SUBSCRIBE TO TMCnet
TMCnet - World's Largest Communications and Technology Community

TMCNet:  SPLUNK INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

[March 31, 2014]

SPLUNK INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" included in Part I, Item 1A or in other parts 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 the 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 39-------------------------------------------------------------------------------- Table of Contents 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 fixed in the short-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.

During fiscal 2014, we expanded our product portfolio from a single product to become a multi-product company. We added Splunk Cloud, which delivers the core functionalities of Splunk Enterprise as a scalable, reliable cloud service. We also introduced Hunk: Splunk Analytics for Hadoop, 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 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 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 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.

In January 2014, we closed our follow-on offering of 6,900,000 shares of common stock. The public offering price of the shares sold in the offering was $81.00 per share. The total gross proceeds from the offering to us were $558.9 million.

After deducting underwriting discounts and commissions of $19.6 million, we received approximately $539.3 million.

For the fiscal years ended January 31, 2014, 2013 and 2012, our total revenues were $302.6 million, $198.9 million and $121.0 million, respectively. For the fiscal year ended January 31, 2014, approximately 23% of our total revenues were derived from customers located outside the United States. Our customers and end-users represent the public sector and a wide variety of industries, including financial services, manufacturing, retail and technology, among others. As of January 31, 2014, we had over 7,000 customers, including 70 of the Fortune 100 companies.

40-------------------------------------------------------------------------------- Table of Contents For the fiscal years ended January 31, 2014, 2013 and 2012, our GAAP operating loss was $78.3 million, $22.0 million and $8.7 million, respectively, and our non-GAAP operating loss was $1.2 million, $1.4 million and $4.9 million, respectively.

For the fiscal years ended January 31, 2014, 2013 and 2012, our GAAP net loss was $79.0 million, $36.7 million and $11.0 million, respectively, and our non-GAAP net loss was $3.1 million, $2.0 million and $5.2 million, respectively.

Our fiscal 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. 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 To supplement our 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, the change in fair value of certain preferred stock warrants previously issued by us, impairment of a long-lived asset, acquisition-related costs, amortization of acquired intangible assets and the partial release of the valuation allowance due to acquisitions.

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 excluded 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 also excluded the non-cash charge for previously capitalized Splunk Storm software development costs (reflected as an impairment of a long-lived asset) as a result of our decision to make Splunk Storm available to customers at no cost. We also exclude acquisition-related costs and 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. We further exclude the partial release of the valuation allowance due to acquisitions from non-GAAP net income (loss) and non-GAAP net income (loss) per share because it is also considered by management to be outside 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 41-------------------------------------------------------------------------------- Table of Contents 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 our net cash provided by operating activities to free cash flow for the fiscal years ended January 31, 2014, 2013 and 2012 (in thousands): Fiscal Year Ended January 31, 2014 2013 2012 Net cash provided by operating activities $ 73,848 $ 46,648 $ 14,622 Less purchases of property and equipment (9,308 ) (9,077 ) (8,180 ) Free cash flow (non-GAAP) $ 64,540 $ 37,571 $ 6,442 Net cash used in investing activities $ (39,046 ) $ (8,563 ) $ (8,052 ) Net cash provided by financing activities $ 556,699 $ 236,235 $ 5,292 The following table reconciles GAAP gross margin to non-GAAP gross margin for the fiscal years ended January 31, 2014, 2013 and 2012: Fiscal Year Ended January 31, 2014 2013 2012 GAAP gross margin 88.2 % 89.2 % 90.4 % Stock-based compensation expense 1.7 0.6 0.1 Employer payroll tax on employee stock plans 0.1 - - Amortization of acquired intangible assets 0.2 - - Impairment of long-lived asset 0.7 - - Non-GAAP gross margin 90.9 % 89.8 % 90.5 % The following table reconciles GAAP operating loss to non-GAAP operating loss for the fiscal years ended January 31, 2014, 2013 and 2012 (in thousands): Fiscal Year Ended January 31, 2014 2013 2012 GAAP operating loss $ (78,307 ) $ (22,033 ) $ (8,686 ) Stock-based compensation expense 69,368 19,480 3,760 Employer payroll tax on employee stock plans 3,971 1,155 - Amortization of acquired intangible assets 906 - - Impairment of long-lived asset 2,128 - - Acquisition-related costs 722 - - Non-GAAP operating loss $ (1,212 ) $ (1,398 ) $ (4,926 ) The following table reconciles GAAP operating margin to non-GAAP operating margin for the fiscal years ended January 31, 2014, 2013 and 2012: Fiscal Year Ended January 31, 2014 2013 2012 GAAP operating margin (25.9 )% (11.1 )% (7.2 )% Stock-based compensation expense 22.9 9.8 3.1 Employer payroll tax on employee stock plans 1.3 0.6 - Amortization of acquired intangible assets 0.3 - - Impairment of long-lived asset 0.7 - - Acquisition-related costs 0.3 - - Non-GAAP operating margin (0.4 )% (0.7 )% (4.1 )% 42-------------------------------------------------------------------------------- Table of Contents The following table reconciles GAAP net loss to non-GAAP net loss for the fiscal years ended January 31, 2014, 2013 and 2012 (in thousands): Fiscal Year Ended January 31, 2014 2013 2012 GAAP net loss $ (79,008 ) $ (36,681 ) $ (10,992 ) Stock-based compensation expense 69,368 19,480 3,760 Change in fair value of preferred stock warrants - 14,087 2,034 Employer payroll tax on employee stock plans 3,971 1,155 - Amortization of acquired intangible assets 906 - - Impairment of long-lived assets 2,128 - - Acquisition-related costs 722 - - Partial release of the valuation allowance due to acquisitions (1,174 ) - - Non-GAAP net loss $ (3,087 ) $ (1,959 ) $ (5,198 ) The following table reconciles GAAP net loss per share to non-GAAP basic and diluted net loss per share for the fiscal years ended January 31, 2014, 2013 and 2012 (in thousands, except per share amounts): Fiscal Year Ended January 31, 2014 2013 2012 GAAP net loss per share $ (0.75 ) $ (0.46 ) $ (0.53 ) Stock-based compensation expense 0.66 0.24 0.18 Change in fair value of preferred stock warrants - 0.18 0.10 Employer payroll tax on employee stock plans 0.03 0.02 - Amortization of acquired intangible assets 0.01 - - Impairment of long-lived assets 0.02 - - Acquisition-related costs 0.01 - - Partial release of the valuation allowance due to acquisitions (0.01 ) - - Non-GAAP basic and diluted loss per share $ (0.03 ) $ (0.02 ) $ (0.25 ) Weighted-average shares used in computing Non-GAAP basic and diluted net loss per share 105,067 80,246 20,646 Components of Operating Results Revenues License revenues. License revenues reflect the revenues recognized from sales of licenses to new customers and additional licenses to existing customers. We are focused on acquiring new customers and increasing revenues from our existing customers as they realize the value of our software by indexing higher volumes of machine data and expanding the use of our software through additional use cases and broader deployment within their organizations. A majority of our license revenues consists of revenues from perpetual licenses, under which we generally recognize the license fee portion of the arrangement upfront, assuming all revenue recognition criteria are satisfied. Customers can also purchase term license agreements, under which we recognize the license fee ratably, on a straight-line basis, over the term of the license. Due to the differing revenue recognition policies applicable to perpetual and term licenses, shifts in the mix between perpetual and term licenses from quarter to quarter could produce substantial variation in revenues recognized even if our sales remain consistent. In addition, seasonal trends that contribute to increased sales activity in the fourth fiscal quarter often result in lower sequential revenue in the first fiscal quarter, and we expect this trend to continue. Comparing our revenues on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. For further discussion of seasonality, cyclicality and quarterly trends, as well as the impact on our margins and results, see "Quarterly Results of Operations-Seasonality, Cyclicality and Quarterly Trends," below.

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 43-------------------------------------------------------------------------------- Table of Contents 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 6% for fiscal 2014. 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 and write-offs of intangible assets. 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, 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 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.

Interest and other income (expense), net Interest and other income (expense), net consists primarily of foreign exchange gains and losses, interest income on our cash and cash equivalents balances, and for fiscal 2013 and 2012, changes in the fair value of preferred stock warrants and interest expense on outstanding debt.

44-------------------------------------------------------------------------------- Table of Contents 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.

Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States. The preparation of 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.

We believe that the assumptions and estimates associated with revenue recognition, share-based compensation and income taxes have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

Accordingly, we believe these are the most critical to fully understand and evaluate our financial condition and results of operations. For further information on all of our significant accounting policies, see Note 1 of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

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.

45-------------------------------------------------------------------------------- Table of Contents Fiscal Year Ended January 31, 2014 2013 2012 (in thousands and as % of revenues ) Consolidated Statement of Operations Data: Revenues License $ 199,024 65.8 % $ 135,922 68.3 % $ 88,308 73.0 % Maintenance and services 103,599 34.2 63,022 31.7 32,652 27.0 Total revenues 302,623 100.0 198,944 100.0 120,960 100.0 Cost of revenues License (1) 330 0.2 727 0.5 890 1.0 Maintenance and services (1) 35,495 34.3 20,697 32.8 10,715 32.8 Total cost of revenues 35,825 11.8 21,424 10.8 11,605 9.6 Gross profit 266,798 88.2 177,520 89.2 109,355 90.4 Operating expenses Research and development 75,895 25.1 41,853 21.0 23,561 19.5 Sales and marketing 215,335 71.2 125,098 62.9 74,782 61.8 General and administrative 53,875 17.8 32,602 16.4 19,698 16.3 Total operating expenses 345,105 114.1 199,553 100.3 118,041 97.6 Operating loss (78,307 ) (25.9 ) (22,033 ) (11.1 ) (8,686 ) (7.2 ) Other income (expense), net Interest income (expense), net 225 0.1 152 0.1 (94 ) (0.1 ) Other income (expense), net (920 ) (0.3 ) - - - - Change in fair value of preferred stock warrants - - (14,087 ) (7.1 ) (2,034 ) (1.7 ) Total other income (expense), net (695 ) (0.2 ) (13,935 ) (7.0 ) (2,128 ) (1.8 ) Loss before income taxes (79,002 ) (26.1 ) (35,968 ) (18.1 ) (10,814 ) (9.0 ) Provision for income taxes 6 - 713 0.4 178 0.1 Net loss $ (79,008 ) (26.1 )% $ (36,681 ) (18.5 )% $ (10,992 ) (9.1 )% ______________________________ (1) Calculated as a percentage of the associated revenues.

46-------------------------------------------------------------------------------- Table of Contents Fiscal 2014, 2013 and 2012 Revenues Fiscal Year Ended January 31, 2014 to 2013 2013 to 2012 2014 2013 2012 % Change % Change (in thousands) Revenues License $ 199,024 $ 135,922 $ 88,308 46.4 % 53.9 %Maintenance and services 103,599 63,022 32,652 64.4 % 93.0 % Total revenues $ 302,623 $ 198,944 $ 120,960 52.1 % 64.5 % Percentage of revenues License 65.8 % 68.3 % 73.0 % Maintenance and services 34.2 31.7 27.0 Total 100.0 % 100.0 % 100.0 % Fiscal 2014 compared to fiscal 2013. Total revenues increased $103.7 million primarily due to growth in license 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 791 and 467 orders greater than $100,000 for the fiscal year ended January 31, 2014 and 2013, respectively. Our total number of Splunk Enterprise customers increased from approximately 5,200 at January 31, 2013 to approximately 7,000 at January 31, 2014. The increase in maintenance and services revenues was due to increases in sales of maintenance agreements resulting from the growth of our installed customer base as well as sales of our professional services.

Fiscal 2013 compared to fiscal 2012. Total revenues increased $78.0 million primarily due to growth in license 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 467 and 282 orders greater than $100,000 for the fiscal year ended January 31, 2013 and 2012, respectively. Our total number of Splunk Enterprise customers increased from approximately 3,700 at January 31, 2012 to approximately 5,200 at January 31, 2013. The increase in maintenance and services revenues was due to increases in sales of maintenance agreements resulting from the growth of our installed customer base as well as sales of our professional services.

Cost of Revenues and Gross Margin Fiscal Year Ended January 31, 2014 to 2013 2013 to 2012 2014 2013 2012 % Change % Change (in thousands) Cost of revenues License $ 330 $ 727 $ 890 (54.6 )% (18.3 )% Maintenance and services 35,495 20,697 10,715 71.5 % 93.2 % Total cost of revenues $ 35,825 $ 21,424 $ 11,605 67.2 % 84.6 % Gross margin License 99.8 % 99.5 % 99.0 % Maintenance and services 65.7 % 67.2 % 67.2 % Total gross margin 88.2 % 89.2 % 90.4 % Fiscal 2014 compared to fiscal 2013. Total cost of revenues increased $14.4 million due to a $14.8 million increase in cost of maintenance and services revenues, slightly offset by the decrease in cost of license revenue.

The increase in cost of maintenance and services revenues was primarily related to an increase of $9.1 million in salaries and benefits expense due to increased headcount, which also includes a $4.1 million increase in stock-based compensation expense. We also had a $2.1 million impairment charge of a long-lived asset for previously capitalized Splunk Storm software development costs, as a result of our decision to make Splunk Storm available to customers at no cost during the third fiscal quarter of 2014. We also had an 47-------------------------------------------------------------------------------- Table of Contents increase of $1.1 million related to overhead costs and an increase of $1.0 million related to consulting fees. Total gross margin decreased slightly due to the $2.1 million impairment charge related to Splunk Storm, as discussed above.

Fiscal 2013 compared to fiscal 2012. Total cost of revenues increased $9.8 million due to a $10.0 million increase in cost of maintenance and services revenues, offset slightly by the decrease in cost of license revenue. The increase in cost of maintenance and services revenues of $10.0 million was primarily related to an increase of $4.7 million in salaries and benefits expense due to increased headcount, which also includes a $1.1 million increase in stock-based compensation expense, and $5.3 million related to professional services expense, as we continue to invest in our professional services organization. Total gross margin decreased slightly, while license gross margin increased slightly and maintenance and services gross margin remained flat, due to revenue mix, with maintenance and services revenue representing a higher percentage of total revenues.

Operating Expenses Fiscal Year Ended January 31, 2014 to 2013 2013 to 2012 2014 2013 2012 % Change % Change (in thousands) Operating expenses (1) Research and development $ 75,895 $ 41,853 $ 23,561 81.3 % 77.6 % Sales and marketing 215,335 125,098 74,782 72.1 % 67.3 % General and administrative 53,875 32,602 19,698 65.3 % 65.5 % Total operating expenses $ 345,105 $ 199,553 $ 118,041 72.9 % 69.1 % Percentage of revenues Research and development 25.1 % 21.0 % 19.5 % Sales and marketing 71.2 62.9 61.8 General and administrative 17.8 16.4 16.3 Total 114.1 % 100.3 % 97.6 % (1) Includes stock-based compensation expense: Research and development $ 20,829 $ 6,170 $ 841 Sales and marketing 30,012 8,093 1,488 General and administrative 13,244 4,000 1,297 Total stock-based compensation expense $ 64,085 $ 18,263 $ 3,626 Research and development expense Fiscal 2014 compared to fiscal 2013. Research and development expense increased $34.0 million due to a $28.2 million increase in salaries and benefits as we increased headcount as part of our focus on further developing and enhancing our products. The increase in salaries and benefits also includes a $14.7 million increase in stock-based compensation expense. We also had an increase of $3.6 million related to overhead costs, also as a result of increased headcount and $1.2 million related to consulting fees.

Fiscal 2013 compared to fiscal 2012. Research and development expense increased $18.3 million primarily due to a $15.9 million increase in salaries and benefits, as we increased headcount as part of our focus on further developing and enhancing our product. The increase in salaries and benefits also includes a $5.3 million increase in stock-based compensation expense. We also had increases of $2.0 million related to overhead costs, also as a result of increased headcount.

Sales and marketing expense Fiscal 2014 compared to fiscal 2013. Sales and marketing expense increased $90.2 million primarily due to a $74.1 million increase in salaries and benefits as we increased headcount to expand our field sales organization and experienced higher commission expense as a result of increased customer orders. The increase in salaries and benefits also includes a $21.9 million increase in stock-based compensation expense. We also incurred a $6.7 million increase due to increased facilities and overhead expense and a $3.5 million increase in travel expenses as a result of international expansion and increased headcount. Finally, we also incurred a $2.7 million increase due to marketing events and increased advertising, a $2.0 million increase related to our sales kickoff and an increase of $0.8 million related to consulting fees.

48-------------------------------------------------------------------------------- Table of Contents Fiscal 2013 compared to fiscal 2012. Sales and marketing expense increased $50.3 million primarily related to a $29.9 million increase in salaries and benefits as we increased headcount to expand our field sales organization, as well as commissions on increased customer orders. The increase in salaries and benefits also includes a $6.6 million increase in stock-based compensation expense. During fiscal 2013, we continued to expand our field sales organization and opened sales offices in Japan, South Korea, Sweden and Taiwan. We had an increase in marketing-related expenses of $7.1 million, primarily as a result of a significant increase in marketing events and advertising. Additionally, we experienced increases in overhead costs of $6.5 million and travel expenses of $3.3 million due to increased headcount.

General and administrative expense Fiscal 2014 compared to fiscal 2013. General and administrative expense increased $21.3 million primarily due to an increase of $20.4 million related to salaries and benefits driven by an increase in headcount for accounting and legal activities to support the overall growth of the business and our international expansion efforts. The increase in salaries and benefits also includes a $9.2 million increase in stock compensation expense.

Fiscal 2013 compared to fiscal 2012. General and administrative expense increased $12.9 million primarily related to a $11.3 million increase in salaries and benefits as we increased headcount to support our overall growth and as we transition to operating as a public company. The increase in salaries and benefits also includes a $2.7 million increase in stock-based compensation expense. We also had an increase of $1.5 million primarily related to accounting and legal activities in connection with becoming and operating as a public company.

Interest and Other Income (Expense), net Fiscal Year Ended January 31, 2014 to 2013 2013 to 2012 2014 2013 2012 % Change % Change (in thousands) Interest and other income (expense), net Interest income (expense), net $ 225 $ 152 $ (94 ) Other income (expense), net (920 ) - - Change in fair value of preferred stock warrants - (14,087 ) (2,034 ) Total interest and other income (expense), net $ (695 ) $ (13,935 ) $ (2,128 ) NM* NM* ______________________ *Not meaningful Fiscal 2014 compared to fiscal 2013. Interest and other income (expense), net reflects a net decrease in expense due to the absence of any warrant re-measurement expense, as we recorded the final revaluation of our preferred stock warrants in conjunction with the completion of our IPO during the first fiscal quarter of 2013.

Fiscal 2013 compared to fiscal 2012. Interest and other income (expense), net increased in expense due to $11.8 million related to the warrant re-measurement expense recorded during fiscal 2013 in conjunction with the final revaluation of our preferred stock warrants upon the completion of our IPO.

Provision for Income Taxes Fiscal Year Ended January 31, 2014 to 2013 2013 to 2012 2014 2013 2012 % Change % Change (in thousands) Provision for income taxes $ 6 $ 713 $ 178 NM* NM* ______________________ *Not meaningful Fiscal 2014 compared to fiscal 2013. The decrease in income tax expense was primarily due to an increase in tax expense from increased activity in our foreign operations, partially offset by a partial release of our deferred tax asset valuation 49-------------------------------------------------------------------------------- Table of Contents allowance related to our acquisitions. We recorded income taxes that were principally attributable to foreign, federal and state taxes.

Fiscal 2013 compared to fiscal 2012. The increase of the provision for income taxes was primarily due to the increase in foreign taxes from legal entities established in foreign jurisdictions.

50-------------------------------------------------------------------------------- Table of Contents Quarterly Results of Operations The following table sets forth our unaudited quarterly statements of operations data for the last eight fiscal quarters. The information for each of these quarters has been prepared on the same basis as the audited annual financial statements included elsewhere in this annual report and, in the opinion of management, includes all adjustments, which includes only normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this annual report. These quarterly operating results are not necessarily indicative of our operating results for any future period.

Three Months Ended Apr 30, July 31, Oct 31, Jan 31, Apr 30, July 31, Oct 31, Jan 31, 2012 2012 2012 2013 2013 2013 2013 2014 (in thousands, except per share amounts) Consolidated Statement of Operations Data: Revenues License $ 24,386 $ 30,203 $ 34,557 $ 46,776 $ 36,172 $ 43,185 $ 50,873 $ 68,794 Maintenance and services 12,805 14,280 17,488 18,449 21,035 23,688 27,760 31,116 Total revenues 37,191 44,483 52,045 65,225 57,207 66,873 78,633 99,910 Cost of revenues License 129 92 62 444 69 76 84 101 Maintenance and services 4,136 4,553 5,817 6,191 6,612 7,345 10,441 11,097 Total cost of revenues (1) 4,265 4,645 5,879 6,635 6,681 7,421 10,525 11,198 Gross profit 32,926 39,838 46,166 58,590 50,526 59,452 68,108 88,712 Operating expenses Research and development (1) 8,103 9,391 11,074 13,285 14,464 16,210 18,961 26,260 Sales and marketing (1) 24,166 27,740 32,847 40,345 41,313 44,634 53,052 76,336 General and administrative (1) 6,846 7,247 7,625 10,884 10,446 11,912 12,917 18,600 Total operating expenses 39,115 44,378 51,546 64,514 66,223 72,756 84,930 121,196 Operating loss (6,189 ) (4,540 ) (5,380 ) (5,924 ) (15,697 ) (13,304 ) (16,822 ) (32,484 ) Interest and other income (expense), net Interest income (expense), net (17 ) 101 31 37 61 58 55 51 Other income (expense), net - - - - (94 ) (82 ) (283 ) (461 ) Change in fair value of preferred stock warrants (14,087 ) - - - - - - - Total interest and other income (expense), net (14,104 ) 101 31 37 (33 ) (24 ) (228 ) (410 ) Loss before income taxes (20,293 ) (4,439 ) (5,349 ) (5,887 ) (15,730 ) (13,328 ) (17,050 ) (32,894 ) Income tax provision (benefit) 177 136 125 275 404 365 (500 ) (263 ) Net loss $ (20,470 ) $ (4,575 ) $ (5,474 ) $ (6,162 ) $(16,134 ) $ (13,693 ) $ (16,550 ) $ (32,631 ) Net loss per share, basic and diluted: $ (0.71 ) $ (0.05 ) $ (0.06 ) $ (0.06 ) $ (0.16 ) $ (0.13 ) $ (0.16 ) $ (0.30 ) (1) Includes stock-based compensation expense as follows: 51-------------------------------------------------------------------------------- Table of Contents Three Months Ended Apr 30, July 31, Oct 31, Jan 31, Apr 30, July 31, Oct 31, Jan 31, 2012 2012 2012 2013 2013 2013 2013 2014 (in thousands)Cost of revenues $ 108 $ 267 $ 322 $ 520 $ 705 $ 865 $ 1,165 $ 2,548 Research and development 895 1,267 1,560 2,448 3,043 3,547 4,405 9,834 Sales and marketing 858 1,505 2,093 3,637 4,322 5,156 5,947 14,587 General and administrative 811 827 710 1,652 1,765 2,389 2,815 6,275 Three Months Ended Apr 30, July 31, Oct 31, Jan 31, Apr 30, July 31, Oct 31, Jan 31, 2012 2012 2012 2013 2013 2013 2013 2014 (as % of revenues) Consolidated Statement of Operations Data: Revenues License 65.6 % 67.9 % 66.4 % 71.7 % 63.2 % 64.6 % 64.7 % 68.9 % Maintenance and services 34.4 32.1 33.6 28.3 36.8 35.4 35.3 31.1 Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cost of revenues License (1) 0.5 0.3 0.2 0.9 0.2 0.2 0.2 0.1 Maintenance and services (1) 32.3 31.9 33.3 33.6 31.4 31.0 37.6 35.7 Total cost of revenues 11.5 10.4 11.3 10.2 11.7 11.1 13.4 11.2 Gross profit 88.5 89.6 88.7 89.8 88.3 88.9 86.6 88.8 Operating expenses Research and development 21.8 21.1 21.3 20.3 25.3 24.2 24.1 26.3 Sales and marketing 65.0 62.4 63.1 61.9 72.1 66.8 67.5 76.4 General and administrative 18.4 16.3 14.7 16.7 18.3 17.8 16.4 18.6 Total operating expenses 105.2 99.8 99.1 98.9 115.7 108.8 108.0 121.3 Operating loss (16.7 ) (10.2 ) (10.4 ) (9.1 ) (27.4 ) (19.9 ) (21.4 ) (32.5 ) Interest and other income (expense), net Interest income (expense), net - 0.2 0.1 0.1 0.1 0.1 0.1 0.1 Other income (expense), net - - - - (0.2 ) (0.1 ) (0.4 ) (0.5 ) Change in fair value of preferred stock warrants (37.9 ) - - - - - - - Total interest and other income (expense), net (37.9 ) 0.2 0.1 0.1 (0.1 ) - (0.3 ) (0.4 ) Loss before income taxes (54.6 ) (10.0 ) (10.3 ) (9.0 ) (27.5 ) (19.9 ) (21.7 ) (32.9 ) Income tax provision (benefit) 0.5 0.3 0.2 0.4 0.7 0.5 (0.6 ) (0.3 ) Net loss (55.1 )% (10.3 )% (10.5 )% (9.4 )% (28.2 )% (20.4 )% (21.1 )% (32.6 )% (1) This percentage is calculated as a percentage of the associated revenues.

Seasonality, Cyclicality and Quarterly Trends 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 52-------------------------------------------------------------------------------- Table of Contents period, which can result in lower sequential revenue in the first fiscal quarter. We believe that third fiscal quarter revenues have been and could continue to be flat compared to second fiscal quarter revenues due to a seasonal slow down in customer orders during the late summer months as a result of summer vacations and holidays in the United States and elsewhere around the world. We expect this seasonality to continue in fiscal 2015 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 timing of revenues in relation to our expenses, much of which does not vary directly with revenues, has an impact on the cost of revenues, research and development expense, sales and marketing expense, and general and administrative expense as a percentage of revenues in each fiscal quarter during the year. 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. Although these seasonal factors are common in the technology industry, historical patterns should not be considered a reliable indicator of our future sales activity or performance.

As is typical in the software industry, we expect a significant portion of our product license orders to be received in the last month of each fiscal quarter.

We typically ship products shortly after the receipt of an order. We may have backlog consisting of product license orders that have not shipped and maintenance, professional and training services that have not been billed and for which the services have not yet been performed. Historically, our backlog has varied from quarter to quarter and has been immaterial to our total revenues.

Liquidity and Capital Resources As of January 31, 2014 2013 2012 (in thousands) Cash and cash equivalents $ 897,453 $ 305,939 $ 31,599 Fiscal Year Ended January 31, 2014 2013 2012 (in thousands)Cash provided by operating activities $ 73,848 $ 46,648 $ 14,622 Cash used in investing activities (39,046 ) (8,563 ) (8,052 ) Cash provided by financing activities 556,699 236,235 5,292 Since fiscal 2010 we have funded our operations primarily through cash generated from operations. At January 31, 2014, our cash and cash equivalents of $897.5 million were held for working capital purposes, a majority of which were invested in money market funds. We intend to increase our capital expenditures in 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 planned investments, particularly in our product development efforts or acquisitions of complementary businesses, applications or technologies.

Operating Activities For fiscal 2014, cash inflows from our operating activities were $73.8 million, which reflects our net loss of $79.0 million, adjusted by non-cash charges of $77.8 million consisting primarily of $69.4 million for stock-based compensation, and $6.7 million for depreciation and amortization. Additional sources of cash inflows were from changes in our working capital, including a $77.4 million increase in deferred revenue due to increased sales of our products and a $15.8 million increase in accrued payroll and compensation driven by higher commissions expense related to increased sales. We also had a $2.5 million increase in accrued expenses and other liabilities due to the overall growth of our business and a $0.2 million increase in accounts payable. These cash inflows were offset by cash outflows including a $19.4 million increase in accounts receivable due to increased sales and a $1.4 million related to an increase in prepaid expenses and other current assets.

For fiscal 2013, cash inflows from our operating activities were $46.6 million, which reflects our net loss of $36.7 million, adjusted by non-cash charges of $37.8 million consisting primarily of $19.5 million for stock-based compensation, $14.1 million for the change in valuation of preferred stock warrants and $4.7 million for depreciation and amortization.

53-------------------------------------------------------------------------------- Table of Contents Additional sources of cash inflows were from changes in our working capital, including a $62.0 million increase in deferred revenue, a $12.0 million increase in accrued payroll and compensation, a $3.4 million increase in accrued expenses and other liabilities and a $0.2 million increase in accounts payable. These cash inflows were offset by cash outflows including a $29.5 million increase in accounts receivable due to increased sales and a $2.7 million related to an increase in prepaid expenses and other current assets.

For fiscal 2012, cash inflows from our operating activities were $14.6 million, which reflects our net loss of $11.0 million, adjusted by non-cash charges of $8.2 million consisting primarily of $3.8 million for stock-based compensation, $2.0 million for the change in valuation of preferred stock warrants and $2.1 million for depreciation and amortization. Additional sources of cash inflows were from changes in our working capital, including a $30.4 million increase in deferred revenue, a $11.1 million increase in accrued compensation and accrued expenses and other liabilities, primarily due to increased headcount, partially offset by a $20.3 million increase in accounts receivable, due to increased sales, and a $3.5 million increase in prepaid expenses and other current and non-current assets.

Investing Activities Our investing activities consist primarily of capital expenditures to purchase property and equipment, strategic investments and changes in our restricted cash. In the future, we expect to continue to invest in capital expenditures to support our expanding operations.

During fiscal 2014, cash used in investing activities of $39.0 million was primarily attributable to $29.7 million of cash purchase price paid, net of cash acquired, for our acquisitions and $9.3 million of capital expenditures for technology and hardware, as well as leasehold improvements on our corporate headquarters in San Francisco, California to support the growth of our business.

During fiscal 2013 and 2012, cash used in investing activities was primarily attributable to capital expenditures for technology hardware to support the growth of our business, as well as leasehold improvements on our corporate and international offices.

Financing Activities For fiscal 2014, cash provided by financing activities of $556.7 million consisted primarily of $539.3 million of proceeds from our follow-on offering, net of paid underwriter discount, and issuance costs and $35.1 million of proceeds received from the issuance of stock related to our equity incentive plans. These increases were partially offset by $18.2 million of taxes paid related to the net settlement of RSUs.

For fiscal 2013, cash provided by financing activities of $236.2 million consisted primarily of initial public offering proceeds of $225.2 million, net of paid underwriter discount and issuance costs, $6.9 million from exercises of stock options and $5.3 million from proceeds received from our employee stock purchase plan. These increases were partially offset by $2.3 million related to the repayment of a term loan.

For fiscal 2012, cash provided by financing activities of $5.3 million consisted primarily of $3.0 million of proceeds from a term loan and $3.1 million from exercises of stock options, offset by $0.7 million related to the repayment of a term loan.

Loan and Security Agreement In May 2009, we entered into a Loan and Security Agreement with Silicon Valley Bank, which expired on April 30, 2013. The agreement included a revolving line of credit facility.

On May 9, 2013 we entered into a Loan Agreement with Silicon Valley Bank. The agreement provides for a revolving line of credit facility, which expires May 9, 2015. Under the agreement, we are able to borrow up to $25 million. Interest on any drawdown under the revolving line of credit accrues either at the prime rate (3.25% in January 2014) or the LIBOR rate plus 2.75%. As of January 31, 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 January 31, 2014.

Contractual Payment Obligations The following summarizes our contractual commitments and obligations as of January 31, 2014: 54-------------------------------------------------------------------------------- Table of Contents Payments Due by Period* Less Than 1 More Than 5 Total year 1-3 years 3-5 years years (in thousands) Operating lease obligations $ 47,936 $ 7,999 $ 16,338 $ 17,114 $ 6,485 _________________________ *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 $1.2 million has been included as an offset to our future minimum rental payments.

Off-Balance Sheet Arrangements During fiscal 2014, 2013 and 2012, 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, vendors and 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 end-user 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 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 January 31, 2014. We are unable to estimate the maximum potential impact of these indemnifications on our future results of operations.

[ Back To Technology News's Homepage ]

OTHER NEWS PROVIDERS







Technology Marketing Corporation

800 Connecticut Ave, 1st Floor East, Norwalk, CT 06854 USA
Ph: 800-243-6002, 203-852-6800
Fx: 203-866-3326

General comments: tmc@tmcnet.com.
Comments about this site: webmaster@tmcnet.com.

STAY CURRENT YOUR WAY

© 2014 Technology Marketing Corporation. All rights reserved | Privacy Policy