Q1 2021 Earnings Call
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I would now behind the concept speaker for today with the kids template for you may begin.
Great. Thank you Valerie and good afternoon, everyone with me on the call today, or Doug Merritt and Jason child.
After market closed 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 pages, well. This 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, such as our forecast for a second quarter as well as duration revenue mix for your long term aerostar and cash flow and trends our markets as well as expectations regarding our products technology strategy customers markets acquisition.
And investments.
These statements reflect our best judgment based on factors currently known to US an actual events or results may differ materially.
Please refer to document to file with the FCC, including the 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 prepared in accordance with generally accepted accounting principles.
A reconciliation of GAAP and non-GAAP result 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.
In the face of on Precedented volatility and uncertainty we're focused on remaining a trusted partner to our customers and help them navigate the fundamental changes in how they operate well keep their data accessible and secure.
In Q1 customers continue to prioritize investments in Splunk and drove air our growth of 52% over last year.
Our transition to cloud accelerated ahead of our expectations.
This is also first quarter with our sales force fully shifted from a total contract value or TCV sales motion to a more cloud subscription oriented annual contract value race, TV focus, which we believe it better aligns with our customer buying preferences and is consistent with our shift toward cloud based delivery.
But that is the backdrop I like to discuss a few patterns that emerge this quarter and the impacts to our business.
First the time of remote work, we've seen increased demand for Splunk cloud trading or cod mix north of 40% the highest ever in our history.
Well above our expectations going into the quarter.
In addition to the faster time to value from cloud or customers also gained business continuity in risk avoidance higher quality experience, but decreased complexity and an accelerated rate of innovation to faster releases and improvements glean from real time cross customer insights.
Second.
Not surprisingly customers across all sectors are trying to understand the economic impacts the current cobot 19 business environment.
As a result sign contracts this quarter tended to be shorter in duration going from 34 months in Q4 to 27 months in Q1.
We see this being especially prominent in sectors hardest hit by the crisis like retail hospitality and travel.
The shorter contract duration impacted overall, TCV, which is reflected in lower our pure bookings growth and lower total revenue recognized in the quarter.
However, when looking at contract value on an easy basis, which cuts to the noise of changes in multiyear duration year over year growth was actually higher in Q1, and we've seen in the last four quarters.
Looking further out visibility of the next few quarters is limited primarily due to macro environment.
Our focus will be to ensure that were tightly connected to our customers and partners as they work through their dynamic environments as well taking care from plays well beam, enabling their productivity and to continue to optimize our investments.
One thing, it's clear to us data matters more than ever in this digital world and every organization is on a journey to bring data to everything.
We pride ourselves on being a world class product company and we're leaning in on innovation. So we can help our customers bring did it every question every decision every action with the cloud first mindset.
As we continue our aggressive shipped to the cloud we're doubling down in investments this area.
Exemplifying are focused on bringing more data to more customers I Hope you saw recently announced partnership a Google and the news that Splunk cloud will now be available on Google cloud.
This builds on our cloud first mindset and offers our customers increased flexibility in choice for real time visibility across hybrid and multi cloud environments.
In addition, Splunk continues to strengthen a strategic relationship with Datav U.S. working across product go to market and the field.
Recently Splunk in need of U.S. launch the workload migration program to help migrate on premises legacy Splunk enterprise workloads to Splunk cloud running on it'd be yes.
We also announced the newly launched it'd be less service ready program, Lambda ready, which recognizes splunks proven solutions for customers to build manage and run sort of less applications.
And the application development, a double up space. We recently released our cloud native signal effects Microservices ATM offering.
It completely integrated observer Dodi solution that provides the world's most robust and scalable way to monitor and manage complex and distributed application portfolios.
We are the only company in the space capable of scaling up to meet needs of large enterprises and our workers recently validated by our placement in the visionary category and Gartners Magic quadrant for eight pm.
Since it started this pandemic one of our key priorities has been helping our customers transition to a new virtual working environment.
Splunks core tenets are about providing near real time visibility the ability that quickly on data in a plane splunk to virtually unlimited use cases across an organization.
These tenants had been fundamental to our cobot rapid response efforts.
We've rolled out several free trials and offerings to our customers, including our remote work insights are R.W.I., which provides customers with dashboards and key metrics to gauge that connectedness in productivity of their IP and cloud infrastructure as a rapidly ship their populations to remote work.
Response from our customers had been overwhelmingly positive and we're continuing to look at ways to enhance RW I. Most recently was zoom usage data.
In collaboration with customers and partners. We also developed a public health platform available free of charge to public health agencies.
It delivers an end to end it covered 19 testing experience managing online citizen intake symptom evaluation and appointment scheduling.
The platform is now live in turn County, Texas, the 15th largest county in the U.S.
We're excited about the potential this solution to help state and local governments across the country.
We just didn't close touch with our customers to ensure they're getting to support that they need and we're hearing from them that they continue to value Splunk as a truck trusted and strategic vendor.
We're encouraged by the many customer stories referred in the first quarter, where organizations are trained to splunk more than ever to help them navigate this volatile environment with the power of data.
Let me share similar wins from the quarter.
Zoom the leader in video Communications became a new Splunk enterprise security customer.
During covered 19 zoom is help keep the world connected.
Splunk Enterprise security Zoom will gain and analytics driven sen given in visibility into potential security threats at machines speed.
We are a longtime zim customer I'm very grateful for their support and helping keep splunk connected.
Longtime customer Allied Irish banks Ray I'd be expanded their use of Splunk enterprise and I T. S. I tell provide insights and take action on increased digital transaction data brought on by couple of 19.
Helped mitigate the spread of covered 19, yeah I'd be is raised their payment threshold for contactless payments encouraging customers to use their cards and mobile devices versus cash.
With increased activity on their systems.
Levered Splunk to ensure a stable and reliable payment experience for customers.
The state of Illinois became a new Splunk cloud Nightie ESI customer helped him better track and monitor the emergency response to cover 19 across the state.
With Splunk, the Prairie state can ensure that their remote workforce at 30000 public servants can stay online also helping them quickly monitor overburden systems that provide critical benefits to citizens.
This effort ensures a continuity of critical services that people have Illinois.
Longtime customer shopify significantly expand their use of splunk purchasing the newly launched signal effects Microservices APN platform.
Shopify is a leading omnichannel E commerce platform and they selected Splunk to help maintain their high observed ability standards as they grow and scale and complexity.
Splunk Shopify can quickly identify and source application challenges in their complex and distribute environment.
And take two interactive software, a leading developer publisher and marketer of interactive entertainment for consumers around the globe, including renewed Renault and games Grand Theft Auto five Red dead redemption, and NVH UK expanded their use of Splunk cloud to increase their visibility into security of their environment.
Splunk helps ensure that take two's consumers have wall run safe and fun online environment, when playing more games.
All these great wins with their customers are thanks to the support provided by our committed plunkers.
At the onset of this crisis retire lessee analyzed all available data, which was showing us that without action global health care systems could quickly become a run and supply change would be depleted.
As a result, we voluntarily closer offices and froze all business travel well before the government mandates went into effect.
I want to thank our 6000 spelunkers their passion tenacity and empathy as we have as we've adjusted to a new normal they've created a truly unique culture, which I'm so proud to be part of.
In closing data driven decision, making matters more than ever and has fueled a very strong quarter for us.
We are aggressively pursuing our transition to the cloud and are well ahead of original expectations.
I wanted to take our customers and partners, who have been tremendously supportive during these times.
I also want to thank all the frontline workers doesn't health care her risking their lives keep us healthy doesn't grocery in retail grew helping us with the essential that we need and there isn't until the data we're ensuring their organizations can make decisions based on the most reliable and accurate information available.
I'll now hand over to Jason's more color in Q1, Jason.
Thanks, Doug and good afternoon, everyone. Thanks for joining us as expected the environment in Q1 created many challenges, but there were a number of positive signs that indicate our business fundamentals remain strong as Doug mentioned, we had high customer engagement and we saw sustained demand for security Nike scaling use cases, driven largely by increased work from home demands.
However, many customers were hesitant to commit to long term contracts, especially for larger orders. This resulted in lower overall average contract duration and total contract value.
An unexpected positive has been a faster shift to cloud as customers increasingly turn to our self service given its rapid time to value and infrastructure cost avoidance attributes.
On our last call I reported that cloud contributed about 35% of total software bookings last year with a target of over 60% in fiscal 2003.
We expected that trajectory to be fairly linear but in Q1 cloud represented 44% of total software bookings far higher than we had planned again, it's likely that this was driven by our customers response to coveted, but we think we can transition the cloud even faster.
As we've said in a rapidly transitioning turns to cloud model revenue growth is muted upfront term license revenue is replaced with ratable services revenue over time, a faster transition will create a greater headwind on total revenue growth as you'd expect.
As a result, we're focused on other primary growth metrics to assess the overall bookings momentum in the business, we've highlighted error or as the optimal indicator of growth because it normalizes the impacts from term cloud mix as well as contract duration.
In addition to air are we also track RPL growth as a good indicator of new business momentum versus RPL bookings, which is distorted by a lower revenue growth from cloud mix shift as well as changes in duration.
Until next stabilizes air ours is the best measure for durable growth.
As volatile and uncertain as the current environment is we're pleased with our execution in the quarter overall.
We ended the period with total air are a $1.77 billion up 52% over last year.
Air our was comprised of 489 from cloud and $1.29 billion from term license and maintenance contracts.
We ended Q1 with total our appeal of $1.72 billion up 44% over Q1 of last year.
The portion of our appeal, which we expect to recognizing revenue over the next 12 months was about a billion dollars at period end to end, which is up 30% year over year.
Additionally, we recorded 81 orders greater than $1 million in total contract value during the quarter up from 46 in Q1 last year, indicating both greater adoption and high strategic value, we delivered to our customers.
Turning to the TNL.
First quarter revenues were $434 million essentially flat year over year.
<unk> revenue was $112 million of 81% over last year.
Our gross margin the high growth in our cloud business is driving improving scale in our overall cost structure non-GAAP cloud gross margin was nearly 60% in Q1, which is a significant milestone towards our target of at least 70% next year.
To highlight the progress of cloud, we're now breaking out cloud revenue and related Cogs on the face of income statement.
Total non-GAAP gross margin in Q1 was 76% down on a year over year basis due to the greater proportion of revenue contribution coming from cloud.
Non-GAAP operating margin was negative 26% in Q1, which was in line with plan.
Just a few comments on the balance sheet.
Our liquidity is strong and we ended the quarter with $1.8 billion in cash and investments our accounts receivable turnover was mostly unchanged in the quarter. Although some customers have asked for modest modest payment concessions, which were evaluating and accommodating on a case by case basis. The overall quality of our accounts receivable remain.
Exceptionally high and at this point, we don't anticipate any material impact to our full year cash collection target.
Turning to guidance there are three items that I want to ensure our crystal clear first our fundamentals remain strong we are confident in our air our growth target of mid 40%. This year and we continue to expect that our operating cash flow will be consistent with last year.
Second due primarily to cloud acceleration and variability in duration, our revenue and operating margin targets are lower for Q2 than our original plan specifically, we expect total revenues of approximately $520 million in Q2, roughly flat year over year.
Slower revenue growth is directly related to higher cloud mix, which is now expected to be on the high 40% range the highest ever.
This will also put pressure on op margin. So we expect non-GAAP operating margin of negative tend to negative 15% in Q2.
Third.
For the remainder of the year given the unpredictability of are accelerating cloud transformation and variability in duration or what drives our guidance for revenue and operating margin.
In closing it was a great quarter was strong air our growth and increasing momentum in cloud. We look forward to updating you on or progress and outlook for the remainder of years, we gained more visibility.
With that let's open it up for questions.
Thank you ladies and gentlemen, like asked a question. Please press Star then one on your Touchstone telephone.
One moment please request.
Our first question, causing Phil Winslow Wells Fargo. Your line is open.
Hi, guys. Thanks for taking my question Congrats on a on a great quarter and also just want to say glad to hear that youre, well and hope all is what would your team and your family.
Two things really jumped out to us this quarter first we're just as you mentioned just to strengthen cloud I mean, obviously much higher mix than we were looking forward. Obviously, you got to waiver bison just some more color on for what you're hearing from customers about why you're seeing that accelerated shifting to cloud and the other metric was just number of deals north of 1 million I mean huge increase increase year over year over year I know it was a little easier comp but.
The big number, especially considering that you have a shorter duration.
Provides more color just were what's driving that strengthen those in a big big deal.
Hello, Phil Thank you very much and I'm glad that you are helping all as Paul.
Well.
Yeah, we were we were really.
As we said very beginning it's impossible to predict what customers want we have always focused not frank customers choice and everything we do.
And we Didnt know hard at work for almost five years now in the cloud offering so it's been great to see the past couple of quarters that continued momentum and cloud.
Really.
Pleased with some of the acquisitions that we've done that are all cloud based I think we've got one of the top teams and the cloud spectrum now.
Hi, sorry basis, all way through the development teams. So that's good to see customers rotating there.
It's hard to pinpoint with total accuracy, what's driving it I think the offering as a portion of it but the other piece that I'm sure you've seen with other customers.
Companies that you cover.
As in this time when everyone had to go virtual and the reaction to unpredictable events was like we've never seen before the ease of use the reliability the flexibility that you get I'm turning to cloud is awesome.
As we watch customers move tens of thousands or hundreds of thousands of people to remote work virtually overnight I think the power of cloud becomes a little bit more apparent.
There was a it was going to see it I'd I agree with you guys.
We ended the quarter there are two things that I wasn't sure of.
And one was broken up with big deals I mean, you guys have written a lot. Many people written as it should within enterprise sales force they get built to do big deals and to see 81 million plus deals.
Was it was really refreshing that our customers continue to need Splunk and view Splunk as critical for.
Their digital transformation needs and their response to daily business.
Great. Thanks, Okay, the bagging tier ones getting to greatly congrats on great quarter.
Thank you Phil Thanks call.
Thank you. Our next question comes Mccosh Lyndon B. Riley your line is open.
Hey, Thank you very much but this is terrific accomplishment guys when you're growing it ended up 52% Geo cloud.
In addition is accelerating and you're doing record number of million daughter deals.
This is simply outstanding I'm curious.
Doug when you look at the leading indicators in your pipeline looks like by most accounts. The month of April saw a big brother rebound and software activity Securities. We can just talk about how the forward looking pipeline is looking like for you guys Post Cove it.
I also I'm curious if you have any specific thoughts on the combination of signaling extremely on mission and how material. There were two securing cloud wins or how is progress and generally speaking tracking over those three acquisitions and one if I can see all the time you don't it's okay difference between ACB I think you said.
CV growth rate accelerated this quarter versus the fourth quarter, you can expand a bit launch that'd be great and congrats again many congratulations.
Thank you cash is amazing effort across our fuel teams and the rest of the company to support them.
And really again just to honored to be serving customers has terminated.
Yes, what I said was ACB growth had its strongest performance that we've seen over the past four quarters. So that again was on the positive front. There's so many things could happen given that we were over three quarters. This quarter. During the fall covered pandemic just trying to help people can react and what we saw was as people but.
Rapidly transitioned to room to remote work.
And sadly, we've seen a pretty big increase in cyber activity net negative cyber activity.
The importance of Splunk and to ensure the resiliency of their existing IP backbone to ensure the cyber efficiency and effectiveness second efficacy of that was absolutely critical and then as you said I am really positive.
Second quarter now results with the new application developer oriented observe ability suite and offering.
Yes, it's still a low numbers game with that offering.
But the growth is really impressive and even more impressive I think the speed of integration that we've seen across omniscient signal effects and some of the pieces from Splunk means that stat speed.
And the.
Awareness of customers that once you get to a certain complexity and volume the only answer really is splunks observer abilities, we right now.
And we talked about that huge customer in Q4 that when all that much Splunk, we're seeing other activity around the world right now where people obviously, if they're going to respond quickly to cover that theyre going to.
Need to spin up a brand new offerings quickly and I think doing that in an ephemeral cloud based world. This way that there would that they're doing that and and we're there to help them work side by side with them to make sure there effective.
Thank you.
Next question. Please. Thank you. Thank your next question comes from Brad.
Nick a credit Suisse. Your line is open.
Great can you guys your me.
Yes, we got you.
Awesome, congratulations on keeping up the momentum.
It's great to see the results I am just as pleased as cash its but I, but.
Maybe I don't express it like he does he spent.
[laughter].
[laughter] a truly mean that let me ask you this.
Yes, I don't expect does that you would typically get us into the granular details of the business week by week and post a forecast call with all of us, but just given the time distortion that we've all done through in the last couple of months I mean weeks feel like months months feel like quarters can you just maybe give us a sense of what you're seeing.
At the field level talking to CIO isn't Ceos and the investments that they are making and maybe just some appreciation for the cadence of the business from March to April and even what you're seeing now into early may that would be helpful and I've got a follow up for Jason.
Sure Brad.
I agree with you I mean, there's a I know cash you'd said post coated.
I don't foresee a post coveted world yet I think there's a lot volatility is still in front of us.
What the so a couple of things that that surprise me.
We moved to a virtual or I'm, sorry on the road executive briefings, two years ago to complement bringing people to headquarters.
Which I think what has been very very successful we tied to 810 12 people with me are top.
Oldman folks product managers customer success folks Susan use who joins me et cetera, and lets go right to the customer our first Steve you see on the road, we're supposed to be the last week of March and we picked it perfectly to be in New York City, and Washington, DC that week.
And I was predicting especially you mean that was right. After most shelter in place orders when it went down that everybody to cancel and we gave the everywhere every customer the option to cancel and we're not only did we have a full week, but we were oversubscribed for that week.
So the resiliency that I've seen.
People everywhere, it's just there's so much.
Chaos and craziness in sadness, that's happening right now the pandemic and there's so much beauty as well with people.
Right and the occasion and keeping focused on what's important to serve their customers. Their citizens are constituencies and I've seen CIO Csos Cfos Ceos.
Lean in like never before and our sales cadence, which I think we've got what are the best enterprise sales teams in the business.
Do you have stayed on top of the day in day out drumbeat and they havent been deterred at all with the fact that they're going to be on zooms, they're going to be on phones, there could be over email that would be on slack channels.
To make sure that they can drive everything from requirements to proof of concept activities to contract negotiations as of quarter is winding down we had have 812 14 persons rooms with different legal departments different to county departments in our sales team just making sure we got.
Deals done.
And so far what I've seen from from our team and talking to some of my colleagues is.
We know how important it is for people to have digital footprint and for us in particular to be able to get visibility in the chaos with as much data as humanly possible.
And and and people I think appreciate that and that shows through in the strongest CV results strongly our results and we just have tapped to stay on it and the first few weeks a may have felt very similar to what we saw in April and the end of March.
Thank you it makes a lot of sense and Jason I totally appreciate pulling this year's guidance on the income statement, just given the lack of visibility on mix of cloud but.
As you think about billion dollar cash flow targeted out on the horizon, how should we think about the various shapes of the curves that can get us there just given what's going on in the world.
Yes, I would.
Thanks for the question I.
I would say the to the driver of cash flow going forward I think is much more tied to air our than revenue.
And so we gave the the reiterated the mid 40% error our growth that we're expecting to see this year and then the 40% CAGR and going out to 23.
If you if use those numbers that gets you to today our number.
Somewhere between the $4 billion to $5 billion range and then if you take kind of the historic cash yield that you've seen us had in the past I think for five or six years, we were over 20% cash yield on a revenue basis.
You should see a similar yield on air are.
As we get out to 23, where we're not going to have the cloud mix shifts impacts that we have right now.
Awesome. Thank you so much for taking the questions great job guys.
Thanks, Thanks, Brad.
Our next question comes from key parts of Morgan Stanley. Your line is open.
Hi, Thank you for taking the questions as it stands just seeing served for Keith Weiss I will talk a little bit about where youre seeing the momentum.
Coming out of April and May was sort of few weeks ended the quarter, how sort of pipeline and sort of bookings and sort of changes in end of April may versus end of March and April and then I had a follow up questions right.
Hi, we have we haven't seen any material difference and.
Customer interest and activity.
There is lot of concerted effort that the sales teams are driving along with help from the marketing teams to make sure that we build inadequate pipeline.
Definitely as you'd imagine.
Everyone's got take different angles to build that pipe.
Like many enterprise software companies. The field is responsible for a lot of pipe Jen and that obviously comes from their activity data and data with customers.
That their visiting and now they're busy and virtually so.
As you I'm sure seem with other software and cloud companies, we've got a ton of virtual events, we have a par campaign kind of cadence remains high.
Shifted the rest of the eventual were purchased participating in through the end of year to the virtual format and we're seeing really high turnouts.
So far with people attending.
Different information sessions, and ultimately in from me and marketing events.
So we're staying on top of.
Serving customers and tight messaging around what's critical for cyber teams infrastructure team snapped up teams to do their job effectively and you'll see on our website relaying layering in quite a bit information on.
In a business use cases from helping people manage workforces, especially for essential workers effectively help you all think through with data.
How to get returned to work profile that works well.
We obviously are not a.
ERP backbone workflow oriented software product, we are helping on the data side to coupled with the efforts that are partners and colleagues that would actually manage the workflow activities of getting people back to work would be engaged with.
Got it that's very helpful and that's my follow up question I wanted to sort of think through the positioning of the product portfolio last year was a big year in terms of.
Boosting allow the capabilities with the signal ex acquisition, our mission Victor Ops and I guess my question is in terms of unifying this product portfolio in treating sort of eight converge real time digital operations management portfolio that could potentially take share on any more concern.
It is IP environment, Jason sort of mentioned that we can't sort of see past calls it just yet and is it something it would certainly agree with and so in terms of the ability to take more wallet share in your core markets in your customer base that potentially with new customers. How far is the product portfolio from being able to execute that vision.
Yes, I think it's there now.
And there's always more works can do on.
All factors of an offering.
But I think the cloud that progression we made in cloud on all of our core data elements.
Classic Splunk enterprise and the cloud as well as a complimentary aspects.
Continues at a really nice pace, we are tripling down on the efforts to make sure that every single.
Element from the data platform to the security suite to the GAAP suite to the App Dev suite.
Our cloud first our leading with cloud.
And the orientation with Splunk, Oh, Hey, how can you will continue to be an has been.
Making sure that we can integrate with the technology is around us.
We've talked a lot about our new mission control framework that will officially be shipping at <unk> Dot com.
Thats a next generation interface for cyber teams.
From the ground up that was built to provide a really effective you why.
Hope those folks and to integrate the different splunk offerings.
Also as open to third party offerings, even those that are similar to the operator would having our own portfolio.
We recognize that it's a super heterogeneous landscape out there.
And that we've got to be a.
Co-operative player with the other pieces that our customers currently use so we can help them bring data to every question every answer and every action.
I appreciate the hot stuck thank you and got some restaurants.
Thank you very much.
Thank you. Our next question comes from Mark Murphy of JP Morgan Your line is open.
Thank you very much in all that my congrats.
I was curious if you.
Think about aggregate data ingest across the customer base was it more common to see customers trying to reduce their ingest in March and April maybe to preserve their own.
Cash flow or was it more common to actually see them increasing ingest too.
Maybe try to protect VPN traffic or or otherwise just adapt to this kind of environment.
Good question. So first of all we're moving more and more of our customers to an infrastructure based pricing metric, which get it will get away from the data ingest piece.
And seeing some really really it's an interesting results there.
One of our big foot print customers that felt gated by data for a long time.
At the towards the end of last year, we got them to a.
Virtual core framework.
And they add five watch their data volumes go up by 30, 35%.
And they still have additional cores left to throw at the problem.
So real really positive for them to build it to.
Rapidly ramp as our online demand has gone through the roof.
And they can have more and more use case, if the powered by Splunk.
What we saw with most of our customers was an increase in the did data that they were looking for.
Yes, we've never seen this degree of VPN saturation as as for all get into experience now.
And now that I've got critical functions support functions finance functions HR functions manufacturing functions that are working from home yes.
The connection from endpoint or way back to the data source and back out is not working it becomes not just a bad thing, but literally a quarter risking or customer interruption risk NPS. So we've seen new data forms begin to flow into splunk.
On higher volumes within most customers.
So I didn't get the visibility that they need.
Yeah, and Doug since you mentioned it I wanted to ask you how have the sales teams it adapted to.
More of an easy CV framework, and then digesting that did you pricing model.
I was trying to understand how much energy they might have put into that during Q1 and why.
Why wouldn't that have kind of dragged down to your.
You're a our gross or or HCV results, if they were kind of.
Distracted with that.
No I'm sure that they were that many of them or who were still coming up the curve really proud of our sales enablement team.
Under Linda who did an incredible job.
Putting together materials for our scale that thankfully, we actually got to have in Vegas the end of February.
So we had a whole year of planning that we took advantage of to make sure that.
We helped the reps as much as possible get comfortable with HCV versus TCV, but honestly I'm sure that there'll be more and more efficiencies when of course this year as they really internalized that.
Really understand what it means for their customers and for how they optimizer on comp plans.
The pricing same thing I think it's getting better and better Edward getting better marketing. It the reps are comfortable with it a bunch of training sessions on that had asked care as well.
But I think theres still ways to go.
To have every customer and even more important prospects I understand the shifts we've made although I can honestly say there are less and less accounts that I now zoom into where people give me the blank stare when I say have you heard about infrastructure based pricing, which I was getting a ton of up until a quarter or so ago now.
The typical responses yet trying to understand it trying to digest. It seems like a good thing worked with my wrap on that which is good I'm really happy to see that.
Okay understood. Thank you very much.
Thanks Mark.
Thank you.
Our next question comes from Keith Bachman of BMO. Your line is open.
Hi, Thank you very much I have two questions that Alaskan, perhaps I'll ask and concurrently adjacent start with you.
I was curious on your views on the operating cash flow targets with doesn't appear have changed if durations moving lower and I understand that revenues less of a proxy, but if durations moving lower why wouldn't that make the transition quicker or are you are you thinking that durational flex back out so to speak it won't stay compressed or get shorter.
As we think about those operating cash flow targets.
And then Doug to.
Ask you a question on on the competitive landscape in pricing given that a lot of organizations are facing topline headwinds how are the discussions changing at all.
Regarding pricing and I know you have a lot going on with infrastructure versus consumption, but how are net net pricing discussions changing and is that leading to any tilting some speaker the competitive landscape and that's it for me.
Hi, this Jason I'm going start since give dug a breather for a minute.
Okay. So in terms of duration.
So the duration that we report is is the overall contract duration on the TCV basis, and so the cash billing, we actually moved a ratable last year. So we're building every year, regardless of whether or not it's one two or three year contract. So duration doesn't really have any impact on on cash.
But what could possibly have an impact is then you have more deals if the shorter duration. The more deals are going to have to do in future years.
Reality is.
Really starting to answer I was thinking.
Yes, so we have really strong retention, we had really strong net expansion.
And so as long as those continue to do well youre going to see air our continued to grow as we forecast.
Okay.
And then on your question.
As far as competitive and pricing.
We didn't see any strong or unusual pricing pressure. This this past quarter.
We definitely had set up a whole structure between our sales team and finance had to be able to work rapidly in cooperation with customers that needed some different payment structure.
Given the various budget and cash needs that everyone.
Kind of hit right now.
So pricing seems to have held up not an unusual discounting quarter.
No again, I think the ability of lean end, but infrastructure based pricing probably helps because in most cases.
It's a much more friendly metric.
On the competitive front same thing.
No no no big change I know, there's a lot of swirling thought out there of.
Hey, do more people jumping to do it yourself projects because are worried about spend so far what we've seen for five years is doing yourself turns out to be a pretty bad equation on total cost ownership basis, as well as a time to value and time to delivery basis.
So for those who works that are probably under a little bit more of a head count pressure and a huge time crunch pressure.
Especially with our new pricing mechanisms and cloud HCV focus.
I would feel badly for them to good energy to yourself piece, because it will probably get their butts capped by their competitors that out.
Right. Okay. Many thanks team.
Thank you appreciate it.
Thank you.
Our next question comes from Raimo Lenschow Barclays. Your line is open.
Thanks, and thanks for squeezing me in and congrats from me as well.
Two questions on the cloud offering one for duck and one for Jason.
Can you talk a little bit about like you mentioned already customer that were working from home, we're focusing a little more on cloud, but like what's true is that also your sales force pushing and what makes it possible to move that quickly to like more cloud and and driving like you were increased optimism there and then for Jason.
The cloud margins are coming up nicely can you just talk a little bit better what's driving it a little bit I mean, obviously, there's a new I think there's a new architecture, that's helping there, but like what's driving it in all the next step to get it from like where we are today to like to the level that you're expecting the couple of years. Thank you.
Thanks Raimo so.
Hi, we've we've worked.
With a high degree of focus to have two elements I think help people with cloud.
One is on premise to cloud transition services.
And two is what we call Autobahn, which is our very rapid way of getting people that want to try out splunk to actually do it with native data sources and native data set they get very effective feedback on is it's going to work me or not but more importantly, their transition from.
PRC too. It's now production is literally just a financial difference say get immediate time to value.
On the migration piece, yes, we've got our own programs, our own controlled and third party consultants, who we trained on helping people move from on premise to cloud and then we've got cool things like a with Amazon.
Where we work together to to launch and pioneer there are workload migration program, where there are number one vendor and got rewards in that area.
That helps moves Splunk enterprise footprints to Splunk cloud type footprints. So both of those make it and make it a little bit easier for new customers new use cases, your existing customers to get rapid value at a cloud.
And then Jason you're on the margin piece, yes on the margin piece I'd say, there's really three things first I'd point to a moving to stateless architecture with something that really started benefited us.
Over the last year so.
Most recently, we moved to truly have moved to multi tenant architecture, where you now see.
A couple of the large public cloud.
Providers and with.
The growth in cloud, we're getting bigger so it's helping us drive better just federal overall terms mostly through volume.
And then the third and last I'd say as we're getting much better elasticity. So we're doing I think a.
A much better job and in terms of managing workloads across the different kind of use cases and.
That allows us to manage cost a bit better so.
We still have a long ways to go but we've made a lot of progress I think we said last quarter. Our plan our target is to get to 70% over the next year or so.
And we feel like we're on our way.
Perfect Congrats.
Thank you regular thanks.
Thank you. Our next question comes from Brent.
Jefferies. Your line is open.
Thanks, Doug many your partners are reporting the major new catalyst new starts.
Probably beyond what you would expect in this environment, but I guess when this kind of settles down do you think this is just a major catalyst coming out of this that actually could effectively accelerate the business as being stabilized.
Hi, good that this definitely what we are hoping for anticipating and looking for.
Hi, I told you guys, who were setting a target of 60 plus percent bookings going to cloud by the end of that by 23.
We start to think through how to revise those targets internally I think this is our opportunity to get too.
80, 90% of cloud in that same time period, and we're focusing all of our parsing out there.
Then even with something as Wackiest duration, that's well, we'll see over the next couple of quarters with a trend looks like and is it 27 to new normal or was in one quarter blip and address backup in the Thirtys.
It's even hard data definitive perspective on what thats, good or bad.
The.
Cohort that we've been shared with you guys for ever shows that same store sales turned out to pretty good for us and expansion is kind of the norm. So.
I sure duration could give us a chance to actually get better value from customers over a longer over a more immediate time period.
Yes, it pressure is on us with term and cloud now being really what we do to make sure that we've got a world class renewal and upsell upgrade program.
Again, the that Susan John spin on the field teams have been working their butts off to get us Tara and have you made some really really nice progress and.
That's definitely going to be front and center for our customers on for US a month over month and into the future.
Great. Thanks.
Thank you.
Our first our next question comes from Steve calling it a Wedbush Securities. Your line is open.
Hey, guys. Thanks for taking my questions I'm, just gonna do a cure for here I'll combined and that's one.
Can you give us a little more color on the dynamic with the impacted customers what are the guardius things, they're asking for and what are you doing for them and with them and then I'll just toss out the other one so with the end of perpetual sales I think it was started November.
How how has that changed the sales motion.
One of the perpetual customers doing with you just more color there would be helpful. Thanks a lot.
Two quick questions Steve Thank you.
So I'll come to a high level flyby and just seemed a little bit deeper on the affected industries, but.
We definitely we went through.
In March and add Bucketed customers into those we think a benefit those are neutral knows it might be affected.
Sorry to come up with different visibility in scenarios for how to make sure that we both prepare for those might be affected him what programs, we might be to help help them with we do see a different set portfolio. If we look at those buckets.
Who expanded versus.
As a class who didn't expand as much yeah definitely ties to as you expected it to the effective it affected industries now they've all got lots that they're working with right now.
Through that was interesting is as you'd imagine we have virtually every major hotel chain airline cruise company all as customers.
And we saw a number of expansions within that category.
And then.
A bunch of renewals and consistency.
As well I don't think that we've seen anyone cancel contracts or fall off yet.
Just go back and scrub every single one but we.
We all were a little bit concern us what happened there what we are seeing which is I'm sure. Some worth what's your from other vendors is.
A lot of request for can you help help us in some way with pet payment terms or discounts or.
And as I said earlier, Jason in the sales team I've got it really effective process to build a field those.
And we view this as a long term opportunity for us.
These are great companies, they're going through a lot of hardship, we believe that they've got a bright future long term.
On the metal of a partnership is tested when things get tough and we are there to make sure that they are successful through this.
With a long term view.
Yes in terms of just some of the asked by customers.
Mostly it's been theres been a little bit on some of the payment terms as you see in Q1, we delivered 46 going to cash flow. So very I call Diminimus amount of movement in Q1.
I expect there to be relatively small changes throughout the rest of the years, well, which is why I reiterated the target, but but we have we are having to be flexible.
In sometimes if folks want to pay a little later than we can adjust maybe the discount to reflect that.
But overall it hasn't been hasn't really been significant it's been relatively small managed.
Got it and do you guys can you comment real briefly just on the with the end of perpetual sales How're you.
It's your go to market with those customers how are your interaction with them as they need new capacity.
Hi, So we I think I've said a couple of times. There is no. We'll pay you to trade in your perpetual or there is no program to incentivize that that motion.
For more wind up seeing as is obviously one of two motion either.
They are frozen and continue to pay their bill.
And use splunk or they layer term or cloud on top of perpetual or the third motion. They trade in perpetual to go to term or cloud.
Ed Anders.
Oh got customers all across the map of we Oh, we understand that people bought those licenses and they own them and.
We're happy to collect their maintenance dollars.
With the growth, obviously is going to come from cloud and we've moved to a cloud first development approach. We now we're updating our cloud on a consistent basis.
So overtime are on prime customers will have software that is increasingly gapped versus what you can get in cloud.
So we're continuing to choose the you make the desk best decision on timing and how you want to deal with the financial aspect of it.
Obviously more time that goes on you depreciate it and then becomes less of a deal whether you retire that asset or not.
Got it thanks, a lot gentlemen.
Thanks, Thank you.
Thank you.
Next question comes from Matt Hedberg RBC capital markets. Your line is open.
Yes. Thanks, This is Matt Swanson on for Matt.
I'll Echo the congratulations on the call here.
Doug could you talk a little deeper into the newest version of signal FX, but also just more broadly thinking about maybe.
How monitoring is changing are increasing in importance in a post covert world or I guess, we don't like post cobot, yet in the current environment moving into this new normal yeah.
Yes, so one of the big announcements that we had this quarter was we released the micro services where in today pm.
And no really nice native kubernetes.
Station et cetera.
The trajectory that we talked about when we bought a seasonal effects omniscient unless we saw the rapid convergence of logs metrics and traces coming together trace pricing obviously been mission critical in is very femoral and touchy environments and the cloud arena to try and do anything similar to what.
As one CPM based.
And the metrics piece being the key drivers for real time dash boarding and and cockpit to make sure that.
You should communicate somebody should dive into an ATM activity or not.
We continue to drive the convergence those three.
Been really proud of the team and their ability to do the integration work between our mission signal effects and Splunk.
We had a very quick release with what was once our mission and signal effects to have that combined trace metrics piece, how you'll see some really interesting stuff from us on the logging front as well.
There is really interesting roadmap and movement on that you why componentry.
And the I think really next gen ease of use that we're focused on.
There was an Achilles heel I think of signal affects the you I probably would be be that is a different experiencing it up and running with signal effects than some of the.
Easy to use but not a scalable alternatives as we have.
So our focus is to.
To bring the world's best most robust world class scaled capability, but to do it with an easy onboarding and low bar difficulty.
So that we get the guys get the best to both the best of both of those worlds.
I think that whole area. It's just there continue to increase in importance.
As all of US are working really hard to delight, our customers with new.
Mobile and online.
Mine experiences.
And without something like our suite I think it's very difficult for any organization to do an effective job with with that transition.
Yeah that makes sense, if I could get one more quick one.
This is obviously not the easiest environment for adding new logos, but do you think with the success of Splunk cloud that maybe it's kind of bucked that trend and drive higher new customer additions.
Yes, I think it that we.
Hypothesize then just eventually centered on over the past couple of quarters.
Is without Super easy Onboarding and transaction capability, all cloud based we're not going to move the needle beyond that roughly 2000, new customers that we get per per year.
The going back to the importance of you why an experience I guess you actually we're just talking about with the.
I'm sort of ability portfolio. So long term over the next two two and half years.
I do think that that is the difference maker and starting to see a much higher rate of net new.
Our our number one focus in front of that though just to make sure that we've got sticky high renewal hi expansion capability.
For those customers producer.
And yet winds up helping us with ease of Onboarding overtime.
But as we talked about I think with Phil's question or what one of the early ones was.
Renewals and expansion is obviously.
Mission critical for US as we go forward from from where we are now given the term and cloud transition we've been going through.
Thank you.
Thanks, Matt.
Thank you. Our next question comes from Cortina Boolani you'd be asked your line is.
Good afternoon, guys. Thanks for taking the questions I hope you're doing well existing state.
Just a certain Doug on the comprehensive.
Suite that you have your visibility arena, particularly for the Keith.
Excuse me.
I wanted to dig into Q, how you're managing going to market with whatever effectively very discrete monetizable areas within.
But at the same time balancing not selling E.
Platform per se, we niggling in dining the customer.
Modular solutions selling and then on for Jason.
Hi, Thanks, Pat and I, so not as I think I've talked about a couple of calls ago. We did retain the independent salesforce as an independent sales force from signal effects have added to it pretty dramatically.
And then taking some of our top leaders across Splunk and put them in positions on the sales and presales sides and all the accompanying areas.
And this really is our.
Experimentation with given the difference in buying centre and budget and decision, making between the application Belbin teams the infrastructure teams the cyber teams and teams outside of that.
Ken a one size fits all sales model work could we need to begin to get could have been more focused on specialization.
And so far it's worked out really well, it's great team and a yet obviously the vernacular the relationships that day in doubt life of that App Dev team is different than we see from an infrastructure I chop Sam.
And I'm excited to see a team continue to grow and continue to add that did a great job they've been doing in Lincoln in market.
Within the App Dev Arena I agree with you and there.
The lesson that we've certainly seen over the years is having more skews and more choice is not necessarily good it sounds good and on the surface and made a business books talk about multi product being absolutely critical to long term success.
Yes, I agree, but you got to simplify that multi product that paradox of choice is not a good one so we're trying to take much more of a.
Singular suite with a series of.
Cities that you can decide to license or not license without getting into the whole skew or.
So that we don't wind up with.
345 independent sales cycles, the micro groups within a general laptop Tim.
And then again, so if one assumes working pretty well.
We were going to work fast when you've got.
Pretty broad and high powered set of scrum teams across the landscape.
If it's a smaller Dev team then you may not need all the bells and whistles that weve brought together under our observe ability suite.
I appreciate that color guys. Thanks.
Jason just for you appreciate that that business is going to be virtually cloud by fiscal 2003 based on the 80% to 90%.
Nick guidance that you share, but any interim period, how should we think about.
Cadence that term business.
First and then the cadence of renewal term business that you.
Transacted in the fiscal 18 fiscal 19 periods that are effectively going to come up for renewal over the next three years.
I appreciate stepping through those dynamics city, that's it for me. Thank you.
Thanks for the question I will I would just say that Doug said, hopefully, 80% to 90% or could yes, yes. It was not a target side definitely not a target that was the brainstorm.
Oh, yes so.
Well update you on ready to make that to target.
I think unfortunately.
Question, It's a great question right question.
But until we I think solidify exactly what the mix shift.
Timeline looks like it's really hard to say, what how fast term contracts convert to cloud.
I think in this environment.
It certainly is.
We're certainly finding customers that are NB too in the middle of the term contract and they're starting to look a cloud and so that's one of the things I think we have to help you know we are going to do whatever customers need if that's something that customers need to do than we have to figure out how to make that work and so.
I think how I think how you should think about how those term contracts.
You know renew or upgrade or shift to cloud. It's just it's hard to say I do expect the vast majority overtime will move to cloud.
It is hard to say exactly what the timing will be.
That that renewal base that you talked about kind of on the 18 and 19.
Period, when when term license growth really started growing that is a significant.
Base, that's growing very large and that is one of the primary reasons why we have confidence in our growth targets is because as that renewal base comes online.
It just it just gives us a great based to draw from and convert into even higher ASP cloud contracts.
Let's see you all well you had one more question I think.
Or did but to be loser.
Our next.
Correct.
Kirk manner.
Sure.
Final question.
Yes, thanks, very much for for fitting men and congrats on a good quarter in a really tough environment.
Can you just talk about sort of your discussions with clients about cloud maybe domestically versus internationally, if theres any sort of difference there in terms of how your clients in the U.S. might be thinking about client about cloud versus what you're seeing internationally and then just for Jason Where's hiring I guess based on your thought process coming into this.
Year I'd imagine you guys might have had to rethink that and margin and maybe what's the thought process on that now thanks.
Really really good point.
And you will see Andy.
Numbers every release now every quarter as something that will actually point to.
The answer.
I forget the telco go to page, but I think overall.
Revenue internationally.
Was.
35%.
In cloud revenue is 18% and 18% is pretty consistent quarter over quarter over quarter, which and the answer for that as yet international installs. So I am more term than they are cloud and it gets recognized from upfront.
And we are seeing the strongest contracts in the U.S. and if you just follow whereas if you ask pcps rather footprint. It we map exactly hi in Australia and the UK.
In Canada, very strong cloud again, the stronger less strong, but still strong in Germany, and France as long as you keep the data resident there and the Paulson there.
Going back to my Brainstorm that you I'd love to see us if I may get to 80% to 90% clad says 60, I didn't say 100.
Because I do think that there are still use cases that demand that product and data sit closer to the customer and.
Till we can pre out away too.
I have the accounting not differ because we've done that then those would probably be caught it new accounts is on Prem solutions and there are countries that maybe slower to move to cloud.
Now in countries, where you're already have customers and are already selling so it's definitely a very bearish on U.S.. Although my belief is that as this has been a global phenomena youre going to see a very different perspective on cloud.
In countries that may have not been as tilted that way.
Because it probably is going whether they'll give you all to respond where they need to.
Assuming that this goes on for another 18, 24, 36 48 months, while we work on therapies in vaccines.
In headcount, yes regarding head count so yeah went when when everything started slowing down in early mid March.
Definitely did kind of put a freeze on on hiring and look at what.
Trying to get a better sense of what the environment.
I was going to how is going to unfold.
In pretty clear that the underlying growth within our business is very healthy so we have been.
Opening up hiring related to Dtcs of course to to serve the growth needs that are going to continue and then also of course, there's some.
Engineering headcount related to a bunch of the migration work that we're continuing to do with related.
In particular with cloud as well as within cloud within signal effects and some of the integration work. There. So so those areas were definitely still hiring most of the or other areas I think like most companies.
Around our our are trying to make sure we're really focused on.
Watching our cost structure a closely.
And make sure that especially with US go into a radical transformation, we need to make sure that our cost structure doesn't outpaced the growth.
Revenue or will it will take well for us to catch up so that's something we're watching very carefully.
But.
But again, we we are mostly focused on making sure that we're making the necessary hires to to manage toward growth targets.
That's super helpful. Thanks, very much.
Sure. Thanks.
We have no further questions at the time left and trying to call back what it does for any closing remarks.
Thank you very much. Thank you all for joining us.
Just in closing I'd say.
Really positive quarter, we've been I think very clear that we are focused on both a term and cloud transition, but ultimately getting to a renewable SaaS model should we can serve our customers much more effectively.
Good to see that acceleration.
So consistently over the past three years with acceleration over the past couple of quarters.
As our offering continues to mature and the market continues to gain more and more appreciation for the criticality of data I think we moved from data being a luxury to did it'd be in a necessity in today's world.
It's very heartening.
We know that there's a lot of unknowns in the coming quarters.
We're going to continue to focus on things that we can focus on which is build Austin product make sure. Our team is sales teams are empowered they've got all tools that they possibly can get hold of to have those high value conversations with customers and keep driving relentlessly on HCV.
Our our and cloud.
So hopefully in the coming quarters, we'll have more good stories to tell to highlight the wrap the rapid transformation that we are driving.
Thank you all.
Thank you ladies and gentleman that does conclude todays conference. Thank you because today you may now disconnect have a great.
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