Q4 2021 Splunk Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Splunk, Inc. Fourth quarter of 2021 financial results conference call on.
At this time of all participant lines are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand the conference.
So Richard of Speaker today, Ken Tinsley. Thank you. Please go ahead Sir.
Great. Thank you and good afternoon with me on the call today are 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 webpage.
As well this.
This conference call is 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 our first quarter as well as future expectations of revenue mix renewals duration and cloud growth in cloud gross margin.
As well as trends in our markets and our business and expectations regarding our acquisitions products technology strategy customers demand and markets.
These statements are based on our assumptions as to the macroeconomic environment in which we will be operating and reflect our best judgment based on factors currently known to us and actual events or results may differ materially.
Many of these assumptions relate to matters that are beyond our control and changing rapidly, including the impact of the COVID-19 pandemic on our business and that of our customers and the overall economic environment.
Related to this uncertainty as certain customers have and may in the future continue to decrease or delay spending commitments, particularly for certain high dollar and long term contracts.
Please refer to documents, we file with the SEC, including the form 8-K filed with today's press release.
Those documents contain risks and other factors, which 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 results is provided in the press release and on our website with that let me turn it over to Doug.
Thank you, Ken and thanks to everyone on the call for joining us.
Q4 was a strong finish to a memorable year for Splunk.
Proud of both our results as well as the dedication and tenacity of our team over these past 12 months and particularly during our year end.
And I am so very grateful for the trust and commitment of our customers and partners.
Splunk ended the year with overall annual recurring revenue of $2 $3 6 billion.
At 41% over last year.
Even more importantly, we saw continued impressive results and our cloud first initiatives with cloud ear, our delivery of $810 million up 83% over last year and accelerating from a growth rate in Q3.
Driving our continued transition to cloud has been our number one company priority for the past three years and Thats continuing into FY 'twenty two.
We remain very pleased with the progress of our transition to cloud.
Looking back in time, just four years ago cloud was less than 20% of our software bookings delivering $48 million on revenue and the upper end of allowable daily data volume was about 10 terabytes per day.
Today cloud revenue stands at $554 million.
Representing an 84% CAGR.
Pulling 100, terabyte, plus footprints with customers, taking advantage of workload versus data and just pricing.
And cloud now represents the majority of our business with 51% of our softer bookings from coming from cloud in Q4.
We've seen that when our customers move to cloud the investment day, making splunk expands rapidly as they utilize the high velocity of our cloud innovations features and machine learning.
Ultimately, allowing them to free up Resourcing and reorient their focus on time to what's most critical to them.
Despite the continuing uncertainty and volatility of the macro environment, we had a strong finish to the year.
Q4, we saw procurement patterns that were closer to what we experienced in Q1 and Q2 and we're also able to closed transactions with several of the accounts that deal slipped in Q3.
Throughout the 100, plus customer interactions of out over the past several months I'm hearing about their continued belief in the value of our technology.
<unk> seen many of them expanded commitments of Splunk as a result.
Over the past year, the world has experienced more change than in the past 10 years and they're of science at 2021 will be similar.
Especially when it comes to data and true technology.
Already we're seeing companies with a strong digital strategy outpacing their peers.
The organizations at prioritize of strategic use and Operationalization of the all of their data will achieve significant business and economic benefits.
We're also seeing cyber security attacks at unprecedented levels and scale.
Magnitude of solar wind hack is hammered home the unsettling at ever present reality of the digital era debt.
Of that all organizations are lightly likely to get hacked at some point.
Digital security has become a broad governance imperative.
Splunk is working side by side with our customers to help them drive the change resiliency and optimization around both of these key and critical trends.
As an example at the onset of the solar wind Tech Splunk took immediate action to both enable customers to investigate whether they had been impacted by the attack.
And of confirm that Splunk itself had not been impacted.
Our customers count on us to deliver timely detection capabilities, we did not disappoint.
Our security strategy team published materials to guide our customers on how to use our products to find evidence of the sunburst backdoor.
Our professional services and customer success teams deployed remote on demand services to help customers implement this guidance.
From there our product and security teams released timely Splunk research and dynamic security content using the update capability on Splunk enterprise security to help our customers to understand their own risk.
As a whole we responded rapidly to deliver the best in class value that our customers and community expect from Splunk.
We know that all organizations are on a journey to bring data to everything and our mission to remove the barriers between data in action. So everyone thrives on the data age has never been more important.
The breadth and depth of our data to everything platform dramatically enhances the richness and value of our focused solutions for our customers across it operations security and Dev ops.
Observer ability was among the standouts within our business in FY 'twenty one.
Fuel by customers accelerating their own digital transformations and shifting of modern application development.
Our customers are clearly excited about our observatory capabilities and the market is too.
Just last week industry analyst firm Giga on publish the industry's first ever evaluation of the cloud observe related market.
Naming splunk is the only outperformer.
Knowing that Splunk has emerged as one of the leaders in the observatory space.
Here are just a few examples from this past quarter for Splunk enables some of the largest and most innovative organizations in the world to do more and bring more of their teams together on a common data platform.
British grocery retailer Tesco is a longtime splunk customer and the third largest retailer in the world in terms of gross revenue.
Tesco recently expand their use of Splunk enterprise security and or obscure ability suite to better support of an 80% increase in online sales brought on by COVID-19, and the run up to Christmas.
By leveraging Splunk to take action on their data Tesco can provide their customers of the seamless online shopping experience and improve delivery speed.
Nationwide building society, the largest building society and the world expanded their use of Splunk cloud and enterprise security to ensure there are 15 million members received this fastest response of protection against fraudulent activity.
Relying on Splunk as an integral part of their cloud transformation to British mutual financial institution has already seen of significant cost reduction across all services and will be better equipped to safeguard their customers their financial accounts and their personal data.
Leading omni channel Commerce platform Shopify continues to expand their use of Splunk enterprise as well as Splunk application performance management or APM as a company transforms are observed absorbability strategy.
With the increase in E Commerce and online purchases brought on by COVID-19.
Shopify, expanding with Splunk to address their growing tracing and application monitoring demands as well as provide them with visibility across their entire organization.
With our Absorbability solutions, Shopify is able to scale and support over 1 million merchants selling their products online.
Longtime customer okta upgrade their use of Splunk cloud, which serves as their data to everything platform across the entire business.
<unk> cloud Arctic and better serve their 9400 plus customers on <unk>.
Monitoring of providing faster response times and fewer error rates.
After also leverages splunk to better understand customer usage patterns, enabling them to continue to enhance our customer experience capabilities.
These customer wins in Q4 underlying the importance data plays as organizations scale their online and virtual environments.
In summary, we delivered a strong finish to our year as we continued to deliver for our customers and execute across our multi pronged transition.
Once again, the majority of our software bookings came from the cloud driven by cloud <unk> growing at 83% year over year.
But as an overall $236 billion of business growing at 41% we are delivering best in class growth at scale, which is just one of the many reasons Splunk was just included among fortune's most admired companies for the first time ever.
We're excited about the year ahead, and the opportunity to serve our customers with our incredibly rich technology portfolio, our industry, leading customer success on support offerings and our cloud first footing.
I'll now hand over to Jason for more on the quarter and fiscal year results Jason.
Thanks, Doug and good afternoon, everyone. Thanks for joining US Q4 was a strong finish to a volatile year. We ended fiscal 'twenty, one with total <unk> of $2 $36 billion up 41% year over year cloud <unk> of 810 million of 83% over last year and 510 customers.
With <unk> greater than $1 million up 44%.
On our last call I described the slowdown on the close rates for several of our largest orders on the final weeks of Q3, which we attributed to persistent uncertainty stemming from Covid and other macro factors.
We said all indicators pointed to strong demand overall, but some customers were taken a pause to reevaluate the timing of high value spending commitments.
We were confident in the eventual closing of many delay of transactions, but specific timing was uncertain.
Today I am pleased to report that not only did we closed transactions with several of the accounts that had deal slip from Q3, but we did not see a repeat of slower close rates in Q4 to the degree that we saw in Q3.
Now on to results.
We ended the period with total <unk> of nearly $2 billion up 10% over Q4 of last year and the portion of <unk>, which we expect to recognize as revenue over the next 12 months was just over $1 2 billion up 23% from last year.
It's important to note that both current and total RPM growth rates were muted last year as we didn't yet have the benefit of renewal bookings from a substantial pool of previously booked to bill to you of contracts.
As we highlighted at analyst day, we expect that the renewal of a sizable base of purpose of term conversions that we initially booked two to three years ago will begin to contribute meaningfully to overall bookings this year FY 'twenty two.
These renewals should drive bookings growth and the convergence of RPM growth on our growth rates over the next 12 to 18 months.
On the P&L.
Total revenues were $745 million on Q4, and $2 billion to $3 billion for the full year, both down slightly from last year, reflecting substantially higher cloud mix as well as a sharp decline in average duration for term contracts.
We expect the average contract duration will start to normalize in Q1 as we lapped the first anniversary of the pandemic.
Q4 cloud revenue was $171 million up 72% over last year.
On a full year was $554 million up 77%, both reflecting continued acceleration of customer adoption of our cloud platform.
On margins, which are all non-GAAP.
Cloud gross margin was 62% in Q4 compared to 54% last year with continued progress towards our long term target of at least 75%.
Total gross margin in Q4 was 83% down on a year over year basis due to the greater proportion of revenue contribution coming from cloud.
Operating margin was 13% in Q4 substantially higher than planned due to our significant topline outperformance and full year op margin was negative 4%.
Again operating margin was impacted by lower revenue from shorter average term contract duration on growing cloud mix.
Finally, operating cash flow was negative $191 million for the year about $100 million better than last year and in line with our expectations. Following our shift to annual invoicing in fiscal 'twenty.
Turning to guidance.
While the demand environment of strong given the continued market uncertainty we remain cautious on specific growth expectations until there are clear signs of market recovery and stabilization.
Until then we will be keeping on guidance resin shortage.
Yeah.
As such we expect to end of Q1 with total <unk> of between $2 42, and 244 billion.
On the income statement the cloud transition continues to drive variability on our revenue on operating margin results.
Total revenues of between $480 $500 million, depending on on cloud mix and with a non-GAAP operating margin of approximately minus 30%, reflecting our normal seasonal pattern.
In closing <unk>.
Q4 was a strong finish to a very unusual year, we outperformed on targets in the first half during the onset of the pandemic song.
Lower than usual large deal close rates in the final weeks of Q3, and then closed the year with strong execution in Q4.
When we look back on the year as a whole we're very pleased with the progress of our transition on the strength of our cloud business in particular.
It's become clear that the headwinds we're facing are predominantly from the term business as customers have been cautious to make long term commitments, especially during the pandemic entre.
On from customers are also being more measured on the size and length of their term contracts as they contemplate their plans for substantial cloud expansion with Splunk.
The term business will likely remain volatile we expect our cloud business will continue to ramp quickly.
The overall demand environment remains strong and cloud continues to outperform our expectations as you can see in the very high IRR on revenue growth rates.
Planning for continued cloud strength in our business and look forward to keeping you updated on our progress on future calls with that let's open it up for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Standby, while we compile the Q&A roster.
Our first question comes from the line of cash Greg Mann from Goldman Sachs. Your line is now open.
Thank you very much and congratulations to the Splunk on putting up really good share.
On this Q4, one question for Jason and one for Doug One so Jason as you look at the cloud numbers can be certainly youre seeing cloud era accelerate at scale, which is truly significant as you play. This out there is a transition that the company went from license to subscription than going from subscription to cloud as you play. This out is it not conceivable debt.
And of two year time.
Horizon of so the cloud becomes a majority of the revenue you do actually becomes a cloud company and one of the implications of of debt for the Splunk business model and one for you Doug If you can given that there's a lot of cross currents you've had a change of leadership.
With the departure of <unk>.
Worldwide head of field operations, and also increasing nicely about the competitive environment and it looks like the execution of certainty of what as you as you sit today and do this call with US what is your outlook for Splunk, given the perception of greater competition.
Hires you might or might not be maintenance to the executive team and how your business pans out and youre confidence overall, although you don't have a target for us three years or so how do you. How do you think about debt free or outlook for Splunk, given all of the crosscurrents that are being discussed. Thank you. So much once again congratulations.
Thank you very much cash I'll start and I'll, let Jason follow up with the cloud piece, which I think is very <unk> W. Cash I agree.
So.
From a splunk competitive position.
I am really excited about where we are right at this point in time I feel like we're in a better position than we've ever been.
The continued expansion of our day to everything capabilities of.
Bettering and stream processing and having that became a much more cheerful portion of the data everything platform continued enhancements in machine learning streaming of non based collaboration services orchestration services I think sets us up to be in a good position as the industry continues to pivot.
Just as importantly, or more importantly, the continued enhancements of our solutions and suites that focus on security.
Option and Absorbability I think are very very well positioned with strong technical buyers.
On a lot of Repurposing and cross fertilization between the data and the use cases across those three buyers debt.
Marketplace will continue to get more competitive no doubt I think that we were early in all areas of security is probably the Prime example of calling it a data problem.
Got a transaction problem or.
And I think as people have woken up continue to wake up to the importance of data.
And the importance of the buyers that we're going after we absolutely should all expect more people to participate and we estimate that 85% to $90 billion worth of total addressable market just across our key target areas.
We're very proud of our $2 $3 65 billion in <unk> as a company and $810 million of <unk> as a cloud provider, but as we can all do the simple math, that's a small percentage of that Tam. So a lot of people chasing as it should be.
And I will continue and my team will continue to look for any and every awesome talent that we can bring into the company.
While we are excited about the progress we've made over the past five years, we are shooting for the $5 $10 $20 billion Mark Theres, the big Tam a lot we have to do so whether it's.
On the development and sales and marketing teams continue to bring in.
Really really best in class folks I'm. So impressed at the people that we're adding to that team or any continued shifts that we will be making to augment.
And strengthen our executive ranks.
That's what we have to do to be able to be as competitive as we need to be to capture the majority of lion's share of these very key and crucial markets.
Jason you want to chime in on the cloud business and its impact overall, yes, so on the cloud business.
So as you pointed out we've seen really strong.
Growth throughout the year.
And so clearly over time.
We'll get to a point, where I think you saw last year for the first time on our software bookings basis, 50% is cloud we've said in the past we expect that number to continue to grow we forecast that it could be 70% to 80% of or sometime in <unk>.
Sometime in the next few years and so you should expect to see that the revenue related to the cloud business should be over half of the revenue.
Not likely this year most likely next year.
That said I mean, you can kind of model you can see how the cloud business has been pretty steady in the 70% to 80% range now for going back I think the last eight quarters.
If you look at the term business, that's kind of where if you kind of step back that's where some of the.
The volatility has been.
And I think of this last quarter you can do the math on basically see that the term business grew at about 26% of the Arrow grew 26% year on year, that's moving around a little bit.
Partly due to customers trying to assess either impacts from the pandemic as well as trying to figure out how.
This capacity on a buy before they make their transition to cloud and so so even though that debt numbers volatile, it's really not kind of of indication on the health of the business. It's more about an indication of what customers want to.
Preserve flexibility so they can continue to make their own plans to move towards cloud, which is what the vast majority of customers have have indicated.
Thanks, Tony and congratulations.
Thanks cash cash.
Thank you. Our next question comes from the line of Brad Zelnick from Credit Suisse. Your line is now open.
Excellent. Thank you so much and ill echo cash congrats great quarter, it's nice to see a return to the kind of performance, we expect from Splunk in Q4.
Excuse me of especially in cloud so I don't want to dwell too much on on the past guys, but just as we think about Q4 and the selling environment and what Youre seeing out there I'd just be curious to get a sense from you guys. How you would characterize the appetite for large deals and how things are unfolding. It's obviously happening very quickly and then specific fall.
Up to what cash had asked I had picked up some recent changes in the North American sales leadership beyond Susan's departure, just wanted to check in on how youre thinking about the stability and productivity of the field organization, specifically in North America.
Thank you Brad it's Doug ill start off.
So the macro environment debt debt I think I've consistently talked about all quarters, even after I think are very impressive Q1.
On appears to be pretty consistent which is.
With so much volatility in the both of it the pandemic and the stock market and the potential impacts on the economy on the number one thing that we have seen is a lot more scrutiny on high dollar value transactions and all of my CEO circles on one of them on their Ceos.
On whether there are specifically talking about on earnings calls and other venues or not.
Something that we're all seeing.
We saw the same thing in Q4.
I think what we have been focused on over the course of this year.
Staying very focused on the environmental factors that we can control not the macro factors that we can't.
And I talked a bit about what we're doing to be prepared for potentially similar behavior in Q4 to help mitigate the risks in Q4 and have us come in within our range on this case over a range for the quarter.
We will see what happens in Q on Q2, if we can keep get that progress on vaccines and opening it up to up of states and that stimulus passes and then hopefully we'll see some of that scrutiny come down.
Got.
Proud of the teams and excited about the work we've been doing.
It really has helped us up our operational game pretty dramatically across the different theaters in the way that we.
Triply locked down on validating budget and trying to flush out unforeseen blockers outside of the economic buyer.
Even when when budgets are fully approved during the economic value of things they've got free reign.
In North America, we were very excited to promote one of our superstars too.
Lead North America, the Americas, I should say.
And eager to see how he continues to grow into that role.
As you guys all can imagine when you're growing the business overall in <unk> rates in excess of 40% cloud growth rates in the high 70% 80%.
On a number of that was the number of three years ago becomes a very different number going into this year of next year. So it's our job to continuously groom and make sure. The people who've got the right skills to be able to scale and continue to bring in additional talent to work side by side or over around different folks. So that we can.
Keep fulfilling the opportunity of Tam that's in front of us.
And.
There is always change always always change and we're just try to stay in front of it as we possibly can and then we've got a very compelling opportunity for our reps this year.
We continue to try and do a better job as move to HCV and incremental SUV.
Make the numbers clear and continue to build confidence that they are achievable and over achievable and my expectations for our sales force. This year is that those that debt put their head down on work are going to have really really good years with.
The targets that we've rolled out in the portfolio that we have for themselves.
Awesome. Thank you so much and congrats again stay well everybody.
Thank you thanks, Brad.
Thank you. Our next question comes from the line of Ramos Lynch go from Barclays. Your line is now open.
Thanks.
Two questions if I may Firstly, let me say on the cloud side Doug.
Obviously, you've been on the journey Dear and I remember.
About this time last year, you said like only like.
I know the minority of Sitos price has actually started selling cloud I'd like to talk a little bit about the evolution. There in terms of sales force adoption, you've mentioned a little bit of some of the Inc.
Incentives do you have in place there to get us a feeling of where we are on that journey of how much free how far we have progressed so far.
Then the second question I had was.
I mean, obviously, you're kind of created a lot of noise in the non of discussions around security.
We picked up on all of our texture of lot of focus on Sim you guys. Obviously the leaders kind of how much did that helped this quarter, how much debt kind of re engage discussions around that subject. Thank you.
Thank you Raimo.
On.
So I.
Cloud absolutely is a highlight.
It has been the number one highlight for the company. It's been a number of one company priority for three years now and we're maintaining it as our number one key in top initiatives this year as well.
And again in the published data you can go back to FY 18, and see that very very consistent and high growth cadence on a revenue basis from $93 million on revenue in FY 18, and cloud of 554.
This year and quickly and this year similar on a basis you go back to FY <unk> of 128 million an IRR in FY 18 at 103% growth rate closing out this year at eight to 10 months and 83% growth rate. So that performance is I think very admirable. If you go and look at the.
The other pure play cloud companies out there day to dog, New relic sumo Salesforce Workday service now crowd strike you.
You'll see that our air on revenue performance to be.
Well above really all of those players right now.
Significantly above some of them. So we're excited about cloud we are seeing more and more reps transact cloud and that would be part of that 51% of software bookings being attributed of cloud this year.
Past year.
And in Q4, we expect that to increase in FY 'twenty two.
The only real gate right now for reps is are they serving a customer or a segment of the world where cloud is either not something that the customer or that portion of the world is excited about or our offering is still not where it needs to be on a compliance of regulatory basis as.
As we work hard to make sure that we are highly applicable in every major region of the world and able to meet the customers' needs.
Yeah, Okay, and then Sullivan.
I'm, sorry with Sullivan Jeff.
I think we've probably got a bit of a boost on silhouette and said when you look at it is more about the hack and the need to really understand what happened in the landscape and Thats, where a data platform like Splunk comes in.
We have of different operating solar wind. So I don't think that we've got a huge opportunity to do full rip and replace from solar wind and I'm not even sure. If that's a wise move from many organizations out there but.
But we do provide a whole different level of scrutiny and capability on monitoring on detection of alerting on reaction on remediation.
And and ingest a lot of data that makes.
Other products out there more effective of more capable. This year, you will see a lot of energy around security and we obviously.
<unk> been very focused on security and tickets of really really important use case.
It's not abating anytime soon we've got a bunch of releases that were really excited about this year that continue to keep us I think of a pole position in the security landscape.
And as much as we've been jumping up.
Net up and down about observe ability, which we are still incredibly excited about and we can talk about in another queue. The next Q&A.
For the next person's Q&A.
I think security is going to continue to be a standout performer for us this year too.
Perfect very clear congrats.
Thanks, guys. Thank you very much.
Thank you. Our next question comes from the line of Phil Winslow from Wells Fargo. Your line is now open.
Hey, guys. Thanks for taking my question and congrats on a stronger than expected the close of the quarter.
It really wanted to focus in on.
On the pricing commentary that you made Doug I think you highlighted your workload based pricing.
Impacting the quarter I guess of couple of sort of sub questions to this first how is sort of customer awareness of the newer pricing models workload predictive pricing.
How is this changing customer conversations now and then also from a sales force perspective sort of how sort of ready to ramp.
Is the sales force on communicating these pricing models and comparing them.
Great question, Phil and great to hear from you.
On this.
Debt awareness on pricing is definitely continues to be one of the top areas of our focus through this year.
As we all know pricing changes are hard I think one of the notes out said it made a lot of transformations with splunk, including pricing.
This is a really important one a couple of metrics that we saw this year that excited me that shows that we're getting the traction that we're hoping.
A third of the overall FY 'twenty, one cloud HCV was workload pricing based.
And almost half of the Americas cloud ACD, which obviously is our more deeply penetrate most deeply penetrated theory was workload based pricing. So it is getting traction.
Do we need to do even better job of marketing it and driving awareness yet do we need to educate.
I think the reps are actually pretty darn educate at this point in time. It was a strong additional education track of the rescue, but do we need to keep doubling down on that today understand it fully understand it yet do we need to get even more aggressive of the partners they understand it yet.
But I.
I am hopeful that over the course of this year.
Especially because it is the default motion within cloud that we will see debt third of cloud workload pricing go up by a pretty dramatic basis.
And the impact on almost half of America AC cloud ACB see that spread to EMEA and APAC as well.
Got it and then just one more sales force follow up if you think about observer ability, which is obviously some of your highlight of Q4 as an area of strength how ready do you think the sales force is to make not only call of duty E ops pits and the security of pets, but actually the broader security pits.
Sorry, sorry of the broader observer ability of pits as well.
Really really good question Phil.
Great growth year for Absorbability by the way triple digit growth on a durability and really proud of the team there.
Also really excited about the continued integrations enhancement to ease of use and the non inorganic work that we're doing with an observer ability.
For all of you on the call I did mentioned that gig of them report that just came out we.
We are the only outperformer in that type of report on where the most functional complete offering across all of the observer ability of vendors. So I think we've got a really good of hand there.
Making sure that every account understands we have there on a marketing basis and then we've got the right sales support is key this year I think the go to market piece is of key linchpin I feel good about the product offerings.
We are not just maintaining our observer ability sales force, but we're beefing up our absurdly salesforce and we're actually mirroring or complementing observer ability dedicated sellers with security and it ops dedicated sellers as well that was successful enough model with us last year net when Christian was tailoring.
Landscape. This year the highest hiring orientation is of complement the generalist account managers with a growing body of Hunter type a classic sales specialist sales reps now I'm not as much specialists overlay of but dedicated sales reps and security of <unk> ability.
So.
Specced.
And are counting on a true ability.
Having as good or better of a year this year as it did last year.
Great Congrats again guys.
Thanks Bill.
Thank you. Our next question comes from the line of Matt Hedberg from RBC capital markets. Your line is now open.
Hey, great guys. Thanks for taking my questions I'll offer my congrats as well.
Doug you have always been strong at expansion and I think with the expanded portfolio of it's really intriguing option for you guys continue to drive more wallet share.
Noticed of customer Count I know you said you had strong close rates I'm just sort of curious if you could talk about that motion of new customers now the cloud is 51% of bookings of majority do you get a sense that maybe that land piece of equation could start to accelerate in fiscal 'twenty two.
Great Great question.
Yes.
I've said for a couple of years now that we've been consistent with our new customer count. It's staying at 2000 ish new customers per year, which is great, but not expanding at an expanding rate like we'd like to see.
Two interesting trends this year.
One third of the cloud customers are net new sort of seeing that.
Happening the way, we had thought which is if it's easier to find try and buy which I think cloud is really the driver for.
That should expand the net new rate for us.
And then to Q4 was the first big uptick in net new logos.
And on a price of seven or eight quarters. So we.
Have two trends that at least her early indicators debt as we continue to focus on cloud breadth and depth and I think most importantly in FY 'twenty to ease of use on all aspects, including online purchasing.
That we'll see that number finally start to get the uptick that debt that we've been targeting and talking about for too many years now.
Yes, that's really good to hear I mean, I think thats, what kind of we all would suspects thats good to hear those.
It's we're good and then I guess, maybe as a follow up to that it looks like you guys are hiring at a rapid pace.
With new sales leadership.
How do you approach this you're obviously, you're not giving us full year guidance, but.
When you think about new reps vis vis your kind of Q1 <unk> growth. How do you think of all that balance between new reps and productivity gains because it seems like there's a real opportunity to kind of accelerate.
Some of this new business momentum that you discussed on talking about.
Yes, great and yes for you can see a ton of openings in our on our website and it is crazy I'm sure we're not alone, but the other high growth companies to really think through how many people have been hired over the past 12 months have never been inside of of Splunk office and physically met other splunk or so.
Cannot wait for that to start to happen in.
And get the benefits of the physical culture that were so famous for.
We are keeping the debt put on the gas for hiring across the board this year, including in the field I think of very positive element for our field reps is a big chunk of the hiring is complementary to the generalist account manager.
We continue to ramp of our renewal sales team, which is a benefit to the existing account manager and as I talked about earlier with Phil we are focusing on complementing the of general list with.
Security and I'm sort of ability of sales specialists.
So we're targeting I think a reasonable productivity number but that put for of reps, but of that productivity is coming because we're getting more resources of more tools to help them within accounts.
And then if you add in the net new attraction with cloud, especially as workload pricing.
For the platform.
<unk> device pricing for the solutions, which I think simplify that dramatically.
Kick in this year.
As I said earlier I think it should be of really stellar year for our sales teams building even stronger for the sales reps in FY 'twenty three.
Thanks, a lot of congrats guys. Thank.
Thank you thank you Matt.
Thank you. Our next question comes from the line of Brian sales from Jefferies. Your line is now open.
Thanks, Doug just coming back to the deals that slipped in Q3 into Q4.
Numerous questions about.
Are most of those now cleaned up did you get the majority of the larger ones.
Through the finish line or are there still a few lingering transactions.
I have a quick follow up.
Yes, as we said in prepared remarks, we were we were happy to see the transactions that came through with the accounts that had the extra scrutiny that we've talked about in Q3 and again, just a reminder that that top 10.
Customer realm, and we talked about was just emblematic theres just a data point of hey, there's some increased scrutiny out there on let me just give it.
One data point that that were working with.
We had some really nice traction.
Through Q4, as well with <unk>.
Being sort of trying to stay a step ahead are aware of or work with the known macro.
Reality that big ticket deals are going to have additional scrutiny, so really really impressed and proud with the <unk>.
Resiliency and thoroughness of our sales teams to do everything they can to kind of flush out that unforeseen stoppage that.
We were experiencing throughout the year.
And again as I said earlier I feel like it.
Well it doesn't kill you makes you stronger.
Think that the team is really came through this year with a nice bonding.
Our whole degree of appreciation and rigor.
Net debt.
Im hopeful will carry through FY 'twenty two.
As I'm sure, we'll be dealing with all kinds of new surprises this year and hopefully most of them positive, but still no new changes in the environment.
Okay, and just back to your comment Doug a compelling opportunity for your sales reps this year.
As you go into the new year.
Overall changes have you made on the go to market.
Anything that you would highlight that debt is is going be of major catalysts you think helpful. On.
On this year that you would call out.
I think that Ah so when I look at the top three company initiatives of the past couple of years had been very consistent.
Get to cloud and cloud versus one.
Continue to double down and penetrate the three core buying centers security <unk> and Dev ops Slash observer ability of number two.
And then continue to expand the underlying data everything platform to serve those use cases number three.
And I think.
All three of those really work in concert to help our reps and the one that we're really really focused on this year and they're all three equally important and those were in priority order.
Was continued focus on the three core buying centers and so from a.
Go to market assistance from a marketing campaign orientation from ROI tooling.
Feedback on usage patterns.
Getting continuing to get more effective and refined and understanding the traction within those three core buying centers.
And we're continuing as you've seen to add more features and functions and capability.
On the underlying platform for sure, but the overall security offer anti <unk> offer and sense of your ability offering so.
Lots of good expansion within their buying center with the additional buying center based reps I think more effective cross buying center selling.
And then.
We really do have FX of job of cornering those three key user communities. That's when we start to see the company standardized on Splunk as their data platform. In this fund use cases that we talked about with Porsche and dominos, and BMW and Tesco and when they start to use us beyond the technical of buying centers kicking ass.
They're focused on revenue generation and cost savings activities.
Thanks, Doug.
Thanks, Matt Thanks, Brent.
Thank you. Our next question comes from the line of Keith Weiss from Morgan Stanley. Your line is now open.
Hi, I've got a tangent sitting in for Keith and congrats on a really great Q4, Doug on loving the all of these data.
Data claims and Nuggets that youre dropping through the Q&A could use more of that.
For my two questions though.
I want to start with Jason on the acceleration of net new cloud gross in terms of that getting back to 80% plus growth.
By your comments it didn't sound like migrations was the key key factor here it sounds like net new customers and existing customers expanding instead of when that migration motion starts to happen do you should we expect an uplift on that term base over time, what's what's sort of the right way to just frame what is already a great organic clock.
Of that story.
This is Jason So I would say I would think of it as being still early days, while it's 50%.
1% of software bookings in the quarter. If you look at the <unk>. It's you know it's more it's closer to a third and so I think you should expect.
You should expect that there is.
Over it well there is a majority of our customer base still has not gone through that transition.
Transition and so I would expect there to be pretty significant kind.
Kind of a tailwind.
In terms of whether or not the growth accelerates or whatnot that of course is dependent upon the timing and a bunch of factors but.
With the trends that we've provided on the website slides you can see it's been pretty consistent and pretty strong for a while.
I think the other thing I would call out is.
The dollar based net retention, which is the cloud based number.
Still remains at our size very.
Very very high of 129% on a trailing four quarter basis, which includes the.
The the slowdown that we saw in Q3.
Is still.
Very very kind of a best in class terms for an $810 million IRR business. So I.
I would expect that there are multiple points of kind of tailwind across customers across expansion history and future opportunities and then also Doug had mentioned observe ability which is all cloud.
That's still early days, but he mentioned the triple digit growth.
<unk> there.
Three acquisitions last quarter that are also helping that the observer ability of Sweden in particular, so there's there's just numerous.
Numerous tailwind.
Got it I appreciate the thoughts there and then my question for you Doug is at a price start their journey and sort of moving to a cloud of operating model and frankly building, a new security fabric and enable that cloud operating model, we're starting to see some security vendors, whether it's cloud strike because of these gallery of Palo Alto start to get into the monitoring game.
And our longstanding trend is monitoring guys getting into security security space.
We look at sort of the opportunity within cloud moving to cloud security fabric who's going to have the strategic high ground, whether it's ski endpoint providers the networking guys coming from the policy layer or coming from that data later like like Splunk is whats the eyes of customers how are you.
Are they thinking about building out these new security capabilities.
That's a good question.
Our view of this space has been consistent for the entire time here. So I guess seven plus years now.
On that securities of data problem.
The.
Many many different tools and proprietary elements that are thrown into that landscape.
Ted to attempt to be a patchwork.
To prevent and remediate.
The huge variety of challenges and changes that customers have to deal with.
Does not seem to have ever slowed down doesn't seem to be slowing down now.
And the only way that you can really make sense of that debt that patchwork is to have a.
Effective valuable high capacity non structured.
Data layer to be able to take in the constantly shifting data feeds can provide the debt the full suite on monitoring.
<unk> detection remediation investigation that we've been building our day to everything platform round and the security solutions around as well. So I think that firms like Splunk are in a unique position. We're very open across the entire landscape as you can see through Splunk base.
Everything that exists in the market, we inter operate with and play with everybody because we don't have a dog in the hunt on the endpoint game network game.
There's too much variety within within these different organizations.
The strength debt I think that organizations are continuing to wake up to is the data that you are going to touch and wrangle for your security needs.
It's the identical data sources in most cases that you also need to touch on Ringo for your infrastructure management and it ops needs and increasingly for your application development of Dev ops needs.
And that's where I think that the real power of all of the investments we've made across <unk> data platform and the solutions on top.
Even more of a true return on investment outstanding player.
And that I believe we've stuck with that strategy from for many many years, where you continue to stick with that strategy.
And we think it's the right strategy to help our customers in a very heterogeneous landscape that not only is multi cloud, but multi on prem and cloud versions.
It makes a lots of them. Thank you kind of thoughts there.
Thank you.
Thank you. Our next question comes from the line of Keith Bachman from Bank of Montreal. Your line is now open.
Thanks, very much and congratulations on the quarter, Doug I wanted to start with you and you used the word scrutiny, which is something that we've had conversations about with investors recently and I want to break that down into something specific surrounding win rates.
And the three buckets or security ops, and then it sort of ability could you talk about as budget dollars get scrutinize, whether thats changed win rates at all.
If you could go through those three buckets, if you will and characterize it and then I have a follow up.
And yes on the buckets are important because of the dynamics are very different between the three buckets.
And I'd add the fourth bucket, which is kind of general data platform layer as well.
The other there are always.
Shifts within those.
But the overall win rates that we see in aggregate across all four buckets of remained super consistent we've been in the mid eighties to operating on a win rate basis overall across that entire landscape.
The puts and takes.
Barry based on shifts that are happening in the quarter.
Where we are.
The new entrant, which is something that were not used here what can we kind of came in and lead the security Arena. We led the Icf's Arena I think we led the unstructured high volume data platform Arena.
Absorbability area, so that there's a lot of intensity and scrutiny that I am giving and the sales teams are giving and the marketing teams of given the competitive teams are given to make sure that.
On the recognition that we're starting to gain as the most functionally rich and capable solution.
That translates into understanding by the customers that that translates into at bats in RFP inclusion and that that translates into increasing win rates in that arena.
So when I really look across the board I think our number one focus as we really believe that's a strong emerging category is still pretty small a lot of players, but growing fast as we can see with us and our competitors.
And one that we really want to ensure that we're successful in the.
The other three I think it's more about continuing to try and stay of step ahead of the competitors.
Yes, we've got really strong position in those three whether its sketch elastic or sumo or.
Certainly Q radar of last generation Sam's.
Cloud service providers as they continue to try and strengthen their security offerings.
And so going back to my earlier comments.
The tailwind to we're getting of the combinatorial impacts that we're getting in it ops is we're leveraging some of the Dev ops on the durability of capability I think is helping us on that should be a big impact this year.
We're really really focused on making sure that.
The deliveries we have stated in a scary arena hit hit with the quality of an ease of use that we're looking for and we keep our lead in the security space.
Okay, Yeah, it seems like Youre, leading security spaces.
As of.
As good of the one I was really one of them out of <unk>, but let me move over to Jason in the net retention rate of cloud net retention rate.
Anything you want to call out Jason put puts and takes as we think about that how that number of rolls out through the year. It's good news to hear that new logos may increase during.
During the year certainly did in Q4, so hopefully that keeps up with Jason anything you want to tell us or call out on the net retention rate.
Well I mean that really I mean, it's been consistent.
And obviously as the numbers get much larger.
Once you get to approximately getting close to $1 billion and they are to hold a high twenties of 120 plus percent net retention as you know, it's it's pretty rare so.
So overall, we're very happy with the numbers that we see and you know.
At this point.
Every quarter, there is probably a little bit of nuance between is the growth coming more from logos were coming from expansion within existing accounts overall.
Pretty much everything is up into the right right now of the club.
And we'll let you know if something changes, but but I think the progress is pretty clear and something we're very proud of.
Okay. Thanks, very much cheers.
If you're thinking.
Thank you. Our next question comes from the line of Michael <unk> from Keybanc. Your line is now open.
A couple of questions from Jason first of all of on an RPM of which T cell on total of this quarter.
You mentioned, obviously there has been some duration headwinds.
I just want to share I get the mechanics, right Jason that day.
I understand that there's more that will be up for renewal of essentially.
Next year, we'll start to get therefore, an acceleration in both total and current RVO.
You got it that's right.
And basically the in the older days, if you've got a breakout our appeal is really two primary components. So when you sell term, it's either going to be if youre, having long term ramping deals where you have capacity growing over time.
Only thing that sits on our P. O is the piece of that ramps and so as duration comes down we have a lot less of that right now.
So you're kind of lapping a period, where you had more gains to RFP on the past because of ramping deals.
The other aspect of term would be of course of the maintenance and so if you. If you have longer durations, you're going to have more of our appeal coming from the longer maintenance contracts.
And then that's offset by the cloud aspects of since almost all of clubs sits on RPM and then of course is ready.
Recognized ratably into revenue every quarter so as.
So while cloud is growing quickly.
We're coming off of some pretty huge term RPM gains that were put in place really over the past couple of years. When we made the purpose of term conversion motion now as those are those of lot of those big initial term deals are coming up for renewal of this year youre going to see the renewal base grows significantly.
And as we sign those renewals youll see <unk> start to replenish and grow.
Pretty significantly, especially in the back half of this year.
And that should impact total on current as well correct.
It will impact both the duration of impact of course is more on is going to be more on total <unk> current is going to be more impacted by of cloud right.
Alright, and then Doug Hope you don't mind, if I ask Jason another question here.
Sure Doug about stuff.
At all.
But.
Obviously I understand it's a volatile time, so we didn't get the fiscal 'twenty, two or the long term guidance, but given what seems at least factoring on duration that you should have a little bit more visibility on.
CV.
We can get some feel for cash flow from ops. This year on year minus 200. This year just does that flip on a meaningful way of this year I would think it of a little more of a view there.
Well the biggest driver to cash flow first is that we are now lapping the impact of change of the invoice invoicing methodology two years ago that happens in starting in Q3. So that's the biggest reason why now we're no longer.
A couple of years ago, we went from a period of collecting most of our revenue upfront to now collecting our invoicing annually and since we're at about two and a half of your average that means we we had kind of a hole in the last two years. So we start lapping that in Q3. So that's the biggest impact let's say second then our growth is.
What's going to be the new and expansion of within accounts of new customers is what's going on lead to incremental they are that's going to lead to more inflow.
The offset though is.
We're not guiding beyond Q1, and therefore I can only speak to the Aarp's at this point what I can say is you will definitely see cash flow.
Revert to positive this year.
And then I'd say, we will update you as the magnet to the magnitude of the cash flow.
We kind of go throughout the year of quarterly.
Great. Thanks, Jason and thanks, Doug for nothing definitive focused on financial never make all of us.
Yeah.
Okay.
Thank you. Our final question comes from the line of Kirk <unk> from Evercore ISI. Your line is now open.
Yeah, great. Thanks for sneaking me in Doug maybe just to start with you. It seemed like the international business had a pretty nice quarter on.
Obviously, a good quarter for term license. It shows so maybe I imagine some of a little bit heavier on the international front on that side, but can you just talk about that bump and it seemed like it outperformed.
A little bit this quarter and just what youre seeing in that theater, and maybe if any of the trends around cloud or a little bit different internationally than in the U S right now.
Yes, very good call out yes.
Yes, so really really proud of the international teams in particular of EMEA had a fantastic quarter and Q4, it's been but what I'm really excited about is it's been a steady build all year long.
On the leadership team that we have over there I think is just a fantastic job of.
Emphasizing the right things.
At the right relationships with of reps transitioning through a really difficult year of.
A lot of chaos of stay at home no don't stay at home.
EMEA has had to deal with.
And I think has laid the foundation for what I believe will be consistent performance of over the coming years.
Same thing in select markets in APAC, who also there early on with the pandemic and have had a bunch of a variety of challenges that they've had to deal with.
On cloud does tend to be a little bit behind it it depends on the market Australia is a lot more of like the U S.
Central Europe is a little bit behind as far as cloud, but my other highlight that I saw internationally. This year, especially again in EMEA was a really really strong shift.
And expansion from where they were on the cloud business as well.
I think the pandemic has certainly created some headwinds on things like deal scrutiny of a big deal scrutiny, but it certainly is.
<unk> emphasized the need for every organization to pivot to cloud to invest much more strongly with cloud.
I'd say that that had.
And impact on our cloud era on revenue, but it's true.
It's actually been our growth there has actually been pretty consistent.
But it certainly I think is probably helping it.
Such a consistent rate.
And that interest.
Big opportunity internationally.
As those countries and those protocols become more comfortable with cloud to see the expansion, we've been watching and U S happened in the same way internationally.
Okay, and then maybe just last one just because you brought up on on the Big deal scrutiny point, Doug I was just kind of curious because.
If you look across the board right now of tech spending budgets are pretty doing well, meaning they are opening up pretty well. So when youre thinking about big deals scrutiny is that just simply a case or the amount of debt. They want to make from a term perspective or of capacity perspective, meaning they're going through sort of of technology infrastructure shift and that's.
Sort of holding them back or are you still seeing companies that are sort of holding back on budget because of the macro because.
Yeah, I think you're hearing more companies say, hey, things are opening up and I realize you have sort of of different game to have to play in terms of helping them through these the shift from on Prem to cloud. So can you just clarify that maybe a little bit.
Yeah, I think it's a little bit of both.
I think debt.
The.
Well there is momentum right now, especially for cloud spend.
It depends on the industry.
How confident people feel and their overall revenues and therefore their ability to increase their spend on it I think it is increasing as a percentage of revenue in most industries, but when you look at many of the industries that we serve that had been under a lot of pressure the oil and gas industry, which were strong in the retail industry.
<unk> on hospitality industry.
There's a lot of pressure on spend there given the unfair impact that they've had.
Balanced by expanding portfolios on the high Tech industry look at zoom or a shop of fire atlassian or other key customers that we've had there scrambling to keep up right now.
On which has been but it's been good for us but it's.
We're a big enough size now in play across all industries on all major Geos.
And then I do take your second point of important which is just a different level of.
Thoughtfulness.
On this and scrutiny on on Prem spend than there is cloud spend.
Given that term is still on prem.
There's really a term but on Prem is still the majority of our customer count on bookings.
On that that has I think even a more meaningful impact on any quarter or cash to them for us than the pandemic itself.
Because of that Jason talked about term length and size of term deals and that that is more all over the map on a quarter per quarter basis, whereas cloud is pretty restaurant consistent.
That's great. Thanks for the thanks for that and congrats on the quarter.
Okay. Thanks Curt.
Thank you at this time I would like to turn the call back over to Doug Merritt for closing remarks.
Thank you.
Thank you all for first pay on time with US I know, there's other companies reported today.
I just wanted to conclude by going back to comment on it during the Q&A.
Which is we've had three very consistent company priorities for the past three plus years get to cloud continue to double down on our three core buying centers and continue to expand our data to everything platform.
I'm really proud of the progress, we're making across all three.
I'm really proud of our willingness to continue to innovate and disrupt ourselves. So that we can serve our customers effectively and create the right long term durable growth.
For all of you as investors.
And.
On.
Enthusiastic about what we see in front of us in FY 'twenty two on FY 'twenty three we.
We've made been making a lot of investment to make sure that all three initiatives continue to move forward and I feel like we're very well positioned over the next 24 36 months to continue to see benefit from those investments.
I'm just trying to call out of huge thanks again to the Splunk community our employees our partners our customers.
For their support and focus from resilient sheets of this year.
And I will be talking to you all again in three months.
For our next earnings call. So thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Okay.
David.