Q4 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Splunk Inc. fourth quarter 2020 conference call.
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After the speaker presentation, there will be a question and answer session.
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I'd now like to hand conference over to your Speaker today, Ken Tinsley, corporate Treasurer, and Vice President of Investor Relations. Thank you. Please go ahead Sir.
Great. Thank you dilemma and good afternoon, everyone with me on the call today, or Doug Merritt and Jason child.
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.
Conference calls being broadcast live via webcast and following the call an audio replay will be available on our website.
On today's call, we will be making forward looking statements, including financial guidance and expectations, including our forecast for first quarter and full year of fiscal 21 20 to 23.
Duration revenue mix and long term cash flow and our expectations regarding our products technology strategy customers market 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 may cause our 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 contain current or accurate information.
We will also discuss non-GAAP financial measures, which are not presented 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 let me turn it over to Doug.
Thank you, Ken and thanks, everyone for joining us.
It was a great quarter and year end for Splunk, I'm very proud of our results and our team.
I'm grateful for their trust and commitment of our customers and partners.
We ended the year with annual recurring revenue of $1.68 billion up 54% over last year.
I'm happy to report that this is ahead of what we forecast last quarter. We introduced our transformation metrics are there are an operating cash flow.
Our shift towards Nubile model is 99% complete as customers are not predominantly opting for terming out contracts.
The flexibility and predictability of our new date, and everything pricing options have made it easier to do business with us and for customers bring data to every question decision and action.
And now we're focusing squarely on cloud as a driver of our next phase of growth.
Cloud first has become our mindset from both a business model and product strategy perspective.
35% of our soccer business was called this past year, and we expect cloud to ramp at a strong pace over these next few years, reaching over 60% of our total softer bookings and if my 23.
I'm extremely excited about the opportunity we see ahead of us and I'm confident in our ability to navigate another successful business model transformation as Jason will elaborate shortly.
Stepping back well, we know for sure is that Digitization, where digital transformation is becoming a real tangible and critical global initiative.
Digital security it become a board level discussion for global enterprises to start ups plenty of go public.
And there's an increased focus on digital technologies to help solve some of the humanities biggest challenges.
Yes, it makes it clear that over the next five years every organization must become a digital organization.
And data is the fuel powering a digital organization.
At Splunk, where empowering customers with capabilities, they simply can't get anywhere else at the time that they need it the most.
We see tremendous opportunities across our core markets, if I T operations security operations and application development.
And we're investing in products and technologies, it extended splunks value and relevance to all of our customers decisions and actions.
Regardless of whether it did they need sits in the Splunk index or somewhere else.
Capabilities, such a stream processing ensure customers can access massive amounts of data in real time, then learn refine and adjust that data as it moves across the screen.
Our Federated search capability searches across Splunk deployments and non Splunk data sources to provide users a holistic overview of their entire data landscape at much higher speed and scale than before.
Event management orchestration automation help our customers proactively remediate issues and take action on the insights and analysis are capturing.
And by focusing on new user interface frameworks like consumer grade design collaboration mobile and natural language processing, we're working to ensure that everyone. In the organization can get value from their data regardless of how skilled or technical they are.
Our vision to bring data to everything is resonating with our customers.
As an example, I'm proud to report that we recently completed our largest order in company history.
Thanks in large part to the value that data stream processing signal effects and omniscient brings to our portfolio.
The combination of streaming traces metrics and logs combined with unparalleled scale and enterprise capabilities.
That portfolio enabled us to be 16 competitors.
Well, our new pricing get this customer the competence and clarity needed to commit to a massive enterprise scale order.
This customer win demonstrates the power of our data everything portfolio and most importantly, our reputation for delivering huge value to our customers.
A few more highlights of customer wins in the quarter include Mclaren racing a prominent technology innovator in racing team, who purchased Splunk enterprise to capture data across their organization, including racing analytics as well as their infrastructure network and server environments.
Splunk did everything platform will help Mclaren racing improved customer engagement on and off the racetrack.
Discovery and provide or television brands, including discovery channel TLC HGTV food network and more expanded their use of Splunk cloud to gain real time visibility into their consumer streaming experience.
Splunk is a central investigative and monitoring solution for their video delivery platform and the streaming analytics powered by Splunk improve the global viewing experience and provide faster meantime to resolution when I to your application issues occur with direct to consumer offerings.
Macquarie government the cloud security platform trusted by over 40% of Australian governmental agencies purchase Splunk Enterprise Enterprise security Phantom and Uva to gain real time visibility monitoring and response, it's the agencies future security state.
Splunk as a key player at Macquarie governments multiyear transformational data journey, and we will be used to support the agile nature of the Australian taxation office as well as help protect righty environment from security threats harmful code fraud and spam.
Earlier, I mentioned that in Q4, we saw momentum build it for a new pricing programs.
As more customers turned to Splunk for increasing set of use cases, we've answered there call for more flexible and predictable pricing options.
Putting those not based on data ingestion.
This is making it easier for customers to bring even more data into splunk and find faster value from that data.
This quarter of had so many customers tell me there are new pricing options have been locked adoption within the business.
Which is giving them the overall confidence predictability and the right total cost of ownership to standardized on splunk as or data platform across their organizations.
Although it's early days and awareness is still building, let me give you a few examples.
Longtime customer Washingtonpost expanded their use of Splunk enterprise for deeper insights and analysis for all post properties and for their fast growing digital content management system platform arc publishing.
Leveraging our flexible pricing programs, the Washington Post uses Splunk for real time monitoring and data insights help improve their overall customer experience.
Splunk is also used to improve information security and threat detection.
Another example, NHS digital whose significantly expanded their use of splunk this quarter through dynamic pricing, adding splunk data stream processor and Splunk enterprise security helped strengthen and secure their networks.
NHS digital already uses Splunk for security and operational monitoring of England National Health systems.
This includes you referral services health and social care network, and spine, which indexes over 1 billion messages a month across 23000 health care I T systems in over 20000 organizations across NHS.
With Splunk NHS digital can enhance security defenses, helping them to securely deliver important health services to patients across England.
In summary, it was a milestone quarter with our cloud bookings more than doubling coupons to Q4. It was a strong finished halfway 20.
I'm so proud of the entire Splunk team, we're uniquely positioned in did it everything under 100% focused on capturing a tremendous opportunity ahead.
We're investing for scale growth and innovation.
Adopted a cloud first mindset and most of all we're committed to helping our customers export their massive data everything opportunities.
I'll now hand over to Jason to walk you in more detail to the quarter in fiscal year results Jason over to you.
Thanks, Doug and good afternoon, everyone. Thanks for joining us today Q4 capped a very strong year for us highlighted by a faster shift to cloud than we expected. We ended the period with total air our of $1.68 billion up 54% over last year.
There are was comprised of $442 million from cloud and $1.238 billion from term license and maintenance contracts.
As we outlined last quarter, because customers have been opt in for term and cloud contracts over perpetual faster than we anticipated we discontinued due perpetual license offerings.
As a result in Q4, 99% of software bookings were either term or cloud and our transition into a renewable model is complete.
Our focus now shifts to the move to predominantly a cloud model.
The bookings mix between term in cloud becomes an important balance to understand since it can have a meaningful impact to the financial statements going into a fly 20 do you would just closed we expected cloud would contribute about 25% to software bookings turns out that cloud demand was significantly higher an old.
Currently 35% of total software TCB was from cloud most of which came in the second half of the year.
And because revenue recognized from a cloud contract is fully ratable, even a large cloud contract on a TCV basis will yield significantly less revenue than a comparable in size term contract as we've said because they are or normalizes bookings activity irrespective of cloud or term here or is the most upon.
Oh pretty metric to evaluate overall momentum of our business.
We ended Q4 with total our appeal of $1.8 billion up 43% over Q4 last year.
The portion of our appeal, which we expect to recognize as revenue over the next 12 months was $1 billion at period end up 23% year over year.
Our appeal bookings were 1.14 or $5 billion up 23% from Q4 last year and full year RPL bookings were $2.9 billion up 28%.
The accelerating cloud contribution in Q4 led to a slower pace of growth in current RPL bookings compared to total RPL bookings. This is due to the out years of a multiyear QAD cloud contract being classified as non current whereas the majority of a term contract is captured in current RPL bookings immediately.
Again, they are normalizes for this mix shift.
In Q4, we recorded 221 orders greater than $1 million in total contract value up from 179 in Q4 last year.
Over the course of the year, we booked 35 orders greater than $10 million compared to 24 in the prior year.
Recall that several large federal government contracts with five year term skewed overall duration in Q3 as expected weighted average duration reverted to prior pretty levels of 34 months in Q4.
Now onto the piano fourth quarter revenues were $791 million up 27% year over year and full year revenues were $2.359 billion up 31%.
Cloud revenue was $99 million up 86% over last year full year cloud revenue was $312 million up 82% from fiscal 19.
Q4 software revenues, which is the total of license and cloud were $617 million up 33% year over year.
On a full year basis software revenues were $1.686 billion up 14, a 40% over last year.
On margins, which are all non-GAAP Q4, gross margin was 86.7% down slightly on a year over year basis due to a greater proportion of cloud revenue contribution.
Full year gross margin was relatively flat at 85%.
Operating margin was 24% in Q4 and 14.2% for the full year, both inline with our plan.
Finally, operating cash flow was negative $288 million for the year also in line with our expectations. Following a mid year shifts to annual invoicing.
Looking forward, we're confident in the continued acceleration of customer adoption and high growth for Jack trajectory and we maintain our guidance for mid 40%.
Our growth this year fiscal 21.
Looking further out we expect to sustain a 40% error or a CAGR through fiscal 23, and we reaffirm our billion dollar operating cash flow target for F. Why 23.
Revenue guidance for this year is a little trickier given the high variability that comes from club bags and related ratable revenue.
With current expectations, the cloud will contribute to a substantially higher proportion to overall bookings in fiscal 21. It follows that revenue growth will flatten this year, even a software bookings and there are continuing high growth rates as we begin to benefit from the renewal of previously book contracts and fly 22, and 23 revenue growth.
Both should rebound sharply.
So we expect total revenues in Q1 of about $450 million and full year revenue of $2.6 billion and will follow our normal seasonal pattern of 40% front half and 60% in the back half.
With anticipated revenue snap back starting in fiscal 2002, we expect annual revenue growth in the high 20% range in both F. why 22 and 23.
With this revenue trajectory. It follows that operating margin will trough in fiscal 21 before rebounding at 22 and 23, we expect a negative 25% operating margin in Q1, and roughly breakeven for the full year and a long term target of 20% by fiscal 23.
At our upcoming analyst and Investor meeting, we intend to provide a framework on how varying degrees of cloud mix will translate to revenue and profitability metrics overtime and we look forward to walk you through more details of this transition and our next phase of growth.
In closing it was a strong finished the year and we're entering fiscal 21 with excellent momentum as the cloud business is poised to ramp rapidly with that let's open it up for questions.
Thank you Sir as a reminder to ask a question you would need to press star one on your telephone sewage or your question press the county.
Please standby we've compiled a culinary roster.
Our first question comes from Kash Rangan from Bank of America. Please go ahead.
Congratulations on a forward looking guidance it looks absolutely terrific and significantly higher than not what we expected.
Were to get this right so what you're saying it's into fiscal 2003, we're poised to doing about $4.6 billion or just take your numbers you guidance Cagar, 40%. So about 4.6 billion billion dollars an error, we're talking about in calendar 2002 time frame and revenue growth. It looks like they should a guidance for high Twentys, if I were to Cagar the fiscal.
Tony on guidance into fiscal 23, that's about 35% compounded revenue growth rate.
And you're reiterating your operating cash flow guide for about a billion it looks absolutely.
And it looks like the some similar to the honored as model transition, which I think was well received the question for you is up with respect to the total RPD bookings is there some seasonality because it was up about 42% in Q3, we got lulled into thinking that it could be up massively again I know, Jason you talk through some of the mechanics of the shift.
Towards the cloud, but my daughter, RPL bookings that number was up 22% could you shed a little bit laid bare and also with respect to you. The that revenue guidance for next year. What are your assumptions in that 2.6, clearly everything else looks even better than.
Expected congratulations again.
These are terrific numbers for forward looking numbers.
Thanks, guys. This is Jason so a I guess just the first tackle the RPL booking question. So yeah. It was 42 in Q3, but also recall that we added we hadn't signal effects into the quarter. So when you normalize for that we grew 35% that said you know it is a deceleration there.
Reason for that is because on our RPL bookings is obviously its revenue plus change and RPL and so there's a number of things that move.
The reality is RPL bookings is a bit volatile and you see this if you look over the last four quarters, you've seen a couple a you know you kind of saying go up and down up and down a and the reason why is because it's really the combination of the timing of when deals close and you know as we get larger we have a a larger number of of larger deal.
That could actually you know.
Cause that volatility and then also of course it depends on what we're comping against and prior period and because of the lumpy mix kind of of of RP of when deals hid it moves around a bit I actually think looking at our appeal bookings on a TTM basis is probably the best way to look at it because it's kind of what do we add into the quarter now in terms of new.
New deals now the best metric as you've heard me say as there are and the reason air our is better than RPL bookings is because it's going to cut through a timing of when a deal closes it's gonna through a whether it's rather than or whether it's on prem or whether its cloud. It's just going to show what is it that were actually delivering in the next 12 months.
And so that's the number you know and you see the air <unk> growth is actually accelerated for I guess now six quarters in a row from and it was 46% move from the first quarter. It reported in Q3.
Three a year ago and the now it's kind of mid stepping up every quarter. So so we're we're really excited about the air our growth.
And and clearly look that's that's that's the number I'd focus on it looks fantastic Doug what made Splunk when that megadeal against 15 companies and what makes Splunk win in this market that seems like a little crowded why should splunk a wind in the long term that's it from me. Thank you congrats.
Thanks Kash.
Thank you for that softball question [laughter]. So this was a I can ask hardball too [laughter] they look good.
No I superpremium, because it is where we are really really proud of that we've obviously, making a ton of investments across the portfolio and all the buying centers security a ops and the App Dev slashing serviceability area, even at adding things like data stream processing and Federated search and this was it I think a test.
But to what we've been driving across the portfolio.
What the prime use case. This this large customer was app Dev and next generation Dev ops model, but like all customers. They also want to leverage the offerings for security overall data center management and infrastructure side.
Distinguish it is when you paired the incredible Rupert and scale capability of DSP to even further enhance the automatic metrics extraction and dash boarding of single effects.
And then the that I think the strong synergies.
Tracing and what we've done with distributor tracing with a signal effects on mission and with the underline log management platform from Splunk, there was nobody that even get within literally a miles of the scale and fidelity and enterprise features.
That that this customer rightfully demanded there yeah, a massive massive organization that powers huge chunks of dollar transactions around the globe. So really was the investments we've been making and high scale high fidelity high capability Enterprise class.
Functionality.
From everything from logging to metrics to streaming to tracing that came together for this customer.
Thank you.
Our next question comes from Brad Zelnick from Credit Suisse. Please go ahead.
Great. Thanks, so much guys and I Echo cashes, congrats on a strong finish, especially the large deal performance and a lot of the wins that you talked about I don't know if I can do that as nice as cash does it fit but [laughter] <unk> I imagine dizzy aspects. So I guess, maybe my first question, Doug I know the budget for what you offer.
Very high priority across just about all verticals, but I have to ask the question is there anything you're seeing real time in terms of the demand environment, just given global health concerns out there that that factors into your outlook for the business right now.
So the their forecast we gave for Q1 and then for the subsequent for your outlook.
Three outlook was based on everything that we have available to us today right as of this moment, we're not seeing any immediate impacts from all the reactions to coded and the other volatility we see them in the market like every other company. We're monitoring it literally on a multiple times per day basis.
But what I I can but I'm super excited I'm happy that we were able to pull off as we did have our sales kick off last week in Las Vegas, I know a lot of companies for reevaluated, whether that is something that guy do or not I.
I think thats, an absolute pivotal of that for every company. It's so difficult to ensure your entire go to market organization is aligned with your product organization.
Especially in a year, where are we are leaning in hard on annual contract value versus total contract value and the cloud is got to ride dynamics to it and we've got a brand new absurd mobility suite and the pricing. There were communicating is so important so the part of that forecast is built on talking to you know roughly 2500 people over the course.
Five days and a lot of the forecast calls we've been driving on a daily basis as well.
Thanks, Doug and Jason maybe just for you as we look out past fiscal 21 to get to your 22 and 23 guidance how should we think about what you're embedding from a from a maintenance conversion perspective are you and are you expecting any uplift upon renewal of term licenses as customers transition to class.
Yeah. It's a great question I would say last quarter I gave the the metric that I think it was 5% of the perpetual installed base had converted to either term or cloud.
That metric.
Hasn't moved much but I think when we're going to provide a more helpful metric for you or within the next quarter and that is to look for net expansion rate because because we're doing very very well against that metric. So in terms of the expectations. There is a there's definitely we know exactly kind of what the renewal cycles look like.
Which is why we are confident in the air our growth. That's why I was was was able to say that we have a 40% error or CAGR from now through a a flight 23.
So that that will certainly be a big part of growth. We also you know certainly there's going to be continue doing new logo growth as well.
But overall I think the best way to look at growth today is of course, there are I think shortly we'll give you some expansion rate metrics as well the combination of those two well will help support the guidance that we gave.
And you can we really see what that 5% number.
That there was nothing that we were doing a special incentivize either within that customer base for the salesforce to try and drive that to a different number and there was nothing we're doing this year and there's nothing I can conceive of doing in any other year to pay for that conversion. We are more than happy to have customers layer term or cloud on top of.
Perfect, that's something that he'd four and they rightfully own we're happy for those maintenance dollars, but as Jason said, what we're really focused on as.
The overall expansion and success rate of this term in cloud contracts and that's where we're all the core growth is going to come from.
Great. Thanks, so much guys congrats again.
I think that's right.
Thank you.
Our next question comes from Matt Hedberg from RBC capital markets. Please go ahead.
Hi, guys. Thanks, I'll Echo my congrats on the air our outlook I think that's a lot better than from which enable us we're thinking.
<unk> to two questions. One last quarter, you guys talked about 50 customers that have converted to sort of more predictive pricing and you'd really seen a dramatic in sort of increasing in their footprints I know, it's still early in another quarter. When one of you could give us an update on sort of how that's progressing as the the conversions.
Yeah, we actually got it and very focused pricing group how that in pair with the marketing team is driving a high visibility on making sure that our customers have the new pricing, whether its predictive pricing bands on data volume or whether its infrastructure based pricing.
Exposed to them at ASCO, Mike you know.
Heavily focused on hey, this pricing is really important aspect teach we have you to bring it to your customers and Susan react good that an end sender or at a product reactor that and then Christian to head of global field record. It over the course Threed has so.
We are seeing a lot of ER positive signs there is not a customer that we've encountered yet that doesn't feel at this is a big advantage to them virtually every customer that has looked at the new pricing and digested has they want it made decision that's right for them and some people looked at infrastructure and then went back to a pretty.
To pricing data volume based piece and others went the other way they really went back to the use cases, they had and what was the highest value return equation for them, but the consistent feedback I've gotten as alright got it. Thank you now I can focus what I wanted to focus on which was value and number of use cases, and making sure that I'm driving the change I want.
Across the company.
So I as I said last last call. We are extremely focused on making sure that no awareness perspective, a tooling perspective, so customers and reps know how to evaluate the pricing and make the best decision and a customer satisfaction perspective that we are extending this to every customer out there.
That's great and then maybe just as a quick follow up I know theres always going to debate with with you guys on on the land versus expand I know we want both in there. So theres, obviously, a large expansion opportunity in the base.
But with the new with the new pricing, Doug I'm wondering if as we move forward say the next couple of years would could we expect a new customer adds to perhaps accelerate from you kind of the four to 500 customers you guys have historically been adding for per quarter.
I am still deeply expected.
Not that movement when I look at.
What do we done over the past three years since we laid a bunch of metrics on would it be how we get trying to bridge. The overall company we really.
Impressively overachieved on what we on what we thought was a relatively decent lean forward.
Yeah, we predicted 2 billion in revenue, we just closed 2.359 billion.
We exceeded our up top brand of op margin target. We gave you told to 14% range were 14.2.
We still would move renewable a from less than 50% to 75%. We just ended at 95% for the year, 9% for the quarter or we said deals Vermillion would would hit 300, we just delivered for 94 for this year.
The overall cloud percentage of softer bookings, we thought were being super aggressive at 26%. We just finished at 35% cloud revenue predicted to 50 million. We just added 312 million cloud revenue. So the way all that tells me is there has been so much momentum within the customers.
I understand the value that no matter, what we do to try to entice people looking at news that has whether one metric of all the metrics. We gave this kind of stock.
And I think our cloud offerings, they have to help because it's much easier to get up and going in cloud, but we just need the reps and the partners to find ways to pay attention to new customers as long as current customers are expanding at rate. They are now I know, it's going to be a constant attention course process to achieve.
Well done lots of et cetera.
Thank you thanks, Matt.
Thank you.
Next question comes from Phil Winslow from Wells Fargo. Please go ahead.
Thanks for taking my question Congrats on a great quarter, an outlook two questions first first one for Jason on last quarter's deck, you gave in operating cash flow.
The chart that should be your directory from 20 to 23 in fiscal 21 years since we guided to a negative operating cash flow effectively in line, maybe little bit lower than fiscal 2000 and that that changed at all or maybe directionally consistent sense.
One quick one for Doug after that.
Thanks, Phil So so first on cash what we said last time and I'll stick with it was already a permit and that is that Q or that last year or if I 20 ones cash should look the same and as that slide 20. So we were minus 208 million. So that's a good.
Forecast for the share that's snap back starts to occur in the middle of 22. So we'll we'll will flip the positive then and then we will be approaching a $1 billion in 23, so no change to the cash guidance footprint. So no change with great and then Doug a question on Additionally in processor.
Obviously, there's a lot I understand not a dot com and as well our fault.
And with customers Wonder if you give us your for study not a DSP economic for a date, what you're hearing from a from customers.
Yeah, I think a lot like are you observe a build to suite really positive indicators with a quarter in a month or have observed observed buying patterns.
It was included a number of deals in Q4 or the big the biggest transaction in company history that we talked about and couldn't into customer that I I can say with assurance that would not have happened without DSP.
This customer processes more transactions per second that he just about any customer in the world and DSP was key to be able to have a high fidelity transport and metric extraction across.
The millions of metrics per second that they drive.
So I think we made the right investment streaming is I think it very important and critical complement to data at rest.
And that and then that's it absolutely is and that will track over the course, the right I think the real traction will be what we just saw with this big deal, which is attaching DSP too specific use cases and.
An app debt as a key one because the volume of data that's happening across that next generation environment that we see a same thing with iops and the gaps landscape and and certainly I trying to get real time bead on events at incidents and occurrences and security its importance important components that as well.
Oh, thanks, guys.
Thanks, Phil Thank you.
Thank you. My next question comes from Raimo Lenschow from Barclays. Please go ahead.
And let me Echo cashless excitement about the numbers the.
Quick question on a bit clouds transition that we see this year, that's a huge change and huge momentum can you talk a little bit about.
What's going on internally in terms of the field people pushing it but I'm also surprised to see deck of much of a shift because you still have data gravity us welcome unlocking side.
So can you talk a little bit about a driver started it's pretty amazing.
Yeah. It was why were reluctant to give guidance for up by 21.
You really need we need to see a full year pattern Whit I 20 to even have the beginnings of model for approximately one and the one thing that encased night will stand behind us, but probably wrong with that by 21 model because it's really hard to predict but it did it was the largest spike that we've ever seen and Q4 and needs.
We're seeing even further interesting thing that that surprised me is we had a little bit of a deceleration on cloud this past year in the Salesforce.
The value of a contract tend to be higher than term because we are.
Providing a service and consuming infrastructure.
And despite the fact that there was a difference and commission credit between cloud in term we side push through at the highest rate we've ever seen in Q4, and the Q1 forecast idea about audio basis has it added equivalent level to Q4. So that just tells me that.
That one the health and quality of that offering has continued to progress and we've got a lot of really interesting things I think unique in the industry from this program to call out of on where you actually get to preview exactly what's your production is since looks like as part of the PSC and then when you buy you just instantaneously flip on on two.
Some of the interesting pricing and option characteristics that we're providing a enrich features within cloud, but I think the underlying uses customers want to go to cloud.
They they see a a really rapid return to value.
Despite that that means that 65% is on Prem and I've said for 5.56 years that I can't foresee us ever being 100% cloud there are a workloads and use cases, where a public cloud is probably not give you the right thing at least the next private tenure.
Irrs. So if we are target now is we think we'll get to 60 plus percent cloud by about 23, which is driving some of that immediate impacts on revenue, but in the benefits as we begin to lap and epitomised up by 23.
But I I don't think that we'll get that that number will get to 95% to 9%.
Okay, Perfect and then one follow up for Jason If I look at the.
Operating margin situation for if I 21, it's like what's the obviously, we had to change and revenue and that's.
That's kind of impact, but in terms of your investment focus on cadence like.
With any change or is this just what we've seen in terms of operating margin guidance, just a reflection of to revenue station.
It's a reflection of revenue revenues coming down because of the the cloud shift.
The reason why we guided to a target of 20% by a flight 23 is if you are kind of going to lay around the 200 or so basis points improvement that we've been targeting.
You get to 20%.
So it's purely kind of a a gap or the effect of the cloud transition GAAP income statement effect.
Okay perfect Congrats.
Thanks very much.
Thank you.
Our next thank you. Our next question comes from Brent Thill from Jefferies. Please go ahead.
Good afternoon.
Doug now that you tease this with the largest you'll ever.
Thank you everyone wants speak here, if you could help just quantify maybe not the exact size to help us ballpark it in for Jason.
There's a lot of questions around how the existing debatable migraine.
Also the pricing change in how you factored that into the guidance for for this upcoming year. Thank you.
Thanks Brent.
So my my hidden internal goal has been I. We've obviously been excited to share a seven figure deals. We now have in sharing eight figure deals with you guys, which have gone from one it the 10 10 million plus in 17 to 35, and that's why 20, which was a nice move my internal guide post I want to see a nine.
Our deal.
And this biggest deal ever was it was getting US close it was a it was trying to turn up to be a nine figure deal. So they're very proud of that just not so much. The the the raw number you would see implication of what that means as far as the importance of that business and for organizations that are fully digital and their entire busy.
This is online.
Then having a unified architecture that allows you to manage everything from security to your data centers to your App Dev portfolio, and then ideally the line of business requirements as well.
When you're billions and billions at our online company.
5100 hundred 50 million dollar contract feels like that is reasonable ask.
And in terms of the the other the second question on the kind of the assumptions on the.
Per installed base transition as well as a pricing impacts that we baked into the air our guidance.
I would say you know as I said and one of the earlier questions. The purpose installed base. It you know that's a it's a relatively small percentage that have moved thus far it we've been we've had that motion for about three years. So it's something that moves relatively slowly there is of course folks who are.
Expanding as or adding new contracts are expanding on top of a per contract and so that's why I think the better metric to look at going forward is probably going to be an expansion right. So I'll be providing that.
Let's say within this quarter.
And then in terms of the pricing impact, we actually started testing that back last summer and so we've been able to kind to see how that impacted I think the fields ability to actually kind of digest that and then and then help customers understand it and then see exactly kind of some of the elasticity impacts.
All that that's something that we've actually been been kind of watching closely for a while so we kind of baked in what the experience. We've seen thus far has been and ER and feel pretty confident about the the forecast that we provided.
Thank you.
Thanks Brent.
Thank you. My next question comes from Michael Turits from Raymond James. Please go ahead.
Hey, guys.
I think at the risk of bidding Ted Oversold.
Okay. That's more clarification will Brad Brents question can you just tell us for the 60% plus growth and they are this quarter and the 45% next quarter how much of that is from migration. So we really know what is this sustainable rate there.
And by migrates, you mean customers are moving from her to either term Uh huh.
Correct and both the it's close call inorganic impact to that and then the expansion pack to there I think that's creating industries.
Yes, so why do you provide that 5% number if we look at all perpetual licenses.
5% transition termed in their per places and turn it for a term are caused license we're still at 5%.
That's below the one percentage point metric between Q3 in Q4 going back to where it we are not incentivizing, there's no benefit per sales rep to do it theres no benefit for a customer do it so when a customer that's 5% the mood looked at the offering to see you know I want to single contracting vehicle I guess, where you're trying to go give me all cloud I'll give you my.
Per place and send it back.
Yeah. So it's a very customer driven decision for our Q1 and four or 521, we've factored zero per customers trading in their licenses for term or cloud, they're all organic purchases of term or cloud and some of those have common will come from existing herb customers.
But theres no program to have them to pay for them to to get there.
Okay. So zero per isn't that guide in other words just to be clear, there's diminish some investors or zero impact from migration concur Andrei our forecast.
Yes.
Okay, and just one clarification that RPL, because we know what single effects was a last quarter what was the inorganic contribution from it this quarter.
We Oh, we yeah, so last quarter, we disclose it because it was the first quarter and we actually absorbed it partially through the quarter at this point, we've integrated the offering.
So we're not breaking it out.
Okay, Alright, thanks, Jason Thanks, Doug.
Got it Michael.
Thank you I'm next question comes from for Cima Boolani from you'd be yes. Please go ahead.
Good afternoon. Thank you for taking the questions I have one for you dug in one for you Jason Doug just coming off their heels of your sales kickoff and how you're sort of putting pedal to the Netherlands cloud software transition I'm wondering if you can talk to you last about what sales incentive.
Changes in the magnitude there on a you're planning to roll out within the sales organization and go to partners as well and holiday new pricing structures, which I imagine has now been officially rolled into the price stocks and the partner channels.
How is it fair salesforce is responding to that and I will follow the Jason.
Oh, great questions. So the excitement at ASCO what was profitable in the you know is I guess, you're gonna have half years, especially if you're the the CEO the company, but I did some most people never had come up to me expressing both clarity of vision and then ultimately excited about it.
Plan and how we simplified the business I think the core the excitement comes from we've probably been able to move twin HCV compensation structure. TCV is so tricky because you're trying to guess are you gave you a purpose license or a term or cloud or you could do a one year to your three year and it says that it's a very inexact science that is frustrating for everybody and the.
On the sales Rep, all the way up to me and ACB, a simple and clear them. So it's a straight line of sight for them for the year.
Last year, we had a deceleration on cloud they didn't get full commission credit for cloud deals because the size of cloud tends to be larger than term, we're trying to neutralize determine cloud. This year, we took that the seller an off so it's a 100% credit whether its term or cloud, which I think we'll have to leaning into cloud because the size of deals tend to be tenant.
The larger.
And I also look at the infrastructure based pricing the Splunk virtual core a within a cloud environment I think that is a really advantageous architecture to cloud discussions it makes more native sense, the buyer than a data volume based metrics sensor or to use state if U.S. Asher GCP infrastructure usage charges.
So I think when you're talking about a cloud deal.
The SVC is going is a very tight fit for them.
Although we've seen cloud customers choose predictive data volume pricing over SPC, depending on whose case.
And all got an extended partners as well.
Fair enough and then just using that as the jumping off point Jason for you.
Appreciate that the operating margin compression on a year over year basis. It's.
Just a mechanical outside the revenue moving a lot worse, but it's we think about his transition Q cloud in cloud software bookings mix shift how should we think about the trajectory on the gross margin front. If you can help us with that thank you.
A good question so.
What we said last quarter was that the gross margin and cloud, which is where the compression will come the obviously the on Prem business has been on the.
Kind of 90 plus percent gross margin range and done it's like that the change the cloud gross margin, obviously has come up substantially from being in the Thirtys last year last quarter, we give the milestone update that it had achieved 50 we are.
I think we said we were going to get to 65% to 70% over the next few years, our expectations, we would expect to see cloud get into the 60% gross margin range by them. This year and then a probably be approaching the 70% range by the end of next year.
So then the question is on overall gross margin in what's your mix assumptions. So you can you can kind of flow through and if you assume 60% you can take 60% of that southern present gross margin or somewhere around there and then you know the rest at the 98% gross margin and get to a number that I.
I think you can.
It sounds like it's still going to be able to hit that 20% gross margin. Then obviously we have to see.
You know some.
Further kind of efficiency gain across go to market R&D in DNA.
And and we do expect that to happen as well.
That's super helpful. Thank you so much.
Thanks.
Thank you. Our next question comes from keep Backman from Bank of Montreal. Please go ahead.
Hi, Thank you I also had too on the total or few bookings Jason could you talk about.
How the migration the cloud.
Over the next 12 months is going to impact the growth rate I heard Doug say the deals tend to be larger.
Then say the term deals and I'm just trying to understand really how does the growth rate of they are which I know you're pointing us to but just trying to see if there's any call outs to how you want us to think about the ARPU bookings of total or fuel bookings over the next 12 months and then I've a follow up.
It's a good question I mean, RPL bookings honestly is oh, a little harder to forecast because duration plays such an important piece of that and right. You know as as we are yeah. We've we've now got our sales team completely aligned on the kind of more of the ACB versus.
TCV vinyl so focused on really making sure. We're we're driving the right air our growth that that again, we were confident in our forecast and so because of that durations going to move around and so and then of course timing as I said is already volatile. So so as a result.
So I would expect that you will see the the numbers probably you know there probably will not look unlike last year, where you might see some volatility across quarters and the overall growth rate I have to decide if we're going to start duration adjusting things it makes it more complicated but but.
You know if theres going be a lot of focus on it you kind of need to look at it that way. So so that's something that I will probably talk about at analyst day.
In the duration of cloud is shorter than then turn right. So it will well.
So so today and yeah, I think well will determine the view well, we'll see if we can create a little more clarity. The one thing I would just think absolutely certain of is the reason we gave the our our Cagar kinda guidance for the next three years is because that.
That's effectively what's going to translate to whatever the duration is and so whatever you see an RPL bookings.
Ultimately, what we're going to deliver is what's in there are and so you know the reason I wanted to I I. The reason I wanted to give that air our guidance is to make sure that regardless of whatever volatility you see in RPL bookings.
You are focused on comparing that to air ours, because they are ours. The one that's more durable more stable and what actually relates to what we're delivering and regardless of you know the timing of when you know multi year duration deals hit or you know.
All that complexity it really it can create volatility that honestly does not translate to a ultimately to revenue there are and and so that's that's why you're going to hear us continue to push on focusing towards they are once we're all ratable this won't be it'll be less complicated.
But we're obviously in a period of transition Okay, well, let me ask my second question for can cut me off rudely <unk> [laughter] you gave a 21 margin and you talked about a snap back in 22 I just wondered if you wanted to assign any Andrew this is operating margin I'm referring to.
Yeah, just give any.
Kind of dimensions on how you're thinking about that word snapped back against your longer term targets.
It totally relates to it completely relates to the speed of the cloud transition you know so if this year goes incredibly well, we'll have a an even higher cloud mix than our current plan, which would be outstanding and fantastic for the business. It will make the GAAP metrics more confusing and then snap backs shorter so.
So I you know that the reason I'm focused on 23 is I don't know how it's just hard to see how fast is gonna go we're not going to tell our customers what they should consume they're going to tell us and so so as a result, we're very confident about where we're going to be in 23, but where we're at on the halfway point at the end 22.
As is a little harder to to see so that's that's why we gave the guidance limited alright fair enough I will see the floor. Thank you.
Thank you. Thank you.
Thank you I'm next question comes from Mark Murphy from JP Morgan. Please go ahead.
Yes. Thank you Doug following up on an earlier question you had said that you recently closed your largest order in company history. It. So just wanted to clarify I'm presuming that that was in fiscal Q4, but what is there any chance that that are part of that was in Q1, and then I think you.
Were you sized it up in terms of TCV is can you help us at all to try to understood roughly understand the a our size of that and then I'll have a follow up.
Yes, so the transaction itself close in Q4.
In January.
Which again good looking at the volatility just environment and it was a nice testament that despite already know some.
Craziness and overall global markets that this customer is willing to lean and at the size the threat to the transaction they did.
Hi, it's.
Yes, being a very very large TCV deal you can imagine that it may be an eight figure air our deal annual deal, but we're not going as.
We won't disclose the dynamics of that the specific deal other than then the purpose why I brought up was it was a portfolio by added reemphasize is that the three years ago focus we've had on trying to bring DSP to market and DFS to market and doing the signal.
Thats omniscient acquisitions not in Phantom the security fold and that that drove the outcomes that we were looking for which is enterprise grade features from security too I T ops and infrastructure management to App, Devon Dev ops.
Okay understood as a follow up on the topic at the current virus. What actions are you taking with respect to your own employees to try to safeguard them. Just for example are you pulling out of conferences are you restricted restricting travel and if if you are doing the ladder or is there any.
Reason to think that some of the onsite implementation work you know could be impacted or at some point you know if the if the problem continues to grow.
Yes, that's.
Like I again, assuming many other companies our employee and customer health is our number one priority.
So we had issued guidance internally at all employees all managers that we value health and safety number one that please restrict business or any travel to business critical travel someone is feeling uncomfortable, yes, there they get to choose I'm, even if it's been.
This critical fine.
Well honor, the employee and or the customer and make sure that we're <unk>, keeping say health and safety top of mind.
For non critical and told meetings, we've begun to move some of those to be virtual.
For external conferences, so far we have not dead deemed that we need to retract.
And again were I guess, we're probably lucky enough in our ESCO timing that it happened before some of the latest falls within the United States.
And where we've got a really good safety and security group, an air issuing updates multiple times per day.
We're staying as on top of this is as any other medium to larger size company can be.
In Asia Pacific Weve rotate a lot more of our professional services work to virtual work.
Wherever we possibly can wherever it makes sense the customers there is possibility there in other locations around the world that if everything moved virtual we all know there are some things rack and stack of hardware that customers, usually do but that might gate, our ability to deploy spark and again, we have got.
Daily calls with our head of customer success.
And as something that we're going to keep as on top of as we possibly can given how dynamic the environment as.
Thank you very much appreciate that.
Thanks Mark.
Thank you I'm next question comes from Steve comic from Wedbush Securities. Please go ahead.
Hi, gentlemen, thanks, one financial question and one quick question on.
On the financials.
You know they are metric is key and that's that's really helping us understand that business, we do keep getting surprise and somebody other metrics now I'm. Just wondering so that we can calibrate going forward can you share with us or give us some understanding of what you're planning for the cloud mix. This year should it be like a linear progression towards that.
80% and what's the impact on revenue.
I don't know per pointed mix shift or how do we think about modeling that.
So.
We're going to have our analyst day I think in 20 days. So we're going to will well, we'll probably shed a little more light on exactly what.
How to kind of think about those things I mean, I'll just say high level. A you know we went from 26, 27% 19 to you know 35. This year I expected to be certainly you know into the into the 40% plus range next year and so in terms of how linear that's good.
To be a yeah, we'll I would say stay tuned because it is again its customers that are are choosing and and so it's hard to its little hard to predict and that's why it you know the air our metric is really the one that's most most important to focus on.
Got it okay, Thanks, Jason and Doug for you.
On the cloud adoption can you, maybe just give us a little color on.
What kinds of use cases, how much of the data is being supported from Prem and it's being used as a deployment option versus de Novo cloud apps and kind of how does the mix due between.
T ops apps security does it kind of mirror your premise mix. So just some understanding of what what it's being used for.
Yep.
A few three years ago, I would say that security was definitely a smaller component and and I T and other use cases for larger.
The big ship that's in the past 24 months is.
The comfort even with some relatively conservative excuse me regulated industries and companies with moving to cloud and with that their growth. We've seen a growth in security data going into cloud and end the deployment of enterprise security and Phantom had a compliment that.
The.
What I would say three years ago Pride, a higher majority of the data was cloud based data.
But again as people become more comfort with cloud and they're moving more more workloads and it's a classic hybrid environment.
We're seeing a it depends on the use case, but a healthy mix of on Prem data stream into cloud as well as cloud data being gathered either native within the cloud if your various internet it'd be asked for having your salesforce and oxide workday data going to come and go with the other data.
Got it okay. Thanks, very much guys.
Thanks, Steve Thank you.
Thank you I last question comes from car care scrap from Deutsche Bank. Please go ahead.
Thanks for fitting me in maybe a two for Doug on this cloud mix, Doug as you see a larger mix of.
Splunk deployed on on cloud, one would assume that youre competitive set might change such that you might start.
Seeing customers evaluate cloud native alternatives, such as Microsoft Azure Sentinel I'm, just wondering if in fact, you're seeing that and as a result, how does your pitch in the field change and then I'll ask my second one of of all the Splunk on cloud.
Can you comment is the bulk of it are occurring on ADW S or are you starting to see some splunk on.
Azure or splunk on some other clouds. Thank you.
Absolutely so somebody I'll take your last one for assistance contacts and I'll go back into what does our cloud growth mean overall, so our SaaS offering our cloud offering which is now 35% revenue that is that as wholly on native yes.
We have architected that solution. So we could begin to spread to other clouds, besides it'd be us, but I would foresee ABS being our tier one strategic vendor for as long as I can can see out given that the relationship we have between the two organizations.
But as we all know customers have a growing bias on whether that offering is housed in need to be asked where nash or a GCP and we want to be able to play across all the clouds.
From a how does that change the dynamics, even when companies are going hard at cloud what I've certainly seen to the global 5000 is 90% of them, having multi cloud strategy.
I think so many of us have been down this road before I'm trying to be an I.B.M. only shopper HP only shopper, Microsoft only or Cisco and that Doesnt tend to work out Super while for the ITC Department in for the company overall.
I think this time, especially given the even more complete control and value that the cloud providers are delivering and people are really really attune to I better find a way to make sure them spreading the workloads round across clouds, and I'd better be smart about where I'm storing my data because he addressed costs can be ridiculous, which.
I think is a good value prop response would be store within Splunk and we've got some interesting stuff that we have on the road map, we were going to help you ensure that the data is yours that its math from anybody I mean that that data will be portable for you.
When I look at a higher order offers if I go above the data as a service landscape to somebody like Sentinel last year at our say.
There's a lot of discussion about hey, what's going on with Microsoft and Google and others as far as your security offerings.
I think after a year evaluation, we heard over and over at this year's our say was very little discussion about Microsoft or anybody else on the security front.
Almost no discussion about open source I think there.
The maturity that awareness, yeah, obviously as with last week. So we've already got some of the effects of quite a virus and people being concerned about volatility the economy, and what but that would but last week told me as people are kind of circling the wagons and making sure that they have vendors. They can trust that evaluates super clear on what their act.
The working with and if I have this goes with any patterns you've seen in past economic disturbances that companies are very very customer centric and have a track record of value and delivery went up doing pretty well and that my my view is in a heterogeneous cloud world you better have vendor that's going to be able to span all those.
Okay, and non clouds and ideally provide you an insulate you from the lock and that customers are afraid of and I think we've got a very strong value prop there.
Got it okay. Thank you.
Thats correct. Thank you ill.
Thank you. This concludes the Q many session at this time I like to turn the call over to Ken Tinsley, corporate Treasurer, and Vice President of Investor Relations for closing remarks. Please go ahead Sir.
Great. Thanks to them now we appreciate your help today and thanks, everybody for joining US hope you have good night.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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