Q3 2020 Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by welcome to the Splunk third quarter 2020 conference call. At this time, all participants' lines are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.
Please be advised of today's conference is being recorded if you require any further assistance. Please press star zero I would now like to attend the conference over to your speaker today, Mr., Ken Tinsley, corporate Treasurer, and Vice President of Investor Relations. Please go ahead Sir.
Great. Thank you Catherine and good afternoon, everyone with me on the call today or Doug Merritt, Jason child.
You've technology officer, Tim totally.
After market close today, we issued a press release, which is also posted on our website also note that we have posted supplemental material on the Investor Relations web page as well.
This conference call as being broadcast live via webcast and following the call an audio replay will be available on our website.
On today's call will be making forward looking statements, including financial guidance and expectations, including our forecast for fourth quarter and full year of fiscal 2020 duration revenue mix and long term cash flows in Iraq, and our expectations regarding our products technology strategy customers markets industry acquisitions and investments.
These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially.
Please refer to documents, we filed with the FCC, including the form 8-K filed with today's press release those documents contain risks and other factors that make up cause actual results to differ from those contained in our forward looking statements.
These forward looking statements are being made as of today and we disclaim any obligation to update or revise these statements. If this call is reviewed after today. The information presented during this call may not comparing current or accurate information.
We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non-GAAP results is provided in the press release and on our website with that now over to Doug.
Thank you Ken and thank you all for joining US we had a great Q3.
Our execution was excellent and our results were strong I'm, particularly proud of our 40% softer revenue growth, 30% total revenue growth and 78% cloud growth.
We completed three strategic acquisitions, we welcomed over 11000 of our customers and partners to our user conference in Las Vegas, and we unveiled the industry's first dated everything platform our expanded vision for bringing dated every question decision and action.
With the rollout of or did it everything platform, we introduced a new pricing approach. So customers can focus on the value that data brings their organizations.
Our new pricing options predictive pricing infrastructure based pricing and rapid adoption packages meaningfully expand or opportunity worldwide, while simultaneously, making it easier to do business with us.
Customer feedback so far has been extremely positive.
In addition, Splunk cloud received a fed ramp certification that strategic acknowledgement of the importance of our technology and a critical step and positioning us to serve our public sector customers as we powered digital transformation across the U.S. government.
With the authorization you can now offer a single solution capable solving I T security and the mission challenges for agencies, where data driven it decisive actions matter for the success the nation.
As you know splunk as prosecuting massive opportunities across I T operations security operations and software development operations.
Data has emerged as the deep strategic asset as more and more enterprises and government agencies around the globe are investing and data centric digital strategies.
We believe data the answer to many of the world's most pressing problems and its greatest opportunities.
It also represents a necessary strategy for all organizations to thrive let alone survive in this new paradigm.
From improving corporate performance to optimizing government government responsiveness to fighting crime to medical research to fire fighting ports. The rollout of course is new electric car. We believe every problem is that data problem and our customers. Thanks, So too.
For example, one of the best News stories I heard about a comp 19 without Domino's Pizza has revealed their secret sauce Splunk to more teams across the company.
Over the past couple of years Domino's has driven a prevalent culture shift they simply do not make any business decision on our second supported with data.
Global Pizza delivery leader uses Splunk to help to manage I T operations protect their customers and their brand for security threats as well as improve their marketing communications and their trademark speedy and high quality customer experience all with data.
Ultimately with Splunk Domino Domino's can ask questions and act on data in real time to keep their business driving.
Airbus Defense and space expanded their longtime partnership of Splunk in order to improve it business efficiency and overall security.
Splunk enables Airbus to better protect and monitor the I.T. landscape throughout Europe , which ensures end to end visibility across mobile devices more reliable systems and reduced operational incidence and team workloads.
And longtime customer anaplan significantly expanded their use of Splunk cloud and enterprise security.
With Splunk Anaplan can take action on I T data across the business to resolve issues within seconds before it impacts their customers.
And a plane is also using splunk across sales and marketing told further drive customer adoption of their products. A great example of a customer who is truly embraced data to everything.
Splunk is the only company, enabling customers to investigate monitor analyze and act on massive volumes of diverse and disconnected data.
Why it's so important.
According to I do see digital transformation investments are projected to reach over one trillion dollars in 2019, and there are expected to reach six trillion in four years.
Splunk is well positioned to be the data foundation for this digital transformation.
We are already the strategic provider to cover 90 of the Fortune 100, and our 19000 customers represent every industry every size of organization and every function.
In order to serve our growing customer base and the growing number of use cases, we're investing in products and technologies that extended splunks value and relevance to all of our customers decisions, regardless of whether the data they need sits in the Splunk index or somewhere else.
Building the Splunk did everything platform has been a multiyear multimillion dollar commitment.
Through a combination of internal development and strategic acquisitions, we've invested in excess of $2 billion over the past couple of years to help the world turn data into doing.
Well our focus is to use these technologies to further strengthen our IP and security use cases, we're also expanding our markets the long term.
Splunks ability to access more data and analyze it faster allows us to appeal to new users and solve new use cases.
In summary, I am proud of our Q3 results and when I think our customers partners and our spelunkers for their commitment to turn data into doing.
Now I'll turn it over Tim totally our Chief Technology Officer to take you through our product and technology strategy.
Thank you Doug it's my pleasure to be on the call.
Splunk is bringing innovation to everything the three highly focused initiatives build by and invest this was clear than ever in Q3, when we announced more innovative products acquisitions and programs than ever before and took splunk beyond the index for the first time in our history.
As of the end of Q3 Splunk at over 450 issued patents and over 650 pending patent applications over the past two years, we've more than doubled the size of our R&D team and today, we have 12 global R&D sites. We've closed the acquisition of eight new companies since September 2017.
And as we announced during our September did everything launch event Splunk is committed a 150 million dollar venture arm to invest in the wider data ecosystem.
We hosted our biggest dot com favour, both in attendance and product innovation, whether you're a technical data nerd for designer there are dozens of amazing things to see during or user conference. Since I'm. All three of those every day of Dot com was off the charts.
Over 11000 people came from around the world to Las Vegas to attend over 420, keynotes and breakout sessions.
Over two days, we announced 20, new releases in beta products, including the general availability of Splunk data stream processor, Splunk data fabric search and Splunk enterprise enterprise It auto and the beta release of several new products, including Splunk mission control.
I couldn't walk far without being stopped by excited customers of partners.
Within our innovation strategy to build Biden invest Splunk is focused on building products that enable unbounded machine learning and real time processing, well offering indulgent design, which fits the product formed a function in the beautiful way.
Furthermore, we are bringing splunk everywhere, you are through mobile and collaborative capabilities to our products.
In Q3, we merge these priorities as we announced products, enabling customers to innovate on Splunk enterprise and beyond the index first we announced the general availability of Splunk data stream processor, a real time stream engine, which sits outside the Splunk index in is powered by our industry, leading unbundled machine learning, which uses a day.
Give learning in real time, and self two ends with no volume or Carden now that the limits.
Were convicted in our feeling that feature of machine learning is in the stream not in the batch world and Splunk is positioning positioned to be the industry leader in the space.
We also released data fabric search with Superchargers, the speed and scale of Splunk enterprise by an order of magnitude or more in addition to adding federated search capability across bunk deployments in non Splunk data sources.
And finally this corner demonstrated the ways repeating in consumer grade design with collaborative features through our new user interface frameworks. This was on full display adopt cough, where we announced two new products that reside on a multitenant cloud native platform.
The first with mission control hybrid cloud SaaS product for the security Security operations Center that connects to and brings together our on premise. This enterprise security you'd be in canton products into one single beautiful pane of glass.
The second product delivered on the new cloud platform with Splunk investigate a cloud based product based on Workstyle investigation flows to search and analyze data collaboratively and in real time.
I've often desktop customers those new to Splunk. The smaller datasets can you speak investigate for easy data Onboarding root cause analysis incident management troubleshooting production issues in much more.
Next I'd like to talk about our acquisition strategy that both enhances the product portfolio and helps deepen our roots in the open source community.
Our acquisitions of omniscient Xtremio Splunk is positioned as a top contributor to open telemetry in Apache Pollstar. This week, we announced additional contributions and donations to help make open telemetry the standard for data collection and to advance the observed over the initiatives of the projects community.
Our investment in open telemetry is important making data collection open and accessible to everyone is a key imperative for Splunk.
We are 100% behind open telemetry as the new standard for the observer ability world.
This new investment comes in it in addition to our existing commitments to open source projects, such as Apache Kafka link spark kubernetes anymore, which are already at the heart of our products.
Customers have welcomed our embrace of open source to enhance ease of use validating that we're building the products our customers want in which transform their organizations.
With our parts just as a signal effects in our mission Splunk as the best solutions for real time monitoring of infrastructure micro services and applications, combining the three pillars of observe ability logs metrics and traces.
We are laser focused on integrating signal effects and omniscient into splunk for a unified observe ability experience.
As I mentioned, the third piece of Splunk innovation is our investment strategy.
In Q3, we introduced Splunk ventures into inaugural funds to introduce the next generation of data analytics.
Splunk ventures is complimentary to our existing operations and provide portfolio companies with a variety of benefits, including access to Splunk technology go to market support and engagement with Splunk meters.
Splunk, we designed our inaugural funds with a focus on outcomes.
We established a 100 million dollar Splunk ventures innovation fund for early stage startups transforming data into business value in the $50 million Splunk ventures, social impact fun to invest in start startups using data to create social good.
We've already made a number of investments in that Dot Com 19, we were proud to announce our first social impact from investment in zone Haven, a startup developing technology to help fire departments going to get ahead of wildfires.
Splunk ventures goal, it's a fund companies that will continue building the product ecosystem surrounding the Splunk data platform.
Splunk ventures will in turn help accelerate new technology in the data did ecosystem to achieve rolled changing outcomes.
When we say, we're bringing innovation to everything we mean everything whether we're building building buying or investing our intent is to enable our customers to bring data to every question decision and action.
Thanks, again for joining us now over to Jason.
Thanks, Tim and good afternoon, everyone. Appreciate you joining us today Q3 execution with solid highlighted by strength in our public sector business third quarter revenues were $626 million up 30% year over year cloud revenue was $80 million up 78% over last year in Q3.
The software revenues, which is the total of license and cloud were $454 million up 40% year over year.
As we outlined last quarter customers have been opting for term and cloud contracts over for over perpetual faster than we anticipated.
As a result, we've accelerated the completion of our shift to a renewable model and discontinued new perpetual license offerings effective November onest.
In Q3, 92% of software bookings were either term or cloud slightly lower than Q2 due to some customers, making a final perpetual purchase.
We maintain our expectation that will exit this year with renewable mix in the high Ninetys and reached nearly 100% next year and beyond.
With the shift to or a renewable model largely complete we've taken a fresh look at which operating metrics are the most relevant to our go forward model with a diminishing contribution from perpetual licenses, we believe an annualized metric on term and cloud better reflects the underlying growth of the business today, we're providing total our our ore and.
You'll recurring revenue, which we define as annualize value of cloud term license and maintenance contracts as of the last day of the period note that our excludes all perpetual license and nonrecurring professional services as you'd expect this metric is intended to provide a view into normalize bookings activity for the period.
Good.
For the quarter ended October 30, Onest total AR was $1.44 billion comprised of 368 million from cloud and 1.07 billion from term license and maintenance contracts. This compares to total air our of $939 million in Q3 of last year representing 53.
Percent growth year over year.
For your benefit we've included a five quarter look back there are in the slides published with today's release.
Our initial outlook for next year is for our growth to be in the mid 40 percents range.
We ended Q3 with total RPL, a $1.45 billion up 52% over Q3 of last year. The portion of RPL, which we expect to recognize as revenue over the next 12 months was $862 million at quarter end up 42% year over year.
RPL bookings was $839 million up 42% from Q3 last year.
In the quarter, we recorded 134 orders greater than $1 million in total contract value up 21% from 111 last year.
In our public sector business, we had a strong third quarter booking several mid eight figure orders with U.S. government agencies. These agencies can require a contract terms greater than three years and in many cases up to five years with orders of this magnitude and the extended duration, our overall duration skew.
Due to 36 months this quarter up from our recent levels of around 33 months. We believe this was specific to pub SEC momentum stemming from the federal fiscal year, ending Q3 animal revert to prior levels in Q4.
On margins, which are non-GAAP Q3, overall gross margin was 86% up slightly on a year over year basis due to scale in our cloud business.
Q3, operating margin was 17% slightly better than planned driven by our solid topline performance.
Turning to guidance, we expect our high growth trajectory to continue for the remainder of the year.
Q4 revenues should reach approximately $780 million with a non-GAAP operating margin of 23%.
For the full year, we're now expecting total revenues of $2.35 billion up from 2.3 billion and we maintain our non-GAAP operating margin target a 14%.
Looking further out we intend to walk you through our updated long term model at our analyst day in spring, but we think it's important to get a view into future cash flows relating to the shift from perpetual to ratable invoicing for cloud and term contracts that we discussed last quarter.
To reiterate the billion change to one year is a cash flow timing consideration only and is driven completely by customer preference and market trends.
Today, we are reiterating the full year operating cash flow target, we updated last quarter and expect roughly the same level for next year in fiscal 21.
As billings from previously booked multiyear contracts begin to contribute more meaningful meaningfully to cash collections cash flow should turn positive and fly 22 and approach $1 billion enough like 23.
Again, we're providing this for high level visibility and will detail other growth and operational targets at a later time.
In closing it was an excellent quarter and we're looking forward to a strong finish to the year with that let's open it up for questions.
Thank you as a reminder to ask a question you would need to press star one on your telephone.
Your question press the pound Keith please standby, we compile the Q and a roster.
Our first question comes from.
Romil lens, Joe with Barclays. Your line is open.
Hey, Thanks for taking my question and congratulations.
Two quick questions. Doug can you talk a little bit about the reception from the customer base around the pricing changes.
Obviously.
Just like Ben.
People want to Pete on ingestion and then.
Huge usage as well like what was the feedback you see any kind of early indications, which people are saying thank you.
Hello.
Thanks right now.
Yes so.
As you would guess I had been on the road pretty much consistently the past two months with our strike event Dot Com and then our continued customer visits series and one of the top things we talk about is pricing.
What I've seen universally is a high enthusiasm and almost a sigh of relief from customers as we talk about.
Both the broad band for a data volume based approach or an infrastructure component for people to just want to go away it get away from data volumes altogether.
One of my favorites as a couple of a couple of visits to visits with large European bank.
Who.
Hi, crisply talked about.
Wildfire abuse cases that are spreading across the bank again, because they moved to infrastructure based pricing and could focus on the value being produced from use cases, it's everything but the volume of data.
So really excited about it.
That said, we have to lean in hard on marketing communications and sales enablement. So every customer hears about it as there are still many customers that I talked to where it's new news or not entirely understood by them.
So a lot of work for our teams to do to ensure that all customers get the understanding the value that has coming with with what we're doing with this splunk portfolio.
Perfect and Jason Thanks for the extra distributor that'd be helpful.
Can you talk on on our so obviously now you kind of still have like the effect of more subscription coming through there is there an idea.
You should we see like normal life are like is it Didnt next year story or is it in two years Korea. How do you have to think about that obviously to new number and we all need to get their heads around that.
Yes, I'd say first we've provided the five quarter by quarter trend just to try to make it a little easier for you guys to try to predicted.
Yes, I'd say second.
The most I think probably the most important thing to think about is.
There are is is we think the most durable growth metric to think about how this business has actually performing annually and if you think about the kind of customer base.
Only about 5% of our perp customers have actually converted to term.
Or cloud and so there's a lot of growth to come so in terms of normalization.
I don't know, we don't expect there to be significant deceleration and that actually brings me to my third point.
We did give an early view of what next year looks like and I said mid 40% range is kind of a good place to start from at this point and we'll certainly update you further in the future.
Okay very very helpful. Thank you congrats thanks.
Thanks, Thank you.
Thank you and our next question comes from Brad Zelnick with Credit Suisse. Your line is open.
Great. Thank you so much and congrats guys on a great quarter.
I've got one for for Jason and one for Doug and follow up Jason If we look to slide $14 billion in operating cash flow in fiscal 2003 and I. Appreciate you said you will share more at analyst day, and as we move forward, but what are the assumptions that gets you there and were specifically, perhaps what are the most sensitive.
Options that can cause you to end up above or below.
Sure.
So first thanks.
Great about the quarter I would say the.
The sensitivities when it comes to cast or is a lot.
The first thing is why is this taking kind of three full years, two to snap back and Youve probably looked at.
Companies that have gone through kind of transformations more than I have but.
We are in short going from collecting the vast majority of the cash upfront to now moving to ratable billing since our average duration is is three years.
We're effectively moving from its going to taking about three years to kind of get through that transition to when you will see the cash flow as a percentage of of revenue or topline.
Flow through and so.
I feel very confident where we're going to be in 23.
Movement between then is going to move a bit depending on a bunch of variable so what's the cloud mix versus on Prem.
What is the ramping of deals how much in year, one versus two and three et cetera. So those are the reasons why I have to be a little more opaque through the transition, but again very confident on where the numbers will be post transition, which will be in 2023 or four I'm, sorry fiscal 2003, which is 20 do I guess.
Excellent Thats, great context, I appreciate it and just one follow up it's great to hear Tim speak about the commitments open telemetry can you talk about the impact you think it'll have an leveling the playing field in the upstream mobility space, how would benefits customers and what it means for Splunk and its competitors.
Yeah, I think moving to an open source framework to collect data is really the best move for the customer would it helps them do is not feel like they are trapped by anyone particular vendor and give them a common substrate upon which to operate ideally that one vendor is splunk, but we're always trying to do what's best for the customer invest for the user and we think that some of the donations that we made it took.
Telemetry.
It's really what's in the best interest of the power Splunk user.
Okay. Thanks so.
Thanks, Brett.
And our next question comes from Keith Weiss with Morgan Stanley . Your line is open.
Excellent. Thank you guys for for taking the question and really really nice quarter.
She is the only real strength in aneurysm.
Current our fuel bookings numbers and there are number so it's really nice to see flow into the model.
I wanted to ask but a couple of kind of the new pieces of the equation.
The one that kind of really Peter interests will a signal effects and sort of getting more fully into that cloud monitoring and them serviceability space any kind of the initial reads that you could give us off in terms of customer interest calm.
How we should be thinking about the timing of that kind of ramping up within your business over the next year.
Thanks, Keith Yeah. We are as you guess, we're super excited about signal effects, but also our mission stream Leo the release of data stream processor.
Streaming is.
An amazing complement to what we do with the index.
And what we're doing with a combination of that portfolio is really exciting Tim has been talking about unbounded learning and are completely unique approach within the industry and processor of apply and machine learning to streaming data rather than data at rest.
But the interest that we've seen since the signal FX announcement has kind of the edge of the wedge and that entire basket of capabilities is very exciting it's clear and high tech in any online business that moving to Nexgen Dev ops model is critical for their success and having a fully agile.
Seed backbone is key to how to move forward.
And I think that portfolio that we now have.
His hedge entails about anything else the industry on a feature function scale and overall capability perspective.
Tim do you have any any thoughts based on all the customers you've been yes interacting with customers have been really positive they recognize sort of the scalability, but signal effects provides especially compared to other other vendors. They know that signal effects is up market product that blends well with our customer base.
The other thing they've been really excited about is our acquisition of our mission.
Their love our customers are starting to cross into all met all sort of facets of our visibility around logs metrics and traces and they really appreciate what omniscient brings to the table in terms of tracing products and it gives you a much better view of your application.
It is on the Microservices based architecture, it's much easier to consume for the user as opposed to traditional tracing solutions, which are sort of this this ball of text.
So there really really buying into the story around the power of the combined Splunk signal effects in our mission portfolio and then the last thing I'd add around that is.
I was really pleasantly excited to see that customers have figured out what sort of my walking hypothesis, which was that our data has been processor product would be a perfect marriage with the ABS everybody suite and our customers have really already figured out that if they can move move DSP together with signal effects. The data platform story that they're building with our products is just amazing so.
Been really pleasantly surprised to see that and Tim why why what does that DSP, yes, a lot of customers. They have logs sitting around and they want to get to place where they have logs metric metrics and traces together and so they are using our existing processor product to take those logs ingest them into the stream inside of DSP and convert to metrics and thats, what they used to ingest.
Turning to signal effects and it's been really powerful thing to see what's going to happen is there going to they're going to take that sort of recipe and build out other use cases on top of the platform.
So we're really excited.
Okay sounds really exciting.
One quick one for for Jason on the gross margin side of equation.
It was cloud scaling.
So rapidly I've been expecting that number to be coming down, but you're still seeing.
Sure on year increases in the overall gross margin I'm, assuming this isn't something that we should be modeling it on a going forward basis.
Probably should be at some point declining right.
Overtime, yes, because cloud margins today or in the mid Fiftys. They that as of right. Now My view is over the next couple of years, they probably get up to 70%. So as you see the mix of cloud growth It will come down since on Prem, We're obviously in the high Ninetys, but.
I would say Q2 Q3 was a little higher.
More because of mix you saw a really strong.
Pub sack business that is all on Prem because our.
Were largely on Prem since our.
A certification.
For fed ramp actually went through late in the quarter. So.
But but I would expect to see as start to get closer to the 70 ish percent range as our cloud mix gross.
Excellent. Thanks, so much.
Appreciate it can you. Thank you.
Our next question comes from Phil Winslow with Wells Fargo. Your line is open.
Yes. Thanks for taking my question is great quarter and Jason. Thank you for all the new metrics.
You bet.
Data stream process there the feedback if we got a dot com.
The positive on that you've touched on earlier, but how are you positioning.
The other streaming products that are out there on the market sort of on a standalone and then in the context of Splunk portfolio and then but also to streamline acquisition I mean, I've heard people talk about sort of pulls our big cost good food auto and obviously kotkin flanker part of.
Your existing capabilities and how do you think about it pulls our upstream.
In the context.
Yeah. So the first part is is a lot of customers are paying with DSP like things must we see a lot of people who have caucus sitting around and for most part. These cases, we see there around using costco more the staging device or or message skew to sort of place data before there's there's later processing happening.
Nothing a lot of sort of processing in the stream itself as of yet.
So I think thats, where sort of sort of some of the confusion starts ally Depay is actually a superset of all that we actually use kaka itself underneath the hood thats part of our solution and we actually have entered as part of the Susan.
So we're much more than just staging area for data. The stream processing engine allows you to do real time alerting monitoring alerts real time aggregation dimension look up P. I'm asking but most importantly allows you to allows you to route data to multiple splunk deployments or even on the sources if it came to that.
So customers are really seeing the extension to the data platform story that Doug and I have been talking about for close to two years at this point and I think customers really understand that DSP is a key piece of that equation.
In terms of Xtremio, you haven't really great to see you picked up on that acquisition.
In the fact that Apache pull Sars underneath the hood there.
With that acquisition, it's a fantastic team of amazing technologists at the core.
The team is X Twitter guys in X. Yahoo, guys, who have been doing this for quite some time and for US largely was it was sort of additive to what we're trying to accomplish with data stream processor and it brings a wealth of talent and expertise.
To the equation and we think that pull Sars, an amazing piece of technology, and really interesting and we're looking for ways to leverage it.
Inside the product product potentially.
And I go back to the four pillars of investigate monitor analyze and act.
What you've seen it and what hopefully our investors and our customers see is we've been rallying around that framework for almost four years now.
Guide, our organic and build approach as well as partner and purchase approach.
And something like extremely on Paul Sorry, I think is one of those lean forward orientations had we love what we've done what DSP, we purposely built in a way so that as new iterations of technology come forward open source in this case our.
Product forget progressive customers get a stable experience and yet the underpinnings that product or it will take advantage of whatever next generation enhancements are advancements come out and community around us.
So hopefully hopefully all you guys are noticing we are actively embracing open source were contributing back to open source community the backbone of.
The overall engineering group continues to be augmented with talent from all around the world. So that we can be leading edge to serve our customers.
Great. Thanks, guys.
Thanks, Phil.
Our next question comes from for T Mobile Lani with.
Your line is open.
Good afternoon now thanks for taking the questions and Tim Nice to see you understand the on the call today.
And on a question for Jason Doug I'll start with you.
Within the context of the pricing contracts in the new models that you've introduced.
You mentioned sales enablement is a key focus area. So along those lines at a high level I was wondering if you'd be able to share your perspectives on how these new contracts will impact incentive compensation structures for your sales organization, who are clearly Easter selling at different models for very long time and equally within Europe .
Indirect channel partner distribution ecosystem, and then I have a follow up for Jason If I may.
Sure.
I think the when we look at data volume that is a proxy for infrastructure and that's why I think initial founders.
Came up with that metric.
So from a.
Shift to the Salesforce banding data volumes I think just simplifies their life and mixture communications more Chris with customers.
Where I think the enablement does come in is a translation on virtual seep, you or virtual core.
Is something where the rep. These spend time with the customer I understand what is or use case and from an infrastructure basis, where they need to bring that use case to life.
In the past two is data wasn't proxy now as we all know him and talking with customers data is still a proxy, but what you do with the data are you query excessively clearing the data are they heart I carnality queries or not.
Our find that having a meaningful decision factor for those customers on whether they're going to get an easier translation to value by leading on infrastructure metric or they're getting easier translation of value by having this elegantly banded tiering solution.
So that the we remain customer success as our number one priority.
And that's why we offer two options.
And I've seen.
I can never predict exactly going into deal, which one the customer is going to lean on.
And I think that that optionality is going to be semi appreciated by our customer base.
I appreciate that color and Jason for you you mentioned that only about 5% as youre perpetual customer base has actually transmission and or migrated over Q term or cloud form factor. So on one hand that certainly an opportunity for you to convert the based on the other hand, I'm wondering how we should interpret alive.
Just from an accounting perspective, how you would manage around horse trading between in erstwhile perpetual contract moving to term.
And in some of these newer pricing models, they're kind of working through the systems. If you can help put some guardrails around that for us from an accounting standpoint that would be really helpful. Thank you.
Well I guess just to clarify the approximately 5% of per installed base. Those are folks that are currently.
In our renewals subscription.
Stream I'm, sorry in our maintenance renewal subscription stream and so what those folks will either do is continue that maintenance stream or they will decide to upgrade into term or cloud and when they upgrade on average they're upgrading at somewhere around three extra higher so I would think of it is either.
There are going to remain.
And we have a very high retention rate or they're going to upgrade into a higher dollar amount does that answer your question.
Yes, that's very helpful in clear thank you.
Great.
Thanks for team.
Our next question comes from Brent.
Phil with Jefferies. Your line is open.
Thanks, Doug you mentioned, the new pricing is meaningfully expanding your opportunity I know, it's really early but if you give us your thoughts and what's surprising you. The most in terms of new key studies or come into the platform from a case study or is there a geo or some other area that youre seeing that maybe perked up.
Yes, the for thank you.
Thanks Brent.
As we've talked about while the variety of use case is always blowing I think all of us way rounds blog.
And as more things are being censored and more departments are getting a bit more aware of how data can play a role in driving their logistics quarter their manufacturing forward or marketing or sales for HR finance I think we're seeing that expansion of use case across those and at dot com something like the keynote where Porsche and the exact firm.
Portion the tie can walk through why Splunk is integral to the rollout and successful servicing that tie Ken I think is one of those examples that could have been true two or three years ago, but with the augmented reality capability that we've introduced with things like DSP to make sure that you can filtered stream that data and maybe even learn from it real.
Time as it split across stream that provides much more enhanced capability for those use cases.
What I really see the impact with pricing being is when I get above half, a terabyte or a terabyte or five terabyte. That's when the light bulb usually goes on with his accounts have Oh, my gosh I've got a true data it everything fabric care for for use add this could be 100 terabyte or at five petabyte.
Eight backbone, how do I make sure I can manage those costs.
And that's where I've seen customers with either option the unlimited banded option on a term basis or the virtual infrastructure option be able to it now have the feeling of control.
And not feel like the data volume as we submit overwhelms them on a lack of predictability or escalate to rapidly escalating price basis. So thats. The the vitality that I think I mentioned with that our European Bank was based on my Gosh I I've got control over infrastructure I don't care, whether we go to 50 terabyte.
Sure a 150 terabyte Toby maybe a performance.
The factor I'm going to have to pay attention to but I'm not going be gated from these use cases.
Thank you.
Thanks Brent.
Thank you and our next question comes from Kash Rangan with Bank of America. Your line is open.
Hey, Thank you very much I've got a deep cash flow question for Tim digital screen process a question for Jason.
Relax that's not that's not good morning skin.
Dotcom was just absolutely fascinating looks so upbeat Doug a question for you high level, we could could be a very long complicated question I'm, just going to dumb it down and what investors considered to be a crowded landscape of Dev ops more broadly speaking what does it take two wind and why do you think splunk is going to.
When especially given.
Your acquisitions and for Jason I do have a cash flow question for you though.
If we can just help us understand why that turn on cash flow is a little bit longer than what we might have expected maybe that was incorrect.
I assume that since.
The renewable stuff has been running relatively high in the last four quarters I would've thought that you started just switched to 86 those Ics Q1 of calendar 18, so but don't get into calendar 2021 that you should start to see the full free cash flow conversion. So.
Obviously that that's not happening, but can you just level set us with the details on why you expect it turned to happen in calendar 22, and not uncommon to 21. Thank you so much.
Awesome I will start to cash with that just that the interpret in Hanover. It.
For the observed go to piece.
What we saw in our due diligence and I think I said this when we announced the acquisition of signal effects that we looked at every single entity in the marketplace and usually two or three times as far as engineered engineered conversations and why we're so excited about signal effects and then the addition of our mission and how we can do with that Patrick.
Costar and extremely up the CSP is the.
Byrle nature. The the complexity of this next generation developing environment, you think public cloud makes a simple that in some sense. It does but it also provides a lot of optionality in a ton of complexity as everything becomes ephemeral and bridge at and and short lived potentially.
Creates a lot of streaming issues and a lot of potential noise.
And we feel that the split that ultimately.
Any company that is successful in that arena is going to get to volume and insight demands that someone like splunk in the portfolio. We have is geared to be able to handle.
Tens to hundreds of teams trying to enter operate together.
Hundreds of terabyte to better by headed by two data on a continuous streaming basis. That's that's a very very challenging environment to actually operate effectively.
And weve distinguish ourselves the years as being easy to use but go to the corner case of scale and performance and that's that's a key component of what we've been.
Evaluating thinking through and driving our observe ability platform around and Tim you I can add better color than that high level frame as Doug mentioned, the fact that we we took a survey the landscape in sort of looked at all the traditional vendors.
You know when the Rins I'm, so confident really excited about where we have is I think we built the world's most scalable observer Burley platform after buying signal effects and well be does we then took on the on this one in built what I saw as being the best tracing product in the entire world. It's just far more easier to use as I sort of indicated on one of the earlier questions. So where we did as we took what I saw.
I mean, the best metrics and traces solutions in the world in married it together with with already the best modern platform, which is us obviously that that Splunk and so I think those three together or just a fantastic recipe for that that Dev ops user who wants an integrated solution and that's certainly what we're laser focused on for the next set of months here is making sure that metrics and traces which is already part.
The signal effects comes together with Splunk and that's that's that's my number one focus.
The last thing is I just.
You probably heard me and other places talk about the Consumerization of the enterprise I'm, just really excited about where we're doing on the user and user interface burnt in making these products easier to use and much more consumable and adding mobility to the equation as much as possible.
That piece to me is really really important for the Dev ops or adept set cops user in the future, they're going to want to sort of be on top of all that wherever they are whenever they want and so.
That combination of the platform the scale and just the user interface I just think makes it an unbeatable equation.
On the cash flow question.
Okay. So let me just kind of break it down into three pieces first I'd say you mentioned six so 66 to six does have an impact on cash. This just on the revenue recognition.
That's why I tried to talk about absolute dollars and not as a percentage of revenue.
So to try to just keep those apart.
As a second if you look at inflow inflow is going to be course was driven by the change to this ratable bill in approach, which we really have been moving a little bit, but we kind of completed that move in earnest middle of this year and and so while that is not necessarily huge per se.
That is going from what last quarter was 50% to 33.
Percent when you're growing those percentages make a significant difference.
Then I would say that ties to the second point, which is or.
Part of the second point, which is we also had an increase amount of ramping deals. So a lot of the big deals that were doing because they're paying on either ingestion or BCP EU. They want to pay as they're utilizing they will pay a smaller par amount in year, one and then bigger near two and then bigger near three and so when you add that on top of.
Going to ratable billing and pushes more cash out and it takes a little longer for this transition to work itself through.
And then the very last piece I'd say the third pieces outflows are outflows are going to continue where they've been and that is while we're we are growing our opex, we've been growing it less thing than revenue.
We are going to still continue to grow and a relatively aggressive fashion as we invest and into.
Further technology as Tim and Doug we've talked a lot about on the call as well as of course building out the go to market function to be able to to sell all those technology. So the fact that were not kind of back on on Opex to try to show cash earlier. So that's why it really will take us three years to get through the cycle, but when we come out we will have stronger cash flow that we've ever had.
Add more than three excellent of our best years been in the past.
Thank you so much very clear.
Thank you thanks Kash.
Our next question comes from Mark Murphy with Jpmorgan. Your line is open.
Yes. Thank you all at my Congrats Jason you had mentioned several mid eight figure orders with government agencies and just wanted to clarify the I'm assuming those are for instance, 50 million total contract value over.
345 years and am I, interpreting that part of that correctly or is that an accurate.
That's those are no they're not that big I mean there.
When you say mid eight figure not mid between eight and nine.
But no so they're they're they're definitely I'd say closer to the tend to twentyish million dollars range, rather than $50 million range. Okay. That's great. Thank you for for clarifying.
The second question is I am I guess I'm, a little surprised you're guiding a our our growth too.
Mid Fortys next fiscal year I would've guessed.
Maybe it started out something closer to 30% just because.
It's such a big number and you are guiding that five quarters out so I'm just curious.
Are you seeing something unusual in the pipeline or is it being lifted is that forecast being lifted a bit by.
This this public sector performance or.
Is there something else going on that's kind of providing you that that level of confidence going out that far.
Well it no. It's just it's just very strong growth and the way Air. Our works is you know it's a kind of a later cake. If you will have for US. Our average duration is about three years. So you have the contracts. We sold this year, what we sold a year ago on what we sold two years ago and so we know that next year you know roughly.
About two thirds, it's going to be sold going into next year and we you know we also feel good about what is going to happen next year, and so that actually gives us pretty good confidence.
Into the pipeline and and the ramp that we expect to see next year. So.
Yes, so I appreciate that the numbers are large, but it's really I mean honestly. It's just the business has been performing extremely well for quite awhile and I think.
I am only been here six months, but my view would be.
It there Hasnt, maybe you didn't complete understanding and I think maybe six or six made it a little confusing since you're pulling forward the license revenue on Prem.
So it made a hard to figure out what was really kind of the annual consumption.
And so hopefully this will provide a better view for just how strong we have been performing how strong we expect to continue performing.
Okay, well said, thank you very much.
Thank you thanks Mark.
Thank you.
Next question comes from Michael Turits with Raymond James Your line is open.
Hey, guys good evening.
Maybe a question Doug Jason together, but on.
The amount of business is still on maintenance you talked about.
Steven mentioned this in terms of migrating over to term or cloud how much of a contributor to.
Hey are is that is that a meaningful driver for that area growth and just to come back I think you said that it was three X did you beat the three act like you go from 25 in maintenance to 75 annual.
Era.
I was confused but very beginning the question.
So I just want to know if migrations from maintenance to term or cloud is part of that driver for a our got it got it yes. So that's why you're saying I want to make sure I wasn't in the same paid so why why I think Jason lead them at that 5%.
Number is there could easily be a perception that that strong EMR growth was us just converting our perpetual contracts to term contracts and not not expanding our footprint within accounts not forming new use cases, not finding new customers.
And that five per day of the a our number.
Only 5% of or perpetual customers have transitioned off a perpetual into term.
For me just going back to adjust and just had a desert response to I think cashes question. That's the indicator of the core strength of the airline business. We are continuing to help our customers find new use cases penetrate new departments and continue to ensure that the new customers would bring on how that same great cohort analysis.
That we've seen.
And I think Thats why he he leaned in on that number to make sure that that people were not confused or did that that they got the purity of that air number.
That's exactly right, Doug Doug gets it.
Yeah, and I guess I would add to the you on the maybe if you kind of break down to 1.4 or five roughly 1.45 billion and we said about 369 million of it as cloud the remaining one point.
Kind of one ish billion or so of that you know about 35% of it or settles maintenance and so.
And then a portion of that his term and a portion of that as a perpetual so.
Yeah, There's I don't I don't know if that helps kind of provide the magnitude but.
Thats all breaks down.
And then Doug.
Customers that have seen the new.
Have adoption pricing and I know, it's early stage, but we had some sense for the elasticity there in other words, what are going to it's essentially a lower unit price is that driving more consumption such that you're getting an increase in total contract value.
Yes. Good just good question city, the whether a price curve is always worked.
Is the higher volume, we get the lower per gigabyte fee there is.
No what we've done with a banded pricing versus the infrastructure pricing.
Is really extend that curve out too much more visibly all the way to an unlimited framework.
So there's always been a.
An advantage to contribute more data well, we the key thing with the banding was.
Term helped people.
Feel like it was more affordable because we were stretching out payments basically for higher volumes over three years. So we saw as we converted from purpose to term people now feeling more comfortable moving from 100 gig to 500 gig.
I think with the banding does that just figured of example, I.
I think what if any does it make it feel more comfortable to go from one terabyte 20 terabytes.
Correlates back to the volume of data and the volume of use cases are out there.
So that what I have seen with the not it's not prolific yet so we have few data points.
Less than 50 customers total that have.
Converted to either infrastructure or the new predicted price framework I missed that a lot like our cohort as a consumer in the new way they are dramatically increasing their footprint with block I haven't seen anyone stay flat or go down yet.
Great. Thanks.
Thanks, Michael.
Our next question comes from Keith Bachman with BMO. Your line is open.
Hi, Thanks, very much the first question I'll throw out there is on.
The rpos, both the current and the total ARPU had a pretty meaningful snapped back and I just wanted to see if theres anything you want to call out.
And or is there anything that we should be thinking about for both our peos.
As we think about to Q4.
I'll take that this is Jason I would say the well RPL at 42% RPL bookings at 42% up versus 17 prior period.
Oh I'm, sorry, 19, total 17 current RPL bookings on the 19, you remember that was roughly 400 basis points of this kind of one onetime impacts I was really more like 23. This quarter at 42, if you took out signal effects, which we acquired last quarter and therefore consolidated into our BPO.
That would have taken it down to about 35%.
On RPL bookings now still.
Very strong growth and still a pretty significant acceleration from last quarter.
The one thing about RPL bookings it is what we're selling within the quarter. We're now so we have a lot of large deals we've talked about the eight figure deals.
Those can move just one or two deals that shifted one quarter versus the next can cause some lumpiness in RPL bookings and that's why I I think it's a good number to look at but not to overreact to much one way or the other that is why I really like air our as the durable growth metric that is going to even out at some of that.
Utility that you will see with RPL bookings, Okay fair enough and thank you Doug the last ones from me for you is similar to the previous question, but as you've gotten more data what do you think the impact on the pricing changes are to splunk because in many ways, if you're going from consumption to core.
They are highly correlated and.
If you had any more incremental thoughts that you've been out talking to customers about what your opportunities to up sell our during this process of transition or potential transition I should say.
Yeah, I think that up sell motion related start two years ago to the Splunk enterprise indexing upsell motion started two years ago, we leaned in much more aggressively with term and cloud.
Again, because the ease of expansion I think went up first but we havent perpetual motion.
What I've seen consistently and all of my customer conversations is at which is again why I think there's been so much sensitivity around that volume data volume based pricing is that there is so much opportunity and appetite for data out there.
Now the interesting thing about the portfolio so.
At the very purposeful in the pricing to make it easier for people to get very high volumes of data and the index and not feel like they were out of control on the costs that will go with it but what's interesting about the portfolio and what Tim and I have been talked about for two years now is.
Data at rest and the index is really important and very valuable, but it's got to be complemented by a if you want to be a data everything platform you need to complement of being able to add value to streaming data and being able to go after a wide variety of data at rest and not just data that has to be in the Splunk index.
Then you added the automation orchestration response capabilities that act pillar that centered around the Phantom acquisition.
And that really when I think out the next two three years.
The activity of expansion of Splunk enterprise indexes awesome, and our reps, who did a really good job there and I think there's a lot of value for customers and that happens and then when you get to add and DSP DFS orchestration automation and then some the apps on top like the developer portfolio with signal effects omniscient et cetera.
Revamped ITI the mission control plus he asked plus Phantom plus GBA.
That that's really the multi product high attach continued growth lever journey that that we are looking forward to and you guys should.
It should be should be taking a look at as well.
Okay. Thanks, Doug.
Thank you. Thank you.
Thank you and our next question comes from Andrew Nowinski with D.A. Davidson. Your line is open.
Great. Thank you and congrats on the a nice quarter.
Just wanted to ask your question on I guess international revenue looks like in modestly decelerated.
It was that just Brexit related or were there any execution issues in the region.
I think the major major driver that was the over performance in public sector, which is for US lot that means that we have we sell to governments around the world that public sector number as the U.S. government.
And which says goes back as the U.S. number versus international.
And then we're very.
Focused on.
Continued execution capability and cadence internationally.
Both in EMEA and APAC and as we've all talked about in that mid to high Twentys. There's no reason that can't be mid to high thirtys or mid to high fortys. So.
There's a lot of work that we've got to do to make sure that happens, but the opportunity across the rest of world is data is.
A neutral player governments commercial organizations.
Companies located every country need to take advantage of data. So there is ample opportunity.
Everywhere, we set and we've got to make sure that we can pursue that effectively.
Okay. Thank you then last one from me obviously current ARPU is very strong.
And I know you had a lot of eight figure deals, but the new logo adds I guess were down on the year over year basis, and given your sales capacity is likely higher now versus last year I was wondering why would that be down.
And whether that might be attributable to your licensing changes you know thanks.
Hi, I don't think a distributor life, let attributable to licensing changes, it's obviously something that weve been very focused on and we have and as I've talked about I'm frustrated by how stubborn it it that metric as we have not seen exponential growth that we know exists.
What Susan and Christian her global head of sales and I keep circling around is there's so much opportunity within the accounts, where there's clear momentum that on a time and attention basis, the reps why I'm spending.
More time, there than they do prospecting and we did carve out and that new team.
Those theyve been here for two quarters now two plus quarters are starting to get ramped.
We are doing a whole multitude of different acts, including portfolio enhancements easier consumption through cloud et cetera to move that number.
But I don't think theres nothing that any of us can find that foundational other than.
Then time and attention and some of the deliveries that and we've been focused on that that will eventually goes there.
Okay nice job.
Thank you.
And our final question comes from Chris Merwin with Goldman Sachs. Your line is open.
Okay. Thanks very much.
Do you mind, just updating us where you are in the process. So very early but the process of integrating signal effects.
Do you plan to bring to market fully integrated solution. When you start to try to cross sell that existing log products, just curious and any updates there. Thanks.
Yeah. This is Tim so in the short term rates are going to see is where we're taking the omniscient acquisition in folding it directly into the signal effects.
User experience and so you're going to see a combined metrics and traces product in the observed booty suite in very short.
Term here.
Early sometime in Q1.
And then the sort of advancements around pulling together the rest of logs.
From Splunk with the resi observation, we will be sometime in.
Middle of next year.
That being said that would be the collapse user interface, we will already be there with the linking between the two so you're just oh linked click away from really going back and forth between the two products.
Okay, great. Thanks very much.
Thanks, Chris.
Thank you and that's all the time, we have for question I'd like to turn the call back to Mr., Ken Tinsley for any closing remarks.
Great. Thank you Catherine I appreciate your health today, and thanks, everybody for joining us have a great night.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
Yes.
Yes.