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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

 
☒      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2023
 
OR
 
☐         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM              TO
 
COMMISSION FILE NUMBER 001-35498
 ____________________________________________________

splunklogoa08.jpg
Splunk Inc.
(Exact name of registrant as specified in its charter)
_____________________________________________________
Delaware 86-1106510
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

270 Brannan Street
San Francisco, California 94107
(Address of principal executive offices)
(Zip Code)
 
(415) 848-8400
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareSPLKThe Nasdaq Stock Market LLC

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
 
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were 167.7 million shares of the Registrant’s Common Stock issued and outstanding as of August 15, 2023.


Table of Contents

TABLE OF CONTENTS
 
  Page No.
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 5.
Item 6.
 

1
Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Splunk Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)July 31, 2023January 31, 2023
Assets  
Current assets  
Cash and cash equivalents$1,523,462 $690,587 
Investments, current925,526 1,316,347 
Accounts receivable, net974,202 1,572,604 
Prepaid expenses and other current assets202,987 174,388 
Deferred commissions, current117,542 116,758 
Total current assets3,743,719 3,870,684 
Investments, non-current41,587 41,700 
Accounts receivable, non-current212,049 314,286 
Operating lease right-of-use assets178,105 186,981 
Property and equipment, net107,541 108,540 
Intangible assets, net91,699 119,588 
Goodwill1,416,920 1,416,920 
Deferred commissions, non-current246,216 242,731 
Other assets39,086 42,493 
Total assets$6,076,922 $6,343,923 
Liabilities and Stockholders’ Equity  
Current liabilities 
Accounts payable$26,214 $15,299 
Accrued compensation300,956 357,550 
Accrued expenses and other liabilities207,421 229,480 
Deferred revenue, current1,392,465 1,657,685 
Debt, current776,456 775,656 
Total current liabilities2,703,512 3,035,670 
Debt, non-current3,102,930 3,099,289 
Operating lease liabilities191,917 202,268 
Deferred revenue, non-current88,688 91,102 
Other liabilities, non-current28,865 26,107 
Total non-current liabilities3,412,400 3,418,766 
Total liabilities6,115,912 6,454,436 
Commitments and contingencies (Note 3)
Stockholders’ equity  
Common stock: $0.001 par value; 1,000,000,000 shares authorized; 167,650,586 shares outstanding at July 31, 2023, and 164,833,781 shares outstanding at January 31, 2023
174 171 
Accumulated other comprehensive loss(1,716)(6,363)
Additional paid-in capital4,993,644 4,671,776 
Treasury stock, at cost: 6,771,997 shares at July 31, 2023 and 6,806,618 shares at January 31, 2023
(984,689)(989,362)
Accumulated deficit(4,046,403)(3,786,735)
Total stockholders’ equity (deficit)(38,990)(110,513)
Total liabilities and stockholders’ equity$6,076,922 $6,343,923 

The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Table of Contents

Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 Three Months Ended July 31,Six Months Ended July 31,
(In thousands, except per share amounts)2023202220232022
Revenues
Cloud services$445,163 $346,405 $864,598 $669,334 
License295,439 281,716 466,869 467,527 
Maintenance and services169,983 170,632 330,626 335,973 
Total revenues910,585 798,753 1,662,093 1,472,834 
Cost of revenues (1)
Cloud services134,587 122,860 264,294 242,381 
License1,963 1,337 3,345 2,800 
Maintenance and services 75,353 82,594 151,499 163,766 
Total cost of revenues211,903 206,791 419,138 408,947 
Gross profit698,682 591,962 1,242,955 1,063,887 
Operating expenses (1)
Research and development239,099 257,057 476,051 512,748 
Sales and marketing 421,635 410,622 828,140 805,835 
General and administrative106,469 114,381 213,841 227,089 
Total operating expenses767,203 782,060 1,518,032 1,545,672 
Operating loss(68,521)(190,098)(275,077)(481,785)
Interest and other income (expense), net
Interest income28,686 4,847 52,624 6,219 
Interest expense(11,243)(12,905)(22,101)(23,568)
Other income (expense), net(5,440)(3,613)(3,834)(3,603)
Total interest and other income (expense), net12,003 (11,671)26,689 (20,952)
Loss before income taxes(56,518)(201,769)(248,388)(502,737)
Income tax provision6,730 7,943 11,280 11,297 
Net loss$(63,248)$(209,712)$(259,668)$(514,034)
Basic and diluted net loss per share$(0.38)$(1.30)$(1.57)$(3.19)
Weighted-average shares used in computing basic and diluted net loss per share166,459 161,787 165,737 161,070 
 _________________________
(1)    Amounts include stock-based compensation expense, as follows:
Cost of revenues$21,789 $22,937 $43,006 $42,799 
Research and development84,900 86,521 161,216 171,384 
Sales and marketing62,157 58,059 120,741 130,873 
General and administrative30,200 31,959 58,554 68,085 


The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Table of Contents

Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
 Three Months Ended July 31,Six Months Ended July 31,
(In thousands)2023202220232022
Net loss$(63,248)$(209,712)$(259,668)$(514,034)
Other comprehensive income (loss)
Net unrealized gain (loss) on investments (net of tax)1,751 (3,827)4,647 (6,541)
Total other comprehensive income (loss)1,751 (3,827)4,647 (6,541)
Comprehensive loss$(61,497)$(213,539)$(255,021)$(520,575)

 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents

Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 Six Months Ended July 31,
(In thousands)20232022
Cash flows from operating activities  
Net loss$(259,668)$(514,034)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization46,945 47,952 
Amortization of deferred commissions66,143 53,574 
Amortization of investment premiums (accretion of discounts), net(10,404)(482)
Loss on strategic equity investments, net3,414 97 
Amortization of debt issuance costs4,441 5,484 
Non-cash operating lease costs(751)(2,805)
Stock-based compensation383,517 413,141 
Deferred income taxes(509)(1,020)
Loss on disposal of assets10 — 
Changes in operating assets and liabilities:
Accounts receivable, net700,777 553,106 
Prepaid expenses and other assets (24,646)17,078 
Deferred commissions(70,412)(62,754)
Accounts payable 10,915 23,629 
Accrued compensation(56,594)(138,298)
Accrued expenses and other liabilities(23,913)(17,142)
Deferred revenue (267,634)(252,807)
Net cash provided by operating activities 501,631 124,719 
Cash flows from investing activities
Purchases of property and equipment(5,873)(6,650)
Capitalized software development costs(5,152)(4,990)
Purchases of marketable securities(877,018)(923,762)
Maturities of marketable securities1,282,895 209,424 
Purchases of strategic investments(3,300)(6,099)
Other investment activities— 1,436 
Net cash provided by (used in) investing activities 391,552 (730,641)
Cash flows from financing activities
Proceeds from the exercise of stock options230 1,132 
Proceeds from employee stock purchase plan51,201 48,596 
Taxes paid related to net share settlement of equity awards(111,739)(124,614)
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 beginning of period 690,587 1,428,691 
Cash and cash equivalents at end of period $1,523,462 $747,883 
Supplemental disclosures
Cash paid for income taxes$4,521 $6,751 
Cash paid for interest10,866 17,659 
Non-cash investing and financing activities
Increase in accrued purchases of property and equipment3,708 2,994 
Vesting of early exercised options— 1 

The accompanying notes are an integral part of these condensed consolidated financial statements.
4
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Splunk Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
 
Three Months Ended July 31,Six Months Ended July 31,
(In thousands)2023202220232022
Common stock
Balance, beginning of period$172 $168 $171 $167 
Vesting of restricted and performance stock units1 1 2 2 
Issuance of common stock upon ESPP purchase1 1 1 1 
Balance, end of period$174 $170 $174 $170 
Additional paid-in capital
Balance, beginning of period$4,818,486 $4,155,066 $4,671,776 $5,032,351 
Cumulative-effect adjustment from adoption of new accounting standards— — — (1,026,611)
Stock-based compensation199,046 199,476 383,517 413,141 
Capitalized software development costs1,602 1,405 3,335 2,510 
Issuance of common stock upon exercise of options143 182 230 1,132 
Vesting of restricted stock units(3,343)— (4,673)— 
Vesting of early exercised options— — — 1 
Taxes paid related to net share settlement of equity awards(73,490)(58,221)(111,741)(124,616)
Issuance of common stock upon ESPP purchase51,200 48,595 51,200 48,595 
Balance, end of period$4,993,644 $4,346,503 $4,993,644 $4,346,503 
Treasury stock
Balance, beginning of period$(988,032)$(1,000,000)$(989,362)$(1,000,000)
Vesting of restricted stock units3,343 — 4,673 — 
Balance, end of period$(984,689)$(1,000,000)$(984,689)$(1,000,000)
Accumulated other comprehensive loss
Balance, beginning of period$(3,467)$(3,913)$(6,363)$(1,199)
Unrealized gain (loss) from investments (net of tax)1,751 (3,827)4,647 (6,541)
Balance, end of period$(1,716)$(7,740)$(1,716)$(7,740)
Accumulated deficit
Balance, beginning of period$(3,983,155)$(3,813,195)$(3,786,735)$(3,808,548)
Cumulative-effect adjustment from adoption of new accounting standards— — — 299,675 
Net loss(63,248)(209,712)(259,668)(514,034)
Balance, end of period$(4,046,403)$(4,022,907)$(4,046,403)$(4,022,907)
Total stockholders’ equity (deficit)$(38,990)$(683,974)$(38,990)$(683,974)


The accompanying notes are an integral part of these condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
(1)    Description of the Business and Significant Accounting Policies

Business

Splunk Inc. (“we,” “us,” “our”) helps customers build a safer and more resilient digital world. We deliver innovative solutions that enable organizations to harness the value of their data to help keep their digital systems secure, available, and performant. Our solutions for security and observability empower Security Operations, IT Operations, and Development Operations teams to maintain resilient systems by monitoring and securing them more quickly and efficiently. We also believe our offerings empower operational transformation, helping customers move from reactive, non-scalable and ineffective approaches to proactive, automated, and machine learning-assisted processes that drive better outcomes even as the scale and complexity of their technology continue to grow.

Fiscal Year

Our fiscal year ends on January 31. References to fiscal 2024, for example, refer to the fiscal year ending January 31, 2024.
 
Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K for the fiscal year ended January 31, 2023, filed with the SEC on March 23, 2023.
 
In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all normal recurring adjustments necessary to state fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods but are not necessarily indicative of the results of operations to be anticipated for the full fiscal 2024.

Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, the reported amounts of revenues and expenses and the accompanying notes. For example, we make estimates with respect to the stand-alone selling price for each performance obligation included in customer contracts with multiple performance obligations, uncollectible accounts receivable, the assessment of the useful life and recoverability of long-lived assets (property and equipment, goodwill and identified intangibles), the period of benefit for deferred commissions, stock-based compensation expense, the fair value of assets acquired and liabilities assumed in business combinations, income taxes, the discount rate used for operating leases and contingencies. Our actual results could differ from those estimates.

There have been no significant changes to our significant accounting policies and estimates described in our Annual Report on Form 10-K for the year ended January 31, 2023, filed with the SEC on March 23, 2023.

Segments

We operate our business as one operating segment: the development, marketing, and sale of cloud services and licensed software solutions that enable our customers to gain real-time business insights by harnessing the value of their data. Our chief operating decision maker is our Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources.

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

Foreign Currency

The functional currency of our foreign subsidiaries is the U.S. Dollar. Foreign currency transaction gains and losses are included in “Other income (expense), net” on our condensed consolidated statements of operations and were not material during the three and six months ended July 31, 2023 and 2022.

Revenue Recognition

Our revenue consists of cloud service fees, license and related maintenance fees, and other service fees. Revenue is recognized when control of the promised subscriptions, products and services are transferred to customers, in an amount that reflects the consideration we expect to receive in exchange for those services and products.

Cloud services are provided on a subscription basis and give our customers access to our cloud solutions and any related customer support. Licenses for on-premises software (“licenses”) are typically term licenses and provide the customer with a right to use the software. When a term license is purchased, maintenance is bundled with the license for the term of the license period. Other services include training and professional services that are not integral to the functionality of the cloud services or licenses.

Our contracts with customers often contain multiple performance obligations, which may include a combination of cloud services, licenses, related maintenance and support services, professional services and training.

The identification of performance obligations and the determination of whether they are distinct and should be accounted for separately may require significant judgment. For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation using the relative stand-alone selling price (“SSP”), and revenue is recognized when the performance obligations are satisfied. We determine the SSP based on an observable standalone selling price when it is available as well as other factors, including the price charged to customers, our discounting practices, and our overall pricing objectives. In situations where pricing is highly variable, we estimate the SSP using the residual approach.

For sales of our cloud services, we recognize revenue ratably over customers’ contract terms, beginning when access is provided to the customer, consistent with the pattern of transfer of benefits for those services. We recognize license revenue upon transfer of control of the licenses, which occurs at delivery of the license key to customers, or when the license term commences, if later. We recognize maintenance and support revenue ratably over the maintenance and support term, consistent with the pattern of benefit to the customer for those services. Professional services and training are either provided on a time and materials basis or over a contract term, and we recognize the associated revenue as those services are delivered. When our contracts include customer acceptance provisions, we recognize revenue no earlier than upon customer acceptance. Our policy is to record revenues net of any applicable sales, use, goods and services, value added, and excise taxes.

Our multi-year cloud services and license contracts are typically invoiced annually. A current receivable for multi-year cloud services is generally recorded upon invoicing. A receivable for multi-year license contracts is recorded upon delivery, whether or not invoiced, to the extent we have an unconditional right to receive payment in the future related to those licenses. The non-current portion of these receivables, primarily consisting of unbilled receivables from multi-year license contracts, is included in “Accounts receivable, non-current” on our interim condensed consolidated balance sheets.

Our standard payment terms generally require payment within 45 days. Actual payment terms and conditions vary. In instances where the timing of revenue recognition differs from the timing of payment, we have determined our contracts do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing.

Deferred revenue is recorded when cash payments are received or due in advance of satisfying our performance obligations to customers. It is comprised of balances related to cloud services, maintenance, training and professional services, as well as licenses that were delivered prior to the license term commencing.

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Recently Adopted Accounting Standards

We did not adopt any new accounting standards during the six months ended July 31, 2023.

Recently Issued Accounting Pronouncements

There have been no accounting pronouncements or changes in accounting pronouncements that are significant or potentially significant to the Company.

(2)    Investments and Fair Value Measurements
 
The carrying amounts of certain of our financial instruments including cash equivalents, accounts receivable, accounts payable and accrued liabilities are representative of fair value due to their short-term maturities.
 
Assets and liabilities recorded at fair value in the condensed consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels that are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:
 
Level 1—Observable inputs, such as quoted prices in active markets for identical assets or liabilities.
 
Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

The following table sets forth the fair value of our financial assets that were measured on a recurring basis:
 
 July 31, 2023January 31, 2023
(In thousands)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Assets:        
Money market funds$781,543 $— $— $781,543 $316,943 $— $— $316,943 
U.S. government and agency securities— 360,722 — 360,722 — 1,180,861 — 1,180,861 
Corporate bonds— 38,935 — 38,935 — 53,833 — 53,833 
Commercial paper— 636,733 — 636,733 — 141,359 — 141,359 
Reported as:        
Assets:        
Cash and cash equivalents   $892,407    $376,649 
Investments, current925,526 1,316,347 
Total   $1,817,933    $1,692,996 

Our investments in money market funds are measured at fair value on a recurring basis. These money market funds are actively traded and reported daily through a variety of sources. The fair value of the money market fund investments is classified as Level 1.

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The following table presents our investments in available-for-sale debt securities as of July 31, 2023:
 
(In thousands)Amortized CostUnrealized GainsUnrealized LossesFair Value
Cash and cash equivalents:
U.S. government and agency securities$6,998 $— $— $6,998 
Commercial paper103,888 — (22)103,866 
Investments, current:
U.S. government and agency securities354,006 — (282)353,724 
Corporate bonds38,995 2 (62)38,935 
Commercial paper533,461 — (594)532,867 
Total available-for-sale investments$1,037,348 $2 $(960)$1,036,390 

The following table presents our investments in available-for-sale debt securities as of January 31, 2023:
 
(In thousands)Amortized CostUnrealized GainsUnrealized LossesFair Value
Cash and cash equivalents:
U.S. government and agency securities$59,732 $— $(26)$59,706 
Investments, current:
U.S. government and agency securities1,125,700 1 (4,546)1,121,155 
Corporate bonds54,173 2 (342)53,833 
Commercial paper142,061 — (702)141,359 
Total available-for-sale investments$1,381,666 $3 $(5,616)$1,376,053 

The following table presents the fair values and unrealized losses related to our investments in available-for-sale debt securities classified by length of time that the securities have been in a continuous unrealized loss position as of July 31, 2023:
 
Less than 12 Months12 Months or GreaterTotal
(In thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
U.S. government and agency securities$355,851 $(282)$— $— $355,851 $(282)
Corporate bonds26,906 (50)7,407 (12)34,313 (62)
Commercial paper636,733 (616)— — 636,733 (616)
Total$1,019,490 $(948)$7,407 $(12)$1,026,897 $(960)

The following table presents the fair values and unrealized losses related to our investments in available-for-sale debt securities classified by length of time that the securities have been in a continuous unrealized loss position as of January 31, 2023:

Less than 12 Months12 Months or GreaterTotal
(In thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
U.S. government and agency securities$1,162,226 $(4,530)$7,959 $(42)$1,170,185 $(4,572)
Corporate bonds50,258 (328)1,887 (14)52,145 (342)
Commercial paper141,359 (702)— — 141,359 (702)
Total$1,353,843 $(5,560)$9,846 $(56)$1,363,689 $(5,616)

Investments with maturities of less than 12 months from the balance sheet date are classified as current assets, which are available for use to fund current operations. Investments with maturities greater than 12 months from the balance sheet date are classified as non-current assets. The contractual maturities of our investments in financial assets as of July 31, 2023 were all less than 12 months.
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Convertible Senior Notes

Refer to Note 6 “Convertible Senior Notes” for details regarding the fair value of our convertible senior notes.

Equity Investments

Our equity investments are included in “Investments, non-current” on our condensed consolidated balance sheets. The following table provides a summary of our equity investments:
 
(In thousands)July 31, 2023January 31, 2023
Equity investments without readily determinable fair values$37,581 $37,994 
Equity investments under the equity method of accounting4,006 3,706 
Total$41,587 $41,700 

During the six months ended July 31, 2023 we recorded a $3.4 million impairment loss related to our strategic equity investments without readily determinable fair values. The impairment loss is included in “Other income (expense), net” on our consolidated statements of operations.

(3)    Commitments and Contingencies
 
Legal Proceedings
 
A putative class action lawsuit alleging violations of federal securities laws was filed on December 4, 2020 in the U.S. District Court for the Northern District of California (the “Court”) against us, our former Chief Executive Officer and our former Chief Financial Officer. The operative complaint, filed by lead plaintiff Louisiana Sheriffs’ Pension & Relief Fund, alleges that defendants made materially false and misleading statements regarding our marketing efforts, hiring practices, and retention of personnel. The lead plaintiff seeks unspecified monetary damages and other relief. On March 21, 2022, the Court issued a decision granting in part and denying in part a motion to dismiss filed by defendants, which limited the putative class period to May 21, 2020 through December 2, 2020.

On January 30, 2023, the parties entered into a stipulation of settlement, subject to Court approval. The settlement resolves all claims asserted against us and the other named defendants without any admission, concession, or finding of any fault, liability, or wrongdoing by defendants. Under the terms of the settlement, we will cause $30 million to be paid into a settlement escrow account, of which $4.6 million has been paid by us in satisfaction of the retention limit of our primary Director & Officer (“D&O”) insurance policy and $25.4 million will be paid by our insurers, in return for a release of claims and dismissal of the case. On February 7, 2023, lead plaintiff filed an unopposed motion for preliminary approval of the settlement, which attaches the stipulation of settlement. The motion for preliminary approval of the settlement is under submission and is awaiting a decision by the Court. The Company recognized a liability, which is included in “Accrued expenses and other liabilities” on our condensed consolidated balance sheets, in the amount of $25.4 million which represents our remaining obligation to settle claims under the stipulation of settlement as of July 31, 2023. A corresponding receivable was recognized, which is included in “Prepaid expenses and other current assets” on our condensed consolidated balance sheets, which represents the insurance proceeds we are entitled to under our D&O insurance policy that will be paid by our insurers to settle claims on our behalf.

Ten derivative lawsuits related to the securities class action were filed in February, March and April 2021, October and December 2022, and January, February and March 2023 in the U.S. District Court for the Northern District of California, the California Superior Court, San Francisco County, and the Court of Chancery of the State of Delaware. Due to the consolidation of several of these lawsuits, there are now seven pending derivative actions. The derivative actions name our former Chief Executive Officer, our former Chief Financial Officer, several other current and former officers, and many of our current and former board members as defendants, and the Company as a nominal defendant. The derivative actions allege claims for breach of fiduciary duties, unjust enrichment, waste of corporate assets, abuse of control, and gross mismanagement against the defendants, and claims for contribution under Sections 10(b) and 21D of the Exchange Act against only our former Chief Executive Officer and former Chief Financial Officer. The plaintiffs seek unspecified monetary damages and other relief on behalf of the Company. The courts have stayed three of the seven derivative actions pursuant to stipulation of the parties, and the parties have submitted a stipulation and proposed order staying one other derivative action. On August 9, 2021, we received
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a demand letter alleging claims similar to those in the derivative lawsuits. On May 23, 2022, the board of directors formed a committee to evaluate the stockholder’s demand and make recommendations to the full board of directors. On September 13, 2022, we received a second demand letter alleging claims similar to those in the derivative lawsuits, which was also referred to the committee.

We are also subject to certain routine legal and regulatory proceedings, as well as demands and claims that arise in the normal course of our business. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. In our opinion, resolution of any pending claims (either individually or in the aggregate) is not expected to have a material adverse impact on our condensed consolidated results of operations, cash flows or financial position, nor is it possible to provide an estimated amount of any such loss. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect our future financial position, results of operations or cash flows, or all, in a particular period.

Indemnification Arrangements
 
During the ordinary course of business, we may indemnify, hold harmless and agree to reimburse for losses suffered or incurred by 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 under Delaware law, we have entered into indemnification agreements with our officers, directors and certain employees, indemnifying them for certain events or occurrences in connection with their service as our officers or directors or those of our direct and indirect subsidiaries.
 
Pursuant to the indemnification agreements, our bylaws, and Delaware law, we are indemnifying our former executive officers in connection with the stipulation of settlement entered into on January 30, 2023. No other claims or reimbursements under indemnification arrangements were material to our interim condensed consolidated financial statements.

(4)    Property and Equipment
 
Property and equipment are stated at cost, net of accumulated depreciation and amortization. These assets are depreciated and amortized using the straight-line method over their estimated useful lives. Property and equipment consisted of the following:
 
(In thousands)July 31, 2023January 31, 2023
Computer equipment and software$75,792 $82,248 
Furniture and fixtures25,693 27,076 
Leasehold and building improvements (1)
111,894 144,130 
Capitalized software development costs (2)
59,076 50,590 
Property and equipment, gross272,455 304,044 
Less: accumulated depreciation and amortization(164,914)(195,504)
Property and equipment, net$107,541 $108,540 
_________________________
(1)    Includes costs related to assets not yet placed into service of $2.3 million and $2.8 million, as of July 31, 2023 and January 31, 2023, respectively.
(2)    Includes costs related to projects still under development of $11.2 million and $5.1 million, as of July 31, 2023 and January 31, 2023, respectively.

Depreciation and amortization expense related to property and equipment, net was $8.6 million and $10.6 million for the three months ended July 31, 2023 and 2022, respectively, and $19.1 million and $19.9 million for the six months ended July 31, 2023 and 2022, respectively.

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Geographic Information
 
The following table presents our long-lived assets, which consist of property and equipment, net of depreciation and amortization, and operating lease right-of-use assets by geographic region:
 
(In thousands)July 31, 2023January 31, 2023
United States$240,842 $251,150 
United Kingdom34,433 36,667 
Other International10,371 7,704 
Total long-lived assets$285,646 $295,521 

(5)    Goodwill and Intangible Assets

Goodwill

There was no impairment of goodwill during the six months ended July 31, 2023 or 2022.

Intangible Assets
 
Intangible assets subject to amortization as of July 31, 2023 were as follows:
 
(In thousands, except useful life)Gross Carrying AmountAccumulated AmortizationNet Carrying AmountWeighted-Average Remaining Useful Life
(in months)
Developed technology$204,969 $(129,633)$75,336 32
Customer relationships71,800 (55,437)16,363 13
Total intangible assets subject to amortization$276,769 $(185,070)$91,699 

Intangible assets subject to amortization as of January 31, 2023 were as follows:

(In thousands, except useful life)Gross Carrying AmountAccumulated AmortizationNet Carrying AmountWeighted-Average Remaining Useful Life
(in months)
Developed technology$204,969 $(110,757)$94,212 36
Customer relationships90,900 (65,524)25,376 18
Total intangible assets subject to amortization$295,869 $(176,281)$119,588 

Amortization expense from acquired intangible assets was $13.7 million and $14.0 million for the three months ended July 31, 2023 and 2022, respectively, and $27.9 million and $28.1 million for the six months ended July 31, 2023 and 2022, respectively.

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The expected future amortization expense for acquired intangible assets as of July 31, 2023 is as follows:

Fiscal Period (In thousands)Expected Amortization Expense
Remaining fiscal 2024$24,737 
Fiscal 202536,743 
Fiscal 202619,858 
Fiscal 202710,361 
Total amortization expense$91,699 

(6)    Convertible Senior Notes

The net carrying amounts of each series of Notes as of July 31, 2023 were as follows:
 
(In thousands)2023 Notes2025 Notes2026 Notes2027 Notes
Principal amount$776,661 $862,500 $1,000,000 $1,265,000 
Unamortized issuance costs(205)(2,834)(10,771)(10,965)
Net carrying amount $776,456 $859,666 $989,229 $1,254,035 

As the 2023 Notes mature within the next twelve months, they are classified as “Debt, current” on our condensed consolidated balance sheets as of July 31, 2023. The 2025 Notes, 2026 Notes, and 2027 Notes do not mature within the next twelve months and are classified as "Debt, non-current” on our condensed consolidated balance sheets as of July 31, 2023.

The following table sets forth the interest expense related to each series of Notes:
 
 Three Months Ended July 31,Six Months Ended July 31,
(In thousands)2023202220232022
2023 Notes:
Coupon interest expense$971 $971 $1,942 $1,942 
Amortization of debt issuance costs424 638 801 966 
Total interest expense related to the 2023 Notes$1,395 $1,609 $2,743 $2,908 
2025 Notes:
Coupon interest expense$2,426 $2,426 $4,852 $4,852 
Amortization of debt issuance costs349 642 603 866 
Total interest expense related to the 2025 Notes$2,775 $3,068 $5,455 $5,718 
2026 Notes:
Coupon interest expense$1,875 $1,875 $3,750 $3,750 
Amortization of debt issuance costs917 1,417 1,737 1,944 
Total interest expense related to the 2026 Notes$2,792 $3,292 $5,487 $5,694 
2027 Notes:
Coupon interest expense$3,558 $3,558 $7,116 $7,116 
Amortization of debt issuance costs723 1,274 1,300 1,708 
Total interest expense related to the 2027 Notes$4,281 $4,832 $8,416 $8,824 

As of July 31, 2023, the total estimated fair values of the 2023 Notes, the 2025 Notes, 2026 Notes, and the 2027 Notes were approximately $0.77 billion, $0.86 billion, $0.81 billion, and $1.09 billion, respectively. We consider the fair value of the 2023 Notes, the 2025 Notes, and the 2027 Notes to be a Level 2 measurement. The fair value for each series of the Notes was
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determined based on the closing trading price per $100 of the applicable series of Notes as of the last day of trading for the period. We consider the fair value of the 2026 Notes to be a Level 3 measurement. The estimated fair value of the 2026 Notes represents the present value of future principal and interest payments.

2023 and 2025 Notes
 
In September 2018, we issued $1.27 billion aggregate principal amount of 0.50% Convertible Senior Notes due 2023 (the “2023 Notes”), and $862.5 million aggregate principal amount of 1.125% Convertible Senior Notes due 2025 (the “2025 Notes”). The 2023 Notes and the 2025 Notes are general senior, unsecured obligations of Splunk. The total proceeds from the issuance of the 2023 Notes and the 2025 Notes was $2.11 billion, net of initial purchaser discounts and other issuance costs. The 2023 Notes will mature on September 15, 2023, and the 2025 Notes will mature on September 15, 2025, in each case unless earlier redeemed, repurchased or converted. The 2023 Notes bear interest from September 21, 2018 at a rate of 0.50% per year and the 2025 Notes bear interest from September 21, 2018 at a rate of 1.125% per year, in each case payable semiannually in arrears on March 15 and September 15 of each year.

The initial conversion rate for each of the 2023 Notes and 2025 Notes is 6.7433 shares of our common stock per $1,000 principal amount of each of the 2023 Notes and 2025 Notes, which is equivalent to an initial conversion price of approximately $148.30 per share of our common stock, subject to adjustment upon the occurrence of certain specified events.

2026 Notes

On July 9, 2021, we issued $1.0 billion aggregate principal amount of 0.75% Convertible Senior Notes due 2026 (the “2026 Notes”). The 2026 Notes are general senior, unsecured obligations of Splunk. The total proceeds from the issuance of the 2026 Notes was $981.7 million, net of issuance costs. The 2026 Notes will mature on July 15, 2026, unless earlier redeemed, repurchased or converted. The 2026 Notes bear interest at a rate of 0.75% per year, payable semiannually in arrears on January 15 and July 15 of each year.

The initial conversion rate for the 2026 Notes is 6.25 shares of our common stock per $1,000 principal amount of the 2026 Notes, which is equivalent to an initial conversion price of approximately $160.00 per share of our common stock, subject to adjustment upon the occurrence of certain specified events.

2027 Notes
 
On June 5, 2020, we issued $1.27 billion aggregate principal amount of 1.125% Convertible Senior Notes due 2027 (the “2027 Notes”). The 2027 Notes are general senior, unsecured obligations of Splunk. The total proceeds from the issuance of the 2027 Notes was $1.25 billion, net of initial purchaser discounts and other issuance costs. The 2027 Notes will mature on June 15, 2027, unless earlier redeemed, repurchased or converted. The 2027 Notes bear interest from June 5, 2020 at a rate of 1.125% per year, payable semiannually in arrears on June 15 and December 15 of each year.

The initial conversion rate for the 2027 Notes is 3.9164 shares of our common stock per $1,000 principal amount of the 2027 Notes, which is equivalent to an initial conversion price of approximately $255.34 per share of our common stock, subject to adjustment upon the occurrence of certain specified events.

Other Terms

The 2023 Notes, 2025 Notes, and 2027 Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding June 15, 2023, June 15, 2025, and December 15, 2026, for the 2023 Notes, 2025 Notes and 2027 Notes, respectively, only under the following circumstances:

•during any fiscal quarter commencing after the fiscal quarter ending on January 31, 2019 (and only during such fiscal quarter) for the 2023 Notes and the 2025 Notes, and October 31, 2020 (and only during such fiscal quarter) for the 2027 Notes, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price for the relevant series of Notes on each applicable trading day;

•during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price (as defined in the indenture governing the relevant series of Notes) per $1,000 principal amount of
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the relevant series of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the relevant series of Notes on each such trading day;

•if we call the relevant series of Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or

•upon the occurrence of specified corporate events as set forth in the relevant indenture.

On or after June 15, 2023, June 15, 2025, and December 15, 2026, for the 2023 Notes, 2025 Notes, and 2027 Notes, respectively, until the close of business on the second scheduled trading day immediately preceding the relevant maturity date, holders of the relevant series of Notes may convert all or any portion of their Notes of such series, in multiples of $1,000 principal amount, regardless of the foregoing circumstances.

Upon conversion, we may satisfy our conversion obligation by paying and/or delivering cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in the manner and subject to the terms and conditions provided in the relevant indenture; provided, in the case of the 2026 Notes, the holder is to determine the settlement method related to any Notes converted in connection with the exercise of our redemption option as mentioned above.

We may redeem for cash all or any portion of the 2027 Notes, at our option, on or after June 20, 2024, and may currently redeem for cash all or any portion of the 2023 Notes and 2025 Notes, if the last reported sale price of our common stock has been at least 130% of the conversion price for the relevant series of Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the relevant series of Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the relevant redemption date. Whether to exercise our redemption options under each respective indenture is solely within our control.

The 2026 Notes are convertible into shares of our common stock at the option of the holder at any time prior to the close of business on the business day immediately preceding the maturity date. We may redeem for cash all or any portion of the 2026 Notes, at our option, on or after July 20, 2024 if the last reported sale price of our common stock has been 140% of the conversion price for the 2026 Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the 2026 Notes, plus accrued and unpaid interest to, but excluding, the redemption date. Whether to exercise our redemption option is solely within our control.

During the three months ended July 31, 2023, the conditions allowing holders of the 2023 Notes, 2025 Notes, 2026 Notes, and 2027 Notes to redeem were not met.

Capped Calls

In connection with the issuance of the 2023 Notes, the 2025 Notes, and the 2027 Notes, we entered into privately negotiated capped call transactions relating to each series of Notes (the “Capped Calls”). The Capped Calls are expected to reduce potential dilution to our common stock upon conversion of the applicable series of Notes and/or offset any cash payments we may make in excess of the principal amount of converted notes of such series, as the case may be, with such reduction and/or offset subject to a cap. The Capped Calls are subject to adjustment upon the occurrence of certain specified extraordinary events affecting us, including merger events and tender offers. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including nationalization, insolvency or delisting, changes in law, failures to deliver, insolvency filings and hedging disruptions.

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The following table sets forth other key terms and premiums paid for the Capped Calls related to the 2023 Notes, the 2025 Notes, and the 2027 Notes:
Capped Calls Entered into in Connection with the Issuance of the 2023 and 2025 NotesCapped Calls Entered into in Connection with the Issuance of the 2027 Notes
Initial strike price, subject to certain adjustments$148.30 $255.34 
Cap price, subject to certain adjustments $232.62 $378.28 
Total premium paid (in thousands)$274,275 $137,379 

For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of any series of Notes. As the Capped Calls qualify for a scope exception from derivative accounting for instruments that are both indexed to our own stock and classified in stockholders’ equity on our consolidated balance sheet, the premium paid for the purchase of the Capped Calls has been recorded as a reduction to “Additional paid-in capital” and will not be remeasured.

(7)    Stock Compensation Plans and Stockholders’ Equity
 
Equity Incentive Plans
 
In 2012, our board of directors and stockholders approved the 2012 Equity Incentive Plan (as amended, the “2012 Plan”), which became effective in April 2012 and expired in March 2022 pursuant to its terms. The 2012 Plan provided for the grant of incentive stock options and for the grant of nonstatutory stock options (“options”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”), stock appreciation rights, performance units (“PSUs”) and performance shares. We ceased making grants under the 2012 Plan when it expired in March 2022.

In January 2022, our board of directors approved the 2022 Inducement Plan (the “Inducement Plan”) in accordance with Listing Rule 5635(c)(4) of the corporate governance rules of the Nasdaq Stock Market. The Inducement Plan was effective in April 2022 and was used for grants to new employees only. In April 2022, we granted stand-alone inducement equity awards to our Chief Executive Officer in accordance with Listing Rule 5635(c)(4) of the corporate governance rules of the Nasdaq Stock Market. In the second quarter of fiscal 2023, our board of directors and stockholders approved the 2022 Equity Incentive Plan (the “2022 Plan”) and we ceased making grants under the Inducement Plan.

During the six months ended July 31, 2023 and 2022, upon each settlement date of our outstanding RSUs and PSUs, we withheld shares to cover the required withholding tax based on the value of a share on the settlement date as determined by the closing price of our common stock on the applicable settlement date. If the settlement date did not fall on a trading day, the value of a share was based on the closing price of our common stock on the next trading day following the settlement date. The amount remitted to the tax authorities for the employees’ tax obligations is reflected as a financing activity on our condensed consolidated statements of cash flows. Shares withheld by us as a result of the net settlement of RSUs and PSUs issued under the 2022 Plan and the 2022 Inducement Plan will not become available for future grant or sale.

PSUs

The following table summarizes our PSU activity during the six months ended July 31, 2023: 

 Shares
(in thousands)		Weighted-Average Grant-Date Fair Value Per Share
Outstanding as of January 31, 2023
386 $193.96 
PSUs granted438 $124.22 
PSUs vested(138)$140.21 
Outstanding as of July 31, 2023
686 $160.21 

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Compensation expense for PSUs with financial performance or market vesting conditions is measured using the fair value at the date of grant and recorded over the vesting period of three or four years under the graded-vesting attribution method.

Certain PSUs granted in fiscal 2024 are subject to a single market performance condition which allows employees to earn 0% to 200% of their target award over two- and three-year performance periods, with a cap of one-third of the target award eligible to be earned for the two-year performance period. The PSUs granted in fiscal 2023 and certain PSUs granted in fiscal 2024 are subject to a single market performance condition which allows employees to earn 0% to 200% of their target award over one-, two- and three-year performance periods, with a cap of one-third of the target award eligible to be earned for each of the one- and two-year performance periods. As of July 31, 2023, awards related to the one-year performance period for the PSUs granted in fiscal 2023 have been earned.

RSUs

The following table summarizes our RSU activity during the six months ended July 31, 2023: 

 Shares
(in thousands)		Weighted-Average Grant-Date Fair Value Per Share
Outstanding as of January 31, 2023
11,627 $128.11 
RSUs granted3,712 $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 

RSAs

The following table summarizes our RSA activity during the six months ended July 31, 2023: 

 Shares
(in thousands)		Weighted-Average Grant-Date Fair Value Per Share
Outstanding as of January 31, 2023
289 $86.15 
RSAs vested(34)$135.14 
Outstanding as of July 31, 2023
255 $79.58 

Stock Options

The following table summarizes our stock option activity during the six months ended July 31, 2023:

 Shares
(in thousands)		Weighted-Average Exercise Price Per ShareWeighted-Average Remaining Contractual Term
(in years)
Aggregate Intrinsic Value (1)
(in thousands)
Outstanding as of January 31, 2023
108 $10.27 5.3$9,276 
Options exercised(22)$10.57 
Options forfeited and expired— $29.81 
Outstanding as of July 31, 2023
86 $10.09 4.8$8,479 
Vested and expected to vest86 $10.09 4.8$8,452 
Exercisable as of July 31, 2023
80 $9.91 4.8$7,838 
_________________________
(1)    The intrinsic value is calculated as the difference between the exercise price of the underlying stock option award and the closing market price of our common stock as of July 31, 2023.
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The following table presents unrecognized compensation cost and the related weighted-average recognition period for RSUs, PSUs, RSAs, and stock options as of July 31, 2023:
 
Unrecognized Compensation Cost
(in thousands)		Weighted-Average Recognition Period
(in years)
RSUs$1,048,459 2.1
PSUs61,557 1.7
RSAs14,516 2.1
Stock options634 1.3
Total unrecognized compensation cost$1,125,166 

(8)    Revenues, Accounts Receivable, Deferred Revenue and Remaining Performance Obligations

Disaggregation of Revenues

The following table presents disaggregated revenues by major product or service type:
 
 Three Months Ended July 31,Six Months Ended July 31,
(In thousands)2023202220232022
Revenues
Cloud services$445,163 $346,405 $864,598 $669,334 
License295,439 281,716 466,869 467,527 
Maintenance and services169,983 170,632 330,626 335,973 
Total revenues$910,585 $798,753 $1,662,093 $1,472,834 

Revenues by geography are based on the shipping address of the customer. The following table presents our revenues by geographic region:
 
 Three Months Ended July 31,Six Months Ended July 31,
(In thousands)2023202220232022
United States$590,198 $547,829 $1,078,512 $1,000,744 
International320,387 250,924 583,581 472,090 
Total revenues$910,585 $798,753 $1,662,093 $1,472,834 

The following table presents revenues as a percentage of consolidated total revenues from customers representing 10% or more of total revenues:
 
Three Months Ended July 31,Six Months Ended July 31,
2023202220232022
Channel Partner A26 %25 %25 %26 %
Channel Partner B18 %15 %16 %14 %

The revenues from these customers are comprised of a number of end user transactions.

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Accounts Receivable
 
The following table presents total current and non-current accounts receivable by channel partners representing 10% or more of total current and non-current accounts receivable, net:
 
July 31, 2023January 31, 2023
Channel Partner A26 %26 %
Channel Partner B12 %6 %

Deferred Revenue
 
Revenues recognized from amounts included in deferred revenue as of January 31, 2023 and 2022 were $0.9 billion and $0.8 billion during the six months ended July 31, 2023 and 2022, respectively.

Remaining Performance Obligations
 
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancelable amounts that will be invoiced in future periods. Our remaining performance obligations were $2.9 billion as of July 31, 2023, of which we expect to recognize approximately 66% as revenue over the next 12 months, and we expect to recognize substantially all of the remainder over the next 13 to 36 months.

(9)    Income Taxes
 
We are subject to income taxes in the U.S. and in foreign jurisdictions. We base our interim tax provision on an estimated annual effective tax rate applied to year-to-date results, and we record discrete tax items in the period to which they relate. Each quarter, we update our estimated annual effective tax rate and record a year-to-date adjustment to our tax provision as necessary. For the three and six months ended July 31, 2023, we determined that the annual effective tax rate method would not provide a reliable estimate for our U.S. jurisdiction because the rate is highly sensitive to immaterial changes in forecasted ordinary income or loss. As a result, we applied the actual effective tax rate to the loss for our U.S. jurisdiction for the three and six months ended July 31, 2023. For the three months ended July 31, 2023 and 2022, we recorded income tax expense of $6.7 million and $7.9 million, respectively. For the six months ended July 31, 2023 and 2022, we recorded income tax expense of $11.3 million and $11.3 million, respectively. Our effective tax rate for the three and six months ended July 31, 2023 differs from the U.S. statutory rate primarily due to the valuation allowance recorded on our U.S. losses.

During the three months ended July 31, 2023, there were no material changes to our unrecognized tax benefits, and we do not expect material changes in our unrecognized tax benefits within the next twelve months. Because of our history of tax losses, all years remain open to tax audit.

(10)    Net Loss Per Share
 
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase or forfeiture. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including convertible senior notes, stock options, RSUs, PSUs and RSAs to the extent dilutive.

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The following table sets forth the computation of historical basic and diluted net loss per share:
 
 Three Months Ended July 31,Six Months Ended July 31,
(In thousands, except per share amounts)2023202220232022
Numerator:    
Net loss$(63,248)$(209,712)$(259,668)$(514,034)
Denominator:    
Weighted-average common shares outstanding166,716 161,912 166,002 161,220 
Less: Weighted-average unvested common shares subject to repurchase or forfeiture(257)(125)(265)(150)
Weighted-average shares used to compute net loss per share, basic and diluted166,459 161,787 165,737 161,070 
Net loss per share, basic and diluted$(0.38)$(1.30)$(1.57)$(3.19)

As we were in a net loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potentially dilutive securities outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:
 
 As of July 31,
(In thousands)20232022
Shares subject to outstanding common stock options86 126 
Shares subject to outstanding RSUs, PSUs and RSAs12,090 13,473 
Employee stock purchase plan3,574 2,183 
Shares underlying the conversion options of the Notes22,258 22,258 
Total38,008 38,040 

(11)    Restructuring

During the fiscal quarter ended April 30, 2023, we announced a restructuring plan (the “Plan”). The Plan resulted in a reduction of our global workforce that has been carried out in phases. The actions associated with the Plan are expected to be completed by the end of fiscal 2024, subject to local law and consultation requirements. The Company has incurred $27.7 million in charges in connection with the Plan during the six months ended July 31, 2023 related to estimated severance payments, retention payments, employee benefits and transition costs, and non-cash charges for share-based compensation. For the three months ended July 31, 2023, we recorded a $1.4 million net reduction in charges to date under the Plan, reflecting the net impact of additional charges related to an action carried out in the three months ended July 31, 2023, net of changes in estimated costs related to actions carried out in the three months ended April 30, 2023.

(In thousands)Workforce reduction
Charges$27,697 
Payments(18,931)
Non-cash items(2,557)
Liability as of July 31, 2023
$6,209 

The liability as of July 31, 2023 for restructuring charges is included in accrued expenses and other liabilities in the condensed consolidated balance sheets.

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Restructuring charges for the six months ended July 31, 2023 are included in the condensed consolidated statements of operations, as follows: 

(In thousands)
Cost of revenues$1,238 
Research and development14,853 
Sales and marketing3,164 
General and administrative8,442 
Total$27,697 

(12)    Subsequent Event

Pursuant to our continuing evaluation of office space needs, in August 2023 we entered into an agreement to sublease certain space located in Plano, TX. We expect to record an impairment charge of approximately $22 million in the three months ended October 31, 2023, which will be allocated to lease-related assets including the right-of-use asset and leasehold improvements. As we remain obligated under the head lease, the related lease liability is not impacted by the sublease.
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim 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 as a result of various factors, including those set forth under “Risk Factors” included in Part II, Item 1A. or in other parts of this report and our other filings with the Securities and Exchange Commission. 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. These forward-looking statements include, but are not limited to, statements concerning the following:

•our future financial and operating results; including trends in and expectations regarding revenues, annual recurring revenue, deferred revenue, remaining performance obligations, operating margins, gross margins, cash flow, operating income and the proportion of transactions that will be recognized ratably, including our expectations with respect to the drivers of such results and trends;
•the effects of the macroeconomic environment, including financial and credit market fluctuations, instability in the banking sector, rising interest rates, political unrest and social strife, and other impacts from the macroenvironment on our business and operations and those of our customers, including impacts on information technology and cybersecurity spending;
•market opportunity;
•expected benefits to customers and potential customers of our offerings;
•investment strategy, business strategy and growth strategy, including our business model and the use of acquisitions to expand our business;
•our sales and marketing strategy, including our international sales, channel partner strategy and our pricing strategy;
•customer product adoption and purchasing patterns, including renewal, expansion and conversion from on-premises to cloud services;
•management’s plans, beliefs and objectives for future operations;
•leadership changes and workforce attrition;
•our ability to provide compelling, uninterrupted and secure cloud services to our customers;
•expectations about competition;
•economic and industry trends or trend analysis;
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•the impact of geopolitical events, including the war in Ukraine;
•our acquisitions, including the expected impacts of such acquisitions;
•expectations about seasonality;
•revenue mix;
•expected impact of changes in accounting pronouncements and other financial and non financial reporting standards;
•operating expenses, including changes in research and development, sales and marketing, facilities and general and administrative expenses;
•sufficiency of cash to meet cash needs for at least the next 12 months;
•exposure to interest rate changes;
•inflation;
•anticipated income tax rates, tax estimates and tax standards;
•capital expenditures, cash flows and liquidity; and
•the impact of climate change, natural disasters and actual or threatened public health emergencies.

These statements represent 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. 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 helps customers build a safer and more resilient digital world. We deliver innovative solutions that enable organizations to harness the value of their data to help keep their digital systems secure, available and performant. Our solutions for security and observability empower Security Operations, IT Operations, and Development Operations teams to maintain resilient systems by monitoring and securing them more quickly and efficiently. We also believe our offerings empower operational transformation, helping customers move from reactive, non-scalable and ineffective approaches to proactive, automated, and machine learning-assisted processes that drive better outcomes even as the scale and complexity of their technology continue to grow.

We believe that the increasing reliance on digital systems has made the resilience of these systems mission-critical for nearly every organization and the sustained ongoing importance of digital systems amidst the evolving threat landscape further elevates Splunk’s central role in enabling secure and reliable operations for our customers.

We recognize revenues associated with our cloud services ratably over the subscription term. We generally recognize license fees upfront.

We typically base our cloud services subscription fees on either the volume of data indexed per day or the infrastructure, data storage and bandwidth required to support the underlying workload. For our license offerings, we typically base the license fees on either the estimated daily data indexing capacity or the compute power to support the workload.

Customers have increasingly adopted our cloud services offerings. Because cloud service revenue recognition principles are different than license fee revenue recognition principles, the shift in our business to cloud has impacted, and it will continue to impact, our revenue and operating margins. For example, the timing of large license contracts may lead to fluctuations in our revenues and our operating results. The degree to which cloud services become our predominant delivery model is dependent on customer choice. The pace of the shift may fluctuate, and the mix of cloud services and license revenue may continue to vary from quarter to quarter and year to year. Therefore, our ability to predict our revenue and margins in any particular period has been, and may continue to be, limited.

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We intend to continue investing for long-term growth. We plan to invest in product development to deliver additional features and performance enhancements, deployment models and solutions that can address new markets. We also plan to continue to invest in our sales and marketing organizations to improve our customer experience and expand our reach.

We have utilized and expect to continue to engage in acquisitions to contribute to our long-term growth objectives. Additionally, we expect to continue to make investments in private companies with complementary technology and business models with the objective of establishing longer-term strategic relationships.

Worldwide economic uncertainties and negative trends, including financial and credit market fluctuations, rising interest rates, political unrest and social strife, and other impacts from the macroeconomic environment have, and could continue to, adversely affect our business operations or financial results. These macroeconomic conditions have caused and could continue to cause a decrease in corporate spending on enterprise software in general and negatively affect the rate of growth of our business.

During fiscal 2023, we saw changes in customer buying patterns due to the uncertain macroeconomic environment, including a slower pace of expansions and migrations to cloud services and enhanced deal scrutiny. We continue to see similar customer behaviors in fiscal 2024 and, based on the current market environment, we expect these to continue through at least the end of the current fiscal year.

See “Risk Factors” included in Part II, Item 1A. for further discussion of the impact and possible future impacts of the macroeconomic environment on our business.

We use certain operating metrics and our financial results to evaluate our performance and monitor the growth of our business.

Key Operating Metrics

Annual Recurring Revenue

We use cloud annual recurring revenue (“Cloud ARR”) and total annual recurring revenue (“Total 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 continue to shift to a cloud services delivery model. Cloud ARR represents the annualized value of active cloud services contracts at the end of a reporting period. Total ARR represents the annualized value of active cloud services, term licenses and maintenance contracts at the end of a reporting period. ARR should be viewed independently of revenue, and does not represent our revenue under U.S. GAAP on an annualized basis, as it is an operating metric that is impacted by contract start and end dates and renewal rates. ARR is not intended to be a replacement for forecasts of revenue.

The following presents our Cloud ARR and Total ARR (in millions):

5644 5646

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Number of Customers with ARR Greater than $1 Million

We monitor the number of customers with Cloud ARR greater than $1 million and Total ARR greater than $1 million at the end of a reporting period. We believe these metrics provide useful information to investors because they are indicators of our growing customer base, and they demonstrate the value customers are receiving from Splunk. The following presents the number of our customers with Cloud ARR greater than $1 million and Total ARR greater than $1 million:

6070 6073

Free Cash Flow

Net cash provided by operating activities was $502 million and $125 million during the six months ended July 31, 2023 and 2022, respectively. Free cash flow represents net cash provided by operating activities, less purchases of property and equipment and capitalized software development costs. We believe free cash flow provides additional information about the cash generated or used by the business. The following presents our free cash flow (in millions):

6574

Below is a calculation of free cash flow:

 Six Months Ended July 31,
(In thousands)20232022
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 

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Dollar-Based Net Retention Rate

We measure our net expansion across existing cloud customers using our cloud dollar-based net retention rate (“Cloud DBNRR”). We calculate Cloud DBNRR at a point in time by dividing the Cloud ARR at the end of a reporting period (“Cloud Current Period ARR”) by the Cloud ARR for the same group of customers at the end of the prior 12-month period (“Cloud Prior Period ARR”). Cloud Current Period ARR includes expansion and is net of existing customer contraction and attrition but excludes ARR from new customers in the current period. The trailing 12-month Cloud DBNRR represents the dollar weighted-average of the point in time Cloud DBNRR as of the end of each of the prior 12 months and is calculated by dividing the sum of the Cloud Current Period ARR for each of the prior 12 months by the sum of the Cloud Prior Period ARR for each of the prior 12 months. We use the trailing 12-month Cloud DBNRR because it mitigates the impact of any monthly expansions, contractions, and attrition which may not be representative of our recurring contract base. The following presents our trailing 12-month Cloud DBNRR:

7290
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Remaining Performance Obligations (“RPO”) Bookings

Total RPO represents contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancelable amounts that will be invoiced. Total RPO is separately disclosed in Note 8 “Revenues, Accounts Receivable, Deferred Revenue and Remaining Performance Obligations” in our accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

We calculate total RPO Bookings as total revenue plus or minus the change in total RPO. RPO Bookings is an indicator of overall bookings momentum. The following presents our total RPO Bookings (in millions):

7964

Below is a calculation of total RPO Bookings:

 Six Months Ended July 31,
(In thousands)20232022
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 
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Financial Summary
(Dollars in millions)
 
Three Months Ended July 31, 2023 and 2022

8088 8090
8092 8094

Our customer base spans numerous industries, including cloud and online services, education, financial services, government, healthcare/pharmaceuticals, industrials/manufacturing, media/entertainment, retail/ecommerce, technology and telecommunications. As of July 31, 2023, our offerings have been deployed by over 90 of the Fortune 100 companies.

Our quarterly results reflect seasonality in the sale of our offerings. Historically, we have seen increased license revenues in the second half of our fiscal year because of industry buying patterns. Furthermore, we have seen greater license and cloud bookings and billings in the second half of our fiscal year as a result of those buying patterns, and with an increasing proportion of our revenues recognized ratably from sales of our cloud services offerings, we have seen a seasonal impact on our remaining performance obligations and deferred revenue. Please note that historical patterns should not be considered a reliable indicator of our future sales activity or performance.

Our operating expenses are comprised mostly of personnel-related costs, including salaries, stock-based compensation, benefits and incentive-based compensation plan expenses, and historically have not fluctuated significantly on a seasonal basis. Because our revenues have fluctuated seasonally, we have seen a seasonal impact on and a quarterly fluctuation of measurements expressed as a percentage of total revenue such as the cost of revenues, research and development expense, sales and marketing expense and general and administrative expense as a percentage of total revenues.

Because we have seen greater bookings and billings in the second half of our fiscal year, our cash collections have been greatest in the fourth and first fiscal quarters with a seasonal decline in other quarters.

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Components of Operating Results

Revenues

Cloud services revenues. We recognize the revenues associated with our cloud services ratably, over the subscription term.

License revenues. We generally recognize the license fee portion of the arrangement upfront, assuming all revenue recognition criteria are satisfied.

Maintenance and services revenues. Maintenance and services revenues consist of revenues from maintenance agreements, professional services and training.

•Maintenance revenues. When a term license is purchased, it is bundled with maintenance 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. Maintenance revenues as a percentage of total revenues were 13% and 15% for the three months ended July 31, 2023 and 2022, respectively. Maintenance revenues as a percentage of total revenues were 14% and 16% for the six months ended July 31, 2023 and 2022, respectively.

•Professional services and training revenues. We provide professional services and training to help our customers deploy our software and train their personnel. Professional services and training have stated billing rates per service hour or are provided on a subscription basis. Related revenues are recognized as services are delivered or ratably over the subscription period. Professional services and training revenue continues to represent a significant portion of our maintenance and services revenue due to the deployment of our offerings in large and complex IT environments.

Cost of Revenues

Cost of cloud services revenues. Cost of cloud services revenues includes third-party hosting fees, salaries, benefits, stock-based compensation and related expenses such as employer taxes related to our delivery of cloud services, allocated overhead for depreciation of equipment, facilities and IT, and amortization of acquired intangible assets. We recognize these expenses as they are incurred. To the extent our customers continue to adopt our cloud services offerings, we would expect to see a corresponding change in our cost of cloud services 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 maintenance and services revenues. Cost of maintenance and services revenues includes salaries, benefits, stock-based compensation and related expenses such as employer taxes related to our delivery of maintenance and services, third-party consulting services and allocated overhead for depreciation of equipment, facilities and IT. We recognize these expenses 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 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.

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We are focused on managing the business with a balanced approach to long-term growth and profitability. We prioritize business investments, and we may take measures to control, and in some cases, reduce targeted sources of operating costs, including hiring in lower cost markets, and if needed, strategic actions such as the consolidation of our real estate footprint and workforce reduction actions. Certain strategic actions have been taken in the current year, including those described further in Note 11 “Restructuring” and Note 12 “Subsequent Events” in our accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. These actions will generally result in increased operating expenses in the short-term due to the related severance payments and other termination benefits.

We generally expect revenue growth to outpace expenses. Accordingly, we expect the year over year decline in operating expenses as a percentage of revenue to continue.

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. While we plan to continue to invest in research and development, we expect related expenses will decrease as a percentage of revenue as a result of measures to control operating costs such as workforce reduction actions through July 31, 2023 and our expectation of increased hiring in lower cost markets.

Sales and marketing. Sales and marketing expenses primarily consist of personnel and facility-related costs for our sales team, commissions earned by our sales personnel, marketing and business development personnel costs, and the cost of marketing and business development programs, including demand generating activities, customer events, and advertising programs to promote our brand and awareness. While we plan to continue to invest in our sales and marketing functions to support business growth, we expect that sales and marketing expenses will decrease as a percentage of revenue as a result of measures taken to control operating costs.

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 expect that general and administrative expenses will decrease as a percentage of revenue as a result of measures taken to control operating costs.

Interest and Other Income (Expense), Net

Interest and other income (expense), net consists primarily of interest expense related to the Notes, foreign exchange gains and losses, and interest income on our investments and cash and cash equivalents balances.

Income Tax Provision (Benefit)

Our income tax provision (benefit) consists of federal, state and foreign income taxes. Because of our history of U.S. operating losses, we have established a full valuation allowance on our U.S. deferred tax assets. We regularly assess the need for the valuation allowance. If we determine that an adjustment is needed, we will record the necessary adjustment in the period that the determination is made.
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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
 
(In thousands and as % of revenues)Three Months Ended July 31,Six Months Ended July 31,
2023202220232022
Revenues
Cloud services$445,163 48.9 %$346,405 43.4 %$864,598 52.0 %$669,334 45.4 %
License295,439 32.4 281,716 35.3 466,869 28.1 467,527 31.7 
Maintenance and services169,983 18.7 170,632 21.4 330,626 19.9 335,973 22.8 
Total revenues910,585 100.0 798,753 100.0 1,662,093 100.0 1,472,834 100.0 
Cost of revenues 
Cloud services (1)
134,587 30.2 122,860 35.5 264,294 30.6 242,381 36.2 
License (1)
1,963 0.7 1,337 0.5 3,345 0.7 2,800 0.6 
Maintenance and services (1)
75,353 44.3 82,594 48.4 151,499 45.8 163,766 48.7 
Total cost of revenues211,903 23.3 206,791 25.9 419,138 25.2 408,947 27.8 
Gross profit698,682 76.7 591,962 74.1 1,242,955 74.8 1,063,887 72.2 
Operating expenses  
Research and development239,099 26.3 257,057 32.2 476,051 28.6 512,748 34.8 
Sales and marketing 421,635 46.3 410,622 51.4 828,140 49.8 805,835 54.7 
General and administrative106,469 11.7 114,381 14.3 213,841 12.9 227,089 15.4 
Total operating expenses767,203 84.3 782,060 97.9 1,518,032 91.3 1,545,672 104.9 
Operating loss(68,521)(7.5)(190,098)(23.8)(275,077)(16.6)(481,785)(32.7)
Interest and other income (expense), net
Interest income28,686 3.2 4,847 0.6 52,624 3.2 6,219 0.4 
Interest expense(11,243)(1.2)(12,905)(1.6)(22,101)(1.3)(23,568)(1.6)
Other income (expense), net(5,440)(0.6)(3,613)(0.5)(3,834)(0.2)(3,603)(0.2)
Total interest and other income (expense), net12,003 1.3 (11,671)(1.5)26,689 1.6 (20,952)(1.4)
Loss before income taxes(56,518)(6.2)(201,769)(25.3)(248,388)(14.9)(502,737)(34.1)
Income tax provision6,730 0.7 7,943 1.0 11,280 0.7 11,297 0.8 
Net loss$(63,248)(6.9)%$(209,712)(26.3)%$(259,668)(15.6)%$(514,034)(34.9)%
_________________________
(1)    Calculated as a percentage of the associated revenues.

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Comparison of the Three Months Ended July 31, 2023 and 2022

 
Revenues
(Dollars in millions)
 
86
88 90 92

9596 99

Three Months Ended July 31, 2023 and 2022
Total revenues increased $111.8 million, or 14.0%, primarily due to the following:

+    increase of $98.8 million, or 28.5%, in cloud services revenues
+    increase of $13.7 million, or 4.9%, in license revenues

The increase in cloud services revenues reflects the continued customer adoption of our cloud services offerings. Our customers are increasingly purchasing our cloud services offerings as they deliver the benefits of our license offerings, while eliminating the need to purchase, deploy and manage infrastructure. The increase in license revenues is a result of increased license deliveries, in the three months ended July 31, 2023, as compared to the three months ended July 31, 2022.
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Cost of Revenues and Gross Margin
(Dollars in millions)
 
879 881

885 887888

891892 895
Three Months Ended July 31, 2023 and 2022
Total cost of revenues increased $5.1 million, or 2.5%, primarily due to the increase in costs to deliver our cloud services offerings, offset by a decrease in maintenance and services cost of revenue. Our cloud services gross margin improved as the growth in our cloud services revenue outpaced the growth in related costs as we further optimized our infrastructure spending. Maintenance and services cost of revenues decreased $7.2 million, or (8.8)%, primarily due to the following a decrease in expenses related to third-party consulting services.
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Operating Expenses
(Dollars in millions)
1445 1447 1449

1452 1454 1456

1459 1461
Research and Development Expense
Three Months Ended July 31, 2023 and 2022
Research and development expense decreased $18.0 million, or (7.0)%, primarily due to the following:

-    decrease of $9.2 million in third-party fees, including those for consulting and hosting services
-    decrease of $2.0 million in salaries and benefits, including stock-based compensation, primarily due to a reduction in force associated with the restructuring plan announced in the three months ended April 30, 2023. Refer to Note 11 “Restructuring” for details.
            


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Sales and Marketing Expense
Three Months Ended July 31, 2023 and 2022
Sales and marketing expense increased $11.0 million, or 2.7%, primarily due to the following:

+    increase of $40.3 million in salaries and benefits, including commissions and stock-based compensation, primarily due to an increase in headcount and increased bookings
-    decrease of $12.3 million in expenses related to third-party consulting services
-    decrease of $9.2 million in employment-related expenses, including travel and entertainment

General and Administrative Expense
Three Months Ended July 31, 2023 and 2022
General and administrative expense decreased $7.9 million, or (6.9)%, primarily due to the following:

-    decrease of $5.6 million in expenses related to third-party consulting and professional services

Interest and Other Income (Expense), net
 Three Months Ended July 31,
(In thousands)20232022
Interest and other income (expense), net
Interest income $28,686 $4,847 
Interest expense(11,243)(12,905)
Other income (expense), net(5,440)(3,613)
Total interest and other income (expense), net$12,003 $(11,671)

Three Months Ended July 31, 2023 and 2022
Interest and other income (expense) increased $23.7 million, primarily driven by an increase in investments in interest-bearing securities.

Income Tax Provision
 Three Months Ended July 31,
(In thousands)20232022
Income tax provision$6,730 $7,943 

Three Months Ended July 31, 2023 and 2022
Our income tax provision is mostly comprised of foreign income taxes, and our effective tax rate differs from the U.S. statutory rate primarily due to the valuation allowance recorded on our U.S. losses. Our foreign income tax provision varies each interim period primarily based on the amount of our projected annual tax expense and how ratably we incur our forecasted income or loss during each quarterly period.


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Comparison of the Six Months Ended July 31, 2023 and 2022

Revenues
(Dollars in millions)
68
70 72 74
76 78 80
Six Months Ended July 31, 2023 and 2022
Total revenues increased $189.3 million, or 12.8%, primarily due an increase of $195.3 million, or 29.2%, in cloud services revenues. The increase in cloud services revenues reflects the continued customer adoption of our cloud services offerings. Our customers are increasingly purchasing our cloud services offerings as they deliver the benefits of our license offerings, while eliminating the need to purchase, deploy and manage infrastructure.
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Cost of Revenues and Gross Margin
(Dollars in millions)

933 935
937 939 941
945 947 949
Six Months Ended July 31, 2023 and 2022
Total cost of revenues increased $10.2 million, or 2.5%, primarily due to the increase in costs to delivery our cloud services offerings, offset by a decrease in maintenance and services cost of revenue. Our cloud services gross margin improved as the growth in our cloud services revenue outpaced the growth in related costs as we further optimized our infrastructure spending. Maintenance and services cost of revenues decreased $12.3 million, or (7.5)%, primarily due to a decrease in expenses related to third-party consulting services.



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Operating Expenses
(Dollars in millions)

1758 1760 1762
1764 1766 1768
1770 1772

Research and Development Expense
Six Months Ended July 31, 2023 and 2022
Research and development expense decreased $36.7 million, or (7.2)%, primarily due to the following:

-    decrease of $22.4 million in third-party fees, including those for consulting and hosting services
-    decrease of $14.0 million in salaries and benefits, including stock-based compensation, primarily due to a reduction in force associated with the restructuring plan announced in the three months ended April 30, 2023. Refer to Note 11 “Restructuring” for details.
+    increase of $7.7 million in severance costs primarily incurred in connection with the restructuring plan announced in the three months ended April 30, 2023. Refer to Note 11 “Restructuring” for details.

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Sales and Marketing Expense
Six Months Ended July 31, 2023 and 2022
Sales and marketing expense increased $22.3 million, or 2.8%, primarily due to the following:

+    increase of $54.8 million in salaries and benefits, including stock-based compensation, primarily due to an increase in headcount
-    decrease of $29.0 million in third-party fees, including those for consulting and marketing programs


General and Administrative Expense
Six Months Ended July 31, 2023 and 2022
General and administrative expense decreased $13.2 million, or (5.8)%, primarily due to the following:

-    decrease of $9.8 million in stock-based compensation
-    decrease of $6.0 million in third-party fees related to consulting services
+    increase $1.8 million in severance costs primarily incurred in connection with the restructuring plan announced in the three months ended April 30, 2023. Refer to Note 11 “Restructuring” for details.


Interest and Other Income (Expense), net
 Six Months Ended July 31,
(In thousands)20232022
Interest and other income (expense), net
Interest income $52,624 $6,219 
Interest expense(22,101)(23,568)
Other income (expense), net(3,834)(3,603)
Total interest and other income (expense), net$26,689 $(20,952)

Six Months Ended July 31, 2023 and 2022
Interest and other income (expense) increased $47.6 million, primarily driven by an increase in investments in interest-bearing securities.

Income Tax Provision
 Six Months Ended July 31,
(In thousands)20232022
Income tax provision$11,280 $11,297 

Six Months Ended July 31, 2023 and 2022
Our income tax provision is mostly comprised of foreign income taxes, and our effective tax rate differs from the U.S. statutory rate primarily due to the valuation allowance recorded on our U.S. losses. Our foreign income tax provision varies each interim period primarily based on the amount of our projected annual tax expense and how ratably we incur our forecasted income or loss during each quarterly period.
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Liquidity and Capital Resources
 
(In thousands)July 31, 2023January 31, 2023
Cash and cash equivalents$1,523,462 $690,587 
Investments, current925,526 1,316,347 

(In millions)
54 56 58

Our principal sources of liquidity are our cash and cash equivalents, investments and net accounts receivable. From time to time, we have also issued convertible debt to supplement our working capital. As of July 31, 2023, we had $2.4 billion of cash, cash equivalents and investments, of which $338.9 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, including the repayment of our 2023 Notes.

Our long-term future capital requirements will depend on many factors including our growth rate and profitability, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the level of investments in our office facilities and our systems infrastructure, the continuing market acceptance of our offerings and any acquisitions of complementary businesses, applications or technologies.

In July 2021, we issued $1.0 billion aggregate principal amount of the 2026 Notes with Silver Lake Alpine, L.P., Silver Lake Alpine (Offshore Master), L.P. and Silver Lake Partners VI, L.P. as the purchasers. The 2026 Notes are general senior, unsecured obligations of Splunk. The total proceeds from the issuance of the 2026 Notes were $981.7 million, net of issuance costs. In June 2020, we issued $1.27 billion aggregate principal amount of the 2027 Notes, including the exercise in full by the initial purchasers of the 2027 Notes of their option to purchase an additional $165.0 million principal amount of 2027 Notes. The 2027 Notes are general senior, unsecured obligations of Splunk. The total proceeds from the issuance of the 2027 Notes was $1.25 billion, net of initial purchaser discounts and other issuance costs. In connection with the issuance of the 2027 Notes, we entered into privately negotiated capped call transactions with certain counterparties (the “2027 Capped Calls”). We used approximately $137.4 million of the net proceeds from the offering of the 2027 Notes to pay the cost of the 2027 Capped Calls and $691.6 million to repurchase, for cash, approximately $488.3 million aggregate principal amount of our outstanding 2023 Notes. In September 2018, we issued $1.27 billion aggregate principal amount of the 2023 Notes and $862.5 million aggregate principal amount of the 2025 Notes. In connection with the issuance of the 2023 Notes and the 2025 Notes, we entered into privately negotiated capped call transactions with certain counterparties (the “2023 and 2025 Capped Calls”). The premiums paid for the purchase of the 2023 and 2025 Capped Calls were $274.3 million. Refer to Note 6 “Convertible Senior Notes” in our accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. It is our current intent to settle the principal amount of the 2023 Notes with cash upon maturity in September 2023.

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.

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Operating Activities

 Net cash provided by (used in) operating activities consists of our net loss adjusted for certain non-cash items and changes in operating assets and liabilities during the year.

Six Months Ended July 31, 2023 and 2022
Net cash provided by operating activities was $501.6 million for the six months ended July 31, 2023 compared to net cash provided by operating activities of $124.7 million in the prior year. The increase in net cash provided by operating activities was primarily due to improved operating results.

Investing Activities

Six Months Ended July 31, 2023 and 2022
Net cash provided by investing activities of $391.6 million during the six months ended July 31, 2023 primarily consisted of maturities of marketable securities of $405.9 million, net of purchases, offset by purchases of property and equipment of $5.9 million, cash used for the development of internal-use software of $5.2 million, and purchases of strategic investments of $3.3 million.

Net cash used in investing activities of $730.6 million during the six months ended July 31, 2022 primarily consisted of marketable securities purchases of $714.3 million, net of maturities, purchases of property and equipment of $6.7 million, purchases of strategic investments of $6.1 million, and cash used for the development of internal-use software of $5.0 million.

Financing Activities

Six Months Ended July 31, 2023 and 2022
Net cash used in financing activities of $60.3 million during the six months ended July 31, 2023 primarily consisted of taxes paid related to the net share settlement of equity awards of $111.7 million, offset by proceeds from employee stock purchase plan of $51.2 million.

Net cash used in financing activities of $74.9 million during the six months ended July 31, 2022 primarily consisted of taxes paid related to the net share settlement of equity awards of $124.6 million, offset by proceeds from employee stock purchase plan of $48.6 million.

Contractual Obligations

Operating Lease Commitments and Contractual Obligations

Our principal commitments consist of obligations under leases for office space and long-term purchase agreements, including hosting services arrangements with cloud service providers. In addition, we have issued convertible debt securities. There have been no significant changes to our lease obligations, legal contingencies or convertible debt securities discussed in our Annual Report on Form 10-K for the year ended January 31, 2023 except for any disclosed in Note 3 “Commitments and Contingencies” and Note 6 “Convertible Senior Notes” of our accompanying Notes to Condensed Consolidated Financial Statements in Part I, Item 1, “Financial Information” of this Quarterly Report on Form 10-Q. As of July 31, 2023, our other contractual commitments associated with long-term purchase agreements that are enforceable and legally binding and that specify all significant terms were payments of $0.3 billion due in the next 12 months and $1.3 billion due thereafter. We expect to fund these obligations with cash flows from operations and cash on our balance sheet.


Off-Balance Sheet Arrangements
 
During the six months ended July 31, 2023 and 2022, 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.

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Indemnification Arrangements
 
During the ordinary course of business, we may indemnify, hold harmless and agree to reimburse for losses suffered or incurred by 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 under Delaware law, we have entered into indemnification agreements with our officers, directors and certain employees, indemnifying them for certain events or occurrences in connection with their service as our officers or directors or those of our direct and indirect subsidiaries.
 
Pursuant to the indemnification agreements, our bylaws, and Delaware law, we are indemnifying our former executive officers in connection with the stipulation of settlement entered into on January 30, 2023. No other claims or reimbursements under indemnification arrangements were material to our interim condensed consolidated financial statements.

Critical Accounting Estimates

We prepare our unaudited interim condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. The preparation of unaudited interim condensed interim consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

There have been no significant changes to our critical accounting estimates as described in our Annual Report on Form 10-K for the year ended January 31, 2023, which was filed with the SEC on March 23, 2023.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no other material changes to our market risk exposures as compared to the market risk exposures described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2023, filed with the SEC on March 23, 2023.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of July 31, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of July 31, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

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

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

The information set forth in Note 3 “Commitments and Contingencies─Legal Proceedings” in our accompanying Notes to Condensed Consolidated Financial Statements is incorporated herein by reference.


Item 1A. Risk Factors

Risk Factor Summary

Our business is subject to numerous risks and uncertainties, including those highlighted in Part II, Item 1A titled “Risk Factors.” These risks include, but are not limited to, the following:

Factors Related to Our Business and Results of Operations
•our business model of sales of licenses and delivery of cloud services;
•fluctuations in our operating results from period to period;
•our organic and inorganic growth and the effectiveness of our controls, systems and procedures as we grow;
•the effectiveness of actions taken to restructure our business to align our cost structure with our strategic priorities;
•our history of losses and the prospect of profitability;
•costly and continuous infrastructure investments required by our cloud services;
•our ability to attract and retain leadership and key personnel, particularly within our industry; and
•expansion and integration related to past and future acquisitions.

Factors Related to the Economy and the Markets in which We Operate
•economic and political conditions and uncertainty, both domestically and internationally, including those specific to industries in which our customers participate;
•intense competition from large and small providers and vendors in the markets in which we operate;
•market acceptance of our new and existing offerings and product enhancements; and
•governmental export and import controls related to operation in international markets.

Factors Related to Customers and Sales
•current and future customer demand, use case expansion and satisfaction;
•our reliance on customer purchases, renewals, upgrades and expansions of term licenses, agreements for cloud services and maintenance and support agreements;
•our evolving pricing models and their impacts on our customers’ purchases, renewals, upgrades and expansions;
•the length of time, expense and unpredictability associated with our sales;
•our international sales and operations;
•dependency on and challenges related to sales to federal, state, local and foreign governments; and
•customer dissatisfaction, data loss or corruption arising from incorrect or improper implementation or use of our products.

Factors Related to IT, Privacy and Data Security
•actual or perceived security breaches or incidents or unauthorized access to our customers’ data, our data or our cloud services;
•interruptions or performance problems associated with our technology and infrastructure, and reliance on SaaS technologies from third parties;
•actual or perceived errors, failures or bugs in our offerings, including when new offerings, versions or updates are released;
•legal requirements, contractual obligations and industry standards related to security, data protection and privacy; and
•issues in the development and use of artificial intelligence (AI).

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Factors Related to Intellectual Property and Other Proprietary Rights
•our ability to protect our trade secrets, trademarks, copyrights, patents, know-how, confidential information, proprietary methods and technologies and other intellectual property and proprietary rights;
•intellectual property rights claims by third parties that may be costly to defend, require us to pay significant damages or limit our ability to use certain technologies;
•maintenance, protection and enhancement of our brand; and
•our use of “open source” software and related potential burdens, restrictions and litigation.

Factors Related to Reliance on Third Parties
•our reliance on third-party providers of cloud infrastructure services to deliver our offerings to users on our platform;
•our ability to maintain successful relationships with our partners, such as distributors and resellers, to license, provide professional services and support our offerings;
•our use of our community website, expansion of our developer network and support from third-party software developers; and
•third-party advice and information that may not be accurate that is provided to others utilizing our community website and our products.

Factors Related to Our Capital Resources and Tax
•our debt servicing obligations;
•our current and future indebtedness may limit our operating flexibility;
•the impact of transactions relating to the Notes on the trading price of our common stock;
•the conditional conversion feature of the Notes;
•counterparty risk related to the Capped Calls;
•our ability to obtain capital on acceptable terms to support our growth;
•our ability to use our net operating losses and tax credits to offset future taxes;
•liability related to past or future sales and use, value added, withholding or similar taxes;
•tax liabilities related to federal, state, local and foreign taxes; and
•the volatility of our common stock.

General Factors
•the impact of natural disasters, climate change and other events beyond our control on our business;
•changes in accounting pronouncements and other financial and nonfinancial reporting standards;
•the strain on resources and diversion of management attention caused by the requirements of being a public company and related complexities; and
•anti-takeover provisions in our charter, bylaws and afforded to us under Delaware law that may have the effect of delaying or preventing a change of control or changes in our management.

Risk Factors

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

Factors Related to Our Business and Results of Operations

Our business model may not be successful and may not accomplish our business and financial objectives, which could negatively impact our operating results.

Historically we generated a majority of our revenues from sales of licenses, whereby we generally recognize the license fee portion of the arrangement upfront, assuming all revenue recognition criteria are satisfied. As customers have increasingly adopted our cloud services offerings, the proportion of revenue from our delivery of cloud services has grown. This shift in our revenue mix has impacted, and it will continue to impact, our revenue and operating margins as a higher percentage of our sales is now recognized ratably from sales of our cloud services offerings. The degree to which cloud services
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become our predominant delivery model depends on customer choice. The pace of the shift may also fluctuate and the mix of cloud services and license revenue may continue to vary from quarter to quarter. Because the shift to cloud involves a greater capital commitment from customers, the pace of the shift to cloud may be impacted by factors outside of our control such as uncertainty in the economy and slowdown in technology spending or an otherwise cautious spending environment. Therefore, our ability to predict our revenue and margins in any particular period has been, and may continue to be, limited. Whether our business model of delivering our portfolio of offerings as a mix of cloud services offerings and license offerings will prove successful and will accomplish our business and financial objectives is subject to numerous uncertainties, including but not limited to: fluctuations or changes in customer demand, renewal and expansion rates, our ability to further develop and scale infrastructure, tax and accounting implications, pricing, and our costs. In addition, the metrics we use to measure the success of our business model, and evaluate and describe our business, will continue to evolve as our business model evolves as significant trends emerge. If we do not successfully execute our business model, our business and future operating results could be adversely affected.

Our operating results may fluctuate significantly and our past operating results may not be a good indication of future performance.

Our revenues, operating margins, cash flows and other operating results have varied, and could in the future vary, significantly from period to period as a result of various factors, many of which are outside of our control. Comparing our revenues and operating results on a period-to-period basis may not be meaningful, and our past results should not be relied upon as an indication of our future performance. For example, we generally recognize license revenues upfront and recognize revenues associated with our cloud services offerings ratably over the term of the agreement. At the beginning of each period, we cannot predict the ratio of orders with revenues that will be recognized upfront and those with revenues that will be recognized ratably that we will enter into during the quarter, due to the fact that our customers have the ability to choose between a term license and cloud subscription agreement. Our customers may choose shorter duration term licenses ahead of migrating to cloud subscriptions and may choose shorter duration cloud subscriptions when transitioning from on-premises to cloud services. Furthermore, during fiscal 2023, we saw changes in customer buying patterns due to the uncertain macroeconomic environment, including a slower pace of expansions and migrations to cloud services and enhanced deal scrutiny. We continue to see similar customer behaviors in fiscal 2024 and, based on the current market environment, we expect these to continue through at least the end of the current fiscal year. The size of our licenses and orders varies greatly and can result in fluctuations in our revenues and operating results. A portion of revenue recognized in any given quarter is a result of ratably recognized agreements entered into during previous quarters, including agreements for our cloud services offerings and maintenance and support agreements. Consequently, a decline in business from such ratably recognized agreements in any quarter may not be reflected in our revenue results for that quarter. Any such decline, however, will negatively affect our revenues in future quarters. Accordingly, the effect of downturns in sales and market acceptance of our offerings may not be fully reflected in our results of operations until future periods.

We may not be able to accurately predict our future revenues or results of operations. For example, although our cloud services delivery model generates recurring revenue and cash flows that are expected to be more predictable over time, we may not be able to accurately forecast our revenue, cash flows and other financial results due to a number of variables, including revenue mix, our customers’ rate of adoption of our cloud services model as compared to term licenses, contract durations, the extent and impact of the overall economic environment on our business, seasonality and the timing of revenue recognition and cash collections. We base our current and future expense levels on our operating plans and sales forecasts, and our operating costs are expected to be relatively fixed in the short-term. As a result, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues, and even a small shortfall in revenues could disproportionately and adversely affect our financial results for that quarter.

In addition to other risk factors described elsewhere in this “Risk Factors” section, factors that may cause our financial results to fluctuate from quarter to quarter include:

•our revenue mix, which may impact our revenue, deferred revenue, remaining performance obligations and operating margins;

•the timing of our sales during the quarter, particularly because a large portion of our sales occur toward the end of the quarter;

•the loss or delay of large transactions;

•changes in the mix of our revenues from sales of licenses to the delivery of cloud services as well as the duration;
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•the mix of revenues attributable to larger transactions as opposed to smaller transactions and the impact that a few large transactions or a change in mix may have on our overall financial results as well as the overall average selling price of our offerings;

•the renewal and usage rates of our customers;

•changes in the competitive dynamics of our market;

•changes in customers’ budgets and in the timing of their purchasing decisions and in the length of sales cycles;

•changes in our pricing models and practices or those of our competitors;

•the amount and timing of costs, including any adverse effects associated with, our recent reduction in workforce;

•customers delaying purchasing decisions in anticipation of new offerings or software enhancements by us or our competitors or for other reasons;

•customer acceptance of and willingness to pay for new versions of our offerings or new solutions for specific product and end markets;

•our ability to successfully introduce and monetize new offerings and licensing and service models for our new offerings;

•network outages or actual or perceived security breaches or incidents;

•the availability and performance of our cloud services offerings;

•our ability to control costs, including our operating expenses;

•changes in laws and regulations that impact our business;

•general economic and political conditions and uncertainty, both domestically and internationally, as well as economic and political conditions and uncertainty specifically affecting industries in which our customers participate, including the current uncertain macroeconomic environment, including financial and credit market fluctuations, uncertainty in the banking sector, rising interest rates, political unrest and social strife, impacts of the COVID-19 pandemic on our economy, geopolitical tensions, including the war in Ukraine, and uncertain or destabilizing national election results in the United States and other jurisdictions in which we operate, which can adversely affect our customers’ ability or willingness to renew, upgrade, or expand their agreements, or delay prospective customers’ purchasing decisions, or reduce the value or duration of new contracts;

•changes to our management and key personnel as we scale and evolve business priorities;

•the rate of expansion, retention and productivity of our sales force;

•the amount and timing of costs associated with recruiting, training, and integrating new employees and retaining and motivating existing employees;

•the amount and timing of our stock-based compensation expenses;

•changes in accounting standards, particularly those related to revenue recognition and sales commissions;
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•use of estimates, judgments and assumptions under current accounting standards;

•the timing of satisfying revenue recognition criteria;

•our ability to qualify and successfully compete for government contracts; and

•the collectability of receivables from customers and resellers, which may be hindered or delayed.

Many of these factors are outside our control, and the variability and unpredictability of such factors could result in our failing to meet or exceed our financial expectations for a given period. We believe that quarter-to-quarter comparisons of our revenues, operating results and cash flows may not necessarily be indicative of our future performance.

If we fail to effectively manage our growth, our business and operating results could be adversely affected.
 
We have experienced and expect to continue to experience growth in our headcount and operations, which has placed and will continue to place demands on our management and our operational and financial systems and infrastructure. As we continue to grow, we must effectively integrate, develop and motivate new employees, while maintaining the effectiveness of our business execution and the beneficial aspects of our corporate culture and values, the challenges of which may be exacerbated due to remote working conditions. In particular, we intend to continue to make direct investments to expand our research and development, sales and marketing, and general and administrative organizations, as well as our international operations. In addition, while we endeavor to grow profitably, investments we make in the growth of our business are generally for the long-term, and may increase our expenses and adversely impact our profitability in the near term.

To effectively manage growth, we must continue to improve our operational, financial and management controls, and our reporting systems and procedures by, among other things:

•improving our key business applications, processes and IT infrastructure to support our business needs and appropriately documenting such systems and processes;

•enhancing information and communication systems to ensure that our employees and offices around the world are well-coordinated and can effectively communicate with each other and our growing base of customers and partners; and

•enhancing our internal controls to ensure timely and accurate reporting of all of our operations and financial results.

These systems enhancements and improvements will require significant capital expenditures and allocation of valuable management and employee resources. If we fail to implement these improvements effectively, our ability to manage our expected growth, ensure uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public reporting companies will be impaired. Additionally, if we do not effectively manage the growth of our business and operations, the quality of our offerings could suffer, which could negatively affect our brand, financial results and overall business.

Actions that we are taking to restructure our business to align our cost structure with our strategic priorities may not have the anticipated effects.

In the quarter ended April 30, 2023, we announced a restructuring plan (the “Plan”) involving approximately 4 percent of our global workforce, mostly in North America. While the Plan and other proactive organizational and strategic changes that include optimizing the company’s processes, cost structure and how the company operates globally were designed to ensure the company continues to balance growth with profitability, we may encounter challenges in the execution of these efforts that could prevent us from recognizing the intended benefits of such efforts or otherwise adversely affect our business, results of operations and financial condition.

As a result of the Plan, we have incurred and may continue to incur some additional costs in the near term, including cash expenditures related to severance payments, certain retention payments (for roles being moved to lower cost regions),
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employee benefits and employee transition costs, as well as non-cash charges for share-based compensation expense. The Plan may result in other unintended consequences, including employee attrition beyond our intended reduction in force, damage to our corporate culture and decreased employee morale among our remaining employees, diversion of management attention, adverse effects to our reputation as an employer (which could make it more difficult for us to hire new employees in the future), loss of institutional knowledge and expertise of departing employees, and potential failure or delays to meet operational and growth targets due to the loss of qualified employees. If we experience any of these adverse consequences, the Plan and other strategic initiatives may not achieve or sustain their intended benefits, or the benefits, even if achieved, may not be adequate to meet our long-term profitability and operational expectations, which could adversely affect our business, results of operations and financial condition.

We have a history of losses, and we may not be profitable in the future.

We have incurred net losses in each year since our inception. As a result, we had an accumulated deficit of $4.05 billion at July 31, 2023. Because our products and offerings, as well as the market for these products and offerings, continue to evolve, it is difficult for us to predict our future operating results. Our operating expenses may increase over the next several years as we hire additional personnel, expand and improve the effectiveness of our distribution channels, improve the performance and scalability of our technology architecture, and continue to develop features and functionality for our offerings. In addition, as a public company, we have incurred and will continue to incur significant legal, accounting and other operating expenses. If our revenues do not increase to offset increases in our operating expenses, we may not be profitable in future periods. Our historical revenue growth has been inconsistent and should not be considered indicative of our future performance. Further, in future periods, our revenue growth could slow, or our revenues could decline for a number of reasons, including downturns in the global and U.S. economy, slowing demand for our offerings, increasing competition, a decrease in the growth of our overall market, changes in our mix of revenues, or our failure, for any reason, to continue to capitalize on growth opportunities. Any failure by us to achieve, sustain or increase profitability on a consistent basis could cause the value of our common stock to decline.

Our cloud services require costly and continual infrastructure investments, and if our cloud services are not successful, our business could be adversely affected.

A cloud-based model of software deployment is one in which a software provider typically licenses an application to customers for use as a service on demand through web browser technologies. Delivering software under a cloud-based model results in higher costs and expenses when compared to sales of licenses for similar functionality. In recent years, companies have begun to expect that key software, such as customer relationship management and enterprise resource planning systems, be provided through a cloud-based model. Many of our offerings are now made available in the cloud as well as on-premises. Customers can sign up for our cloud services offerings and reduce the need to provision, deploy and manage internal infrastructure. In order to deliver our cloud services offerings via a largely cloud-based deployment, we have made and will continue to incur substantial costs to implement and maintain this alternative business model. In addition, as we look to deliver new or different cloud services, we are making significant technology investments to deliver new capabilities and advance our software to deliver cloud-native customer experiences. We expect that over time the percentage of our revenue attributable to our cloud services offerings will continue to increase. If our cloud services do not garner widespread market adoption, or there is a reduction in demand for cloud services caused by a lack of customer acceptance, technological challenges, weakening economic or political conditions, security or privacy concerns, inability to properly manage such services, competing technologies and products, decreases in corporate spending or otherwise, our financial results, business model and competitive position could suffer. If these investments do not yield the expected return, or we are unable to decrease the cost of delivering our cloud services, our gross margins, overall financial results, business model and competitive position could suffer. As customers have increasingly adopted our cloud services offerings, this also impacts the way we recognize revenues, which may affect our operating results and could have an adverse effect on our business operations and financial results.

Even with these investments and costs, some customers may desire on-premises deployment of our offerings. Our cloud services offerings may not be adopted among customers, due to potential concerns regarding, among other things, changes to pricing models, service availability, scalability, ability to use customer-developed apps, information security of a cloud service and hosted data, and access to data while offline or once a subscription has expired. Market acceptance of our cloud services offerings can be affected by a variety of factors, including but not limited to: security, reliability, performance, terms of service, support terms, customer preference, community engagement, customer concerns with entrusting a third-party to store and manage their data, public concerns regarding data privacy or data protection, and the enactment of restrictive laws or regulations in the affected jurisdictions. If we or other providers of cloud services experience security incidents or breaches, loss of customer data, disruptions in delivery of services, network outages, disruptions in availability of the internet, unauthorized access or other problems, the market for cloud services as a whole may be negatively affected. Moreover, sales of
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cloud services could displace sales of licenses. Alternatively, subscriptions to cloud services that exceed our expectations may unexpectedly increase our costs, lower our margins, lower our profits or increase our losses and otherwise negatively affect our projected financial results.

If we are unable to attract and retain leadership and key personnel, our business could be adversely affected.

We depend on the continued contributions of our leadership, senior management and other key personnel, the loss of whom could adversely affect our business. Recently, our management team has undergone significant change. Changes in our executive management team or key personnel could disrupt our business, and could impact our ability to preserve our culture, which could negatively affect our ability to recruit and retain personnel. Changes to our executive management team or key personnel increase our dependency on other team members who remain with us. If we lose the services of any member of the executive management team or any key personnel, we may not be able to locate a suitable or qualified replacement, and we may incur additional expenses to recruit and train a replacement, which could severely disrupt our business and growth and could be particularly disruptive in light of the recent leadership transitions. There is intense competition for executive management and it may take an extended period of time to find a candidate that meets our requirements if any of our executives depart unexpectedly. We do not maintain a key-person life insurance policy on any of our officers or other employees.

Our future success also depends on our ability to identify, attract and retain highly skilled technical, managerial, finance and other personnel, particularly in our sales and marketing, research and development, general and administrative, and professional service departments. We have faced, and may continue to face, higher employee turnover rates. Further, inflationary pressures, or stress over economic, geopolitical, or pandemic-related events such as those the global market is currently experiencing, may result in employee attrition. We face intense competition for qualified individuals from numerous software and other technology companies. We may incur significant costs to attract and retain these qualified individuals, and we may lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. As we move into new geographies, we will need to attract and recruit skilled personnel in those areas. Further, our current and future office environments or flexible work practices may not meet the expectations of our employees or prospective employees. If we are unable to retain and motivate our existing employees and attract qualified employees who are capable of meeting our growing technical, operational and managerial requirements, which may be exacerbated by the Plan and any similar future actions, we may be unable to manage our business effectively, which could adversely affect our business, results of operations and financial condition.

We continue to be substantially dependent on our sales force to effectively execute our sales strategies to obtain new customers and to drive additional use cases and adoption among our existing customers. We believe that there is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth. We have experienced, and may continue to experience, high attrition rates among our sales force. As our sales strategies continue to evolve and offerings expand, additional training for new hires and our existing team may be required for our sales force to successfully execute on those strategies. We periodically adjust our sales organization and our compensation programs as part of our efforts to optimize our sales operations to grow revenue and drive incremental growth. For example, at the beginning of the fourth quarter of fiscal 2023, we realigned the parts of our sales teams that are focused on security and observability product areas in favor of a single seller model. If we have not structured our sales organization or compensation for our sales personnel in a way that properly supports our company’s objectives, or if we fail to make changes in a timely fashion or do not effectively manage changes, our revenue growth could be adversely affected. If we are unable to hire, train and retain effective sales personnel, or the sales personnel are not successful in obtaining new customers or increasing sales to our existing customer base, our business will be adversely affected. Our sales and marketing expenses represent a significant percentage of our total expenses, and our business, results of operations, and financial condition may suffer if our sales and marketing expenditures do not contribute to increasing revenue as we anticipate.

In addition, we rely upon compensation packages to help attract, motivate and retain our employees, executive officers and directors, and to align the interests of our employees, executive officers and directors with our stockholders, and any failure to design and implement a compensation program that achieves these objectives, may adversely affect our ability to recruit and retain our employees, executive officers and directors.

Volatility or lack of performance in our stock price may also affect our ability to attract and retain our key employees. In addition, many of our senior management personnel and other key employees have become, or will soon become, vested in a substantial amount of stock or restricted stock units. Employees may be more likely to leave us if their restricted stock units have declined in value relative to the value at the time they were granted, or conversely, if the shares they own or the shares underlying their vested restricted stock units have significantly appreciated in value relative to the original purchase prices of the shares. If we are unable to retain our employees, or if we need to increase our compensation expenses to retain our employees, our business, results of operations, financial condition and cash flows would be adversely affected.
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We have in the past made and may in the future make acquisitions, strategic investments, divestitures and other transactions that could require significant management attention, disrupt our business, fail to achieve our strategic objectives, dilute stockholder value or negatively impact our results of operations.

We have in the past acquired or invested in, and we continue to seek to acquire or invest in businesses, technologies, or other assets that we believe could complement or expand our business. The identification, evaluation, and negotiation of potential acquisition or strategic investment transactions may divert the attention of management and entail various expenses, whether or not such transactions are ultimately completed. In addition, the consummation and integration of technologies or businesses involves significant risks, including the following:

•an acquisition may negatively affect our financial results because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment;

•we may be exposed to claims and disputes by third parties, including intellectual property claims, disputes and counter claims;

•we may incur potential goodwill impairment charges related to acquisitions;

•we may incur costs and experience potential difficulties associated with the requirement to test and assimilate the internal control processes of the acquired business;

•we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, infrastructure, products, personnel or operations of any company that we acquire, particularly if we are unable to attract and retain key personnel;

•we may not realize the expected benefits of the acquisition, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;

•an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;

•an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company;

•relationships with existing customers, vendors and distributors as business partners may be impacted as a result of us acquiring another company or business that competes with or otherwise is incompatible with those existing relationships;

•our due diligence of an acquired company or business may not identify significant problems or liabilities, or we may underestimate the costs and effects of identified liabilities;

•we may be exposed to litigation or other claims in connection with, or inheritance of claims or litigation risk as a result of, an acquisition, including but not limited to claims from former employees, customers or other third parties, which may differ from or be more significant than the risks our business faces;

•we may encounter difficulties in, or may be unable to, successfully sell any acquired products;

•an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions;

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•an acquisition may require us to comply with additional laws and regulations, or to engage in substantial remediation efforts to cause the acquired company to comply with applicable laws or regulations, or result in liabilities resulting from the acquired company’s failure to comply with applicable laws or regulations;

•our use of cash to pay for an acquisition would limit other potential uses for our cash;

•if we incur debt to fund such acquisition, such debt may subject us to material restrictions on our ability to conduct our business as well as financial maintenance covenants; and

•to the extent that we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease.

The occurrence of any of these risks could have a material adverse effect on our business operations and financial results.

Factors Related to the Economy and the Markets in which We Operate

Economic uncertainties or downturns could materially adversely affect our business.

Our business is subject to fluctuations in the worldwide economy, including financial and credit market fluctuations, changes in economic policy, increased inflation and responsive actions, including rising interest rates, labor shortages, supply chain disruptions, trade uncertainty, changes in tariffs, sanctions, international treaties, other trade restrictions, natural disasters, outbreaks of pandemic diseases, political unrest and social strife, acts of terrorism, armed conflicts, such as the war in Ukraine, geopolitical tensions in Taiwan and other global conflicts, instability in the banking sector or other impacts from the macroeconomic environment. The U.S. and worldwide economy is undergoing a period of volatility and uncertainty, which has impacted our business, markets, customers and industry. These macroeconomic conditions have caused and may continue to cause a decrease in corporate spending on enterprise software in general and negatively affect the rate of growth of our business. For example, increased inflation in recent months and related government responses increasing interest rates, the collapse of several financial institutions, and related instability in the global financial markets, may cause difficulties for our customers, resulting in reduced spending by them on our offerings. Continued or prolonged worldwide economic uncertainties or downturns could adversely affect our business operations or financial results.

Volatile or uncertain economic conditions could make it extremely difficult for our customers and us to forecast and plan future business activities accurately, and they could cause our customers to reevaluate their decision to purchase our offerings, which could delay and lengthen our sales cycles or result in cancellations of planned purchases. Furthermore, during challenging economic times our customers may face issues in gaining timely access to sufficient credit, which could result in an impairment of their ability to make timely payments to us. If that were to occur, we may be required to increase our allowance for doubtful accounts, which would adversely affect our financial results.

We have a significant number of customers in the business services, energy, financial services, healthcare and pharmaceuticals, manufacturing, media and entertainment, online services, retail, technology, telecommunications and travel and transportation industries, each of which is impacted to different degrees by different economic conditions. A substantial downturn in any of these industries may cause firms to react to worsening conditions by reducing their capital expenditures in general or by specifically reducing their spending on information technology. Customers in these industries may delay or cancel information technology projects or seek to lower their costs by renegotiating vendor contracts. During fiscal 2023, we saw changes in customer buying patterns due to the uncertain macroeconomic environment, including a slower pace of expansions and migrations to cloud services and enhanced deal scrutiny. We continue to see similar customer behaviors in fiscal 2024 and, based on the current market environment, we expect these to continue through at least the end of the current fiscal year. To the extent purchases of our offerings are perceived by customers and potential customers to be discretionary, our revenues may be disproportionately affected by delays or reductions in general information technology spending. Also, customers may choose to develop in-house software as an alternative to using our offerings. Moreover, competitors may respond to market conditions by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our offerings.

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We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry or geography. If the economic conditions of the general economy or industries in which we operate worsen from present levels, our business operations and financial results could be adversely affected.

We face intense competition in our markets, and we may be unable to compete effectively against our current and future competitors.

Although our offerings target the new and emerging industry for cloud and software services that deliver real-time business insights from data, we compete against a variety of large cloud service providers (“CSPs”) and software vendors, as well as smaller specialized companies, open source projects and custom development efforts, which provide solutions in the specific marketspaces we address. Our principal competitors include:

•Cloud monitoring and APM/Observability vendors;

•Monitoring, troubleshooting, security and analytics services offered (embedded or add-ons) by major public CSPs;

•Legacy security, systems management and other IT vendors; and

•IT departments that undertake custom software development efforts to analyze and manage their operations data across their public and private cloud landscapes.

The principal competitive factors in the markets include features, performance and support, scalability and flexibility, ease of deployment and use, total cost of ownership and time to value. Some of our current and potential competitors have advantages over us, such as longer operating histories, significantly greater financial, technical, marketing or other resources, stronger brand and business user recognition, larger intellectual property portfolios, broader global distribution networks and presence and more developed networks of partners and skilled users. Further, competitors may be able to offer products or functionality similar to ours at a more attractive price than we can, such as by integrating or bundling their software products with their other product offerings. In addition, our industry is evolving rapidly and is becoming increasingly competitive. Larger and more established companies may focus on delivering real-time business insights from data and could directly compete with us. For example, companies may commercialize open source software in a manner that competes with our offerings or causes potential customers to believe that such products and our offerings perform the same function. If companies move a greater proportion of their data and computational needs to the cloud, new competitors may emerge that offer services comparable to ours or that are better suited for cloud-based data, and the demand for our offerings may decrease. Smaller companies could also launch new products and services that we do not offer and that could gain market acceptance quickly.

In recent years, there have been significant acquisitions and consolidation by and among our competitors. We anticipate this trend of consolidation will continue, which will present heightened competitive challenges to our business. In particular, consolidation in our industry increases the likelihood of our competitors offering bundled or integrated products, and we believe that it may increase the competitive pressures we face with respect to our offerings. If we are unable to differentiate our offerings from the integrated or bundled products of our competitors, such as by offering enhanced functionality, performance or value, we may see decreased demand for those offerings, which would adversely affect our business operations, financial results and growth prospects. Further, it is possible that continued industry consolidation may impact customers’ perceptions of the viability of smaller or even medium-sized software firms and consequently their willingness to use software solutions from such firms. Similarly, if customers seek to concentrate their software license purchases in the product portfolios of a few large providers, we may be at a competitive disadvantage regardless of the performance and features of our offerings. We believe that in order to remain competitive at the large enterprise level, we will need to develop and expand relationships with CSPs, global system integrators and managed service providers that provide a broad range of products and services. If we are unable to anticipate competitive challenges or compete effectively, our business operations and financial results could be materially and adversely affected.

If our new and existing offerings and product enhancements do not achieve sufficient market acceptance, our financial results and competitive position will suffer.

Our business substantially depends on, and we expect our business to continue to substantially depend on, sales of licenses, maintenance and services related to Splunk Enterprise and sales of subscriptions related to our cloud-based offerings. As such, the market acceptance of these offerings is critical to our continued success. Demand for these offerings is affected by
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a number of factors beyond our control, including continued market acceptance of these products by referenceable accounts for existing and new use cases, the timing of development and release of new products by our competitors, technological change, and growth or contraction in the market and the economy in general. If we are unable to continue to meet customer demands or to achieve more widespread market acceptance of these platform products, our business operations, financial results and growth prospects will be materially and adversely affected.

We spend substantial amounts of time and money to research and develop or acquire new offerings and enhanced versions of our existing offerings to incorporate additional features, improve functionality or other enhancements in order to meet our customers’ rapidly evolving demands. In addition, we continue to invest in solutions that can be deployed on top of our platform to target specific use cases and to cultivate our community of application developers and users. When we develop a new or enhanced version of an existing offering, we typically incur expenses and expend resources upfront to market, promote and sell the new offering. Therefore, when we develop or acquire new or enhanced offerings, their introduction must achieve high levels of market acceptance in order to justify the amount of our investment in developing and bringing them to market. If our recent product expansions and offerings do not garner widespread market adoption and implementation, our financial results and competitive position could suffer.

Further, we may make changes to our offerings that our customers do not like, find useful or agree with. We may also discontinue certain features, begin to charge for certain features that are currently free or increase fees for any of our features or usage of our offerings.

Our new and existing offerings or product enhancements and changes to our existing offerings could fail to attain sufficient market acceptance for many reasons, including:

•our failure to predict market demand accurately in terms of product functionality and to supply offerings that meet this demand in a timely fashion;

•real or perceived defects, errors or failures;

•negative publicity about their performance or effectiveness;

•delays in releasing to the market our new offerings or enhancements to our existing offerings to the market;

•release of cloud-based offerings that do not, or are perceived to not, fully meet customers’ security and compliance needs;

•introduction or anticipated introduction of competing products by our competitors;

•inability to scale and perform to meet customer demands;

•poor business conditions for our end-customers, causing them to delay IT purchases; and

•reluctance of customers to purchase products incorporating open source software.

If our new or existing offerings or enhancements and changes do not achieve adequate acceptance in the market, our competitive position will be impaired, and our revenue, business and financial results will be negatively impacted. The adverse effect on our financial results may be particularly acute because of the significant research, development, marketing, sales and other expenses we will have incurred in connection with the new offerings or enhancements.

We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls.

Our offerings are subject to United States export controls, and we incorporate encryption technology into certain of our offerings. These encryption offerings and the underlying technology may be exported outside of the United States only with the required export authorizations, including by license.
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Furthermore, our activities are subject to the U.S. economic sanctions laws and regulations that prohibit the shipment of certain products and services without the required export authorizations or export to countries, governments, and persons targeted by U.S. sanctions. While we take precautions to prevent our offerings from being exported in violation of these laws, including obtaining authorizations for our encryption offerings where appropriate, implementing IP address blocking and screenings against U.S. Government and international lists of restricted and prohibited persons, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. For example, downloads of our free software may have in the past been made in potential violation of the export control and economic sanctions laws.

We also note that if our partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm as well as other negative consequences including government investigations and penalties. We presently incorporate export control compliance requirements in our partner and customer agreements. Complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities.

Violations of U.S. sanctions or export control laws can result in fines or penalties, including civil penalties of up to $300,000 or twice the value of the transaction, whichever is greater, per violation. In the event of criminal knowing and willful violations of these laws, fines of up to $1 million per violation and possible incarceration for responsible employees and managers could be imposed.

From time to time, as part of our acquisition activity, we have discovered a limited number of instances where certain activity raised concerns about potential violations of U.S. sanctions or export control laws. For example, we previously discovered that the SaaS platform or product of an acquired company was accessed (or attempted to be accessed) from IP addresses potentially located in embargoed countries. As a result, we have submitted and may, in the future, submit voluntary disclosures with the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) to alert the agency to these types of potential violations. If we (including the companies we acquire) are found to be in violation of U.S. economic sanctions or export control laws, it could result in fines and penalties. We may also be adversely affected through other penalties, reputational harm, loss of access to certain markets or otherwise.

While we have extensive procedures in place, we recently determined that one of our development partners in India may have accessed certain of our encryption source code and technology without meeting relevant export control requirements. We filed an Initial Voluntary Disclosure in December 2022 with the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) and filed the Final Voluntary Disclosure with BIS on June 6, 2023.

Also, various countries, in addition to the United States, regulate the import and export of certain encryption and other technology, including import and export permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our offerings or could limit our customers’ ability to implement our offerings in those countries. Changes in our offerings or future changes in export and import regulations may create delays in the introduction of our offerings in international markets, prevent our customers with international operations from deploying our offerings globally or, in some cases, prevent the export or import of our offerings to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, including as a result of geopolitical developments following the war in Ukraine, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our offerings by, or in our decreased ability to export or sell our offerings to, existing or potential customers with international operations. Any decreased use of our offerings or limitation on our ability to export or sell our offerings would likely adversely affect our business operations and financial results.

Factors Related to Customers and Sales

If customers do not expand their use of our offerings beyond the current predominant use cases, our ability to grow our business and operating results may be adversely affected.

Most of our customers currently use our offerings to support application management, IT operations, security and compliance functions. Our ability to grow our business depends in part on our ability to help enable current and future customers to increase their use of our offerings for their existing use cases and expand their use of our offerings to additional use cases. If we fail to achieve market acceptance of our offerings for these applications, if we fail to predict demand for product functionality or respond to such demand in a timely fashion, if our customers are not satisfied with our offerings, or if a
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competitor establishes a more widely adopted solution for these applications, our ability to grow our business and financial results will be adversely affected.

Our business and growth depend substantially on customers entering into, renewing, upgrading and expanding their term licenses, agreements for cloud services and maintenance and support agreements with us. Any decline in our customer renewals, upgrades or expansions could adversely affect our future operating results.

We typically enter into agreements for our license offerings, cloud services, and maintenance and support services, which customers have discretion to renew or terminate at the end of the initial term. In order for us to improve our operating results, it is important that new customers enter into renewable agreements, and our existing customers renew, upgrade and expand their agreements when the initial contract term expires. Our customers have no obligation to renew, upgrade or expand their agreements with us after the terms have expired. Our customers’ renewal, upgrade and expansion rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our offerings, our pricing, the effects of general economic conditions, competitive offerings or alterations or reductions in our customers’ spending levels. During fiscal 2023, we saw changes in customer buying patterns due to the uncertain macroeconomic environment, including a slower pace of expansions and migrations to cloud services and enhanced deal scrutiny. We continue to see similar customer behaviors in fiscal 2024 and, based on the current market environment, we expect these to continue through at least the end of the current fiscal year. If our customers do not renew, upgrade or expand their agreements with us or renew on terms less favorable to us, our revenues may decline.

We employ multiple and evolving pricing models, which subject us to various pricing and licensing challenges that could make it difficult for us to derive value from our customers and may adversely affect our operating results.

We employ multiple and evolving pricing models for our offerings. For example, we generally charge our customers for their use of Splunk Enterprise based on either the estimated daily data indexing capacity or a metric related to compute power consumed to support our customers’ workload. We are seeing an increasing share of our business being based on workload pricing. In addition, Splunk Cloud Platform is generally priced based on either the volume of data indexed per day including a fixed amount of data storage, or purchased infrastructure, data storage and bandwidth our customers require to support the underlying workload. Splunk SOAR and Splunk On-Call are priced by the number of seats, with Splunk SOAR also having a metric based on events sent to the software. Further, certain observability offerings are priced based on the number of hosts. Depending on the mix of licenses and cloud subscriptions, our revenues or deferred revenues could be adversely affected. Our pricing models or increased customer data volumes or computer usage may ultimately result in a higher total cost to our customers generally over time, or may cause our customers to limit or decrease usage in order to stay within the limits of their existing licenses or cloud subscriptions, or lower their costs, making it more difficult for us to compete or negatively impacting our financial results. As the amount of data and analytic needs within our customers’ organizations grow, we face downward pressure from our customers regarding our pricing, which could adversely affect our revenues and operating margins. In addition, our pricing models may allow competitors with different pricing models to attract customers unfamiliar or uncomfortable with our pricing models, which would cause us to lose business or modify our pricing models, both of which could adversely affect our revenues and operating margins. We have introduced and expect to continue to introduce variations to our pricing models, including but not limited to, predictive pricing programs, workload-based pricing, entity-based pricing, “rapid adoption” packages and other pricing programs that provide broader usage and cost predictability as well as tiered pricing based on deployment models, data source types, compute and storage units and customer environments. Any change in pricing models bears inherent risks as it may provide customers a choice to go for the lower-cost option, therefore putting renewal and customer lifetime value at risk. Although we believe that these pricing models and variations to these models will drive net new customers and increase customer adoption, it is possible that they will not and may potentially cause customers to decline to purchase or renew licenses or cloud subscriptions, or confuse customers and reduce their lifetime value, which could negatively impact our revenue, business and financial results.

Furthermore, while our offerings can measure and limit customer usage for the most part, we removed metered license enforcement via our software under certain circumstances, and in other circumstances, such limitations may be improperly circumvented or otherwise bypassed by users. For those offerings where we are not fully able to track usage, customers may be consuming over their licensed capacity, which may reduce our revenue opportunities. Similarly, we provide our customers with an encrypted license key for enabling their use of our offerings. There is no guarantee that users of our offerings will abide by the terms of the license limitations or encrypted license keys, and if they do not, we may not be able to capture the full value for the use of our offerings. For example, our enterprise license is generally meant for our customers’ internal use only. If our internal use customers improperly make our offerings available to their customers or other third parties, for example, through a cloud or managed service offering not authorized by us, it may displace our end user sales. Additionally, if an internal use
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customer that has received a volume discount from us improperly makes available our offerings to its end customers, we may experience price erosion and be unable to capture the appropriate value from those end customers.

Our sales cycle is long and unpredictable, particularly with respect to large customers, and our sales efforts require considerable time and expense.

Our operating results may fluctuate, in part, because of the resource intensive nature of our sales efforts, the length and variability of the sales cycle of our offerings and the short-term difficulty in adjusting our operating expenses. Our operating results depend in part on sales to large customers. The length of our sales cycle, from initial evaluation to delivery of and payment for the software license, varies substantially from customer to customer. This variation is due to numerous factors, including in the expansion of our offerings and new pricing models, as well as the potential for different buying centers for the same offering. In addition, Splunk Cloud Platform has generated interest from our customers who are also considering purchasing and deploying Splunk Enterprise on-premises. In some cases, our customers may wish to consider a combination of these offerings, potentially further slowing our sales cycle. Our sales cycle can extend to more than a year for certain customers, particularly large customers. It is difficult to predict exactly when, or even if, an existing customer will convert from a term license to cloud services, we will make a sale with a potential customer, or a user of a trial version of one of our offerings will upgrade to the paid version of that offering. As a result, large individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. For example, during fiscal 2023, we saw changes in customer buying patterns due to the uncertain macroeconomic environment, including a slower pace of expansions and migrations to cloud services and enhanced deal scrutiny. We continue to see similar customer behaviors in fiscal 2024 and, based on the current market environment, we expect these to continue through at least the end of the current fiscal year. The loss or delay of one or more large transactions in a quarter could impact our operating results for that quarter and any future quarters for which revenues from that transaction are lost or delayed. As a result of these factors, it is difficult for us to forecast our revenues accurately in any quarter. Because a substantial portion of our expenses are relatively fixed in the short-term (subject to rising fixed costs in the longer term as discussed above), our operating results will suffer if revenues fall below our expectations in a particular quarter.

Our international sales and operations subject us to additional risks and challenges that can adversely affect our business operations and financial results.

During the three months ended July 31, 2023, we derived approximately 35% of our total revenues from customers outside the United States, and we are continuing to expand our international operations as part of our growth strategy. This strategy requires us to recruit and retain qualified technical and managerial employees, manage multiple remote locations performing complex software development projects and ensure intellectual property protection outside of the U.S. We expect to continue to hire employees outside of the United States to reach new customers and gain access to additional technical talent. We currently have sales personnel and sales and support operations in the United States and certain countries around the world. To the extent that we experience difficulties in recruiting, training, managing, or retaining non-U.S. staff, and specifically sales management and sales personnel staff, we may experience difficulties in sales productivity in, or market penetration of, non-U.S. markets. Additionally, our sales organization outside the United States is substantially smaller than our sales organization in the United States, and we rely heavily on our indirect sales channel for non-U.S. sales. Our ability to convince customers to expand their use of our offerings or renew their agreements with us is directly correlated to our direct engagement with the customer. To the extent we are unable to engage with non-U.S. customers effectively with our limited sales force, professional services and support capacity or our indirect sales model, we may be unable to grow sales to new or existing customers to the same degree we have experienced in the United States.

Our international operations subject us to a variety of risks and challenges, including:

•difficulties in managing and staffing international operations and the increased management, travel, infrastructure and legal compliance costs associated with having multiple international operations;

•reliance on partners, which may have different incentives or may sell competing products, as well as different approaches with respect to compliance with laws and regulations, business practices and other day-to-day activities;

•longer payment cycles and difficulties in collecting accounts receivable or satisfying revenue recognition criteria, especially in emerging markets;

•increased financial accounting and reporting burdens and complexities;
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•general economic conditions in each country or region;

•political uncertainty and international conflicts around the world;

•compliance with multiple and changing foreign laws and regulations, including those governing employment, tax, privacy and data protection, data transfer, data security, data residency, and industry-specific matters, and the risks and costs of non-compliance with such laws and regulations;

•compliance with laws and regulations for foreign operations, including the United States Foreign Corrupt Practices Act, the United Kingdom Bribery Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our offerings in certain foreign markets, and the risks and costs of non-compliance, including as a result of any changes in trade relations, sanctioned parties or other restrictions;

•heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of financial statements and irregularities in financial statements;

•fluctuations in currency exchange rates and the related effect on our financial results;

•difficulties in repatriating or transferring funds from, or converting currencies in, certain countries;

•the need for localized software and licensing programs;

•reduced protection for intellectual property rights in some countries and practical difficulties of enforcing intellectual property and contract rights abroad; and

•natural disasters, diseases and pandemics, such as COVID-19, that may disproportionately affect areas in which we do business.

Geopolitical events may impact our operations and financial results. For example, the impact of the United Kingdom exiting the European Union (the “EU”) (often referred to as “Brexit”) on EU-UK political, trade, economic and diplomatic relations continues to be uncertain and such impact may not be fully realized for several years or more. Continued uncertainty and friction may result in regulatory, operational, and cost challenges to our United Kingdom and international operations.

Any of these risks could adversely affect our international operations, reduce our international revenues or increase our operating costs, adversely affecting our business operations, financial results and growth prospects.

In addition, compliance with laws and regulations applicable to our international operations increases our cost of doing business in foreign jurisdictions. We may be unable to keep current with changes in foreign government requirements and laws as they change from time to time. Failure to comply with these regulations could have adverse effects on our business. In many foreign countries, it is common for others to engage in business practices that are prohibited by our internal policies and procedures or United States regulations applicable to us. In addition, although we have implemented policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of our employees, contractors, partners and agents will comply with these laws and policies. Violations of laws or key control policies by our employees, contractors, partners or agents could result in delays in revenue recognition, financial reporting misstatements, fines, penalties, or the prohibition of the importation or exportation of our offerings and could have a material adverse effect on our business operations and financial results.

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Our sales to public sector customers are subject to a number of additional challenges and risks.

We derive a portion of our revenues from contracts with U.S. federal, state and local and foreign governments, and we believe that the success and growth of our business will continue to depend on our successful engagement on government contracts. For our sales to these public sector customers, we must comply with laws and regulations relating to the formation, administration and performance of contracts, which affect how our partners and how we do business with governmental agencies. These laws and regulations provide public sector customers rights, many of which are not typically found in commercial contracts. Such rights may include price protection, the accuracy of information provided to the government, compliance with procurement integrity and government ethics, compliance with specified product certifications, product restrictions, pre-conditions for access to controlled or classified information, compliance with supply chain requirements, labor regulations, supplier diversity policies, and other terms that are particular to public sector customers. These laws and regulations may impose added costs on our business, and failure to comply with these or other applicable regulations and requirements, including non-compliance in the past, could lead to bid protests, contract cure actions, contract actions grounded in fraud, claims for damages or other relief, penalties, termination of contracts, loss of exclusive rights in our intellectual property, substantial audit or re-procurement costs and temporary suspension or permanent debarment from government contracting. Any such damages, penalties, disruptions or limitations in our ability to do business with the public sector could have a material adverse effect on our business operations and financial results.

In October 2019, Splunk Cloud Platform received authorization under the U.S. Federal Risk and Authorization Management Program (“FedRAMP”) at the moderate level that allows U.S. federal government agencies and contractors to have greater integration with our platform if and when they transition to cloud-based computing. Splunk achieved accreditation against the Protected Level under the Australian Information Security Registered Assessors Program (IRAP) in June 2021. In September 2021, the U.S. Defense Information Systems Agency granted Splunk Cloud Platform U.S. Department of Defense (“DoD”) Impact Level 5 (“IL5”), which allows U.S. government agencies to use our platform for high sensitivity controlled unclassified information. Further, in June 2023, Splunk attained authorization for the Splunk Cloud Platform from the State Risk and Authorization Management Program (“StateRAMP”) at the moderate level. Maintaining FedRAMP, IRAP, IL5, StateRAMP and other such restricted cloud environments places an increased compliance burden upon us, which may increase our internal costs to provide services to government agencies. If we cannot adequately comply with these compliance requirements and the complexities of maintaining multiple programs, our growth could be adversely impacted, and we could incur significant liability and our reputation and business could be harmed.

Factors that could impede our ability to maintain or increase the amount of revenues derived from government contracts, include:

•changes in fiscal or contracting policies;

•decreases in available government funding;

•ability to adapt to public sector budgetary cycles and funding authorizations, with funding reductions or delays having an adverse impact on public sector demand for our products;

•changes in government procurement programs or applicable requirements;

•changes in government sanctions programs and related policies;

•changes in underlying regulatory requirements that vary across the geographies in which we operate, which could increase costs and compliance risks, including, but not limited to, the Biden Administration’s Executive Order 14028, “Improving the Nation’s Cybersecurity,” and the Cyber Incident Reporting for Critical Infrastructure Act of 2022;

•compliance with agency software security and maturity model requirements promulgated in response to the US Office of Management and Budget memos M-21-31 and M-22-18;

•changes in government regulations around the world related to, among other things, national defense, cybersecurity, supply chain security, and critical infrastructure designations;
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•noncompliance with laws, contract provisions or government procurement or other applicable regulations, or the perception that any such noncompliance has occurred or is likely;

•changes in the political environment and budgeting, including before or after a change of leadership within the government administration, and any resulting uncertainty or changes in policy or priorities and resultant funding;

•ability to obtain or maintain the organizational and personnel clearances required to perform on classified contracts for government customers, or to obtain or maintain security clearances for our employees;

•changes to government certification requirements or approved product lists;

•ability to achieve or maintain one or more government certifications, including, but not limited to, the U.S. DoD Cybersecurity Maturity Model and the U.K. Ministry of Defence Cyber Essentials Plus certifications, the US FedRAMP High authorization, the Japanese Government’s Information system Security Management and Assessment Program (“ISMAP”), and our existing FedRAMP Moderate, IL5, IRAP and StateRAMP authorizations;

•ability to maintain products on key government acquisition contracts;

•an extended government shutdown or other potential delays or changes in the government appropriations or other funding authorization processes including as a result of events such as war, incidents of terrorism, natural disasters, and public health concerns or epidemics;

•changes in the duration of, and product expansion and offerings in, our contracts and subcontracts with government and prime contractor customers;

•delays in the payment of our invoices by government or prime contractor payment offices; and

•bid protests by competitors

The occurrence of any of the foregoing could cause governments and governmental agencies to delay or refrain from purchasing licenses of our offerings in the future or otherwise have an adverse effect on our business operations and financial results. To the extent that we become more reliant on contracts with government entities, including foreign government entities, in the future, our exposure to such risks and challenges could increase, which in turn could adversely impact our business.

Incorrect or improper implementation or use of our software could result in customer dissatisfaction, customer data loss or corruption and negatively affect our business, operations, financial results and growth prospects.

Our software is deployed in a wide variety of technology environments. Increasingly, our software has been deployed in large scale, complex technology environments, and we believe our future success will depend on our ability to increase sales of licenses for use in such deployments. We often must assist our customers in achieving successful implementations for large, complex deployments. If we or our customers are unable to implement our software successfully, including related to technologies that we have obtained through acquisitions, are unable to do so in a timely manner or if an improper implementation or change in system configuration results in errors or loss of data, customer perceptions of our company may be impaired, our reputation and brand may suffer, and customers may choose not to increase their use of our offerings. In addition, our software imposes server load and index storage requirements for implementation. If our customers do not have the server load capacity or the storage capacity required, they may not be able to effectively implement and use our software and, therefore, may not choose to increase their use of our offerings.

Our customers and third-party partners may need training in the proper use of and the variety of benefits that can be derived from our software to maximize its potential. If our software is not implemented or used correctly or as intended, inadequate performance, errors, data loss or corruption may result. Because our customers rely on our software and maintenance and support services to manage a wide range of operations, the incorrect or improper implementation or use of our
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software, our failure to train customers on how to efficiently and effectively use our software, or our failure to provide maintenance services to our customers, may result in negative publicity or legal claims against us. Also, as we continue to expand our customer base, any failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our offerings.

Factors Related to IT, Privacy and Data Security

If we or our third-party service providers experience a security breach or incident, including supply chain attacks, or unauthorized parties otherwise obtain access to our customers’ data, our data, or our cloud services, our offerings may be perceived as not being secure, our reputation may be harmed, demand for our offerings may be reduced, and we may incur significant liabilities.

Our offerings involve the processing, storage and transmission of data, and security breaches and incidents could result in unauthorized access to, or the loss, destruction, misuse, disclosure, modification, corruption, or unavailability of, this information, litigation, indemnity obligations, fines, penalties and other liability. In addition, vulnerabilities in our offerings, including any systems, software, equipment, networking configurations or other aspects of their environments or deployments, may make them vulnerable to security breaches or attacks if their offerings operating controls fail or their source code is accessed or exploited. We may become the target of cyber-attacks by third parties seeking unauthorized access to our data or our customers’ data or to disrupt our ability to provide services. There is also a danger of industrial espionage, misuse, fraud, theft of information or assets (including source code), or damage to assets by people who have gained access (authorized or unauthorized) to our facilities, systems or information. Because there are many different techniques used to obtain unauthorized access to systems and data, and such techniques continue to evolve, we may be unable to anticipate attempted security breaches and incidents and proactively implement adequate preventative measures. Additionally, with many of our employees continuing to work remotely, we face an increased risk of attempted security breaches and incidents. While we have taken steps to protect the confidential information that we have access to, including confidential information we may obtain through our customer support services or customer usage of our cloud services offerings, our security measures or those of our third-party service providers could be breached or otherwise fail to prevent unauthorized access to or disclosure, modification, misuse, loss or destruction of such information. Computer malware, ransomware, cyber viruses, social engineering (phishing, smishing and vishing attacks), denial of service or other attacks, employee theft or misuse and increasingly sophisticated network attacks have become more prevalent in our industry, particularly against cloud services. The frequency and sophistication of these malicious attacks has increased, and it appears that cyber crimes and cyber criminal networks, some of which may be state-supported, have been provided substantial resources and may target U.S. enterprises or our customers and their use of our products. Furthermore, the risk of state-supported and geopolitical-related cyber attacks may increase in connection with ongoing global geopolitical tensions, such as the war in Ukraine and any related political or economic responses and counter-responses. In the past, we have had to take corrective action against cyber attackers to protect our cloud environment. In addition, we do not directly control content that customers store in our offerings. If customers use our offerings for the transmission or storage of personal information or other sensitive types of information and our security measures are, or are believed to have been breached or otherwise to have failed as a result of third-party action, employee error, malfeasance or otherwise, our reputation could be damaged, our business may suffer, and we could incur significant liability.

We also process, store and transmit our own data as part of our business and operations. This data may include personal, confidential or proprietary information. We make use of third-party technology and systems for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, communication with and content delivery to customers and prospects, back-office support, credit card processing, human resources services, customer relationship management, enterprise risk planning and other functions. Although we have developed systems and processes that are designed to protect our business and proprietary information and prevent data loss and other security breaches and incidents, and to reduce the impact of a security breach or incident at a third-party vendor, such measures cannot provide absolute security. We may expend significant resources, adapt our business activities and practices, or modify our operations or information technology in an effort to protect against security incidents and to mitigate, detect, and remediate vulnerabilities. There can be no assurance that any security measures that we or our third-party service providers, including CSPs, have implemented will be effective against current or future security threats, and we cannot guarantee that our software, systems and networks or those of our third-party service providers, including CSPs, have not been breached or otherwise compromised, or that they do not contain vulnerabilities or compromised trusted code that could be exploited and result in a breach of or disruption to our software, systems and networks or the software, systems and networks of third parties that support us and our services. Our ability to mitigate these risks may also be impacted by the acquisition of new companies, requiring us to incorporate and secure different or more complex IT environments. While we maintain measures designed to protect the integrity, confidentiality and security of our data and other data we maintain or otherwise process, and enable the secure development of our software, our security measures or those of our third-party service providers could fail and result in a
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compromise of our applications or unauthorized access to or disclosure, modification, misuse, loss, corruption, unavailability, or destruction of such data.

Any security breach or other security incident impacting us or any of our third-party service providers, or the perception that one has occurred, could result in a loss of customer confidence in the security of our offerings and damage to our brand, reputation, and market position, loss of sales and customers, result in unauthorized access to or disclosure, modification, misuse, loss, corruption, unavailability, or destruction of our data or our customers’ data, reduce the demand for and negatively impact market acceptance of our offerings, disrupt normal business operations, require us to spend material resources to investigate or correct the breach and to prevent future security breaches and incidents, expose us to legal claims and liabilities, including litigation, regulatory investigations and enforcement actions, and indemnity obligations, and adversely affect our revenues and operating results. These risks may increase as we continue to grow the number and scale of our cloud services offerings, and process, store, and transmit increasing amounts of data. Additionally, we may need to expend significant financial and development resources to analyze, correct, eliminate, or work around errors or defects or to eliminate or otherwise address vulnerabilities, and we and our third-party service providers may face difficulties or delays in identifying or otherwise responding to any potential security breach or incident and otherwise providing services.

Third parties may also conduct attacks designed to deny customers access to our cloud services offerings. A significant disruption in access to, or ability to use, our cloud services offerings could damage our reputation with current and potential customers, expose us to claims and liability, cause us to lose customers, negatively impact market acceptance of our cloud services offerings or other offerings, or otherwise negatively affect our business.

The attack against SolarWinds, in which hackers inserted malware into a SolarWinds software update, highlights the growing risk from the infection of trusted third-party software while it is under assembly, known as a supply chain attack. In addition to software supply chain attacks, third-party vulnerabilities may impact our security posture. We have a threat and vulnerability management program designed to identify, track, remediate and help mitigate vulnerabilities in our IT environments. Nevertheless, the attack on on-premise Microsoft Exchange services and the Log4j vulnerability, which could be exploited to allow unauthorized actors to execute code remotely, highlight the risk that third-party products and open-source software we use may contain vulnerabilities that can be exploited by adversaries.

Further, if a high profile security breach, incident, or disruption occurs with respect to another cloud-based platform or service provider, our customers and potential customers may lose trust in cloud-based offerings generally, which could adversely impact our ability to retain existing customers or attract new ones, potentially causing a negative impact on our business.

We cannot be certain that our insurance coverage will be adequate for data security liabilities incurred and, will cover any indemnification claims against us relating to any incident, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation.

Interruptions or performance problems associated with our technology and infrastructure, and our reliance on Software-as-a-Service (“SaaS”) technologies from third parties, may adversely affect our business operations and financial results.

Our continued growth depends in part on the ability of our existing and potential customers to use and access our cloud services offerings or our website in order to download our software or encrypted access keys for our software within an acceptable amount of time. In addition, we rely heavily on hosted SaaS technologies from third parties in order to operate critical functions of our business, including our cloud services offerings, enterprise resource planning services and customer relationship management services. We have experienced and may in the future experience real or perceived website and cloud service disruptions, storage failures, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors, capacity constraints due to an overwhelming number of users accessing our website and services simultaneously, and real or perceived security risks, including unauthorized access to our systems or networks, software vulnerability exploits or cyber security, denial of service or ransomware attacks. In some instances, we may not be able to identify the cause or causes of these website or service performance problems or provide an effective remediation or patch within an acceptable period of time. It may become increasingly difficult to maintain and improve our website and service performance, especially during peak usage times and as our offerings become more complex and our user traffic increases or where security exploits may have no available patches or mitigations (“zero day” exploits). If our website or cloud
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services offerings are compromised or unavailable or if our users are unable to download our software or encrypted access keys within a reasonable amount of time or at all, we could suffer damage to our reputation with current and potential customers, be exposed to legal liability, and lose customers, all of which could negatively affect our business. We expect to continue to make significant investments to maintain and improve website and service performance and to enable rapid releases of new features and apps for our offerings. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed and continually develop and secure our software, technology and network architecture to accommodate actual and anticipated changes in technology and evolving security threats, our business and operating results may be adversely affected.

Real or perceived errors, failures or bugs in our offerings could adversely affect our financial results and growth prospects.

Because our offerings are complex, undetected errors, failures or bugs may occur, especially when new offerings, versions or updates are released, including related to technologies that we have obtained through acquisitions. Our software is often installed and used in large-scale computing environments with different operating systems, system management software, and equipment and networking configurations, which may cause errors or failures of our software or other aspects of the computing environment into which it is deployed. In addition, deployment of our software into complicated, large-scale computing environments may expose undetected errors, failures or bugs in our software. Despite testing by us, errors, failures or bugs may not be found in our offerings until they are released to our customers. In the past, we have discovered errors, failures and bugs in some of our offerings after their introduction. Real or perceived errors, failures or bugs in our offerings could result in negative publicity, loss of or delay in market acceptance of our offerings, loss of competitive position or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem.

In addition, if an actual or perceived failure of our software occurs in a customer’s deployment or in our cloud services, regardless of whether the failure is attributable to our software, the market perception of the effectiveness of our offerings could be adversely affected. Alleviating any of these problems could require significant expenditures of our capital and other resources and could cause interruptions, delays or cessation of our licensing, which could cause us to lose existing or potential customers and could adversely affect our financial results and growth prospects.

We are subject to a number of legal requirements, contractual obligations and industry standards regarding security, data protection, and privacy, and any failure to comply with these requirements, obligations or standards could have an adverse effect on our reputation, business, financial condition and operating results.

Data privacy and security have become significant issues in the United States and in many other countries where we have employees and operations and where we offer licenses or cloud subscriptions to our offerings. The regulatory framework for data privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. These obligations may be interpreted and applied inconsistently from one jurisdiction to another and may conflict with one another, other regulatory requirements, industry standards, or our internal practices. The U.S. federal and various state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations limiting, or laws and regulations regarding the collection, distribution, use, disclosure, storage, and security of certain types of information. For example, on January 1, 2020, the California Consumer Privacy Act (“CCPA”) went into effect. The CCPA requires covered companies to provide new disclosures to California consumers, and afford such consumers new abilities to opt-out of certain sales of personal information. Additionally, the California Privacy Rights Act (“CPRA”), which modifies the CCPA, was approved by California voters in the November 3, 2020 election, creating obligations relating to consumer data beginning on January 1, 2022, and which became fully effective as of January 1, 2023. Other states have proposed, and in certain cases enacted, similar state laws. For example, Virginia, Colorado, and Connecticut all have enacted general privacy legislation that has become effective in 2023; Utah has enacted similar legislation that becomes effective December 31, 2023; Florida, Montana, Oregon and Texas have enacted similar legislation that becomes effective in 2024; Iowa and Tennessee have enacted similar legislation that becomes effective in 2025; and Indiana has enacted similar legislation that becomes effective in 2026. The U.S. federal government also is contemplating federal privacy legislation. The effects of recently proposed or enacted legislation potentially are far-reaching and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply.

Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy or data protection legal framework with which we or our customers must comply. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure, other processing, and security of data that identifies or may be used to identify or locate an individual. These laws and regulations often are more restrictive than those in the United States and are rapidly evolving. For example, the EU General Data Protection Regulation (“GDPR”) became effective on May 25, 2018, and,
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in addition to imposing stringent obligations relating to data protection and security, authorizes fines up to 4% of global annual revenue for some violations. We relied in part upon the EU-U.S. Privacy Shield Framework developed by the U.S. Department of Commerce and the European Commission and the Swiss-U.S. Privacy Shield Framework developed by the U.S. Department of Commerce and the Swiss Administration to provide U.S. companies with a valid data transfer mechanism under EU and Swiss law to permit them to transfer personal data from the European Economic Area (“EEA”) and Switzerland to the United States. On July 16, 2020, the Court of Justice of the European Union (“CJEU”) invalidated the EU-U.S. Privacy Shield, concluding it did not provide adequate protection for personal data transferred to the U.S. On September 8, 2020, the Swiss Federal Data Protection and Information Commissioner invalidated the Swiss-US Privacy Shield on similar grounds. In its July 16, 2020 opinion, the CJEU imposed additional obligations on companies when relying on standard contractual clauses approved by the European Commission (“EU SCCs”) to transfer personal data. The CJEU decision may result in European data protection regulators applying differing standards for, and requiring ad hoc verification of, transfers of personal data from Europe to the U.S. On June 4, 2021, the European Commission published new EU SCCs that are required to be implemented. The United Kingdom published new standard contractual clauses for use when transferring personal data outside of the United Kingdom (“UK SCCs”) that also are required to be implemented. The revised EU SCCs and UK SCCs, recommendations and opinions of regulators, customer demand, and other developments relating to cross-border data transfer, may require us to implement additional contractual, technical and operational safeguards for any personal data transferred out of the EEA, Switzerland, and the United Kingdom, or necessitate the provision of services entirely performed in the EEA, Switzerland, and United Kingdom (as well as other geographies internationally), and shielded from governmental access by the United States. These efforts may increase compliance and related costs, create duplication and inefficiencies in our ability to provide services globally, lead to increased regulatory scrutiny or liability, necessitate additional contractual negotiations, and adversely impact our business, financial condition and operating results. Due to the pace of the regulatory framework's evolution in the U.S. and internationally, we may not be able to make the needed changes in a timely manner or at all, and we may be precluded from pursuing opportunities in jurisdictions where we cannot meet the regulatory requirements. This may adversely impact our financial condition and operating results. On March 25, 2022, the United States and EU announced an “agreement in principle” to replace the EU-U.S. Privacy Shield transfer framework with the Trans-Atlantic Data Privacy Framework (“EU-U.S. DPF”). On July 10, 2023, the European Commission adopted an adequacy decision in relation to the EU-U.S. DPF, allowing the EU-U.S. DPF to be utilized as a means of legitimizing EU-U.S. personal data transfers for participating entities. We are evaluating whether the EU-U.S. DPF will be appropriate for us to utilize. The EU-U.S. DPF may be subject to legal challenges from privacy advocacy groups or others, and the European Commission’s adequacy decision regarding the EU-U.S. DPF provides that the EU-U.S. DPF will be subject to future reviews and may be subject to suspension, amendment, repeal, or limitations to its scope by the European Commission.

On February 23, 2022, the European Commission proposed new legislation, the Data Act, which imposes obligations related to access, sharing, portability, and international transfer of non-personal data. The Council of the EU and EU Parliament will debate the draft Data Act, and, if adopted, the earliest date of entry into force is in 2024. We expect to incur additional costs to comply with the requirements of the Data Act as it is finalized for implementation.

The United Kingdom enacted a Data Protection Act in May 2018 that substantially implemented the GDPR, and has implemented legislation referred to as the “UK GDPR” that generally provides for implementation of the GDPR in the United Kingdom and provides for a similar penalty structure. On June 28, 2021, the European Commission announced a decision that the United Kingdom is an “adequate country” to which personal data could be exported from the EEA, but this decision must be renewed and may face challenges in the future, creating uncertainty regarding transfers of personal data to the United Kingdom from the EEA. Additionally, we cannot fully predict how the Data Protection Act, the UK GDPR, and other United Kingdom data protection laws or regulations may develop in the medium to longer term nor the effects of divergent laws and guidance regarding how data transfers to and from the United Kingdom will be regulated in the future. The United Kingdom government proposed significant changes to its data protection regime in legislation introduced in March 2023, superseding a proposal that was published in July 2022. We are monitoring these developments. Our EMEA headquarters is in London, causing these areas of uncertainty with respect to United Kingdom data protection law and cross-border personal data transfers to be particularly significant to our operations. Some countries also are considering or have enacted legislation requiring local storage and processing of data, or similar requirements, which could increase the cost and complexity of delivering our services outside of the United States.

Complying with the GDPR, CCPA, CPRA or other laws, regulations, or other obligations relating to privacy, data protection, data localization or security in the U.S. or other regions worldwide, including Australia’s Privacy Act, Canada’s Personal Information Protection and Electronic Documents Act, and Japan’s Act on the Protection of Personal Information, may cause us to incur substantial operational costs or require us to modify our data handling practices and policies, which may compromise our growth strategy, adversely affect our ability to acquire customers, and otherwise adversely affect our business, financial condition and operating results. Further, any actual or alleged non-compliance could result in claims and proceedings
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against us by governmental entities or others, could result in substantial fines or other liability, and may otherwise adversely impact our business, financial condition and operating results and prevent us from offering certain services where we operate. Some statutory requirements, both in the United States and abroad, such as the Health Insurance Portability and Accountability Act of 1996 and numerous state statutes, include obligations of companies to notify individuals of security breaches involving certain types of personal information, which could result from breaches experienced by us or our service providers. Any actual or perceived security breach or incident could impact our reputation, harm our customer confidence, hurt our sales and expansion into new markets or cause us to lose existing customers, and could expose us to potential liability or require us to expend significant resources on data security and in responding to any such actual or perceived breach or incident.

In addition to government regulation, self-regulatory standards, industry-specific regulation and other industry standards or requirements may legally or contractually apply to us, be argued to apply to us, or we may elect to comply with, or to facilitate our customers’ compliance with, such standards, regulations or requirements. Regulators in certain industries, such as financial services, have adopted and may in the future adopt regulations or interpretive positions regarding the use of cloud computing and other outsourced services. For example, some financial services regulators have imposed guidelines for use of cloud computing services that mandate specific controls or require financial services enterprises to obtain regulatory approval prior to outsourcing certain functions. If we are unable to comply with these guidelines or controls, or if our customers are unable to obtain regulatory approval to use our services where required, our business may be harmed. In addition, an inability to satisfy the standards of certain government agencies that our customers may expect may have an adverse impact on our business and results. If in the future we are unable to achieve or maintain industry-specific certifications or other requirements or standards relevant to our customers, it may harm our business and adversely affect our results. Furthermore, because privacy, data protection and data security are critical competitive factors in our industry, we may make statements on our website, in marketing materials, or in other settings about our data processing and data security measures and our compliance with, or our ability to facilitate our customers’ compliance with, these standards. We also expect that laws, regulations, industry standards and other obligations relating to privacy, data protection and security will continue to evolve worldwide, and that there will continue to be new, modified, and re-interpreted laws, regulations, standards, and other obligations in these areas. We cannot yet determine the impact such future laws, regulations and standards, or amendments to or re-interpretations of, existing laws and regulations, industry standards, or other obligations may have on our business. New laws, amendments to or re-interpretations of existing laws and regulations, industry standards, and contractual and other obligations, in the U.S. or in multiple jurisdictions, may require us to incur additional costs and restrict our business operations. Because the interpretation and application of laws, standards, contractual obligations and other obligations relating to privacy and data protection are uncertain, these laws, standards, and contractual and other obligations may be interpreted and applied in a manner that is, or is alleged to be, inconsistent with our data management practices, our policies or procedures, or the features of our offerings. If so, in addition to the possibility of fines, lawsuits and other claims, we may find it necessary or appropriate to fundamentally change our business activities and practices, including the establishment of localized data storage or other data processing operations, or modify or cease offering certain offerings either generally or in certain geographic regions, any of which could have an adverse effect on our business. We may be unable to make such changes and modifications in a commercially reasonable manner or at all, and our ability to develop new offerings and features could be limited. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our offerings. Compliance with these regulations may also require us to devote greater resources to support certain customers, which may increase costs and lengthen sales cycles. Any inability to adequately address privacy, data protection or security-related concerns, even if unfounded, or to successfully negotiate privacy, data protection or security-related contractual terms with customers, or to comply with applicable laws, regulations, standards, and other actual and alleged obligations relating to privacy, data protection, and security, could result in additional cost and liability to us, damage our reputation, inhibit sales, slow our sales cycles, and adversely affect our business. Privacy and personal security concerns, whether valid or not valid, may inhibit market adoption of our offerings, particularly in certain industries and foreign countries.

Issues in the development and use of artificial intelligence (AI), combined with an uncertain regulatory environment, may result in reputational harm, liability, or other adverse consequences to our business operations.

We use machine learning and artificial intelligence (AI) technologies in our offerings and business, and we are making investments in expanding our artificial intelligence capabilities in our products, services, and tools, including ongoing deployment and improvement of existing machine learning and AI technologies, as well as developing new product features using AI technologies, including, for example, generative AI. AI technologies are complex and rapidly evolving, and we face significant competition from other companies as well as an evolving regulatory landscape. The introduction of AI technologies into new or existing products may result in new or enhanced governmental or regulatory scrutiny, litigation, confidentiality or security risks, ethical concerns, legal liability, or other complications that could adversely affect our business, reputation, or
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financial results. The intellectual property ownership and license rights, including copyright, surrounding AI technologies has not been fully addressed by U.S. courts or other federal or state laws or regulations, and the use or adoption of third-party AI technologies into our products and services may result in exposure to claims of copyright infringement or other intellectual property misappropriation.

Uncertainty around new and emerging AI technologies, such as generative AI, may require additional investment in the development and maintenance of proprietary datasets and machine learning models, development of new approaches and processes to provide attribution or remuneration to creators of training data, and development of appropriate protections and safeguards for handling the use of customer data with AI technologies, which may be costly and could impact our expenses if we decide to expand generative AI into our product offerings. AI technologies incorporated into our product offerings may use algorithms, datasets, or training methodologies that may be flawed or contain deficiencies that may be difficult to detect during testing. AI technologies, including generative AI, may create content that appears correct but is factually inaccurate, flawed or biased. Our customers or others may rely on or use such content to their detriment, or it may lead to discriminatory or other adverse outcomes, which may expose us to brand or reputational harm, competitive harm, and/or legal liability. The use of AI technologies presents emerging ethical and social issues, and if we enable or offer solutions that draw scrutiny or controversy due to their perceived or actual impact on customers or on society as a whole, we may experience brand or reputational harm, competitive harm, and/or legal liability.

Factors Related to Intellectual Property and Other Proprietary Rights

Failure to protect our intellectual property rights could adversely affect our business and our brand.

Our success and ability to compete depends, in part, on our ability to protect our trade secrets, trademarks, copyrights, patents, know-how, confidential information, proprietary methods and technologies and other intellectual property and proprietary rights, so that we can prevent others from using our inventions, proprietary information and property. We generally rely on patent, copyright, trade secret and trademark laws, and confidentiality or license agreements with our employees, consultants, vendors, customers, partners and others, and generally limit access to and distribution of our proprietary information, in order to protect our intellectual property rights and maintain our competitive position. However, we cannot guarantee that the steps we take to protect our intellectual property rights will be effective. For example, with many of our employees continuing to work remotely, we may be unable to prevent theft or misappropriation of our intellectual property by departing employees.

Our issued patents and any patents issued in the future may not provide us with any competitive advantages, and our patent applications may never be granted. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications, or we may not be able to do so at a reasonable cost or in a timely manner. Even if issued, there can be no assurance that these patents will adequately protect our intellectual property, as the legal standards relating to the infringement, validity, enforceability and scope of protection of patent and other intellectual property rights are complex and often uncertain. Any patents that are issued, and any of our other intellectual property rights may be challenged by others and invalidated or narrowed through administrative process, litigation, or similar proceedings, allowing other companies to develop offerings that compete with ours, which could adversely affect our competitive business position, business prospects and financial condition. In addition, issuance of a patent does not guarantee that we have a right to practice the patented invention. We cannot be certain that we were the first to use the inventions claimed in our issued patents or pending patent applications or otherwise used in our offerings, that we were the first to file patent applications, or that third parties do not have blocking patents that could be used to prevent us from marketing or practicing our offerings or technology. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our offerings are available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States (in particular, some foreign jurisdictions do not permit patent protection for software, and even in the United States, this protection is limited), and mechanisms for enforcement of intellectual property rights may be inadequate. We have filed for patents in the United States and in limited non-U.S. jurisdictions, but such protections may not be available or adequate in all countries in which we operate or in which we seek to enforce our intellectual property rights, or may be difficult to enforce in practice. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against certain third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. As we expand our international activities, our exposure to unauthorized copying and use of our products and platform capabilities and proprietary information will likely increase. We are currently unable to measure the full extent of this unauthorized use of our products, platform capabilities, software, and proprietary information. We believe, however, that such unauthorized use is and can be expected to be a persistent problem that negatively impacts our revenue and financial results. Additional uncertainty may result from recent and future changes to intellectual property legislation in the United States
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and other countries and from interpretations of the intellectual property laws of the United States and other countries by applicable courts and agencies. Further, although we endeavor to enter into non-disclosure agreements with our employees, licensees and others who may have access to confidential and proprietary information, we cannot assure that these agreements or other steps we have taken will prevent unauthorized use, disclosure or reverse engineering of our technology.

Moreover, third parties may independently develop technologies or products that compete with ours, and we may be unable to prevent this competition.

We have been and may continue to be required to spend significant resources to defend, monitor, and protect our intellectual property rights, such as by initiating claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. However, we may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be adequate to compensate us for the harm suffered. Additionally, we may provoke third parties to assert counterclaims against us. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may adversely affect our business operations or financial results. For any of these reasons, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology or use of our brand, and our business might be adversely affected.

We have been, and may in the future be, subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.

Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. The litigation may involve patent holding companies or other adverse patent owners that have no relevant product revenues and against which our patents may therefore provide little or no deterrence. From time-to-time, third parties, including certain of these leading companies and non-practicing entities, have asserted and may assert patent, copyright, trademark or other intellectual property rights against us, our partners, our technology partners or our customers. We have received, and may in the future receive, notices that claim we have misappropriated, misused, or infringed other parties’ intellectual property rights, including those obtained through acquisitions of new technologies, and, to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property infringement claims, which is not uncommon with respect to the enterprise software market.

There may be third-party intellectual property rights, including issued or pending patents, that cover or claim to cover significant aspects of our technologies or business methods. We may be exposed to increased risk of being the subject of intellectual property infringement claims as a result of acquisitions, as, among other things, we have a lower level of visibility into the development process with respect to such technology or the care taken to safeguard against infringement risks. Any intellectual property claims, with or without merit, could be very time-consuming, could be expensive to settle or litigate and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages or enhanced statutory damages if we are found to have willfully infringed patents or copyrights. These claims could also result in our having to stop using technology found to be in violation of a third-party’s rights. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of our offerings and may be unable to compete effectively. Any of these results would adversely affect our business operations and financial results.

If we are not able to maintain and enhance our brand, our business and operating results may be adversely affected.

We believe that maintaining and enhancing the “Splunk” brand identity is critical to our relationships with current customers and partners and to our ability to attract new customers and partners. The successful promotion of our brand will depend largely upon our marketing efforts, our ability to continue to offer high-quality offerings and our ability to successfully differentiate our offerings from those of our competitors. In addition, independent industry analysts often provide reviews of
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our offerings, as well as those of our competitors, and perception of our offerings in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or less positive as compared to those of our competitors’ products and services, our brand may be adversely affected.

Moreover, it may be difficult to maintain and enhance our brand in connection with sales through partners. We have and will continue to incur substantial expenditures in connection with our campaigns, and we anticipate that brand promotion expenditures will increase as the market becomes more competitive and as we attempt to grow our business. To the extent that these activities yield increased revenues, these revenues may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand, our business may not grow, we may have reduced pricing power relative to competitors with stronger brands, and we could lose customers and partners, all of which would adversely affect our business operations and financial results.

Our use of “open source” software could negatively affect our ability to sell our offerings and subject us to possible litigation, and our participation in open source projects may impose unanticipated burdens or restrictions.

We use open source software in our offerings and business, including as incorporated into software we receive from third-party commercial software vendors or technologies obtained through acquisitions, and expect to continue to use open source software in the future. Use of open source software may entail greater risks than use of third-party commercial software. The terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market or commercialize our products. We may face claims from others alleging breach of license requirements or infringement of intellectual property rights in what we believe to be licensed open source software. In addition, under the terms of some open source licenses, under certain conditions, we could be required to release our proprietary source code that was developed using, incorporating or linked with such open source software, or apply open source licenses to our proprietary software, including authorizing further modification and redistribution. These claims or requirements, including any change to the applicable license terms, could also result in litigation, require us to purchase a costly license, require us to devote additional research and development resources to change our offerings, or require us to cease offering the implicated products unless and until we can find alternative tools or re-engineer them to avoid infringement or release of our proprietary source code, any of which would have a negative effect on our business and operating results. Some open source software may include generative artificial intelligence (AI) software or other software that incorporates or relies on generative AI. The use of such software may expose us to risks as the intellectual property ownership and license rights, including copyright, of generative AI software and tools, has not been fully interpreted by U.S. courts or been fully addressed by federal or state regulation. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide updates, warranties, support, indemnities, assurances of title or controls on origin of the software, or other contractual protections regarding infringement claims or the quality of the code. Likewise, some open source projects have known security and other vulnerabilities and architectural instabilities, or are otherwise subject to security attacks due to their wide availability, and are provided on an “as-is” basis. Additionally, we, including companies that we acquired, have intentionally made certain proprietary software available on an open source basis, both by contributing modifications back to existing open source projects, and by making certain internally developed tools available pursuant to open source licenses, and we plan to continue to do so in the future. While we have established procedures, including a review process for any such contributions, which is designed to protect any code that may be competitively sensitive, we cannot guarantee that this process has always been applied consistently by us or by companies that we have acquired, prior to the acquisition. Even when applied, because any software source code we contribute to open source projects is publicly available, our ability to protect our intellectual property rights with respect to such software source code may be limited or lost entirely, and we may be unable to prevent our competitors or others from using such contributed software source code for competitive purposes, or for commercial or other purposes beyond what we intended. Many of these risks associated with usage of open source software could be difficult to eliminate or manage, and could, if not properly addressed, negatively affect the performance of our offerings and our business.

Factors Related to Reliance on Third Parties

We increasingly rely on third-party providers of cloud infrastructure services to deliver our offerings to users on our platform, and any disruption of or interference with our use of these services could adversely affect our business.

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Our cloud services offerings are hosted exclusively by our CSPs. We do not have control over the operations or the facilities of CSPs that we use, and any changes in a CSP’s service levels, which may be less than 100%, may adversely affect our ability to meet the commitments we make to our customers and their requirements. We currently offer a 100% uptime service level agreement (“SLA”) for Splunk Cloud Platform. It may become increasingly difficult to maintain and improve our performance, especially during peak usage times, as the usage of our offerings increases. If any of the services provided by the CSPs fail or become unavailable due to extended outages, interruptions or because they are no longer available on commercially reasonable terms or prices, or if we are unable to deliver 100% uptime under our SLAs, our revenues could be reduced, our reputation could be damaged, we could be exposed to legal liability, expenses could increase, our ability to manage our finances could be interrupted and our processes for managing sales of our offerings and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business, financial results and the usage of our offerings. If we are unable to renew our agreements with our CSPs on commercially reasonable terms, or our agreements are prematurely terminated, or we need to add new CSPs to increase capacity and uptime, we could experience interruptions, downtime, delays, and additional expenses related to transferring to and providing support for these new platforms. Our customers may require that we provide our cloud services offerings through Infrastructure-as-a-Service (IaaS) Platforms that we do not offer, which could adversely affect our ability to attract new customers or maintain current customers, either of which could negatively affect our financial condition.

Any of the above circumstances or events may harm our reputation and brand, reduce the availability or usage of our platform and impair our ability to attract new users, any of which could adversely affect our business, financial condition and results of operations.

If we are unable to maintain successful relationships with our partners, and to help our partners enhance their ability to independently sell and deploy our offerings, our business operations, financial results and growth prospects could be adversely affected.

In addition to our direct sales force, we use partners, such as distributors and resellers, to license, provide professional services and support our offerings. Historically, we have relied on a limited number of such partners for a substantial portion of our total sales, particularly in the Europe, Middle East and Africa (“EMEA”) and Asia Pacific (“APAC”) regions, and for sales to government agencies. For example, sales through our top two partners represented 44% of our revenue in the three months ended July 31, 2023. We expect that sales through partners in all regions will continue to be a significant portion of our revenues for the foreseeable future. As changes in our partner strategy are implemented, including potentially emphasizing partner-sourced transactions, results from sales through our partners may be adversely affected.

Our agreements with our partners are generally non-exclusive, meaning our partners may offer customers the products of several different companies, including products that compete with ours. If our partners do not effectively market and sell our offerings, choose to use greater efforts to market and sell their own products or those of our competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our offerings may be adversely affected. Our partners may cease marketing our offerings with limited or no notice and with little or no penalty. The loss of a substantial number of our partners or any of our key partners, our possible inability to replace them, or the failure to recruit additional partners could materially and adversely affect our results of operations and could have an impact on the growth rate of our revenue as we work to obtain new partners or replacement relationships. In addition, sales by partners are more likely than direct sales to involve collectability and compliance concerns, in particular sales by our partners in developing markets, and accordingly, variations in the mix between revenues attributable to sales by partners and revenues attributable to direct sales may result in fluctuations in our operating results.

As customers have increasingly adopted our cloud services offerings, the manner in which we conduct business with and compensate our partners, as well as the business demands placed upon our partners has changed, requiring some of our historically effective partners to adapt their sales and marketing techniques to sell cloud services and term licenses. Such changes may lead to shorter duration contracts, which require more frequent customer contact by, and different business terms with, our partners. In some circumstances, new partners may be more effective in adapting to our business model, particularly when such partners have experience selling cloud services. Therefore, our expectations for our partners, and our rubric for evaluating compatible partners may change, which may adversely impact our results of operations.

Our ability to achieve revenue growth in the future will depend in part on our success in maintaining successful relationships with our partners, and to help our partners enhance their ability to independently sell and deploy our offerings. In order to achieve these objectives, we may be required to adjust our incentives, pricing or discount programs for our partners, which could adversely affect our operating results. If we are unable to maintain our relationships with these partners, or
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otherwise develop and expand our indirect distribution channel, our business, results of operations, financial condition or cash flows could be adversely affected.

Our future performance depends in part on proper use of our community website, Splunkbase, expansion of our developer network, and support from third-party software developers.

Our offerings enable third-party software developers to build apps on top of our platform. We operate a community website, Splunkbase, for sharing these third-party apps, including add-ons and extensions. While we expect Splunkbase to support our sales and marketing efforts, it also presents certain risks to our business, including:

•third-party developers may not continue developing or supporting the software apps that they share on Splunkbase;

•we cannot guarantee that if and as we change the architecture of our products and services, third-party developers will evolve their existing software apps to be compatible or that they will participate in the creation of new apps utilizing the new architecture;

•as we convert certain on-premises Splunk products to cloud-based services, third-party developers may not convert their apps to work in the cloud environment or may not find our expanded developer network to be palatable for their cloud-based apps;

•we cannot provide any assurance that these apps meet the same quality and security standards that we apply to our own development efforts, and, to the extent they contain bugs, defects or security vulnerabilities, they may create disruptions in our customers’ use of our offerings or negatively affect our brand;

•we do not currently provide support for software apps developed by third-party software developers, and users may be left without support and potentially disappointed by their experience of using our offerings if the third-party software developers do not provide appropriate support for these apps;

•these third-party software developers may not possess the appropriate intellectual property rights to develop and share their apps or otherwise may not have assessed legal and compliance risks related to distributing their apps;

•some of these apps are hosted in external sites for a fee and are not controlled or reviewed by us, which may lead to a negative experience by customers that may impact our reputation; and

•some of these developers may use the insight they gain using our offerings and from documentation publicly available on our website to develop competing products.

Many of these risks are not within our control to prevent, and our brand may be damaged if these apps, add-ons or extensions do not perform to our customers’ satisfaction and that dissatisfaction is attributed to us.

If poor advice or misinformation is spread through our community website, Splunk Answers, users of our offerings may experience unsatisfactory results from using our offerings, which could adversely affect our reputation and our ability to grow our business.

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

Servicing our debt, including the Notes, requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the $776.7 million aggregate principal amount of the 2023 Notes, the $862.5 million aggregate principal amount of the 2025 Notes, the $1.0 billion aggregate principal amount of the 2026 Notes, and the $1.27 billion aggregate principal amount of the 2027 Notes that we issued in September 2018, July 2021 and June 2020 depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. We intend to pay the principal amount of our 2023 Notes in cash at maturity in September 2023, which will be a significant use of cash. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt, including the Notes, and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or issuing additional equity, equity-linked or debt instruments on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. If we are unable to engage in any of these activities or engage in these activities on desirable terms, we may be unable to comply with our debt obligations, including the Notes, which would materially and adversely impact our business, financial condition and operating results.

Our current and future indebtedness, including the Notes, may limit our operating flexibility or otherwise affect our business.

Our existing and future indebtedness, including the Notes, could have important consequences to our stockholders and significant effects on our business. For example, it could:

•make it more difficult for us to satisfy or refinance our debt obligations, including the Notes;

•require us to raise additional capital to refinance the Notes as they mature;

•increase our vulnerability to general adverse economic and industry conditions;

•require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital and other general corporate purposes;

•limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

•restrict us from exploiting business opportunities;

•place us at a competitive disadvantage compared to our competitors that have less indebtedness; and

•limit our availability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general purposes.

Any of the foregoing could have a material adverse effect on our business, results of operations or financial condition.

Transactions relating to the Notes may affect the trading price of our common stock.

The conversion of some or all of the Notes will dilute the ownership interests of our stockholders. Upon conversion of the Notes, we have the option to pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock; provided, in the case of the 2026 Notes, a holder of an SL Note (as defined in the indenture governing the 2026 Notes) has the right to determine the settlement method for any SL Note converted in connection with our delivery of a redemption notice. If we elect or, in the case of a conversion of the 2026 Notes in connection with a Redemption Notice, are required, to settle our conversion obligation in shares of our common stock or a combination of cash and shares of our common stock, any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. Holders of the Notes may also hedge their positions in the Notes by entering
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into short positions with respect to the underlying common stock. In addition, any anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock.

Additionally, in connection with establishing their initial hedges of the Capped Calls, the counterparties to the Capped Calls entered into various derivative transactions with respect to our common stock and/or purchased shares of our common stock concurrently with or shortly after the pricing of the applicable series of Notes. From time to time, the counterparties to the Capped Calls may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities in secondary market transactions prior to the maturity of the applicable series of Notes (and are likely to do so following any conversion, repurchase, or redemption of such Notes, to the extent we exercise the relevant election under the applicable Capped Call). This activity could also cause a decrease and/or increased volatility in the market price of our common stock.

The conditional conversion feature of the 2023 Notes, 2025 Notes, or 2027 Notes, if triggered, may adversely affect our financial condition and operating results.

In the event the conditional conversion feature of the 2023 Notes, 2025 Notes, or 2027 Notes is triggered, holders of such Notes will be entitled under the applicable indenture governing such Notes to convert their Notes at any time during specified periods at their option. There is no conditional conversion feature with respect to the 2026 Notes, and holders of the 2026 Notes may elect to convert at any time. If one or more holders of a series of Notes elect to convert such Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock, we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, in certain circumstances, such as conversion by holders or redemption, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the relevant series of Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital. It is our current intent to settle the principal amount of the 2023 Notes with cash upon maturity in September 2023. The 2023 Notes are classified as current debt on our condensed consolidated balance sheets as of July 31, 2023.

We are subject to counterparty risk with respect to the Capped Calls.

In connection with the offerings of the 2023 Notes, 2025 Notes and 2027 Notes, we entered into the Capped Calls. The counterparties to the Capped Calls are financial institutions, and we will be subject to the risk that one or more of the counterparties may default, fail to perform or exercise their termination rights under the Capped Calls. Our exposure to the credit risk of the counterparties will not be secured by any collateral. If a counterparty to the Capped Calls becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under such transaction. Our exposure will depend on many factors but, generally, our exposure will increase if the market price or the volatility of our common stock increases. In addition, upon a default, failure to perform or a termination of the Capped Calls by a counterparty, we may suffer more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the counterparties.

We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or enhance our offerings, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we have engaged in, and may need to engage in the future, in equity, equity-linked or debt financings to secure additional funds. A significant or prolonged disruption of global financial markets could further reduce our ability to access capital, which could negatively affect our ability to secure these additional funds, or such funds may be on terms that are significantly less favorable to us. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. For example, if we elect to settle our conversion obligation under the Notes in shares of our common stock or a combination of cash and shares of our common stock, the issuance of such common stock may dilute the ownership interests of our stockholders and sales in the public market could adversely affect prevailing market prices. It is our current intent to settle the principal amount of the 2023 Notes with cash upon maturity in September 2023. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions, or otherwise reduce operational flexibility. We may not be able to obtain additional financing on terms favorable to us, if at all. In addition, the macroeconomic environment, including instability among financial institutions and
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rising interest rates may adversely impact the credit markets or the terms we are able to achieve at the time we wish or need to seek funding. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be adversely affected, or we may need to accept less favorable terms, which could increase our cost of capital, reduce our cash balances or otherwise restrict our ability to grow.

Our ability to use our net operating losses and tax credits to offset future taxable income and tax may be subject to certain limitations.

Our unused net operating losses (“NOLs”) and tax credits generally carry forward to offset future taxable income and tax. We record an asset for these future tax benefits, with our U.S. federal and state tax benefits subject to a full valuation allowance. Federal, state and foreign taxing bodies often place limitations on NOLs and tax credit carryforward benefits. As a result, we may not be able to utilize the NOL and tax credit assets reflected on our balance sheet, even if we attain profitability. Section 382 of the United States Internal Revenue Code of 1986, as amended (the “Code”), is one such example of a limitation. A corporation that undergoes an ownership change within the meaning of Section 382 of the Code is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. Future changes in our stock ownership, some of which may be outside of our control, could result in an ownership change under Section 382 of the Code. Changes in the law may also impact our ability to use our NOL and tax credit carryforwards. For example, the legislation commonly referred to as the Tax Cuts and Jobs Act of 2017, as modified by the Coronavirus Aid, Relief, and Economic Security Act, limited federal NOL deductions to 80% of taxable income for NOLs incurred in tax years beginning after December 31, 2017. As a result of this limitation, we may face a federal income tax liability even though we have unused NOL carry forwards.

Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added, withholding, or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our financial results.

We do not collect sales and use, value added, withholding, and similar taxes in all jurisdictions in which we have sales, based on our belief that such taxes are not applicable. Certain jurisdictions in which we do not collect such taxes may successfully assert that such taxes are applicable and that could result in tax assessments, penalties, interest and requirements to collect such taxes in the future. Such tax assessments, penalties, interest or future requirements to charge taxes to our customers may adversely affect our financial results.

We could be subject to additional tax liabilities.

We are subject to federal, state and local taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and our worldwide provision for taxes as there are many activities and transactions for which the ultimate tax determination is uncertain. The relevant taxing authorities may disagree with our determinations. If such a disagreement were to occur, and our position is not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Our financial statements reflect our best judgment of needed reserves to cover known contingencies, but there can be no assurances on the final outcome of any tax assessment. Our tax obligations and effective tax rates could also be adversely affected by changes in tax, accounting and other laws, regulations, principles and interpretations. In fact, many countries and organizations such as the Organization for Economic Cooperation and Development have proposed or enacted changes to existing tax laws or issued guidance that could increase our tax liabilities in countries where we do business. For example, beginning in January 2022, the Tax Cuts and Jobs Act of 2017 eliminates the right to deduct research and development expenditures for tax purposes in the period the expenses were incurred and, instead, requires all U.S. and foreign research and development expenditures to be amortized over five and fifteen tax years, respectively. This and other changes to tax laws and regulations, or interpretations thereof, in the United States or other tax jurisdictions in which we do business, could adversely impact our business, financial condition, and results of operation.

Our stock price has been volatile, may continue to be volatile and may decline regardless of our financial performance.

The trading prices of the securities of technology companies have been highly volatile. The market price of our common stock has fluctuated significantly and is likely to continue to fluctuate significantly or experience declines in the future. Your investment in our stock could lose some or all of its value. Some of the factors, many of which are beyond our control, that could significantly affect the market price of our stock include:
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•actual or anticipated fluctuations in our financial results;

•variations in our operating results, annual recurring revenue, free cash flow and other financial and operating metrics, and how those results compare to securities analyst expectations;

•the financial projections we provide to the public, any changes in these projections or our failure to meet or exceed these projections;

•our revenue mix, which may impact our revenue, deferred revenue, remaining performance obligations and operating margins;

•variations in, and limitations of, the various financial and other metrics and modeling used by analysts in their research and reports about our business;

•failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

•ratings changes by any securities analysts who follow our company;

•actions instituted by activist shareholders or others that could disrupt our ongoing business, divert resources, increase our expenses and distract our management;

•changes in our stockholder base or hedging activity among our stockholders;

•issuances of shares of our common stock, whether in connection with an acquisition or upon conversion of some or all of our outstanding Notes;

•announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;

•changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

•price and volume fluctuations in certain categories of companies, such as high-growth or cloud companies, or the overall stock market, including as a result of trends in the global economy;

•the inclusion, exclusion, or removal of our stock from any indices, such as the removal of our stock from the Nasdaq-100 Index in December 2022;

•public health crises and related measures by private industry and governments to protect the public health;

•general economic and political conditions and uncertainty, both domestically and internationally, as well as economic and political conditions and uncertainty specifically affecting industries in which our customers participate, including continued impacts from the war in Ukraine;

•any major change in our board of directors or management;

•lawsuits threatened or filed against us;

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•actual or perceived security breaches or incidents; and

•other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

In addition, the stock markets, and in particular the market on which our common stock is listed, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the financial performance of those companies. In the past, following periods of market, or stock specific volatility, securities class action litigation and stockholder derivative litigation have often been instituted. In December 2020, a putative class action lawsuit was filed in the U.S. District Court for the Northern District of California against us, our former Chief Executive Officer and our former Chief Financial Officer alleging violations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The operative complaint alleges that defendants made materially false and misleading statements regarding our marketing efforts, hiring practices, and retention of personnel. On January 30, 2023, the parties entered into a stipulation of settlement, subject to court approval. In addition, seven derivative actions related to the securities class action are pending in the U.S. District Court for the Northern District of California, the California Superior Court, San Francisco County, and the Court of Chancery of the State of Delaware. For further information on these and other matters, see Note 3 “Commitments and Contingencies ─ Legal Proceedings” in our accompanying Notes to Consolidated Financial Statements is incorporated herein by reference.

Litigation in general, and these lawsuits, could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, results of operations, financial condition and cash flows. If we were to become involved in additional litigation in the future, it also could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, results of operations, financial condition and cash flows.

General Factors

Natural disasters, climate change and other events beyond our control could harm our business.

Our business operations are subject to interruption by natural disasters, flooding, fire, extreme heat and drought, power shortages, pandemics, terrorism, political unrest, telecommunications failure, vandalism, cyber-attacks, infrastructure disruptions, geopolitical instability, war, the effects of climate change and other events beyond our control. Although we maintain crisis management and disaster response plans, such events could make it difficult or impossible for us to deliver our services to our customers, could decrease demand for our services, and could cause us to incur substantial expense. Our insurance may not be sufficient to cover losses or additional expenses that we may sustain. Our California corporate offices are located near major seismic faults. Significant recovery time could be required to resume operations and our financial condition and operating results could be adversely affected in the event of a major earthquake or catastrophic event.

In addition, the long-term effects of climate change on the global economy and the technology industry in particular are unclear, however we recognize that there are inherent climate related risks wherever business is conducted. Any of our primary locations may be vulnerable to the adverse effects of climate change. For example, our California corporate offices have historically experienced, and are projected to continue to experience, physical climate change risks, including drought and water scarcity, warmer temperatures, rising sea levels, wildfires and air quality impacts and power shut-offs associated with wildfire prevention. Climate-related events, including the increasing frequency, severity and unpredictability of extreme weather events and their impact on critical infrastructure in the United States and elsewhere, have the potential to disrupt our business, our third-party suppliers, and/or the business of our customers, and may cause us to experience higher attrition, losses and additional costs to maintain and resume operations. We may incur increasing costs related to the development and implementation of initiatives to reduce our greenhouse gas emissions to comply with the scale and pace of new regulatory and market standards. Transitional climate change risks may subject us to increased regulations, reporting requirements, standards, or stakeholder expectations regarding the environmental impacts of our business and untimely or inaccurate disclosure could adversely affect our reputation, business or financial performance.

Changes in accounting pronouncements and other financial and nonfinancial reporting standards may negatively impact our financial results.

Generally accepted accounting principles in the United States (“U.S. GAAP”) are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the SEC, and other various bodies formed to promulgate and interpret
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appropriate accounting principles. We regularly monitor our compliance with applicable financial reporting standards and review new pronouncements and interpretations that are relevant to us. As a result of new standards, changes to existing standards and changes in their interpretation, we may be required to change our accounting policies, to alter our operational policies to implement new or enhance existing systems so that they reflect new or amended financial reporting standards, and to adjust our published financial statements. Such changes may have an adverse effect on our financial position and operating results, cause an adverse deviation from our revenue and operating profit targets, or both.

In addition, as we identify ESG topics for voluntary disclosure and work to align with the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (“TCFD”), the International Sustainability Standards Board’s (“ISSB’s”) and Sustainability Accounting Standards Board (“SASB”) standards, and our own ESG assessment of priority of issues, we have expanded and, in the future, may continue to expand our disclosures in these areas. Statements about our ESG initiatives and goals, and progress against those goals, may be based on disclosure standards and frameworks that are still developing, internal controls and processes that continue to evolve, or assumptions that are subject to change in the future. If the standards by which we report or measure our progress change, or our ESG-related data, processing and reporting are incomplete or inaccurate, or if we fail to achieve progress on our metrics on a timely basis, or at all, our reputation, business, financial performance and growth could be adversely affected.

The requirements of being a public company and a growing and increasingly complex organization may strain our resources, and divert management’s attention.

We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of The Nasdaq Stock Market and other applicable securities rules and regulations. Compliance with these rules and regulations has increased and may continue to increase our legal and financial compliance costs, making some activities more difficult, time-consuming or costly, and has increased and will continue to increase demand on our systems and resources.

In addition, changing laws, regulations, standards and practices relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations, standards and practices are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as regulatory and governing bodies provide new guidance or as market practices develop. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

From time to time, public companies are subject to campaigns by investors seeking to increase short-term stockholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases, management changes or sales of assets or the entire company. If stockholders attempt to effect such changes or acquire control over us, responding to such actions would be costly, time-consuming and disruptive, which could adversely affect our results of operations, financial results and the value of our common stock. These factors could also make it more difficult for us to attract and retain qualified employees, executive officers and members of our board of directors.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:

•authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights and preferences determined by our board of directors;

•require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

•specify that special meetings of our stockholders can be called only by our board of directors, the Chair of our board of directors, or our Chief Executive Officer;

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•establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;

•establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving three-year staggered terms;

•prohibit cumulative voting in the election of directors;

•provide that our directors may be removed only for cause;

•provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and

•require the approval of our board of directors or the holders of a super majority of our outstanding shares of capital stock to amend our amended and restated bylaws and certain provisions of our amended and restated certificate of incorporation.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.

Item 5. Other Information

Securities Trading Plans of Directors and Executive Officers

During our last fiscal quarter, no director or officer, as defined in Rule 16a-1(f), adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” each as defined in Regulation S-K Item 408.

Item 6. Exhibits

The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Quarterly Report.

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EXHIBIT
INDEX
 
Exhibit
Number		 Description
 
   
 
   
 
101.INSInline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHInline XBRL Taxonomy Schema Linkbase Document
101.CALInline XBRL Taxonomy Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Definition Linkbase Document
101.LABInline XBRL Taxonomy Labels Linkbase Document
101.PREInline XBRL Taxonomy Presentation Linkbase Document
104Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101)
#Indicates management contract or compensatory plan
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Date: August 24, 2023  
   
   
 SPLUNK INC.
  
  
 By:/s/ Brian Roberts
  Brian Roberts
  Senior Vice President and Chief Financial Officer
  (Principal Financial Officer)

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