Splunk(SPLK) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents Splunk Inc.'s unaudited condensed consolidated financial statements for Q2 and H1 FY2024, including balance sheets, statements of operations, comprehensive loss, cash flows, and stockholders' equity, with detailed notes Condensed Consolidated Balance Sheets | (In thousands) | July 31, 2023 | January 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $1,523,462 | $690,587 | | Investments, current | 925,526 | 1,316,347 | | Accounts receivable, net | 974,202 | 1,572,604 | | Total current assets | 3,743,719 | 3,870,684 | | Total assets | $6,076,922 | $6,343,923 | | Liabilities and Stockholders' Equity | | | | Deferred revenue, current | 1,392,465 | 1,657,685 | | Debt, current | 776,456 | 775,656 | | Total current liabilities | 2,703,512 | 3,035,670 | | Total liabilities | 6,115,912 | 6,454,436 | | Total stockholders' equity (deficit) | (38,990) | (110,513) | | Total liabilities and stockholders' equity | $6,076,922 | $6,343,923 | - Total assets decreased from $6.34 billion at January 31, 2023, to $6.08 billion at July 31, 2023. Total liabilities also decreased from $6.45 billion to $6.12 billion over the same period. Stockholders' deficit improved from $(110.5) million to $(39.0) million[10] Condensed Consolidated Statements of Operations | (In thousands, except per share amounts) | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | | | | | | Cloud services | $445,163 | $346,405 | $864,598 | $669,334 | | License | 295,439 | 281,716 | 466,869 | 467,527 | | Maintenance and services | 169,983 | 170,632 | 330,626 | 335,973 | | Total revenues | 910,585 | 798,753 | 1,662,093 | 1,472,834 | | Gross profit | 698,682 | 591,962 | 1,242,955 | 1,063,887 | | Operating loss | (68,521) | (190,098) | (275,077) | (481,785) | | Net loss | $(63,248) | $(209,712) | $(259,668) | $(514,034) | | Basic and diluted net loss per share | $(0.38) | $(1.30) | $(1.57) | $(3.19) | - Total revenues increased by 14.0% for the three months ended July 31, 2023, and by 12.8% for the six months ended July 31, 2023, primarily driven by a significant increase in cloud services revenue. Net loss decreased substantially, improving from $(209.7) million to $(63.2) million for the three-month period and from $(514.0) million to $(259.7) million for the six-month period[11] Condensed Consolidated Statements of Comprehensive Loss | (In thousands) | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(63,248) | $(209,712) | $(259,668) | $(514,034) | | Total other comprehensive income (loss) | 1,751 | (3,827) | 4,647 | (6,541) | | Comprehensive loss | $(61,497) | $(213,539) | $(255,021) | $(520,575) | - The company reported a comprehensive loss of $(61.5) million for the three months ended July 31, 2023, a significant improvement from $(213.5) million in the prior year. For the six-month period, comprehensive loss improved from $(520.6) million to $(255.0) million, primarily due to reduced net loss and positive other comprehensive income from investments[12] Condensed Consolidated Statements of Cash Flows | (In thousands) | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $501,631 | $124,719 | | Net cash provided by (used in) investing activities | 391,552 | (730,641) | | Net cash used in financing activities | (60,308) | (74,886) | | Net increase (decrease) in cash and cash equivalents | 832,875 | (680,808) | | Cash and cash equivalents at end of period | $1,523,462 | $747,883 | - Net cash provided by operating activities significantly increased to $501.6 million for the six months ended July 31, 2023, up from $124.7 million in the prior year. Investing activities shifted from a net use of $730.6 million to a net provision of $391.6 million, largely due to marketable securities maturities outpacing purchases[14] Condensed Consolidated Statements of Stockholders' Equity (Deficit) | (In thousands) | July 31, 2023 | July 31, 2022 | | :--- | :--- | :--- | | Common stock | $174 | $170 | | Additional paid-in capital | 4,993,644 | 4,346,503 | | Treasury stock | (984,689) | (1,000,000) | | Accumulated other comprehensive loss | (1,716) | (7,740) | | Accumulated deficit | (4,046,403) | (4,022,907) | | Total stockholders' equity (deficit) | $(38,990) | $(683,974) | - Total stockholders' deficit improved significantly from $(684.0) million at July 31, 2022, to $(39.0) million at July 31, 2023. This improvement was primarily driven by an increase in additional paid-in capital and a reduction in accumulated deficit[15] Notes to Condensed Consolidated Financial Statements (1) Description of the Business and Significant Accounting Policies Splunk Inc. provides security and observability solutions, operating as a single segment focused on cloud services and licensed software, with no significant accounting policy changes - Splunk Inc. helps customers build a safer and more resilient digital world by delivering innovative solutions for security and observability, empowering Security Operations, IT Operations, and Development Operations teams[17][103] - The company operates as one operating segment, focusing on the development, marketing, and sale of cloud services and licensed software solutions[23] - Revenue recognition policies differentiate between cloud services (ratably over subscription term) and licenses (generally upfront upon delivery of license key)[26][30] (2) Investments and Fair Value Measurements Details Splunk's financial assets measured at fair value, including money market funds and debt securities, with a $3.4 million impairment loss on strategic equity investments Fair Value of Financial Assets (In thousands) | Asset Type | July 31, 2023 (Total) | January 31, 2023 (Total) | | :--- | :--- | :--- | | Money market funds | $781,543 | $316,943 | | U.S. government and agency securities | 360,722 | 1,180,861 | | Corporate bonds | 38,935 | 53,833 | | Commercial paper | 636,733 | 141,359 | | Total | $1,817,933 | $1,692,996 | Equity Investments (In thousands) | Type | July 31, 2023 | January 31, 2023 | | :--- | :--- | :--- | | Equity investments without readily determinable fair values | $37,581 | $37,994 | | Equity investments under the equity method of accounting | 4,006 | 3,706 | | Total | $41,587 | $41,700 | - During the six months ended July 31, 2023, Splunk recorded a $3.4 million impairment loss related to strategic equity investments without readily determinable fair values, impacting 'Other income (expense), net'[43] (3) Commitments and Contingencies Splunk is involved in legal proceedings, including a $30 million class action settlement and pending derivative actions, alongside standard indemnification arrangements - A putative class action lawsuit was settled for $30 million, with Splunk paying $4.6 million and insurers covering $25.4 million. A corresponding liability and receivable were recognized[45] - Seven derivative lawsuits related to the securities class action are pending, alleging breach of fiduciary duties and other claims against former officers and board members, with Splunk as a nominal defendant[46] - Splunk indemnifies officers, directors, and certain employees, and is indemnifying former executive officers in connection with the class action settlement[50][51] (4) Property and Equipment Property and equipment are recorded at cost, with net property and equipment slightly decreasing to $107.5 million at July 31, 2023, primarily located in the United States Property and Equipment, Net (In thousands) | Category | July 31, 2023 | January 31, 2023 | | :--- | :--- | :--- | | Computer equipment and software | $75,792 | $82,248 | | Furniture and fixtures | 25,693 | 27,076 | | Leasehold and building improvements | 111,894 | 144,130 | | Capitalized software development costs | 59,076 | 50,590 | | Property and equipment, gross | 272,455 | 304,044 | | Less: accumulated depreciation and amortization | (164,914) | (195,504) | | Property and equipment, net | $107,541 | $108,540 | Long-Lived Assets by Geographic Region (In thousands) | Region | July 31, 2023 | January 31, 2023 | | :--- | :--- | :--- | | United States | $240,842 | $251,150 | | United Kingdom | 34,433 | 36,667 | | Other International | 10,371 | 7,704 | | Total long-lived assets | $285,646 | $295,521 | (5) Goodwill and Intangible Assets Goodwill remained at $1.42 billion with no impairment, while intangible assets decreased to $91.7 million, with $24.7 million expected amortization for the remainder of fiscal 2024 - Goodwill remained at $1.42 billion as of July 31, 2023, with no impairment recorded during the six months ended July 31, 2023 or 2022[10][54] Intangible Assets Subject to Amortization (In thousands) | Category | July 31, 2023 (Net Carrying Amount) | January 31, 2023 (Net Carrying Amount) | | :--- | :--- | :--- | | Developed technology | $75,336 | $94,212 | | Customer relationships | 16,363 | 25,376 | | Total intangible assets | $91,699 | $119,588 | Expected Future Amortization Expense (In thousands) | Fiscal Period | Expected Amortization Expense | | :--- | :--- | | Remaining fiscal 2024 | $24,737 | | Fiscal 2025 | 36,743 | | Fiscal 2026 | 19,858 | | Fiscal 2027 | 10,361 | | Total | $91,699 | (6) Convertible Senior Notes Splunk has four series of Convertible Senior Notes, with the $776.7 million 2023 Notes classified as current debt and expected to be settled in cash upon September 2023 maturity Net Carrying Amounts of Convertible Senior Notes (In thousands) as of July 31, 2023 | Note Series | Principal Amount | Net Carrying Amount | | :--- | :--- | :--- | | 2023 Notes | $776,661 | $776,456 | | 2025 Notes | 862,500 | 859,666 | | 2026 Notes | 1,000,000 | 989,229 | | 2027 Notes | 1,265,000 | 1,254,035 | | Total | $3,904,161 | $3,879,386 | Total Interest Expense Related to Convertible Senior Notes (In thousands) | Period | 2023 Notes | 2025 Notes | 2026 Notes | 2027 Notes | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Three Months Ended July 31, 2023 | $1,395 | $2,775 | $2,792 | $4,281 | $11,243 | | Six Months Ended July 31, 2023 | $2,743 | $5,455 | $5,487 | $8,416 | $22,101 | - The 2023 Notes, with a principal amount of $776.7 million, are classified as current debt and are intended to be settled in cash upon maturity in September 2023[58][167][312] (7) Stock Compensation Plans and Stockholders' Equity Splunk utilizes various equity incentive plans, granting 438 thousand PSUs and 3,712 thousand RSUs, with total unrecognized compensation cost of $1.13 billion as of July 31, 2023 PSU Activity (In thousands) | | Shares | Weighted-Average Grant-Date Fair Value Per Share | | :--- | :--- | :--- | | Outstanding as of January 31, 2023 | 386 | $193.96 | | PSUs granted | 438 | $124.22 | | PSUs vested | (138) | $140.21 | | Outstanding as of July 31, 2023 | 686 | $160.21 | RSU Activity (In thousands) | | Shares | Weighted-Average Grant-Date Fair Value Per Share | | :--- | :--- | :--- | | Outstanding as of January 31, 2023 | 11,627 | $128.11 | | RSUs granted | 3,712 | $92.72 | | RSUs vested | (3,112) | $134.73 | | RSUs forfeited and canceled | (1,078) | $128.64 | | Outstanding as of July 31, 2023 | 11,149 | $114.44 | Unrecognized Compensation Cost (In thousands) | Award Type | Unrecognized Compensation Cost | Weighted-Average Recognition Period (in years) | | :--- | :--- | :--- | | RSUs | $1,048,459 | 2.1 | | PSUs | 61,557 | 1.7 | | RSAs | 14,516 | 2.1 | | Stock options | 634 | 1.3 | | Total | $1,125,166 | | (8) Revenues, Accounts Receivable, Deferred Revenue and Remaining Performance Obligations Splunk's revenues are disaggregated by cloud services, license, and maintenance, with cloud services showing significant growth and $2.9 billion in RPO as of July 31, 2023 Disaggregated Revenues (In thousands) | Revenue Type | Three Months Ended July 31, 2023 | Six Months Ended July 31, 2023 | | :--- | :--- | :--- | | Cloud services | $445,163 | $864,598 | | License | 295,439 | 466,869 | | Maintenance and services | 169,983 | 330,626 | | Total revenues | $910,585 | $1,662,093 | Revenues by Geographic Region (In thousands) | Region | Three Months Ended July 31, 2023 | Six Months Ended July 31, 2023 | | :--- | :--- | :--- | | United States | $590,198 | $1,078,512 | | International | 320,387 | 583,581 | | Total revenues | $910,585 | $1,662,093 | - Remaining performance obligations (RPO) were $2.9 billion as of July 31, 2023, with approximately 66% expected to be recognized as revenue over the next 12 months[88] (9) Income Taxes Splunk recorded income tax expense of $6.7 million (three months) and $11.3 million (six months), with the effective tax rate differing due to a valuation allowance on U.S. losses Income Tax Provision (In thousands) | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three Months Ended July 31, | $6,730 | $7,943 | | Six Months Ended July 31, | $11,280 | $11,297 | - The effective tax rate differs from the U.S. statutory rate primarily due to the valuation allowance recorded on U.S. losses[89][152][160] (10) Net Loss Per Share Basic and diluted net loss per share improved to $(0.38) (three months) and $(1.57) (six months), with potentially dilutive securities excluded due to net loss Net Loss Per Share (In thousands, except per share amounts) | Period | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(63,248) | $(209,712) | $(259,668) | $(514,034) | | Weighted-average shares used to compute net loss per share, basic and diluted | 166,459 | 161,787 | 165,737 | 161,070 | | Net loss per share, basic and diluted | $(0.38) | $(1.30) | $(1.57) | $(3.19) | - Basic and diluted net loss per share are the same for all periods presented because the company was in a net loss position, making the inclusion of potentially dilutive securities anti-dilutive[93] (11) Restructuring Splunk announced a Q1 fiscal 2024 restructuring plan, reducing its workforce by 4%, incurring $27.7 million in charges, with a $6.2 million remaining liability - Splunk announced a restructuring plan in the fiscal quarter ended April 30, 2023, resulting in a reduction of its global workforce, expected to be completed by the end of fiscal 2024[94][206] Restructuring Charges and Liability (In thousands) for Six Months Ended July 31, 2023 | Item | Amount | | :--- | :--- | | Total Charges | $27,697 | | Payments | (18,931) | | Non-cash items | (2,557) | | Liability as of July 31, 2023 | $6,209 | Restructuring Charges by Operating Expense Category (In thousands) for Six Months Ended July 31, 2023 | Category | Amount | | :--- | :--- | | Cost of revenues | $1,238 | | Research and development | 14,853 | | Sales and marketing | 3,164 | | General and administrative | 8,442 | | Total | $27,697 | (12) Subsequent Event In August 2023, Splunk agreed to sublease office space, anticipating a $22 million impairment charge in Q3 fiscal 2024 related to lease-related assets - In August 2023, Splunk agreed to sublease office space in Plano, TX, anticipating an impairment charge of approximately $22 million in the three months ended October 31, 2023, affecting lease-related assets[97] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on Splunk's financial condition and operational performance, focusing on the cloud shift, key metrics, financial results comparison, liquidity, and critical accounting estimates Overview Splunk provides security and observability solutions, with a cloud services focus impacting revenue and margins, while macroeconomic uncertainties slow customer expansion and increase deal scrutiny - Splunk's core business is providing security and observability solutions, enabling organizations to harness data for secure, available, and performant digital systems[103] - The company is transitioning to a cloud services delivery model, which impacts revenue recognition (ratably for cloud, upfront for licenses) and operating margins[104][106] - Macroeconomic uncertainties, including rising interest rates and financial market fluctuations, have led to changes in customer buying patterns, such as slower expansions and migrations to cloud services, and enhanced deal scrutiny, expected to continue through fiscal year-end[109][110] Key Operating Metrics Splunk monitors business growth and cloud adoption using Cloud ARR, Total ARR, customers with ARR over $1 million, Free Cash Flow, Cloud DBNRR, and RPO Bookings Annual Recurring Revenue Annual Recurring Revenue (In millions) | Metric | July 31, 2023 | January 31, 2023 | | :--- | :--- | :--- | | Cloud ARR | $1,800 | $1,649 | | Total ARR | $3,900 | $3,650 | - Cloud ARR increased to $1.8 billion at July 31, 2023, from $1.65 billion at January 31, 2023, reflecting continued customer adoption of cloud services. Total ARR also grew to $3.9 billion from $3.65 billion[113] Number of Customers with ARR Greater than $1 Million Customers with ARR Greater than $1 Million | Metric | July 31, 2023 | January 31, 2023 | | :--- | :--- | :--- | | Cloud ARR > $1M | 860 | 800 | | Total ARR > $1M | 840 | 820 | - The number of customers with Cloud ARR greater than $1 million increased to 860 at July 31, 2023, from 800 at January 31, 2023, indicating growth in the high-value cloud customer base[114] Free Cash Flow Free Cash Flow (In thousands) | Metric | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $501,631 | $124,719 | | Less purchases of property and equipment | (5,873) | (6,650) | | Less capitalized software development costs | (5,152) | (4,990) | | Free cash flow | $490,606 | $113,079 | - Free cash flow significantly increased to $490.6 million for the six months ended July 31, 2023, compared to $113.1 million in the prior year, driven by improved operating cash flows[116] Dollar-Based Net Retention Rate Trailing 12-Month Cloud Dollar-Based Net Retention Rate | Period | Rate | | :--- | :--- | | July 31, 2023 | 126% | | January 31, 2023 | 129% | - The trailing 12-month Cloud Dollar-Based Net Retention Rate was 126% as of July 31, 2023, indicating strong expansion from existing cloud customers, though slightly down from 129% at January 31, 2023[117] Remaining Performance Obligations ("RPO") Bookings Total RPO Bookings (In thousands) | Metric | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :--- | :--- | :--- | | Total revenues | $1,662,093 | $1,472,834 | | Change in total RPO | (176,384) | (187,395) | | Total RPO Bookings | $1,485,709 | $1,285,439 | - Total RPO Bookings increased to $1.49 billion for the six months ended July 31, 2023, up from $1.29 billion in the prior year, indicating positive bookings momentum[120] Financial Summary Splunk serves over 90 Fortune 100 companies, experiences seasonality with higher second-half license revenues, and operating expenses remain relatively stable, causing quarterly percentage variations - Splunk's customer base includes over 90 of the Fortune 100 companies, spanning numerous industries[122] - The company's results reflect seasonality, with increased license revenues, bookings, and billings historically observed in the second half of the fiscal year[123][125] - Operating expenses, mainly personnel costs, do not fluctuate significantly on a seasonal basis, leading to seasonal impacts on expense percentages relative to total revenue[124] Components of Operating Results Outlines Splunk's revenue and cost components, and operating expenses, with a goal for revenue growth to outpace expenses and a projected decline in operating expenses as a percentage of revenue due to cost controls - Revenues are categorized into cloud services (recognized ratably), license (generally upfront), and maintenance and services (ratably over term)[126] - Cost of revenues includes third-party hosting fees, personnel costs, and amortization of acquired intangibles, with cloud services costs expected to change with customer adoption[127][128][129] - Operating expenses (R&D, Sales & Marketing, G&A) are primarily personnel-related and are expected to decrease as a percentage of revenue due to cost control measures, including workforce reductions and increased hiring in lower-cost markets[130][131][132][133][134][135] Results of Operations Splunk's results show significant improvements in net loss and cloud services revenue growth, with improved gross profit margins and reduced operating expenses as a percentage of revenue Comparison of the Three Months Ended July 31, 2023 and 2022 Total revenues increased by 14.0% to $910.6 million, driven by 28.5% cloud services growth, with net loss improving to $(63.2) million and gross margin reaching 76.7% Revenues (In millions) | Revenue Type | 3 Months Ended July 31, 2023 | 3 Months Ended July 31, 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Cloud services | $445.2 | $346.4 | $98.8 | 28.5% | | License | 295.4 | 281.7 | 13.7 | 4.9% | | Maintenance and services | 170.0 | 170.6 | (0.6) | (0.4)% | | Total revenues | $910.6 | $798.8 | $111.8 | 14.0% | Cost of Revenues and Gross Margin (In millions) | Metric | 3 Months Ended July 31, 2023 | 3 Months Ended July 31, 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total cost of revenues | $211.9 | $206.8 | $5.1 | 2.5% | | Gross profit | $698.7 | $592.0 | $106.7 | 18.0% | | Gross margin | 76.7% | 74.1% | 2.6 pp | | - Research and development expense decreased by $18.0 million (7.0%), primarily due to lower third-party fees and a reduction in salaries and benefits from restructuring[147] - Interest and other income (expense), net, increased by $23.7 million, shifting from a net expense to a net income, driven by higher interest income from investments[150] Comparison of the Six Months Ended July 31, 2023 and 2022 Total revenues increased by 12.8% to $1.66 billion, driven by 29.2% cloud services growth, with net loss improving to $(259.7) million and gross margin reaching 74.8% Revenues (In millions) | Revenue Type | 6 Months Ended July 31, 2023 | 6 Months Ended July 31, 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $1,662.1 | $1,472.8 | $189.3 | 12.8% | | Cloud services | $864.6 | $669.3 | $195.3 | 29.2% | | License | 466.9 | 467.5 | (0.6) | (0.1)% | | Maintenance and services | 330.6 | 336.0 | (5.4) | (1.6)% | Cost of Revenues and Gross Margin (In millions) | Metric | 6 Months Ended July 31, 2023 | 6 Months Ended July 31, 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total cost of revenues | $419.1 | $408.9 | $10.2 | 2.5% | | Gross profit | $1,243.0 | $1,063.9 | $179.1 | 16.8% | | Gross margin | 74.8% | 72.2% | 2.6 pp | | - Research and development expense decreased by $36.7 million (7.2%), primarily due to reduced third-party fees and lower salaries/benefits from restructuring, partially offset by severance costs[156] - Interest and other income (expense), net, increased by $47.6 million, shifting from a net expense to a net income, driven by higher interest income from investments[158] Liquidity and Capital Resources Splunk maintains strong liquidity with $2.4 billion in cash and investments, sufficient for the next 12 months, including $776.7 million debt repayment, driven by $501.6 million operating cash flow Cash and Investments (In thousands) | Category | July 31, 2023 | January 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,523,462 | $690,587 | | Investments, current | 925,526 | 1,316,347 | | Total | $2,448,988 | $2,006,934 | - Net cash provided by operating activities was $501.6 million for the six months ended July 31, 2023, a substantial increase from $124.7 million in the prior year, primarily due to improved operating results[170] - Net cash provided by investing activities was $391.6 million for the six months ended July 31, 2023, a significant shift from a net use of $730.6 million in the prior year, mainly due to maturities of marketable securities[171][172] - Splunk intends to settle the principal amount of the 2023 Notes ($776.7 million) with cash upon maturity in September 2023[167] Contractual Obligations Splunk's principal commitments include operating leases and long-term purchase agreements, totaling $1.6 billion, with $0.3 billion due in the next 12 months - Principal commitments include operating leases for office space and long-term purchase agreements, including hosting services[175] - As of July 31, 2023, other contractual commitments associated with long-term purchase agreements totaled $1.6 billion, with $0.3 billion due in the next 12 months and $1.3 billion due thereafter[175] Off-Balance Sheet Arrangements Splunk had no off-balance sheet arrangements with unconsolidated organizations or financial partnerships during the six months ended July 31, 2023 and 2022 - Splunk did not engage in any off-balance sheet arrangements with unconsolidated organizations or financial partnerships during the six months ended July 31, 2023 and 2022[176] Indemnification Arrangements Splunk indemnifies customers, vendors, officers, and directors for IP infringement and other claims, including former executive officers in connection with a recent settlement - Splunk indemnifies customers, vendors, officers, directors, and certain employees for intellectual property infringement and other claims[177][178] - Former executive officers are being indemnified in connection with the January 30, 2023, stipulation of settlement[179] Critical Accounting Estimates Splunk's financial statements rely on GAAP estimates and assumptions, with no significant changes to critical accounting estimates since the FY2023 Annual Report on Form 10-K - The preparation of financial statements requires management to make estimates, judgments, and assumptions that affect reported amounts[180] - There have been no significant changes to critical accounting estimates since the Annual Report on Form 10-K for the fiscal year ended January 31, 2023[181] Item 3. Quantitative and Qualitative Disclosures about Market Risk No material changes to Splunk's market risk exposures were identified compared to the FY2023 Annual Report on Form 10-K - No material changes to market risk exposures were identified compared to the Annual Report on Form 10-K for the fiscal year ended January 31, 2023[183] Item 4. Controls and Procedures Splunk's disclosure controls and procedures were deemed effective as of July 31, 2023, with no material changes to internal control over financial reporting, acknowledging inherent limitations - As of July 31, 2023, Splunk's disclosure controls and procedures were evaluated and deemed effective at the reasonable assurance level by management, including the CEO and CFO[184] - No changes in internal control over financial reporting occurred during the period that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[185] - Management acknowledges that control systems provide only reasonable, not absolute, assurance and have inherent limitations, such as potential for errors, circumvention, or management override[186] PART II. OTHER INFORMATION Item 1. Legal Proceedings Incorporates legal proceedings details by reference from Note 3, "Commitments and Contingencies—Legal Proceedings," in the financial statements - Information on legal proceedings is incorporated by reference from Note 3, "Commitments and Contingencies—Legal Proceedings," in the financial statements[188] Item 1A. Risk Factors Splunk faces numerous risks from its evolving cloud business model, economic uncertainties, competition, customer adoption challenges, IT security threats, IP protection, third-party reliance, capital resources, and tax liabilities Risk Factor Summary Splunk's business is subject to risks across operations (cloud model, profitability), economic conditions, customer dynamics, IT security, intellectual property, third-party reliance, capital, and general factors - Key business risks include the success of the cloud services model, fluctuations in operating results, and the effectiveness of restructuring actions[189][192] - Economic and market risks involve intense competition, market acceptance of new offerings, and governmental export/import controls[190][192] - IT, privacy, and data security risks include potential security breaches, service interruptions, and compliance with evolving data protection laws[191][192] Factors Related to Our Business and Results of Operations Splunk's cloud transition creates revenue volatility, future profitability is uncertain due to losses and investments, and managing growth, acquisitions, and personnel retention are critical challenges - The shift to a cloud services delivery model impacts revenue recognition and operating margins, making future revenue and margin prediction difficult[196][198] - Splunk has a history of net losses, with an accumulated deficit of $4.05 billion at July 31, 2023, and future profitability is uncertain due to increasing operating expenses and potential slowdowns in revenue growth[210] - The restructuring plan, involving a workforce reduction, may cause additional costs, employee attrition, decreased morale, and diversion of management attention, potentially hindering the achievement of intended benefits[206][209] - The company's success depends on attracting and retaining leadership and key personnel, especially in sales and R&D, amidst intense competition and potential employee turnover[214][215][216] Factors Related to the Economy and the Markets in which We Operate Splunk is vulnerable to global economic uncertainties, intense competition, and export controls, which can reduce corporate spending, lengthen sales cycles, and impact international operations - Worldwide economic uncertainties and negative trends, such as inflation and rising interest rates, can adversely affect corporate spending on enterprise software, delaying purchases and impacting Splunk's growth[223][224] - Splunk faces intense competition from large cloud service providers, legacy IT vendors, and open-source projects, with competitive factors including features, performance, scalability, and cost of ownership[227][228] - Governmental export and import controls, including U.S. economic sanctions, could impair Splunk's ability to compete internationally and subject it to liability for violations, as evidenced by a recent voluntary disclosure regarding encryption source code access[234][235][239] Factors Related to Customers and Sales Splunk's growth depends on customer expansion and renewals, challenged by evolving pricing models and long sales cycles, with international sales (35% of revenue) facing additional risks from foreign laws and currency fluctuations - Business growth depends on customers expanding use cases and renewing/upgrading agreements, which are influenced by customer satisfaction, pricing, and macroeconomic conditions[241][243] - Splunk employs multiple and evolving pricing models (e.g., data volume, compute power, seats), which can lead to pricing challenges, customer usage limitations, and competitive disadvantages[244] - The sales cycle is long and unpredictable, particularly for large customers, leading to potential fluctuations in operating results and difficulties in accurate revenue forecasting[247] - International sales, comprising 35% of total revenues, face risks such as managing remote operations, compliance with diverse foreign laws, currency exchange rate fluctuations, and reduced intellectual property protection[248][249] Factors Related to IT, Privacy and Data Security Splunk faces significant risks from security breaches, infrastructure performance issues, evolving data privacy regulations, and new challenges related to intellectual property and ethical concerns from AI technologies - Security breaches or incidents, including supply chain attacks, could lead to unauthorized access to data, reputational harm, reduced demand for offerings, and significant liabilities[262][265][267] - Interruptions or performance problems with Splunk's technology and infrastructure, or reliance on third-party SaaS technologies, can adversely affect business operations and financial results[270][271] - Splunk is subject to evolving global data privacy and security laws (e.g., GDPR, CCPA, CPRA), requiring substantial compliance costs and potentially impacting its ability to acquire customers and offer services[274][275][279] - The development and use of AI technologies, including generative AI, present risks such as uncertain intellectual property rights, potential for flawed or biased content, and increased regulatory scrutiny, which could result in reputational harm or legal liability[282][283][284] Factors Related to Intellectual Property and Other Proprietary Rights Splunk's success relies on protecting its intellectual property, but faces risks from ineffective protection, costly third-party infringement claims, and obligations related to open-source software use - Failure to protect intellectual property rights (patents, copyrights, trade secrets) could adversely affect Splunk's business and brand, especially with remote work increasing misappropriation risks[285] - Splunk is subject to costly intellectual property rights claims by third parties, which could lead to significant damages, limit technology use, or require expensive licensing or re-engineering[290][291] - The use of open-source software in offerings carries risks, including potential litigation, unanticipated license restrictions, and requirements to release proprietary source code[295] Factors Related to Reliance on Third Parties Splunk heavily relies on third-party cloud providers and partners, facing risks from service disruptions, changes in partner performance, and issues with community-driven apps impacting reputation and revenue - Splunk's cloud services are exclusively hosted by third-party Cloud Service Providers (CSPs), and any disruptions or failures in their services could adversely affect Splunk's ability to meet customer commitments and damage its reputation[297] - Reliance on partners (distributors, resellers) for a substantial portion of sales, particularly in EMEA, APAC, and government sectors, means their performance and loyalty are critical to revenue growth[299][300] - The community website (Splunkbase) and third-party developer network pose risks related to app quality, security vulnerabilities, lack of support, and potential damage to Splunk's brand if apps do not perform to customer satisfaction[304][305] Factors Related to Our Capital Resources and Tax Servicing Splunk's substantial debt, including $3.9 billion in convertible senior notes, requires significant cash flow, with risks from conditional conversion features, NOL limitations, and potential additional tax liabilities - Servicing substantial debt, including $3.9 billion in convertible senior notes, requires significant cash flow, and the company intends to settle the $776.7 million 2023 Notes in cash upon maturity[307][58] - The conditional conversion feature of certain notes, if triggered, could require cash settlement, adversely affecting liquidity and potentially reclassifying debt as a current liability[312] - Splunk's ability to use net operating losses (NOLs) and tax credits to offset future taxable income is subject to limitations, such as Section 382 of the Code and changes in tax laws like the Tax Cuts and Jobs Act of 2017[316] - The company faces risks of additional tax liabilities from federal, state, and foreign jurisdictions due to differing interpretations of tax laws and potential changes in regulations, which could adversely impact financial results[317][318] General Factors Splunk's business is vulnerable to natural disasters, climate change, and other uncontrollable events, with changes in accounting and ESG standards impacting results, and anti-takeover provisions limiting stockholder influence - Natural disasters, climate change, pandemics, and geopolitical instability can interrupt business operations, decrease demand, and lead to substantial expenses[324][325] - Changes in accounting pronouncements (U.S. GAAP) and evolving ESG reporting standards may negatively impact financial results and reputation due to compliance costs and potential inaccuracies in disclosures[326][328] - Being a public company strains resources, increases legal and financial compliance costs, and diverts management's attention, potentially affecting operational efficiency and stock price[329][331] - Anti-takeover provisions in charter documents and Delaware law could delay or prevent a change of control, limiting stockholders' ability to influence management or realize a premium for their shares[332][335] Item 5. Other Information No director or executive officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the last fiscal quarter - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the last fiscal quarter[336] Item 6. Exhibits Lists exhibits filed or incorporated by reference, including the Amended and Restated 2022 Equity Incentive Plan and officer certifications - Exhibits include the Splunk Inc. Amended and Restated 2022 Equity Incentive Plan, certifications required under the Securities Exchange Act of 1934, and Inline XBRL documents[340] Signatures The report was duly signed on behalf of Splunk Inc. by Brian Roberts, Senior Vice President and Chief Financial Officer, on August 24, 2023 - The report was signed by Brian Roberts, Senior Vice President and Chief Financial Officer, on August 24, 2023[342]