Q2 2021 Splunk Inc Earnings Call
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Ladies and gentlemen.
You for standing behind and welcome to the Splunk second quarter 2021 financial results Conference call.
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I'd now like to hand, the conference over to your speaker today.
Mr. Ken Tinsley.
For Treasurer, and Vice President Investor Relations. Thank you. Please go ahead Sir.
Great. Thank you Daniel one good afternoon, everyone with me on the call today, our Doug Merritt and Jason child.
After market close today, we issued a press release, which is posted on our website also note that we have posted supplemental material on the Investor Relations Web page as well. This conference calls being broadcast live via webcast and following the call an audio replay will be available on the website.
On today's call will be making forward looking statements, including financial guidance and expectations, such as our forecast for third quarter as well as revenue revenue mix cloud gross margin full year and long term or are in operating cash flow and trends in our markets as well as our expectations regarding our products technology strategy customers end markets.
These statements are based on our assumptions as the macroeconomic environment is in which we will operate reflect our best judgment based on factors currently known to us and actual events or results may differ materially.
Many of these assumptions relating to matters that are beyond our control and changing rapidly, including the impact of the cobot 19 pandemic on our business and our overall economic environment.
Please refer to documents, we file 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 the call me not to contain current or accurate information.
We'll also discuss non-GAAP financial measures, which were not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non-GAAP results is provided in the press release and on our website that let me turn it over Doug.
Thank you, Ken and thanks to everyone on the call for joining US I Hope you and your loved ones are staying safe and healthy.
We delivered a strong second quarter with annual recurring revenue.
Our 50% over last year.
Cloud momentum continues to accelerate after the first time in our history, our cloud based products drove over half of total suffer bookings far outpacing expectations and squarely current confirming Splunk is a cloud first company.
The step shifting growth has put us in a trajectory to reach our acquired 23 cloud mix target, 60% two years ahead of schedule.
Our customers are turning to splunk cloud faster than ever before thanks to its rapid time to value high velocity of innovative features and lower total cost of ownership.
The current macro environment, just playing a role here too as more and more organizations accelerate their moved a cloud based services in response to the pandemic.
Many of the purchase it purchasing trends we saw in Q1 continued or accelerated in Q2.
Although some customers remain has a tend to commit to long term contracts, especially for larger orders many existing customers continue to expand their uses splunk as they realize substantial value from current deployments.
They drive enhanced ROI as they expand in new use cases, and the increasing shift a crowd to cloud.
Splunk customers wanting to frontline's other rapidly digitizing enterprise driving cloud I T security and Dev ops transformations to create new ways of working.
In recent months and due primarily to the pandemic, we're seeing rapid expansion of distance learning Tele health online retail and remote work.
All generating new kinds of data and metrics and all powered by digital technologies.
The acceleration of these trends leaves little doubt, we have entered the data age.
In this new age data is no longer a supplement or byproduct of our society isn't essential element of high performing organizations government and communities.
Data dependent technologies shape, nearly every aspect of how we work shop communicate and learn.
Splunk is leading organizations into the data age with a cloud first mindset.
Hopefully start today's announcement about the appointment of Sean boiled to our board of directors.
Sean brings deep experience in scaling multi billion dollar cloud organizations, most recently as vice President and CFO it it'd be less.
And we are thrilled to walk you named him to Splunk as we continue our cloud journey.
In Q2, we announced the Splunk cloud is now also available on Google Cloud.
Offering our customers increased flexibility and choice for real time visibility across hybrid and multi cloud environments.
Since that announcement, we're seeing strong traction with a limited availability release and are working with our first set up production customers.
And we continue to build on our strategic relationship a native yes, but the it'd be yes service ready program Lambda ready, which recognizes splunks proven solutions for customers to build manage and run serverless applications.
We also rolled out a series of enhancements and extend our cloud capabilities and strengthen the foundational technologies where unified platform.
The latest release of Splunk data stream processor or DSP lever just the most advanced streaming capabilities from Apache pulse are the best of breed open source software from the founders extremely show, which we acquired last fall.
DSP, one dot one continuously collects processes and delivers data to the splunk platform or other destinations on premise where in the cloud all within milliseconds.
But DSP, we're now the only technology provider, yes introduced machine learning across our fault platform, including shrink streaming analytics.
Our online machine learning approaches our state of the art with entirely novel approaches to deployment and ease of use and when applied to the stream enable customers to break the volume Cardinal study in speed barriers that offline batch processing presents.
Ultimately our unified platform approach to machine learning enables customers greater easement data quality and what did ingest.
In Q2, we announced a general availability of mission control.
This new security products services key Samit functionalities.
Body in the foundational elements to perform advanced detection and investigation streamline security operations processes contain intermediate threats.
And gain visibility across your entire security infrastructure through powerful integrations.
All of course in the cloud.
Next our accelerator release schedule for I.T. service intelligence for Splunk cloud enables us to deliver a centralized framework for monitoring and investigation and one view.
And enhanced service monitoring event management features to support large scale deployments.
Finally, Splunk has also expanded connected experience capabilities to support popular mobile device management providers, including mobile iron and Vmware Airwatch to securely deploy splunk mobile at scale and bring Splunk solutions to an increasingly mobile workforce.
I'd also like to take a moment to celebrate the open source community and splunks, increasing involvement to giving back.
Splunk is now the number one contributor to open telemetry, which is the second largest project in the cloud Native competing foundation only behind Kubernetes.
We have no doubt that open source is an indispensable component and the software and services world.
We continue to embrace a growing number of open source projects within our data to everything platform.
Stepping back.
All organizations run a journey to bring data to everything and Splunks mission is to remove the barriers between data and action. So everyone can thrive in the date age.
We want to be these strategic partner for our customers as they accelerate their digital transformation initiatives and shift a hybrid and multi cloud environments.
You're a few highlights from the quarter.
We're honored to see a marquee global 100 company dramatically increase or splunk footprint to help accelerate their digital transformation.
This customer has been a longtime beneficiary splunks incredibly powerful indexing in search offerings in the cloud.
And as the impacts of covered or felt they saw a significant increase in demand their online channels and digital properties.
Renewing this portion of the Splunk offering using a workload based pricing provided the customers flexibility confidence and clarity during unexpected growth.
Splunk cloud provide unparalleled scalability and performance.
In addition to support their deep commitment to consumer experience. This customer chose splunk and our unmatched capabilities of metrics tracers and logs provide observe ability across your digital channels for the highest quality digital consumer experience.
The increase came into a broader swap or portfolio further cemented splunk as their data to everything platform.
Secondly, serving nearly 400000 students Chicago public schools is the third largest school districts in United States.
They've been a splunk cloud customer since 2015, and what the emergence of covered 19 recently further expanded on Splunk cloud to help support or shift to remote learning.
With cloud Chicago public schools improve their visibility into remote learning challenge has helped to better serve both students and teachers across the Chicago Metropolitan area.
California Polytechnic State University, San Luis Obispo, or Cal Poly expanded their use of Splunk cloud and Splunk Enterprise security shake it better address increase fishing activity brought him I covered 19.
Cal Poly is training their students on Splunk to take the lead as first responders and protect our virtual campus, allowing them to review suspicious emails block compromise portal accounts and resolve malicious attacks all in only a few hours.
Yeah, All New Haven health health system rank them on the top hospitals. According to U.S. News and World reports America's Best hospitals listing.
Became a new splunk customer after trialing, our remote work insights offering.
Now Yale New Haven health system can leverage that power Splunk cloud and enterprise security to combat threats with advanced analytics at scale.
He is impressive customer wins underlined the importance data place as organization scale their virtual environments.
We're seeing tightly connected to our customers and partners and are confident we're making all the right moves to meet their needs an ever evolving data age.
In closing I am proud of our Q2 performance and when I think our customers and partners for their continued commitment to Splunk and our data it everything platform.
And I want to explicitly things are over 6000 spelunkers for their passion creativity, and empathy and doing what's right for our customers and just as importantly for each other.
We're looking forward to seeing everyone virtually at Dot Com 20 in October, but we'll be engaging with tens of thousands of our most passionate customers and sharing our latest product innovations.
Ill now hand over to Jason for more on Q2, Jason.
Thanks, Doug and good afternoon, everyone. Thanks for joining us in the face of continued uncertainty and volatility from coded our execution in the quarter was strong as we surpassed well over half a billion dollars in cloud EMR.
Today's report, we're making a hard pivot to cloud based metrics to evaluate or performance going forward at a high level, we're phasing out TCV based metrics, which were better suited for our legacy perpetual model and replacing them with SAS indicators.
In our eight your.
Plus history as a public company, we have maintained exceptional renewal and upsell rates, which are the result of delivering high value and customer satisfaction with our products and services.
In the cloud model these buying trends, our best captured in the retention or expansion rate.
Our trailing 12 month dollar based net retention rate for cloud has been consistently above 130% and was 132% in Q2 and for your reference prior period rates are included in the supplemental slides.
As Doug said customers are accelerating their adoption of just a splunk cloud.
In Q2 cloud contributed 53% to total software bookings compared to 36% in Q2 last year and 44% in Q1.
In the first half of this year cloud and it was 50% versus 32% in the first half of last year.
We believe the momentum in cloud shift to sustainable and we're pushing the transition to cloud even faster as we now plan for cloud next to reach 60%. This year, which is a milestone we had originally planned to hit in flight 23.
In a rapidly transitioning turned to cloud model like ours revenue growth is muted as upfront term license revenue was replaced with ratable services revenue over time, so air our and our appeal or better growth metrics to assess the overall bookings momentum in the business.
We ended Q2 with cloud air are a $568 million up 89% year over year, which you'll see from the slides is an acceleration in growth rate over Q1.
Total ARR was $1.93 billion up 50% from the year ago period.
We ended with total RPL of $1.75 billion up 42% over Q2 of last year and the portion of our BPO, which we expect to recognize as revenue over the next 12 months was just over $1 billion at period end accelerate into 37% growth year over year.
To better align with our cloud model and give you a better sense of the recurring nature of our customer engagements. We are retiring the TCV based customer count metrics and moving to an air our base number.
We ended Q2 or 396 customers with air are greater than $1 million, which compares to 274 in Q2 last year.
And a four quarter look back to this metric is also included in the supplemental slides.
Turning to the piano.
Second quarter total revenues were $492 million down slightly year over year, reflecting substantially higher cloud mix.
Revenue was $126 million up 79% over last year.
On gross margin the high growth in our cloud business continues to drive improving leverage in our overall cost structure.
Non-GAAP cloud gross margin was 59% in Q2 compared to 53% last year with continued progress towards our 70 plus percent target next year.
Total non-GAAP gross margin in Q2 was 70% down on a year over year basis due to the greater proportion of revenue contribution coming from cloud.
Non-GAAP operating margin was negative 13% in Q2, which was in line with plan.
On the balance sheet during the quarter, we completed a convertible bond offering and place roughly $1.2 billion a seven year notes, we utilize the majority of the proceeds to repurchase a portion of the 2023 notes, which flattened the maturity towers of existing debt due within the next five years.
We opportunistically added some cash and ended the quarter with approximately $2.1 billion in total cash and investments.
Turning to guidance.
It's important to highlight that the fundamentals of the business remains strong and we're confident in our ability to deliver continued high growth over the long term.
Given current visibility we are maintaining our total air our growth targets of mid 40% this year and a three year CAGR of 40% threw up by 23.
On the income statement, our outperformance on cloud Nics relative to plan continues to drive variability in our revenue operating margin targets.
Just as we saw Q1 in Q2 total revenues in Q3 are expected to be relatively flat on a year over year basis or between 600 and $630 million depending on cloud contribution.
Increasing cloud mix will continue to put pressure on our margin as well. So we expect non-GAAP operating margin of between two and 5% in Q3.
Current year operating cash flow is tracking ahead of plan and we now expected to be slightly better than last year.
Operating cash flow should turn positive enough by 22.
And we'll reach the $1 billion target 1 billion dollar target in flight 23.
In closing our cloud transaction cloud transition is substantially ahead of our plan and we're leveraging current trends to accelerated even faster.
With cloud Air are now over a half a billion dollars and total air are nearing $2 billion with both growing at high rates. We are rapidly build in one of the fastest growing SaaS businesses at scale.
With that let's open it up for questions.
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Please standby well, we compile the Q on a roster.
Our first question comes from Kash Rangan.
Thanks America Your line is now.
That's an unbelievable quarter congratulations for the Splunk team.
Doug.
Clearly the businesses hitting a tipping point at scale, it's rare to see a software company. If your size growth this rapidly while still going into the cloud manage all these transition so much appreciated the question for you is.
As you look at digital transformation, how strong our the tailwinds.
Is it a transformation as it relates to cloud business and how sustainable is this cloud growth and one for you Jason very quickly.
Can you revisit very briefly how we get to that billion dollars in cash flow and what are the levers and one of the assumptions behind getting to the billion dollars in cash flow in fiscal 2003 thats. It. Thank you so much.
Cat cash thank you as always.
There's no doubt that the macro environment is helping propel our cloud transition. However, we all have seen this quarter. Other pure SaaS plays that saw flat or decelerating cloud momentum on what we went from low eightys.
No.
9%, so theres got to be more play besides just the macro.
I think the there's a handful of things that are really helping us right now.
I think our willingness to step up big with a 1 billion plus investment and observe ability.
And you all know that are observe ability suite is cloud only certainly is helping there we've been very very pleased with the continued progress and success of or do within observe ability.
We are continuous focus on portfolio expansion.
Adding elements like streaming so portfolio I think is another nice tailwind for us.
And our teams and just want to call out the human execution.
As as you can all imagine.
In this environment, while there's a lot of glowing reports, there's a lot of businesses under a lot of pressure and there is increasing scrutiny on spend increasing hurdles.
And seen our teams continue to put their head downs.
Heads down and push through this environments. We can help our customers I think is an element to that as well.
Cash on the $1 billion cash flow question, just at a high level.
The way, we're going to get there is really just by returning to where we've been in the past so before we made the ratable.
Or invoicing change, our we started collecting annually instead of upfront, which since our average.
Contract is just shy of three years, what that means is we're only right now getting rough roughly when we started this last year roughly about a third of the cash upfront versus the reserves, which we were getting before.
We will stop lapping that change by Middle of next year, we started last year and moving from one to three years from three years down to one your collection means that takes us two years to lap it.
And so when we come out that the other side, which will be in Q3 of that fly 22.
Inflow will then be right back to the level it used to be.
If you go back in history I think it was 2013 through 18, we had cash yield as a percentage of revenue was actually between 20 and 24% every one of those years and so if you look at our air our targets.
I think kashi should be looking at as percentage of EMR as opposed to.
Revenue because of the revenue recognition differential when you apply that 20% to our.
Our air our target by 23, you get to roughly $1 billion, so taking the 20% on the roughly.
Four and a half a billion dollars.
There are play by end of F. by 23.
Thank you so much real standard compare to pure play monitoring tools that are traction of your size, but you outgrow them. Thank you so much.
Thank you Catherine.
Thank you. Our next question comes from Keith Weiss with Morgan Stanley. Your line is now open.
Okay. Thank you for taking the question guys and also.
Congratulations really nice performance in what is still very difficult spending environment out there and it's really great to see that transition to the cloud kicking in place. So aggressively so two questions around that one.
Understand the environment is helping sort of push more people to cloud gives their ability suite is there anything that you guys are doing proactively to to push customers in that direction or maybe two accenture sales guys more aggressively and pushing people to the cloud.
Number one second question is now that we're getting to that 50% target. So much earlier doesn't have any impact on sort of the model and how we should be thinking about the progression over the next couple of years towards that sort of end state maybe not end state, but it towards that 40% CAGR and that billion dollar cash.
Target are there any impact and sort of how we get there was sort of the shape of the curve.
Hi.
When I when I kick kick off I'm on the other more qualitative aspects.
We have as we said in past calls we have been modifying year over year The Commission plan.
Two did initially we're just trying to make the ratable vehicles at least on parity with perpetual then we eventually got disappointing perpetual was less desirable.
We were trying to keep cloud in term neutral and this year, where we made cloud more attractive than den term.
We have seen without a doubt that it significantly better for our customers when they're deploying cloud their time to value is decreased dramatically. The velocity of features as you'd expect on cloud is significantly higher.
The.
Proactive and far more insightful machine learning recommendations, we can drive.
And our areas are pretty critical insights, we can help them with on security and I T resiliency and.
Our really only possible cloud.
So there is the reps are definitely focused on it that said human change management is not easy.
The sales leadership team has done an excellent job Susan Christian.
Our head of enablement, Linda and so many others to make sure that we are educating the reps on what it means to sell cloud the nuances of the cloud landscape not everyone in the Splunk sales team has sold cloud before their past.
So we've got multi pronged efforts to make sure that internally and externally the cloud messages coming through and we see that growth continue.
Jason once you walked through any of the impacts yeah. So Keith on the on the impact to the long term targets well on on air are in cash there really has no change to those targets since those are independent of kind of cloud mix assumptions.
Revenue course is affected so the faster the transition occurs.
Quicker you will see.
A stronger snap back in in revenue growth. So this is a will reach a little more havoc on RPL. This year as you're seeing right now with our revenue growth, but you'll see a quicker rebound I would say next year and into 23.
But no change to err on cash.
Excellent. Thank you Chris Thank you so much guys.
Thanks Kate.
Thank you.
Next question comes from Raimo Lenschow with Barclays. Your line is now open.
Hey, Thanks, Congrats from me as well and quick one on let me see on the cloud for one more question.
If you look at the current your cloud portfolios now we have signal and omission on that but we still in the early stages. So how do you think about the dry deferred for drivers for customers to kind of adopt your cloud offering.
As you get the new you I later this year you have signal on this well, which broadens the time et cetera.
Should receive like an estimation there like go well how do you think about like.
The sales was being more motivated and to product any color sort of getting broker and then.
One question for Jason If you think about like you gave us ERP oil and then as celebrated but then we kind of hold to calculate like a bookings number.
Puts and takes we should be aware when we do the bookings calculation. Thank you.
Thanks very much.
So.
The our targets going into 21, where to have a 60% of total bookings be cloud based by the end it backed by 23.
I think that this rapid acceleration for time as multiple different items and observe ability suite is certainly a contributor to that.
We were.
We all been talking about what or what's the additional buying center that Splunk is going to go after when you could add new buying center and we continue to execute well in security and I T ops, and we love those too.
But I think this observed ability slash app Dev buying center this isn't really appropriate Adam it's adjacent see it to close pull in Penn.
I love our product in line up there so that is helping to propel this cloud momentum achieving a three year target in one year.
Is it is it's exciting.
Yes, there is finite edge I think for us on cloud given what we do and we talked about this for my six years of Splunk.
There are workloads and there are.
Scenarios, where cloud doesn't make sense. So I still we're still are not don't have a perfect science on this but somewhere in that 80 or 90% range of of cloud is probably where it will see a top out.
And the sooner we can get to that upper end to better. So acceleration is good obviously acceleration comes at the expense of term, which will come at the shorter term revenue head.
But consistent era growth and longer term revenue consistency as we make that transition.
Raimo on the on the bookings question.
Last quarter, we mentioned that we were pulling those at least from our our slides as a focal metric primarily because theyre just confusing with the transformation.
And so in particular total RPL bookings.
It is under pressure because our duration as down I mean, you can see in term on or on the slide that shows that term duration is down about seven almost southern half month year on year, and that's primarily because a lot to customers are not wanting to commit to longer term term contracts, because theyre interested and cloud.
And so that makes the total RPL bookings number look low.
Maybe they'll continues to be very very strong.
Which the best translation to ACB is just era and you can see our our continues to be very strong.
And then if you look at current RPL bookings that one is also confusing because of the cloud shift and so when youre looking at revenue plus change in our BPO revenue of course under the term Sixtyl six term revenue is all recognized upfront and so a year ago, we had a bus.
A much higher term mix. So you have much more revenue booked upfront in which would mean that appears on the through your deal your book and all that revenue upfront and then your AD in the change in RPL and so the problem is with.
A higher cloud next you have less revenue.
And you're not pulling in those periods of revenue that really relate to beyond the next 12 months. So so that's why we released recommend just just look at the two most important growth drivers are what is the our growth which is kinda durable growth that will go a revenue will be delivering over the next 12 months and then how are we building more.
Your backlog and Unbilled through RPL and so those two metrics really give you the growth picture and that's what we're focused on.
Thank you congrats.
Thanks Raimo. Thank you.
Thank you. Our next question comes from Brent Thill with Jefferies. Your line is no open.
Thanks, Doug couple of questions just on the business trends, you're seeing maybe if you could just talk to you know what you've been seeing.
Throughout the quarter on kind of to now and I think Salesforce pointed out last night that things seem like they're getting better every week and just curious if you.
With.
I would agree with that same in.
In just in general kind of how you look at the pipeline. How you think things are building back and then do real quick for Jason.
Some great price to that.
Seems to be resonating well any more color on the pricing side and how thats being accepted among clients in sales in the channel and be helpful. Thank you.
Absolutely Brent.
So.
We definitely.
Don't see a super clean clear rosy picture going forward.
Well, we saw throughout Q2, and especially towards the end of Q2.
Is significantly more scrutiny on any spend at all on all deals it wasn't just any splunk deals.
Constantly changing environment of approvals with last minute approvals being thrown in unexpectedly there were a number of deals we signed a quarter, where our economic buyer who.
Indicates to us wherever there's a CIO or the c. So.
Significant senior exact who had budget.
Signed a docs and said let's go.
Have financial procurement 12, no no the board once review at the CEO attribute again to CFO untreated again.
I think it's very pollyanna ish for people to think that the fundamental dislocations, we're seeing with coded are not going to be felt through the economy in one way or the other.
With the chaos that the election with stimulus variability.
I think we'd all be pretty surprised if we had a super needy and we just were all marching toward positive up be drawn Q4 Q1 Q2. So.
We remain extraordinarily focused on diligent execution.
Rigor on sales continues go up and open up which goes back to some of my call outs that team. They really have kept their heads down are doing.
Phenomenon work to make sure that date execute weighted the way that they need to.
And I don't I don't anticipate as smooth uneasy landscape anytime in the foreseeable future that doesn't give us excuses on execution right Theres a lot of Weve, but there is we have power and this but the macro environment is still something that.
That that's going to be variable I believe.
And on a Brent on the pricing question I.
I would just kind of echo what we said in the past and that is very strong receptivity because we're now we're providing way more clarity than we've done in the past to enable customers to be able to predict exactly what their price will be as they continue to increase the data volumes at the push to Splunk.
And in particular folks have really reacted positively to the kind of instance, based pricing so splunk virtual core for cloud or BCP you for.
From on Prem and those are both very well received very very high acceptance rates for customers that have been offered.
The options that have accepted that.
The the second thing I'd point out, though is that it is still relatively early innings, because the way since since virtually every one of our.
Customers is under contract and they are typically under multiyear contract, they're not going to see the new pricing unless they are up for renewal or if there would be on capacity and so since we've been in this program for not just not quite a year or close to it and since the average customer contractors.
Between two and half three years think of us is being probably roughly somewhere between a third to half of our customers have actually seen us and so.
Very much liking, what we're seeing from customers, but I think we still have a ways to go in terms of awareness.
And then continuing to refine the program as we go.
Great. Thank you.
Thanks Brent.
Thank you. Our next question comes from Phil Winslow with Wells Fargo. Your line is now open.
Hi, Thanks for taking my question Congrats on just another great quarter.
Speaking I guess would do is called video sort of expanding beyond the index for backlog a better term I wanted to focus in on DSP, because we've a lot of your question Barber now is going to observe ability. So Doug can you give us an update on DSP and what are you hearing from customers in terms of sort of how they're thinking about DSP and I guess pulls are now with the one on one release.
Terms was call it will be front end explore DSP platform for its all four.
Actually even interacting with the observe abilities.
Thank you felt yes. It is that when I think about our portfolio and I think we've been framing. This made for a couple of years now, but just want to reiterate I think about four different.
Areas, the foundational areas to platform and that is there to serve any use case.
With our three targets being the other three areas of the for the cyber team the infrastructure management Slash actually ops team, Andy App Dev slash observe ability teams.
And yes, we view DSP as part of that platform and then moved beyond the index was it's awesome to the index still is incredibly powerful it remains I think unique in the world and the industry as being the only storage vehicle that elegantly demands no upfront structuring a data and still is able to provide structure.
I had meetings that data on that kind of query and so that remains critically important portfolio.
But there is more it's a world and indexing, which is why we lead chemistry and processing.
It's why you'll find elements like druid in our cloud stack to help with that more classic multidimensional data.
So we view this landscape as very complex and robust we clearly are open source friendly at this point in time.
With things like Frank Flink, Pollstar comp guide as.
Typical and well mannered elements within the development team.
And we view streaming as a critically important initiative for the company.
Dramatically and enhances and increases the scale and efficiency of the observed ability suite.
We are seeing had a bites of data being managed by DSP to make sure that there are highly accurate no sample no drop metrics and traces being extracted effectively.
It clearly is a hold another platform to do processing on.
Not only as you're really intelligent transformations and enrichments, they're happening on the data in the stream that help reduce the size and scope of data wherever it lands.
But our stream based ethanol is unique and then there's all the orchestration automation interrogation other elements on top that stream. So it's a it's ed becoming a pretty indispensable and non.
Elective portion of the platform portfolio.
The DSP continue to get more and more wound into the different solutions that we targeted toward those three buying centers.
We remain very bullish on the opportunities that observe ability gives us and new platform components like streaming and take that those are some of the fuel that we're seeing for our ability to can continue to maintain high growth.
Awesome. Thanks, guys congrats guys.
Thank you. Thank you bill.
Thank you. Our next question comes from Matt Hedberg with RBC capital markets. Your line is no.
Great. Thanks for taking my question guys. Doug wondering if you can comment a little bit more specifically I. Appreciate your macro comp comments to a prior question, but but its coated actually accelerating the adoption of Hsas and I'm also wondering.
That's also having an impact on new customer addition, or a new customer adoption I know this is not great environment for the customer adds, but but curious where splunk cloud is being deployed as it within your base or is it actually accelerating some new customer ads.
I do at into macro arena I, absolutely think that curve. It is accelerating cloud globally and for organize it organizations like us.
I was pretty amazed to.
Look at where we look at industry activity three industries in particular that we called out in Q1 that we were tracking and want to make sure that were there to help with travel and transportation manufacturing.
Retail.
That they actually increased their purchasing activity with Splunk as industry is between Q on Q2.
And as we know those three industries have not had easiest time. So I think that that was reinforcement and direct conversations have customers those categories. It reinforcement that had the only way we're going to tag have any chance of getting through this as we have to accelerate ways. We never dreamed of our digital footprint exceptionally way, we can communicate internally and externally and.
And do the type of business that we need to invent new lines of business.
So that it's a clear tailwind net new customers I think of size from most organizations are likely give me an issue we definitely find it harder to get brand new prospecting engagements.
Versus will work with trusted sources within accounts now that said, we had net new customers.
But healthy rate of new customers equivalent to last year I still have not found a way to break that baby out and have it scale like crazy like we want to.
And and some of those net new customers were part of the million plus there are number so.
This is something that affects.
Organizations that are already familiar with Splunk as well so is that aren't and and we're seeing both both being impacted.
That's great. That's super helpful. Thanks, Doug in adjacent you really do appreciate the color and the focus on air our and CRP, though given this mix shift that we're seeing though and I am wondering obviously you guys outperformed the cloud mix, if if if the cloud mix it come in closer to where you expected relative to your Twoq Q2 Guide I'm wondering why.
Revenue would been sort of in line above the high in the range of sort of curious directionally. How revenue would have done if mix would have been similar to what kind of what you expected.
Yes, so I mean at a high level. If you just take the TCV that we had total the total contract value in the quarter and add back the the take the 500 basis point differential and cloud mix versus what we had guided to it translates to.
Between 25 to $39 and so I think we were about 28 million below guidance and so we would have been right on.
Absent the cloud aspect.
Great Super helpful. Appreciate the color Jason Thanks, Thanks, Congrats guys.
Thanks Ben.
Thank you. Our next question comes from Mark Murphy with JP Morgan. Your line is now open.
Yes. Thank you congrats.
I'm interested in what do you think this year to the demand curve looks like if you were to try to split it into remote work remote learning use cases versus everything else. So in other words, all activity, which I think you mentioned more.
This call Doug.
Every particularly around a lot of the school district wins.
But everything around monitoring VPN and VDI environments.
You had this package called remote work insights.
You have all of these new products for monitoring them and webex types of logs.
Im trying to understand how material is that contribution and how would you say that is trending today versus back in April.
So it definitely helped us, but the number of organizations that.
At this burning need they saw that we had something to help them.
And that probably was the instigator to say, let me switch one can do for us.
At the end today the power of Splunk is the data that you are going to ingest from VPN from applications from networks from can be used for hundreds of different options and opportunities.
And so when we talk about someone like.
I think is at Yale New Haven, who got intrigued because of remote work, but then the and deployed that but then deployed splunk for classic IP overall visibility and for classics security.
Analytics and visibility that again is the power of the Splunk platform that.
Our new pricing model finally gets us away from data volume, but its is the thing that the day volume guys missed as you pay for once and then you get to use it in a multitude of different different dimensions. So I think it is having a lead gen and an entry eager engagement impact, but then ultimately the data where the remote work Kim.
Realty become similar to date similar data to the rest of our use cases.
Okay understood and quick follow up Jason I was interested in whether the security mix.
If you look at it as a percentage of bookings or percentage of revenue is it looking any different today than it did.
More of it again, just trying to understand there.
Has been.
An uplift in security adoption because of the pandemic.
It remains pretty consistently at about half of our business.
I'd say, maybe this slight difference would be.
The other half used to be ICTI noted at about half as identity and observe ability, which is certainly growing.
But thats that that's what we've done thus far.
Thank you.
Thanks Mark.
Thank you. Our next question comes from Cortina Boolani would you be US your line is now open.
Good afternoon, thanks for taking the questions Doug ill start with you I appreciate the detail in color around.
One dollar air our engagement with the customer base.
But I was wondering if you could characterize how that sales notion is progressing because if I think about historically instead of a TCV perpetual license model. The a format was an important conduit for senator larger deals. So I'm wondering how that's.
Valving, we're transitioning as you do move to an air R&D City based model and how that factors into how you transact.
And in large deals into velocity those large deals and have a quick follow up for Jason.
Yeah, I'm I'm really really excited about the movement from TCV to ACB for a number of reasons and you combine that with cloud I think you just wind up with a much more durable and healthy business.
You could lump up TCV get these big Big outliers that in Essex or six model at a pretty big impact in the quarter, but.
But but they weren't as consistent.
What you what we're shifting to is one the default for all cloud transactions is workload based pricing shore.
Clearly beyond and away from that due to volume based pricing.
And in a cloud based mentality and E.L.A.. If we assume standard terminology is is a.
A very rare and unlikely thing that you've got to pay for that the infrastructure you consume.
So the workload pricing combined with the this portfolio approach, we've got to assess security portfolio and I T portfolio, an app Dev portfolio observed ability portfolio and then as platform portfolio I.
I think that here or is the way that we'll continue to be driven is land with a meaningful contract that is either platform or one of those portfolios and then expand within that portfolio make sure that securities using all the facilities and that consumes more workloads or more users depending on the.
Ill.
And then begin to do the effective job at traversing other departments.
So we view that hey, our figure and that's why we wanted to make sure that we also came forward with the dollar based net renewal rate for you guys.
As to really important and complimentary aspects of what the field needs to focus on land you drive to drive to a million plus there are but that's going to come through effective renewals and the right dollar based net net renewal rate.
That's super helpful. Thank you so much for the detail on Jason for you.
Appreciate that you're sure that's coming up on the cost of a pretty large wave.
Term renewal business, so taking back to 18 to 19, when the term license and modality really started to kick off so as we think about sort of fiscal 2002 fiscal 23 and that stable of term renewal business. How do you see that I guess modulating with cloud accelerating with.
Drummers opting for media cloud based procurement and consumption model can you help us with some of the assumption that youre operating under as some of these conversions potentially happening.
That's it for me thank you.
Thanks, that's a good question.
We we are they're all good questions, but thats a really that's a trend do you want.
Yes.
The I would say in the model that we're using assumes that yes, we have a significantly grown renewal base, which is certainly a tailwind to our a our growth as we've talked about in the past and that renewal base is growing substantially.
Really next year than even more thereafter.
The percentage of those renewals that we expect to move to cloud. We think is going to be in line with the overall.
Cloud mix.
Rate, which is which is what we've seen happen this year and maybe a little bit more accelerated than than we've seen in the past.
That said, yes.
It's hard to know.
If the environment stays like it is now than you will probably see continued.
Faster or consider continued acceleration towards cloud but.
It's hard to determine because ultimately we don't tell the customer what to pick that theyre going to pick whatever works best for them.
Our I'd say from a product side. We are we've moved to cloud first such that if you buy the cloud product you are getting the latest and greatest you're going to get updates faster and so our view it is superior product and so it's likely that.
Folks will be moving faster to cloud but.
That's that's definitely one of the bigger.
Bigger.
Yes, I guess sensitivities as we look towards next year.
Fair enough appreciate that thank you.
Thank you thanks for doing.
In Q. Our next question comes from Andrew Nowinski with da Davidson. Your line is now.
Okay, great. Thank you just two quick ones from me.
I know you're focused on the cloud service, but the license business is still a billion dollar business had a question on the pricing in the competitive landscape there.
I know you made changes I made the prices more transparent to the customer, but do you think competitors like elastic might be adding some pressure to that segment. In addition to the shift to the cloud.
That's a great question.
I mean that the pricing changes that we rolled out our universal.
We've gotten equivalent to our workload based pricing in the cloud from prime customers.
I know anyone that is buying a term license.
As being presented with that option as well.
We have maintained very consistent when rates against elastic.
Which which are still very impressive when rich.
For the old engagement. So we see are involved in.
And that competitive environment feels fairly stable there.
He is probably the way I'd answer that.
Got it. Thank you and then just last one for me I know, we're coming up onto a stronger us federal.
Spending period, but I'm wondering how the U.S. fed deals contributed to your quarter.
In the July quarter. Thanks.
The public team did really nice job as always in Q2.
Q3 is a high variability quarter.
It's usually the biggest quarter from hub publish that given federal your end.
There is more uncertainty and inconsistency in the pub SEC environment than we've seen a long time.
The team has got their head down and is working diligently to try and mitigate whatever the uncertainties whatever uncertainties uncertainties. They can.
But this is probably.
Probably the most volatile.
Environment that I've seen in six years of Splunk.
So we will wait and see a dip into Q3, what happened within that federal spending segment and.
The teams I know are really passionate about that buyers are passionate and the teams are passionate about.
Making sure that that our federal agencies get access to Splunk and hopefully.
That will that will be allowed to given all the volatility in that segment.
Great. Thank you.
Thank you Andy.
Thank you.
Our final question today comes from Keith Bachman with Bank of Montreal. Your line is now open.
Thank you I also had two questions. Doug for you first you just mentioned the net retention rate or the cloud net retention rate, which is really strong at 33 or 30 to 33 132.
With that.
The for the total they are though and that's the cloud. They are where's the reason, you're suggesting that is because you have to transition mix, which skews the data set.
On the cloud they are in as part of that is do you think that 133 132 is that a durable type of number.
Hi, yes, so we actually purposely gave gave cloud because it is durable.
The performance overall was was meaningfully higher than it was in cloud.
But we know that a portion of that is the benefit that we get.
From the perpetual and.
Perpetual license based moving to term.
And just see go a little bit more detail, but we want to make sure. We gave something that we felt was can be consistent going forward and we expect the overall net retention rate to actually come down from there that higher levels rise cloud should maintain.
I'll just add on that the because there is a higher average selling price with the hosted cloud solution versus the on Prem solution.
Folks moving over to customers moving over to cloud are going to see a like an initial onetime boost and then over time they should be growing at the cloud based net retention rates. So we thought showing the higher number.
When you have a when its conflated by customers that are making that switch over to cloud.
Makes it a little bit high the best way to measure it over a longer period of time is to look at the cloud net retention rate customers that were buying cloud a year ago, where are they today. That's that's exactly what we put in our slide deck the 132.
Okay, well, it's still really loan so really really strong retention rates that's great.
Jason on my follow up questions on cloud gross margins you've seen the transition as you said the cloud the current transition happened a bit faster.
How should we be thinking about the cloud gross margins in particular.
Yeah. That's a that's been an ongoing effort for a couple of years a lot of progress has been made by.
Tim and senders team in particular on margin so I've talked in the past about how you know theres a lot of.
Work that was being done first on building stateless architecture, she could separate.
Compute.
Yes compute storage from.
Compute.
Processing and pricing.
Thats, let's step one most of that work most that was pretty far along there's also building a kind of multi tenant architecture. So that we can actually focus on the best price for whatever the services, that's probably a little bit earlier and in process.
And then.
I think there's there's certainly effort also and just getting better overall terms as the size of the business increases and we're able to negotiate better discounts. It. So the combination of those three things is why we're confident and being able to get to a 70 plus percent gross margin struck.
Sure overtime, we believe we can hit that by the end of next year, we expect to hit.
Above 60% by the end of this year.
But that said, it's something that we started roughly two years ago. If I think we mentioned in the past that it was as low as 30%.
And so it's really mostly just execution oriented work. The reason why most other cloud businesses that you look at that are offering similar services to offer typically in the 70 plus percent ranges because they've already done network or maybe their native to cloud and so they are built that way.
But but from our perspective, it's it's definitely not innovation work its execution work and we're confident that we can get that get to those 70 plus percent targets.
In a year and app or so.
Okay, great. Many thanks.
You bet safety.
Thank you ladies and gentlemen, this concludes our question and answer session I'll now like to turn the call back over to Doug Merritt for any closing remarks.
Thank you.
Hopefully as you all I've seen by our consistent results over the past few quarters.
We remain active focused on.
The willingness to run headfirst into difficult transformations, because that's what's necessary for our customer success and for the long term durable success of our company.
While we do that to simultaneously stay very rigorously focused on execution. So we can drive consistent results.
I think we're all really pleased and excited on the Splunk side at the a monumental progress made and cloud over the past five plus years as we started from nothing.
Learned a lot lessons and if I think built a very interesting business.
And that the macro environment to something that is a little bit out of most of our control.
But the category demand is incredibly healthy.
The macro is driving some of the fundamentals that we believe we're going to manifest one way the other just a bit more quickly.
And I am.
Increasingly more and more confident that the breadth and scope of our portfolio combined with the needs of the market and our ability to both take risk and manage that risk where risk through execution.
Is what's driving us to attach rates the growth rate. So we have out or do you guys to compare other companies at the 2 billion error.
Metric or I guess 1.9 to five on our side.
And their growth rates and I think you'll come where at the same appreciation that I have that we are a unique stand out in our ability to grow irrespective of transformation and then when you add in the magnitude the transformation has been driving.
My hats are off to every single Splunk or our partner ecosystem and the graciousness for our customers to continue to support everything we're trying to get done.
I continue to think all view on the call for your belief and support and us as a company.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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