our research and development expenses will continue to increase, in absolute dollars, as we increase our research and development headcount to further strengthen and enhance our software and invest in the development of our solutions and apps.

 

Sales and marketing.   Sales and marketing expenses primarily consist of personnel and facility-related costs for our sales, marketing and business development personnel, commissions earned by our sales personnel, and the cost of marketing and business development programs. We expect that sales and marketing expenses will continue to increase, in absolute dollars, as we continue to hire additional personnel and invest in marketing programs.

 

General and administrative.   General and administrative expenses primarily consist of personnel and facility-related costs for our executive, finance, legal, human resources and administrative personnel, legal, accounting and other professional services fees, and other corporate expenses. We have recently incurred additional expenses due to growing our operations and continue to incur additional expenses associated with being a publicly traded company, including higher legal, corporate insurance and accounting expenses, and the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act and related regulations. We also expect that general and administrative expenses will continue to increase, in absolute dollars, as we expand our operations, including internationally.

 

Other Income (Expense), net

 

Other income (expense), net consists primarily of the changes in the fair value of preferred stock warrants, interest expense on outstanding debt and interest income on our cash and cash equivalents balances.

 

Provision for Income Taxes

 

Provision for income taxes is based on the amount of earnings and enacted federal, state and foreign tax rates and adjusted for allowable credits and deductions. Our provision for income taxes consists of state and foreign taxes.  Our income tax provision may be significantly affected by changes to our estimates for tax in jurisdictions in which we operate and other estimates utilized in determining the global effective tax rate. Actual results may also differ from our estimates based on changes in economic conditions. Such changes could have a substantial impact on the income tax provision.

 

Because of our history of U.S. net operating losses, we have established a full valuation allowance against potential future benefits for deferred tax assets including loss carryforwards and research and development and other tax credits.  Our income tax provision could be significantly impacted by estimates surrounding our uncertain tax positions and changes to our valuation allowance in future periods. We reevaluate the judgments surrounding our estimates and make adjustments as appropriate each reporting period.

 

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Results of Operations

 

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

 

		Three months ended
		April 30, 2012					April 30, 2011
		Amount			% of Revenue		Amount			% of Revenue
		($ amounts in 000’s)
Condensed Consolidated Statement of Operations Data:
Revenues
License		$	24,386		65.6	%	$	14,546		70.5	%
Maintenance and services		12,805			34.4		6,093			29.5
Total revenues		37,191			100.0		20,639			100.0
Cost of revenues
License(1)		129			0.5		136			0.9
Maintenance and services(1)		4,136			32.3		1,868			30.7
Total cost of revenues		4,265			11.5		2,004			9.7
Gross profit		32,926			88.5		18,635			90.3
Operating expenses
Research and development		8,103			21.8		4,338			21.0
Sales and marketing		24,166			65.0		12,768			61.9
General and administrative		6,846			18.4		3,292			16.0
Total operating expenses		39,115			105.2		20,398			98.9
Operating loss		(6,189		)	(16.7	)	(1,763		)	(8.6	)
Other income (expense), net
Other income (expense), net		(17		)	—		(10		)	—
Change in fair value of preferred stock warrants		(14,087		)	(37.9	)	(473		)	(2.3	)
Total other income (expense), net		(14,104		)	(37.9	)	(483		)	(2.3	)
Loss before income taxes		(20,293		)	(54.6	)	(2,246		)	(10.9	)
Provision for income taxes		177			(0.5	)	—			—
Net loss		$	(20,470	)	(55.1	)%	$	(2,246	)	(10.9	)%

 

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

 

Comparison of the Three Months Ended April 30, 2012 and 2011

 

Revenues

 

		Three Months Ended April 30,						2012 to 2011
		2012			2011			% Change
		($ amounts in 000’s)
Revenues
License		$	24,386		$	14,546		67.6	%
Maintenance and services		12,805			6,093			110.2	%
Total revenues		$	37,191		$	20,639		80.2	%
Percentage of revenues
License		65.6		%	70.5		%
Maintenance and services		34.4			29.5
Total		100.0		%	100.0		%

 

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