SPLUNK INC.
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. 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. Statements that are not purely historical are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are often identified by the use of words such as, but
not limited to, "anticipate," "believe," "can," "continue," "could," "estimate,"
"expect," "predict," "intend," "may," "might," "plan," "project," "potential,"
"seek," "should," "target," "will," "would" and similar expressions or
variations intended to identify forward-looking statements. Such statements
include, but are not limited to, statements concerning our business and our
market opportunity, our future financial and
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operating results; our planned investments, particularly in our product
development efforts; our planned expansion of our sales and marketing
organization; our expectations regarding our acquisitions; our expectation that
we will continue to use acquisitions to contribute to our growth objectives; our
growth and product integration strategies; our continued efforts to market and
sell both domestically and internationally; our expectations about seasonal
trends; the impact of the COVID-19 pandemic and related public health measures
on our business; our ability to achieve our goals; our expectations regarding
our revenues mix and the impact of our business model transition; our
expectations regarding our cost of revenues and gross margin; use of non-GAAP
(as defined below) financial measures; our expectations regarding new accounting
standards; our expectations regarding our operating expenses, including
increases in research and development, sales and marketing, and general and
administrative expenses; our expectations regarding our capital expenditures;
sufficiency of cash to meet cash needs for at least the next 12 months; exposure
to interest rate changes; inflation; anticipated income tax rates and
liabilities; our expectations regarding our leases; exposure to exchange rate
fluctuations and our ability to manage such exposure; and our expected cash
flows and liquidity.
These statements are based on the beliefs and assumptions of our management
based on information currently available to us. Such forward-looking statements
are subject to risks, uncertainties and other important factors that could cause
actual results and the timing of certain events to differ materially from future
results expressed or implied by such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those identified below, and those discussed in the section titled "Risk Factors"
included under Part II, Item 1A below. Furthermore, such forward-looking
statements speak only as of the date of this report. Except as required by law,
we undertake no obligation to update any forward-looking statements to reflect
events or circumstances that occur after the date of this report.
Amounts reported in millions are rounded based on the amounts in thousands. As a
result, the sum of the components reported in millions may not equal the total
amount reported in millions due to rounding. In addition, percentages presented
are calculated from the underlying numbers in thousands and may not add to their
respective totals due to rounding.
Overview
Splunk provides innovative software solutions that ingest data from different
sources including systems, devices and interactions, and turn that data into
meaningful business insights across the organization. Our Data-to-Everything
platform enables users to investigate, monitor, analyze and act on data
regardless of format or source. Data is produced by nearly every software
application and electronic device across an organization and contains a
real-time record of various activities, such as business transactions, customer
and user behavior, and security threats. Beyond an organization's traditional
information technology ("IT") and security infrastructure, data from the
Industrial Internet, including industrial control systems, sensors, supervisory
control and data acquisition ("SCADA") systems, networks, manufacturing systems,
smart meters and the Internet of Things ("IoT"), which includes
consumer-oriented systems, such as electronic wearables, mobile devices,
automobiles and medical devices are also continuously generating data. Our
Data-to-Everything platform helps organizations gain the value contained in data
by delivering real-time information to enable operational decision making.
We believe the market for products that deliver real-time business insights from
data 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
offerings to address this market.
Our offerings are designed to deliver rapid 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. Prospective users can get started with our
free online sandboxes that enable our customers to immediately try and
experience Splunk offerings. Users that prefer to deploy the software
on-premises can take advantage of our free 60-day trial of Splunk Enterprise and
a 15-day free trial is available to users that prefer the core functionalities
of Splunk Enterprise delivered as a cloud service. These users can sign up for
Splunk Cloud and avoid the need to provision, deploy and manage internal
infrastructure. Alternatively, they can simply download and install the
software, typically in a matter of hours, to connect to their relevant data
sources. We offer free development-test licenses for certain commercial
customers, allowing users to explore new data and use cases in a non-production
environment without incurring additional fees. We also offer support, training
and professional services to our customers to assist in the deployment of our
software.
For Splunk Enterprise, we typically base our license fees on either the estimated daily data indexing capacity or the compute power our customers require. Beginning in fiscal 2020, we shifted our licensing model whereby a substantial majority of our license revenues consist of revenues from term licenses, and to a much lesser extent, perpetual licenses, under which we generally recognize the license fee portion of these arrangements upfront. As a result, the timing of when we enter into large
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Splunk Cloud delivers the core capabilities of Splunk Enterprise as a scalable,
reliable cloud service. We typically base our Splunk Cloud annual subscription
fees on either the volume of data indexed per day including a fixed amount of
data storage, or purchased infrastructure and data storage our customers
require. We recognize the revenues associated with our cloud services ratably
over the associated subscription term.
Splunk Enterprise Security ("ES") addresses emerging security threats and
security information and event management ("SIEM") use cases through monitoring,
alerts and analytics. Splunk IT Service Intelligence ("ITSI") is a machine
learning powered monitoring and analytics solution that correlates nearly any
kind of data across IT and the business to provide monitoring and
troubleshooting support and predict problems before they have an impact. Splunk
Phantom automates and orchestrates incident response workflows to take immediate
action the moment an incident is detected. VictorOps is a cloud-based
Collaborative Incident Response system that delivers context-rich alerts,
reducing the time required to react to and address incidents. SignalFx is a
cloud-based service that provides real-time monitoring and metrics for cloud
infrastructure, microservices and applications observability, as well as
application performance management ("APM") for organizations.
Our revenue mix has shifted from sales of perpetual licenses to sales of term
licenses and cloud subscriptions and we expect it will continue to shift in
favor of cloud subscriptions as we transition to a predominantly subscription
model. We expect our transition to a subscription model will impact the timing
of our recognition of revenue as an increasing percentage of our sales become
recognized ratably, as well as impact our operating margins as cloud services
become a larger percentage of our sales. To the extent our shift to a
predominantly subscription model happens faster than we expect, our ability to
predict our revenue and margins in any particular period may be more limited. We
have also shifted from generally invoicing our multi-year contracts upfront to
invoicing on an annual basis. Accordingly, we have seen the timing of our cash
collections extend over a longer period of time than it has historically, and
expect this to negatively impact operating cash flows through at least fiscal
2022.
We use total annual recurring revenue ("Total ARR") and cloud annual recurring
revenue ("Cloud ARR") to identify the annual recurring value of customer
contracts at the end of a reporting period and to monitor the growth of our
recurring business as we transition to a predominantly subscription model. Total
ARR represents the annualized revenue run-rate of active term license,
maintenance, and subscription contracts at the end of a reporting period. Cloud
ARR represents the annualized revenue run-rate of active subscription contracts
at the end of a reporting period. Total ARR was $1.77 billion and Cloud ARR was
$480 million as of April 30, 2020 .
We intend to continue investing for long-term growth. We have invested and
intend to continue to invest in product development to deliver additional
features and performance enhancements, deployment models and solutions that can
address new end markets. We expect to continue to expand our sales and marketing
organizations to market and sell our software both in the United States and
internationally.
We have utilized and expect to continue to utilize acquisitions to contribute to
our long-term growth objectives. During fiscal 2020, we completed the
acquisitions of SignalFx, Inc. ("SignalFx"), a developer of real-time monitoring
and metrics for cloud infrastructure, microservices and applications, Cloud
Native Labs, Inc. ("Omnition"), which develops a platform for distributed
tracing and application monitoring and Streamlio, Inc. , which specializes in
designing and operating streaming data solutions.
Our goal is to make our software the platform for delivering real-time business insights from 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 partner relationships, to increase our sales capacity and enable greater market presence.
•Further penetrate our existing customer base and drive enterprise-wide adoption.
•Enhance our value proposition through a focus on solutions which address core and expanded use cases.
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•Grow our user communities and partner ecosystem to increase awareness of our
brand, target new use cases, drive operational leverage and deliver more
targeted, higher value solutions.
•Continue to deliver a rich developer environment to enable rapid development of enterprise applications that leverage 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 new offerings as well as
additional product functionality; acquire new customers across geographies and
industries; cultivate incremental sales from our existing customers by driving
increased use of our software within organizations; provide additional solutions
that leverage our core data platform to help organizations understand and
realize the value of their data in specific end markets and use cases; add
additional original equipment manufacturer ("OEM") and strategic relationships
to enable new sales channels for our software as well as extend our integration
with third-party products; help software developers leverage the functionality
of our data platform through software development kits ("SDKs") and application
programming interfaces ("APIs"); and successfully integrate acquired businesses
and technologies.
In December 2019 , COVID-19 was reported in China , in January 2020 the World
Health Organization ("WHO") declared it a Public Health Emergency of
International Concern, and in March 2020 the WHO declared it a pandemic. The
long-term impact of COVID-19 on our operational and financial performance will
depend on certain developments including the duration, spread, severity, and
potential recurrence of the virus. Our future performance will also depend on
the impact of COVID-19 on our customers, partners, employee productivity, and
sales cycles, including as a result of travel restrictions. These potential
developments are uncertain and cannot be predicted and as such, the extent to
which COVID-19 will impact our business, operations, financial condition and
results of operations over the long term is unknown. Furthermore, due to our
shift to a predominantly subscription model, the effect of COVID-19 may not be
fully reflected in our results of operations until future periods.
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Financial Summary
(Dollars in millions)
Three Months Ended April 30, 2020 and 2019
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* Refer to Non-GAAP Financial Results and Reconciliations below for further
information regarding our GAAP to non-GAAP Financial Measures and related
reconciliations.
Our customer base spans numerous industry verticals, including cloud and online
services, education, financial services, government, healthcare/pharmaceuticals,
industrials/manufacturing, media/entertainment, retail/ecommerce, technology and
telecommunications, among others. As of April 30, 2020 , our customers include
over 90 of the Fortune 100 companies.
Our quarterly results reflect seasonality in the sale of our offerings.
Historically, a pattern of increased sales in the fourth fiscal quarter as a
result of industry buying patterns has positively impacted sales activity in
that period, which can result in lower sequential revenues in the following
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 and Reconciliations
To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with the following non-GAAP financial measures: cost of revenues, cloud services gross profit, gross margin, research and development expense, sales and marketing expense, general and administrative expense, operating income (loss), operating margin, income tax provision (benefit), net income (loss), net income (loss) per share and free cash flow (collectively the "non-GAAP financial measures"). These non-GAAP financial measures exclude all or a combination of the following (as reflected in the following reconciliation tables): expenses related to stock-based compensation and related employer payroll tax, amortization of acquired intangible assets, capitalized software development costs and non-cash interest expense related to our convertible senior notes. The non-GAAP financial measures are also adjusted for our estimated tax rate on non-GAAP income (loss). To determine the annual non-GAAP tax rate, we evaluate a financial projection based on our non-GAAP results. The annual non-GAAP tax rate takes into account other factors including our current operating structure, our existing tax positions in various jurisdictions and key legislation in major jurisdictions where we operate. The non-GAAP tax rate applied to the three months endedApril 30, 2020 was 20%. We will provide updates to this rate on an annual basis, or more frequently if material changes occur. The applicable fiscal 2020 tax rates are noted in the reconciliations. In addition, our non-GAAP financial measures include free cash flow, which represents operating cash flow less purchases of property and equipment. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated or used by the business. 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 and 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 also exclude amortization of acquired intangible assets, capitalized software development costs and non-cash interest expense related to our convertible senior notes from our non-GAAP financial measures because these expenses are considered by management to be outside of our core operating results. There are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by our competitors and exclude expenses that may have a material impact upon our reported financial results. Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees. The 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 management in our financial and operational decision making. In addition, these non-GAAP financial measures facilitate comparisons to competitors' operating results. The non-GAAP financial measures are meant to supplement and be viewed in conjunction with GAAP financial measures. 28 -------------------------------------------------------------------------------- Table of Contents The following table reconciles our net cash provided by operating activities to free cash flow: Three Months Ended April 30, (In thousands) 2020 2019 Net cash provided by operating activities$ 46,044 $ 35,029 Less purchases of property and equipment (14,756) (14,900) Free cash flow (non-GAAP)$ 31,288 $ 20,129 Net cash provided by (used in) investing activities$ 147,009 $ (6,275) Net cash used in financing activities
The following table reconciles our GAAP to non-GAAP financial measures for the
three months ended
Non-cash interest
Stock-based compensation Amortization of expense related to Income tax effects
(In thousands, except per share and related employer acquired intangible Capitalized software convertible senior related to non-GAAP
amounts) GAAP payroll tax assets development costs notes adjustments (2) Non-GAAP
Cost of revenues $ 128,617 $ (13,982) $ (10,373) $ - $ - $ - $ 104,262
Gross margin 70.4 % 3.2 % 2.4 % - % - % - % 76.0 %
Research and development 192,124 (71,265) (25) 3,548 - - 124,382
Sales and marketing 319,224 (59,422) (4,333) - - - 255,469
General and administrative 82,724 (21,645) - - - - 61,079
Operating loss (288,612) 166,314 14,731 (3,548) - - (111,115)
Operating margin (66.5) % 38.3 % 3.4 % (0.8) % - % - % (25.6) %
Income tax benefit (1,669) - - - - (20,198) (21,867)
Net loss $ (305,579) $ 166,314 $ 14,731 $ (3,548) $ 20,416 $ 20,198 $ (87,468)
Net loss per share (1) $ (1.94) $ 1.05 $ 0.09 $ (0.02) $ 0.13 $ 0.13 $ (0.56)
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(1) Calculated based on 157,534 weighted-average shares of common stock.
(2) Represents the tax effect of the non-GAAP adjustments based on the
estimated annual effective tax rate of 20%.
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The following table reconciles our GAAP to non-GAAP financial measures for the
three months ended April 30, 2019 :
Non-cash interest
Stock-based compensation Amortization of expenserelated to Income tax effects
and related employer acquired intangible convertible senior related to non-GAAP
(In thousands, except per share amounts) GAAP payroll tax assets notes adjustments (2) Non-GAAP
Cost of revenues $ 95,823 $ (11,674) $ (5,922) $ - $ - $ 78,227
Gross margin 77.4 % 2.8 % 1.4 % - % - % 81.6 %
Research and development 129,290 (43,445) (249) - - 85,596
Sales and marketing 278,961 (53,403) (955) - - 224,603
General and administrative 65,762 (21,546) - - - 44,216
Operating loss (144,986) 130,068 7,126 - - (7,792)
Operating margin (34.1) % 30.6 % 1.7 % - % - % (1.8) %
Income tax provision 3,233 - - - (2,432) 801
Net income (loss) $ (155,429) $ 130,068 $ 7,126 $
19,005 $ 2,432
$ (1.04) $ 0.02 _________________________ (1) GAAP net loss per share calculated based on 149,060 weighted-average shares of common stock. Non-GAAP net income per share calculated based on 155,247 diluted weighted-average shares of common stock, which includes 6,367 potentially dilutive shares related to employee stock awards. GAAP to non-GAAP net income (loss) per share is not reconciled due to the difference in the number of shares used to calculate basic and diluted weighted-average shares of common stock. (2) Represents the tax effect of the non-GAAP adjustments based on the estimated annual effective tax rate of 20%. The following table reconciles our GAAP to non-GAAP Cloud services gross profit: Three Months Ended October 31, January 31, (In thousands) April 30, 2019 July 31, 2019 2019 2020 April 30, 2020 GAAP Cloud services gross profit$ 29,729
1,533 1,634 1,543 2,756 2,390
Amortization of acquired intangible assets 418 417 2,497 4,488 5,006
Non-GAAP Cloud services gross profit $ 31,680 $ 37,347 $ 43,435 $ 53,672 $ 66,058
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Revenues
License revenues. License revenues consist of revenues from term licenses, and to a much lesser extent perpetual licenses, under which we generally recognize the license fee portion of the arrangement upfront, assuming all revenue recognition criteria are satisfied. License revenues reflect the revenues recognized from sales of licenses to new customers and additional licenses to existing customers, including sales from the renewal of term licenses. 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 data and expanding the use of our software through additional use cases and broader deployment within their organizations. In addition, seasonal trends that contribute to increased sales activity in the fourth fiscal quarter often result in lower sequential revenues in the first fiscal quarter, and we expect this trend to continue. Cloud services revenues. Cloud services allow customers to use hosted software over the contract period without taking possession of the software. We recognize the revenues associated with our cloud services ratably, over the associated subscription term. "Cloud services" revenues have been reclassified from "Maintenance and services" revenues on our condensed consolidated statements of operations. We believe this presentation provides a more meaningful representation of the nature of our revenue. This reclassification had no impact on our previously reported total revenues.
Maintenance and services revenues. Maintenance and services revenues consist of revenues from maintenance agreements and professional services and training.
•Maintenance revenues. When a term license is purchased, maintenance is bundled with the license for the term of the license period. Typically, when purchasing a perpetual license, a customer also purchases one year of maintenance for which we charge a percentage of the license fee. 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. Maintenance revenues as a percentage of total revenues were 26% and 28% for the three months endedApril 30, 2020 and 2019, respectively. •Professional services and training revenues. We have a professional services organization focused on helping our customers deploy our software in highly complex operational environments and train their personnel. Training and professional services have stated billing rates per service hour or are provided on a subscription basis, accordingly, revenues are recognized as services are delivered or ratably over the subscription period. 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 products, 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 cloud services revenues. Cost of cloud services revenues includes salaries, benefits, stock-based compensation and related expenses such as employer taxes for our cloud services organization, allocated overhead for depreciation of equipment, facilities and IT, amortization of acquired intangible assets and third-party hosting fees. We recognize expenses related to our cloud services organizations 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 organizations,
third-party consulting services and allocated overhead for depreciation of
equipment, facilities and IT. We recognize expenses related to our maintenance
and services organizations as they are incurred.
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Operating Expenses
Our operating expenses are classified into three categories: research and
development, sales and marketing and general and administrative. For each
category, the largest component is personnel costs, which include salaries,
employee benefit costs, bonuses, commissions as applicable, stock-based
compensation and related expenses such as employer taxes. Operating expenses
also include allocated overhead costs for depreciation of equipment, facilities
and IT. Allocated costs for facilities include costs for compensation of our
facilities personnel, leasehold improvements and rent. Our allocated costs for
IT include costs for compensation of our IT personnel, costs associated with our
IT infrastructure and software subscriptions. 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, including advertising programs to promote our
brand and awareness, demand generating activities and customer events. We expect
that sales and marketing expenses will continue to increase, in absolute
dollars, as we continue to hire additional personnel and invest in marketing
programs.
General and administrative. General and administrative expenses primarily
consist of personnel and facility-related costs for our executive, finance,
legal, human resources and administrative personnel; our legal, accounting and
other professional services fees; and other corporate expenses. We anticipate
continuing to incur additional expenses due to growing our operations, including
higher legal, corporate insurance and accounting expenses.
Interest and Other Income (Expense), Net
Interest and other income (expense), net consists primarily of interest expense related to our convertible senior notes, foreign exchange gains and losses, interest income on our investments and cash and cash equivalents balances and changes in the fair value of forward exchange contracts.
Income Tax Provision (Benefit)
The income tax provision (benefit) 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. 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. Because of our history ofU.S. net operating losses, we have established a full valuation allowance against potential future benefits forU.S. deferred 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. 32 -------------------------------------------------------------------------------- Table of Contents Results of Operations
The following table sets 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.
Condensed Consolidated Statements of Operations Data
Three Months Ended April 30,
(In thousands and as % of revenues) 2020 2019
Revenues
License $ 148,385 34.2 % $ 202,862 47.7 %
Cloud services 112,152 25.8 62,055 14.6
Maintenance and services 173,540 40.0 159,933 37.6
Total revenues 434,077 100.0 424,850 100.0
Cost of revenues
License (1) 6,066 4.1 5,682 2.8
Cloud services (1) 53,490 47.7 32,326 52.1
Maintenance and services (1) 69,061 39.8 57,815 36.1
Total cost of revenues 128,617 29.6 95,823 22.6
Gross profit 305,460 70.4 329,027 77.4
Operating expenses
Research and development 192,124 44.3 129,290 30.4
Sales and marketing 319,224 73.5 278,961 65.7
General and administrative 82,724 19.1 65,762 15.5
Total operating expenses 594,072 136.9 474,013 111.6
Operating loss (288,612) (66.5) (144,986) (34.1)
Interest and other income (expense), net
Interest income 6,475 1.5 16,346 3.8
Interest expense (24,437) (5.6) (23,017) (5.4)
Other income (expense), net (674) (0.2) (539) (0.1)
Total interest and other income (expense), net (18,636) (4.3) (7,210) (1.7)
Loss before income taxes (307,248) (70.8) (152,196) (35.8)
Income tax provision (benefit) (1,669) (0.4) 3,233 0.8
Net loss $ (305,579) (70.4) % $ (155,429) (36.6) %
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(1) Calculated as a percentage of the associated revenues.
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Comparison of the Three Months Ended April 30, 2020 and 2019
Revenues
(Dollars in millions)
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Our revenue mix has shifted from sales of perpetual licenses to sales of term
licenses and cloud subscriptions and we expect it will continue to shift in
favor of cloud subscriptions as we transition to a predominantly subscription
model. We expect our transition to a subscription model will impact the timing
of our recognition of revenue as an increasing percentage of our sales become
recognized ratably. The increase in cloud services revenues was primarily driven
by increased sales of our cloud services as a result of our transition to a
predominantly subscription model. Our customers are increasingly purchasing our
Splunk Cloud service as it delivers the benefits of Splunk Enterprise, while
eliminating the need to purchase, deploy and manage infrastructure.
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The increase in maintenance and services revenues was primarily driven by
increased professional services revenues. The decrease in license revenues was
primarily driven by the shift in our revenue mix from sales of term licenses to
cloud subscriptions.
Three Months Ended
Total revenues increased
+ increase of
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Cost of Revenues and Gross Margin
(Dollars in millions)
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Three Months Ended
Total cost of revenues increased
+ increase of$10.9 million in third-party hosting fees to support our cloud services + increase of$4.9 million in salaries and benefits, including stock-based compensation expense as we increased headcount + increase of$4.6 million in intangible asset amortization related to our acquisitions
Maintenance and services cost of revenues increased
+ increase of
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Total gross margin decreased primarily due to a shift in the overall revenue mix in favor of cloud services, which have lower gross margins than our license business.
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Operating Expenses
(Dollars in millions)
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Research and Development Expense
Three Months Ended April 30, 2020 and 2019
Research and development expense increased
+ increase of$55.2 million in salaries and benefits, which includes a$27.3 million increase in stock-based compensation expense as we increased headcount + increase of$4.2 million in overhead expenses, primarily due to facility-related costs + increase of$2.9 million in hosting fees to support our product development efforts 38 -------------------------------------------------------------------------------- Table of Contents Sales and Marketing Expense Three Months EndedApril 30, 2020 and 2019
Sales and marketing expense increased
+ increase of$37.7 million in salaries and benefits, which includes a$6.2 million increase in stock-based compensation expense as we increased headcount to expand our field sales organization + increase of$9.2 million in overhead expenses, primarily due to facility-related costs - decrease of$4.4 million in sales-related event costs, primarily due to the cancellation of our annual sales achievement event as a result of the COVID-19 pandemic and related restrictions General and Administrative Expense Three Months EndedApril 30, 2020 and 2019
General and administrative expense increased
+ increase of
Interest and Other Income (Expense), net
Three Months Ended April 30,
(In thousands) 2020 2019
Interest and other income (expense), net
Interest income $ 6,475 $ 16,346
Interest expense (24,437) (23,017)
Other income (expense), net (674) (539)
Total interest and other income (expense), net $
(18,636)
Three Months Ended
Interest and other income (expense), net reflects a net increase in expense of
Income Tax Provision (Benefit)
Three Months Ended April 30 ,
(In thousands) 2020 2019
Income tax provision (benefit)$ (1,669) $
3,233
Three Months Ended
The decrease in income tax provision (benefit) for the three months endedApril 30, 2020 was primarily due to an increase in net loss before taxes resulting in less base erosion and anti-abuse taxes, the benefit of our operating loss used to offset Other comprehensive income under intraperiod tax allocation rules and current benefits recorded because of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). 39 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources (In thousands) April 30, 2020 January 31, 2020 Cash and cash equivalents$ 922,507 $ 778,653 Investments, current 834,067 976,508 Investments, non-current 17,142 35,370 (In millions) [[Image Removed: splk-20200430_g52.jpg]] [[Image Removed: splk-20200430_g53.jpg]] [[Image Removed: splk-20200430_g54.jpg]] Our principal sources of liquidity are our cash and cash equivalents, investments and net accounts receivable. As ofApril 30, 2020 , we had$1.77 billion of cash, cash equivalents and investments of which$115.9 million was held by foreign subsidiaries. We believe that these funds will be sufficient to meet our anticipated cash needs for at least the next 12 months. We intend to continue to focus our capital expenditures for the remainder of fiscal 2021 to support the growth in our operations, including acquisition-related activities. Beginning in fiscal 2020, we shifted from generally invoicing our multi-year contracts upfront to invoicing on an annual basis. Accordingly, we have seen the timing of our cash collections extend over a longer period of time than it has been historically, and expect this to negatively impact operating cash flows through at least fiscal 2022.
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 investments in our systems infrastructure, the continuing market acceptance of our offerings and our planned investments, particularly in our product development efforts or acquisitions of complementary businesses, applications or technologies.
InSeptember 2018 , we issued$2.13 billion aggregate principal amount of convertible senior notes, which includes$1.27 billion aggregate principal amount of 0.50% Convertible Senior Notes due 2023 and$862.5 million aggregate principal amount of 1.125% Convertible Senior Notes due 2025 (collectively, the "Notes"). In connection with the issuance of the Notes, we entered into privately negotiated capped call transactions with certain counterparties (the "Capped Calls"). The premiums paid for the purchase of the Capped Calls were$274.3 million . Refer to Note 7 of our accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on 10-Q. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, if at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition could be adversely affected. 40 -------------------------------------------------------------------------------- Table of Contents Operating Activities
Operating activities consist of our net loss adjusted for certain non-cash items and changes in operating assets and liabilities during the year.
Three Months Ended
Net cash provided by operating activities was$46.0 million for the three months endedApril 30, 2020 compared to$35.0 million from the prior year. The increase in net cash provided by operating activities was primarily due to the following: + increase in accounts receivable collections + decrease in payments for prepaid expenses The increase in net cash provided by operating activities was partially offset by an increase in payments for accrued expenses and other liabilities, and a reduction in deferred revenue. Investing Activities Three Months EndedApril 30, 2020 and 2019 Net cash provided by investing activities was$147.0 million for the three months endedApril 30, 2020 compared to net cash used in investing activities of$6.3 million from the prior year. The decrease in net cash used by investing activities was primarily related to the following:
+ decrease of
Financing Activities Three Months EndedApril 30, 2020 and 2019 Net cash used in financing activities was$47.8 million for the three months endedApril 30, 2020 compared to$68.6 million from the prior year. The decrease in net cash used in financing activities was primarily due to the following:
+ decrease of
Contractual Obligations and Commitments
There have been no significant changes to our contractual obligations and
commitments discussed in our Annual Report on Form 10-K for the year ended
Off-Balance Sheet Arrangements
During the three months endedApril 30, 2020 and 2019, 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 each of their affiliates for certain intellectual property infringement and other claims by third parties with respect to our offerings, in connection with our commercial license arrangements or related to general business dealings with those parties. As permitted underDelaware law, we have entered into indemnification agreements with our officers, directors and certain employees, indemnifying them for certain events or occurrences while they serve as our officers or directors or those of our direct and indirect subsidiaries. 41 -------------------------------------------------------------------------------- Table of Contents To date, there have not been any costs incurred in connection with such indemnification obligations; therefore, there is no accrual of such amounts as ofApril 30, 2020 . We are unable to estimate the maximum potential impact of these indemnifications on our future results of operations.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with GAAP. The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
Recently Issued Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact
of these pronouncements on our condensed consolidated financial statements,
refer to Note 1 in our accompanying Notes to Condensed Consolidated Financial
Statements included in Part I of this Quarterly Report on Form 10-Q.
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