Q1 2022 Splunk Inc Earnings Call

[music].

50 per standing by and welcome to disclose the Inc. First quarter 2022 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a.

A question and answer session. The ask a question during the session you will lead to price Star 1 on your telephone as a reminder, today's program may be recorded and now I'd like to introduce your host for today's program, Ken Tinsley Vice President of Investor Relations. Please go ahead Sir.

Great. Thank you Jonathan 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 web page as well.

This conference call is being broadcast live via webcast and following the call and audio replay will be available on the website.

On today's call, we will be making forward looking statements, including financial guidance and expectations, such as our forecast for our second quarter as well as future expectations of revenue mix renewals duration RPM growth cloud growth and gross margin as well as trends and our markets and our business and our expectations regarding our acquisition.

<unk> products technology strategy customers and demand with markets.

These statements are based on our assumptions as to the macroeconomic environment, and 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 the assumptions relate to matters that are beyond our control and changing rapidly, including the impact of COVID-19, pandemic on our business and that of our customers and the overall economic environment.

Related to this uncertainty 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 release those documents contain risks and and other factors that may cause our actual results to differ from those contained in our forward looking statements.

These forward looking statements are being made as of today and we disclaim any obligation to update or revise these statements. If this call is reviewed after today. The information presented during this call may not contain current or accurate information.

And we will also discuss non-GAAP financial metric measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non-GAAP results is provided and the press release and on the website.

With that let me turn it over to Doug.

Thank you, Ken and thanks to everyone on the call for joining us because.

And Theres, a great start to our new fiscal year, and our business fundamentals have proven strong as ever.

We have now turned the corner into the second half of the journey, we embarked on and just over 2 years ago to become a cloud first company.

With more than 50% of soccer bookings now coming from cloud or financial model is rapidly evolving and to that of a true SaaS business.

We are navigating our business through multiple and simultaneous transformations to deliver customer success, while becoming the leading data platform and the cloud.

And do that by being hyper focused on our customers' needs.

Transforming our business and pricing models, we are in the.

Our portfolio of products and cloud services and we.

We're optimizing how we engage deliver and measure of value to our customers.

Helping our customers make the transition the cloud is our highest priority.

And Q1, we ended with the cloud era of more than $877 million up.

The 83% over last year.

We're honored to see the high interest and our cloud offerings and we will continue to focus on maintaining our high growth cloud trajectory and accelerating the transition where possible.

Also for the first time more than half of our net new cloud <unk> utilized workload based pricing.

We rolled out this price and structure to ensure that value is aligned to the cloud consumption model.

Workload pricing delivers flexibility and data types and <unk>.

<unk> and data value all of which are critical for improved business outcomes as customers move to the cloud.

Surpassing the 50% Mark as the strong indicators of new pricing mechanism is being embraced by our customers.

As a cloud first company, we are aggressively investing and the right people with the right leadership skills required to drive us to this important phase of growth.

And the last year, we've attracted incredible talent, while continuing to invest and leaders from within.

And we've welcomed over a dozen new executives from cloud companies like AWS and Salesforce, Google at the Dropbox and Autodesk among others.

Most notably in April we welcome Teresa Carlson as President and Chief growth Officer, and just last week, we welcome Shawn base as our president of products and technology.

So the <unk>, Sean had extensive experience scaling hyper growth cloud businesses on their experiences of both AWS and Microsoft.

Our ability to attract such high caliber talent is the massive testament to where we are is the company today and the opportunity that lies ahead.

And I'm excited to partner with Teresa and Sean to take our customers. The next level by scaling and driving and both our company and our cloud growth.

And the past year data increasingly became an essential service and.

And cloud adoption accelerated rapidly.

This occurred just as we entered a pivotal moment and our transformation to the cloud and we were prime to help our customers through the unprecedented precedented dynamics of this past year.

These macro market conditions play to the strength of our platform.

We continue to enhance our offerings to deliver engaging experience across the splunk platform, but the cloud native solutions purpose built for it.

Security and observer ability teams.

Beginning with our Absorbability portfolio, which has the most extensive breadth and depth of any modern architecture and the market.

This has enabled our cloud business to accelerate even further by expanding into previously untapped departments within the enterprise.

And April Gartner named Us the visionary and their 2021 magic quadrant per application performance monitoring or APM.

Paired with our strong placement and Giga arms radar per cloud of durability, and which we are a leader and the only outperformer, we're seeing growing market recognition for our vision and APM and our leadership and observer ability.

At the beginning of May we announced general availability per Splunk observed the cloud deal and the full stack analytics powered and enterprise grade observer ability of solution.

And our launch event and we showcase that are observed body cloud brings together of the world's best in class solutions for infrastructure monitoring APM real user monitoring synthetic monitoring log investigation and incident response.

Developers and site reliability engineers are sorry can now get all of their answers and 1 elegant interface with unified metrics traces and logs all collected and real time without sampling and at any scale.

I'd like to take a moment to recognize our product design team for their dedication to delivering of completely re imagined and user experience for our customers and the splunk observe though the cloud.

We now offer 1 of the markets most integrated and easy to use observed the platforms for developers Sru's cloud ops and the leadership.

A number of customers blue apron, rappee quantum metric and Lenovo just name a few are already finding success with the Splunk observer ability of cloud.

And 1 of many examples of care Dot com relies on our solution to holistically understand their entire environment, allowing developers to quickly find and fix errors improve application of architecture and accelerate future releases.

But the Splunk observed by the cloud as a single platform to fulfill all of its observer of the needs care Dot Com has accelerated their mean time to investigate and resolve incidents for more than an hour to less than 10 minutes, creating a much better customer experience.

Our customer success, but the Splunk observed body cloud builds on our ongoing expertise and serving customers specific needs.

For example, on the largest not for profit and medical care providers and the U S expanded their use of Splunk enterprise to better monitor and scale of critical applications across their hospitals and medical offices.

They rely on our platform the streamline their operations through real time analytics, and AI ops capabilities detecting and resolving issues before the impact there 12 million plus members and helping to scale services keep up with the extraordinarily high demand brought on by COVID-19.

Turning to security now more than ever and the pandemic relative rife with phishing attacks malware and attempt to breaches.

Clear that security is a data problem alright.

Alright, now girl of the state of scared of you report just released last week.

And on the overall of greatest challenge organizations face.

Rising cloud complexity.

Particularly as the shift to hybrid architectures continues to expand into a multi cloud ecosystem.

As I share during my keynote at last month's RSA conference organizations see the unified data centric view across the cloud environments paired with the right analytics and insight from across the ecosystem for intelligent detection and response.

That's the among the top reasons for our acquisition of true Star, which.

And as our leadership and security analytics through cloud Native intelligence.

As of cloud delivered solution designed to prioritize data within today's threat landscape true star is perfectly suited to enhance the level of cloud security that our platform offers today.

First of our also shares our belief and heightened automation set soccer teams can prioritize more critical work.

In addition, its Apis enabled customers to bring data driven intelligence into all stages of incident response.

Finally true stars relationships with technology partners across the security communities equip customers with immediate access to the latest threat information and scared of research.

I am pleased to report to be closer of true store acquisition late last week.

We look forward to our customers seeing the powerful effects of having true start within the Splunk family to further accelerate time to value and resolution per security teams.

Many customers turn to us last quarter for security, including to Lloyd Canada.

1 of Canada's largest professional services firms and cyber security service providers to <unk>.

<unk>, Canada uses Splunk cloud and Splunk Es as its Sim platform to consistently detect and respond to the evolving threat landscape.

In addition to their use of Splunk internally. They also maintain a longtime strategic partnership with us to develop the cyber intelligence center with full visibility across their security tools, including anti virus tools on say security operations and implementation services and more helping delight safeguard their customers and their personal information from cyber.

The threats.

Splunk is also providing mission critical services to the U S Department of defense.

Working in close partnership with <unk> technology, we're providing the D O D with asset management and cyber security software as part of a core enterprise technology agreement.

This designation.

At $833 million over the next over the next 10 years as part of the Dod's well respected enterprise software initiative.

As always we thank all of our customers and partners for their continued commitment to bring data securely to every question every decision and every action.

In closing as organizations continue to reinvent themselves and the cloud, we are providing our customers with and and visibility.

In terms of their expected contributions of what does he of mandate from these 2 executives and 1 for you Jason It looks like the cloud mix is improving but we're still seeing some some volatility with the RPE OCR P O the lanes and free cash flow at what point do those metrics starting to settle in and produce the cadence that the investors would like thank you. So.

And congrats.

Thank you very much for the question.

The the consistency that Teresa in Shanghai to add too is a maniacal focus on customers on customer success. We've made that are number 1 kind of a corporate priority of years ago.

We made our cloud first transition on a more on corporate initiative 3 plus years ago.

They got to come in after years of focused execution on transitioning our portfolio to be cloud first and then expanding in key in critical areas like Oh.

All of the great work on her Absorbability cloud that just went ta a month ago or a few weeks ago.

What I'm excited about is we have 2 unbelievably well proven leaders that I've sat on top of $10 billion plus ports.

Portfolios that have been growing.

Fast as fast or faster than any of the.

<unk> growth numbers that AWS over all of us posting.

And the.

The scale that they have that they've witnessed the operating rhythm and cadence that they've become part of and driven the partner focus that they have leverage and execute on.

Within their AWS fold and in lives prior to it'll be the AWS couple.

Complements who they are as people very down to Earth humble hardworking. They can go deep as well as stay high and.

And the relationships that they bring from AWS from Microsoft and from the many many people to interact with outside I think will be a long pain set of dividends for Splunk are partners of our customers our employees as well.

I'm really really thrilled to have both of them joined our ranks, but there are complemented as I talked about by over 15 senior executives that are come in not just made of AWS, but from sales force Google.

Adobe key organizations that are cloud first in their orientation.

And these are people much like the recent Sean that have infinite choice somewhere to land. So they understand the company and they understand our opportunity and how well positioned we are and I'm a I'm excited to fill.

Feel the continued benefits that we've seen from the people who have landed and.

The impact on Joel that <unk>, Sean will happen.

Jason over to you.

Yeah. Thanks for the question of cash on the <unk>.

<unk> and <unk>. So <unk> you know I think it was the 21% growth in Q1. It was 23 back in Q4, I expect the CRP low numbers to stay in that range.

Because of you know you have a cloud.

<unk>, that's growing much faster on the non cloud that's going much slower.

And so the combination of I think will stay somewhere in the range that you've seen for the past couple of quarters total ARPA.

It has been down very much because of the lower duration that we saw last year. We have seen term duration continued to come down a little bit I do expect to see total ARPA.

Accelerate.

Pretty significantly well into the double digits.

By the end of this year.

But it's going to take a while as we're lapping a lot of these duration changes, which which did decrease throughout the year last year.

Wonderful look forward to the cloud journey. Thank you so much pick numbers. Thanks, guys. Thanks cash.

The queue. Our next question comes from the line of Brent Thill from Jefferies. Your question. Please.

Doug on a lot of questions about the go to market this year and in how you've optimized the sales team now on our <unk>.

Seems to be of cleaner model.

Can you just walk through the changes you made in Q1, and how you think the rest of the year on unfolding.

Jason I know you had gone into negative 30% op margins I think you came in a little worse. So I think investors are asking.

What what was the delta between your plan on what happened on.

On the operating margin side.

<unk>.

Thanks, Brian Okay.

I will kick it off.

Talked about in the last call.

We have moved the sales force a couple of years ago from total contract value to last year annual contract value and this year, we're separating out incremental expansion versus renewal.

Ultimately, we want to get to is a consumption based metric so as we've talked about the transformations.

Getting to a portfolio that is cloud native surplus and really represents what we want and what day and expect deliver our customers. The ski and then of lie on the rest of the organization is critical as well.

I'm excited about the experience that Teresa brings as well as other key additions that we've had.

To ensure that we not just have the right metrics and focused areas for our sales teams, but that we had the right processes scale support and complimentary teams to make sure that our sales teams are successful and that the engage most effectively with net new customers and the.

Many many customers are on prem that still need to convert to our cloud offering.

As we focus on the value add the high return on investment that customers get when they move to cloud and they move to workload or entity based pricing.

Which is a resounding success within our customer base right now.

Jason on the op margin.

Yes, so there are 3 factors.

On why the operating margin came in a little lower than what we were expecting let's say first we did outperform on our Q1 targets specifically on the <unk>, which did lead to our quota carrying reps, earning higher commissions.

We are I think it is good but we are a little higher than where we expected in some of the critical areas of quota carrying reps and software developers.

And then lastly, we did have higher opex related to cloud deployment costs for a bunch of the new products and services that were launched in Q1.

And so those were I think largely mostly kind of 1 time impacts I don't expect to see the increased cost.

Flow through.

For the rest of the year.

Great. Thanks for the color.

Thanks, Brent Thanks, Brian.

Thank you. Our next question comes from the line of Raimo <unk> from Barclays. Your question. Please.

Thank you.

Doug.

You mentioned the opposite of of the loyalty Operability of cloud to a couple of weeks ago will go into <unk> can you talk a little bit about first feedback how are customers using etch like it always is it a broad based adoption of it more on logs et cetera.

How do you see that there and then a follow up for Jason on the duration.

Where are we on that journey.

On.

Of Northern region. So are we kind of of close to the level that we're seeing now or is there more to come. Thank you.

Thanks, Ken.

Yeah the.

The focus the observed the other cloud was to drive clear on effective integration across the different components that are in collection makeup that variability of suite.

From APM too.

Digital experience management management, and monitoring to synthetic monitoring et cetera.

The team has done an incredible job of driving really rapid and effective integration and then just as importantly, our renewed and revitalized.

Unified user experience for our customers.

I think of gave care dot com is 1 of the deeper dives on my prepared remarks.

They're really focused on the totality of the.

On the different capabilities that we've brought to bear with us from sort of really suite customers can pick and choose but ultimately as you are driving high volume of net new application capabilities on a cloud first basis.

Developing an AWS or other clouds, you you really need the entire observer ability cloud to get that job done effectively which is why we've been so focused on making sure that we've got the breadth and depth of features that drive that effective performance.

The application development teams the Dev ops teams the state of reliability engineering teams and cloud ops teams.

The organizations are so dependent on as they transition to be a digital first set of companies.

On the the contract duration piece I would say first for cloud.

Clearly the multi year agreement is continually.

The remaining our primary motion and our compensation plan does include incentives to drive this outcome, where possible I would say that the Q1 impact was impacted because we did have some shorter.

Duration deals that were related to expansion and we wanted to co term those with the existing contracts. So I do expect to see the term side of the the cloud duration go back up into the kind of mid to high twenties.

For term, we do continue to work with customers on the right timing of the eventual migration to cloud.

In many cases customers are choosing to extend the term contracts over a shorter period than they've done historically as the anticipated moving to cloud.

So as a result, I do expect to see some downward pressure throughout the year on term durations.

Thank you.

Thanks, very much thanks very much.

Thank you. Our next question comes from the line of Matt Hedberg from RBC capital markets. Your question. Please.

Oh, Hey, guys. Thanks for thanks for the questions and well done as well on the <unk> side.

Kind of of 2 point of question I guess for Doug on.

With all of these breaches. It strikes me that you guys are on a really good position to help both of the public and private sector.

With your Sim broader security solutions.

It feels like the ability to sift through the noise is more important than ever so I guess could you talk to.

Do we be in front of the bit of of Sim cycle and secondarily, obviously, the Dod contractors is great is there even further opportunity from from the U S government.

Great questions, Matt So I'll start with the and then work back which was yes. It was great to see that Dod contract obviously.

On multiple years of focusing on success with that total contract to realize all of the benefits there.

The latest cyber set of initiatives that president Biden pushed out I think we are.

Paul and definitely I think.

Are going to continue to drive not just the right behavior and opportunity for public sector organizations, but I think dramatically benefit the commercial as well.

But we are really excited about the public sector business.

Long tenure, there not just in the U S. But in other major countries around the world and obviously <unk> General go to market skills are fantastic, but the leverage that she is able to exert on the public sector business should be a big boost to them as well.

Yes, none of us are happy other than maybe the hackers and the people there on the other end about the cyber the negative cyber activity we're seeing.

It is a.

Something that is obviously extremely important for every organization around the world to get their arms around and I agree with you completely.

That we have taken a data as the security problem.

Roche has a very unique stance 7.8 years ago that the world is slowly starting to swing toward the dilemma for anyone that wants to do that is you must be able to be the heterogeneous collection service. The average CSO is dealing with well over 50, often of 100 or more different vendors.

Specific solutions that make up the landscape.

The cloud has the.

Ability to enhance the security posture. It also creates even more divergent data sources and more surface area that you've got to pay attention to so being the data driven agnostic collection vehicle.

For customers.

I think is very important position our Sim products are key but as we all know Sam keeps expanding and we've dramatically re factored our security suite to not just include them, but insider threat capability orchestration automation.

You saw we G.

Our mission control framework very open approach to integrating all tooling that exists out there for Sox.

G 8 are sort of capability as a cloud oriented offerings. So we're focusing very aggressively on continuing to keep pace with the breadth and depth that sox and cyber teams need including the addition of the true star.

Set of capabilities and that Austin, the company that actually closed late last week.

<unk>.

While we don't want the ambulance chasing in any way.

This environment.

Definitely.

Making the security front and center for Ceos and boards of directors.

Super helpful color. Thanks, a lot guys.

Thanks, Matt.

Thank you. Our next question comes from the line of Keith Bachman from Bank of Montreal. Your question. Please.

Yes. Thank you of 1 for Doug and 1 for Jason If I could Doug I wanted to start with you in terms of trying to understand better.

The deployment capabilities from what I mean by that is.

Obviously, you went through a business transition, where you're offering both on cloud and on premise on migrating customers to use your cloud capabilities, but I wanted to reverse that lens and ask you where you are actually are deployed is it more on for on premise of situations like at bank of Montreal vs. We're interacting with the cloud.

<unk> at the customer level and the reason I'm asking it is just some concern to us more and more workloads shifts of the cloud that is all of those on.

On premise deployment shift to the cloud that you might lose a little bit of.

Share in that process, so again, not asking how your customers subscribing to you, but where you are where splunk is attaching too. If you will and then of a follow up for Jason.

Sure. So 1 when we talk about our cloud solutions I mean, the way that the language of pardon me of the shift to is we are of SaaS organization, we are providing splunk as the service tour of our customers.

SaaS deployment is truly best in class at this point in time. It is cloud native silver list very very effective in the job. The performance as you can see from our growth rates.

So the number 1 value prop that we are focused on the customers is why would you do low value very difficult work and an area that it could be managed for you and not only are you going to get a better TCE O that youre going to get much higher quality delivery because of the many many.

People that we deploy around our automation frameworks of our site reliability on cloud apps capability et cetera.

The data sources, just continuing to grow.

The cloud, it's nice to talk about the.

The AWS cloud of the GCB clouded the Azure cloud, but there are hundreds of services within those cloud environments. The services are continuously changing as they need to to be competitive that means that the API of the data flows that the turbulence within that environment. Our high all of those are additional sources of streaming data or data at rest of for Splunk.

As well as the multitude of tools that are third party of live on those clouds as well as all of the different tooling and hardware components that are self managed by organizations.

So that goes kind of back to that sweet spot of data volumes continue to grow.

And.

Our DB NR, but again this is very clear and consistent within our cloud framework shows that the additional products that we're releasing things like the of durability of cloud. In addition to the growth around data and complexity of what's been our customers.

As a good positive trend.

We're trying to counteract that with customers the being much more efficient with how we deploy our solutions. So they can do more at the same cost knowing that theres. Other factors are going to increase the envelope that they have to deal with.

Okay. So Doug just put words.

Consider splunk is indifferent to the data sources, whether it be on prem or cloud absolutely yeah. It doesn't matter to us at all.

Okay.

Okay.

Jason 1 for you the cloud gross margins.

<unk> in dollars of growing up but sequentially. Your cloud gross margins of declined again modestly but from Q3.21.

And so I just wanted to try to understand what are the reasons that the cloud gross margins of decline for the last couple of quarters and how should we be thinking about those cloud gross margin specifically as we think about the next couple of quarters. Thank you.

Thanks Keith.

I guess the the short answer to your question is in Q4 as well as Q1 Theres been new products that we've released specifically on Splunk observe ability cloud.

That have led to some movement in.

In gross margin, Unfortunately down, but we don't see that as long term.

So I would expect that we are certainly on track to hit our long term drug about 75% cloud G. M R.

Our expectation I think we said last quarter was we hope to end this year at 70%.

Exiting the year and Thats currently what we still plan for.

Okay, great. Thank you.

Thanks Keith.

Thank you on our next question comes from the line of Kirk <unk> from Evercore ISI. Your question. Please.

Yes, thanks, very much and congrats on the solid quarter I guess, Doug. The first question would be for you 6 months ago, we sort of got more aware of the fact that as customers are moving over from termed the cloud that there might be some.

Shrinkage of the deal the deal terms things like that do you guys feel like you.

Of your hands around that you of a big base of renewals coming up have you been able to sort of get in front of those sort of at the kind of discussions the customers want to have your better prepared for at this point of kind of it seems like that's happening, but I just wanted to get your view on that and if anything's changed maybe over the last 6 months.

On that regard.

Good question Kirk.

So yes, we are part of what the headwinds were seeing within the term business is.

As we've seen across its long term or cloud the.

The current customer expansion rate has always been a very positive factor for our <unk> on revenue, but if you're sitting in term and youre unsure.

When youre going to go to cloud and what that looks like the expansion rate for term customer is probably going be muted, while they're trying to establish what their cloud footprint looks like the positive tailwind is the move to cloud by itself even on a flat basis.

Ex size on term on the exact same size on cloud is a better it goes on the Arrow goes up because of the overall billing of cloud. The includes the infrastructure that we're passing through to the customer.

The majority of customers, that's a probably the vast vast vast vast majority.

Have a step up when they move to cloud because of that nature of expansion of data and expansion of use cases, which block the.

Number 1 focus area that's true.

You said immediately as Doug into that she's building on from what the team was doing but I think we can get better at is being Super Crystal clear on what a blocker is for on Prem customers against cloud and making sure that we have not just rate sales motions, but we've got the right technical support the right.

Sure of the right partners and any appropriate incentives to assure them that the training of cloud is going to be as smooth as we've seen at the 4 thousands of customers now.

They can get on the same value basis that we see with those native cloud customers get them to workload based pricing.

Much more friendly metric and see the number of users go up the number of use cases go up in the.

Overall ROI of continuing to talk positively if that customer so.

So when we're looking out Q2, Q3 Q4 that number 1 vector is how many of those customers that are currently on prem are going to move to cloud.

To complement that with the roughly we said last call roughly a third of of how they are driven from new customers.

And then as Jason said in his prepared remarks, we've clearly got the DB NRI of that's positive as well. So we're not wholly dependent on the cloud the on Prem to cloud transition that's it.

Benefit of our installed base, but it's definitely a factor that's really important of course.

Okay, and Jason once the U I realize the income statement profitability measures are kind of masked by the the transition, but when we think about you all coming out of this of normalizing a little bit I mean every sort of other enterprise software companies seem some benefits from remote work, whether it's real estate savings, whether it's less travel I mean is there any reason.

That sort of overall efficiency of the business model should be higher as we normalize on sort of just the revenue transition versus where you were.

Say a year or 2 ago. I mean are you seeing some of the same benefits I guess, we're seeing in companies that frankly are already sort of explore.

Some of the cloud.

And in the cloud revenue model.

I'm hopeful, but I think it's early since really hard on anyone's returned to work and therefore hasn't really return to travel.

Hard to know exactly how the market will actually react I do think it's certainly reasonable to think that with the productivity gains we have seen that we should be able to flow that through that said. We also have 1 of the bigger cloud transformations in recent history going on so.

I don't know E M.

Any benefits we get on Opex.

<unk> is probably going to be.

On dwarfed Unfortunately by whatever the revenue recognition impacts of the the transformation.

Okay. Thanks, guys.

Thanks Kirk.

Thank you. Our next question comes from the line of Brad Sills from Bofa Securities.

The Securities your question please.

Hey, guys. Thanks for taking my question wanted to ask about the comment you made Jason earlier that part of the reason for the duration.

You know move as Youre seeing of higher higher mix of co term deals.

What's driving that is it just simply customers coming back.

More of kind of mid term and expanding at a greater rate than in the past and if so where is that incremental demand coming from.

So we had we had a couple of big deal.

This last quarter that were that were co term deals Inc.

In cloud and so that was why we saw such sort of kind of a pronounced reduction in cloud duration.

You know it certainly of the durability of sweep is 1 of the key drivers.

For for that.

That said.

I don't know that this is.

This is expected to continue we'll see it's just with the large deals they happened.

Pretty.

Infrequently.

Our expectation is that you will see cloud duration get back up to the kind of mid to high <unk> through.

Through the balance of this year.

Got it great. Thanks, and 1 more if I may please just with this latest release in the observer ability it sounds exciting.

Far along are you with the integration of some of the recent acquisitions plumber rigor of mission that Theres a lot in there, but you guys of acquired and I know theres been a lot of work on integrating that thank you so much.

Yes, absolutely absolutely.

That release was the integration of all of those acquisitions release.

With the unified UI now now the cash continues there.

There are still additional features.

Across infrastructure monitoring APM synthetic monitoring et cetera that we are intent on adding.

Got to make sure of the observer ability of Swedish lit up and all the key regions of the world and available locally within the different veins Havent got to make sure that it is.

It fits into the compliance frameworks that different entities federal government is a good example of.

Our bound by.

And we've got to continue to focus on driving ease of use on try find buy.

So it's.

We're really really excited we're way ahead of where we thought it would be with the help of some key acquisitions, but also really focused execution from our engineering teams.

To drive that unified footprint. It is really clear from the analyst at this point in time that we are way ahead of everybody else on breadth and depth of functionality.

And now it's about driving awareness getting more at bats, and continuing on on those key focus areas that I just walked through.

That's great. Thanks, Doug Thanks, Jason.

Thank you Brad.

Thank you and our final question for today comes from the line of Gregg Moskowitz from Mizuho. Your question. Please.

Alright, thanks for taking the question so Doug it's actually a good segue to my question on Observer ability cloud do you expect that this is going to help you land a lot more net new logos going forward and then for Jason naturally. This is a very different pricing model for you and that it's all Ho space what impact do you anticipate this happening on the anabolic going forward.

Thanks.

Awesome, Thanks, Craig So I'll still a bit of Jason Thunder on.

We are really focusing with our solutions observer ability of securities.

On a.

Simple single metric around entities.

So that if all your focus on of that suite, you know how to license it and its value tied in as clear for the.

End user and then we are continued to focus on a single metric to the platform, which of that workload based pricing metrics. So low.

Very very intently to our customers' customer success is number 1 priority we don't like your data volume metric. So we are focused on that we have delivered and we're excited to see the momentum we're getting with NTT based pricing on our solutions workload with the underlying platform.

And then just totally planned from the beginning of your question, which was net new logos Ken look us.

Last call that roughly a third of cloud is.

As from new customers and we are seeing some positive trends with new customers have said for a couple of them.

But the key lever on beginning of a C.

More dramatic increase of net new accounts was going to be having a easy button around cloud.

We are beginning to see that theres more work with more value.

On the observed though the suites certainly as the new buyer within existing customers. We have not had a strong set of initiatives around that Dev ops team and all the people that spend the Dev ops team. So we're excited to leverage our position within security and it too.

To traverse over to Dev ops ultimately all 3 of these entities SEC ops ops Dev ops have to work together the end.

Customer doesn't care about the individual individual jobs of those tech.

The tech leaders they care about the the solution. They are getting so tying those together is really important we think that we are unique.

The only vendor that can effectively serve all 3 independently or on a combined basis.

And we are absolutely internally measuring and very very focused on net new customer count increases as our whole cloud portfolio continues to perform.

Alright, it makes sense very helpful. Thanks, Doug.

Thanks, Greg.

The queue. This does conclude the question and answer session of today's program I'd like to hand, the program back to Doug Merritt for any further remarks.

Great. Thank you.

We appreciate all you tuning in today.

We are really proud of the progress we've made on every front, we have turned the corner on our journey to become a cloud first company really clear corporate initiative from multiple years and are proud of that execution. We take a cloud first approach in everything we do from delivering high value of our customers to working with our pardon.

<unk> and really ensuring that there is high value opportunities for our partners as we move to cloud as well as which features and capabilities, we're delivering from a cloud first basis.

I believe that we have never been better aligned with our market opportunity than we are right now.

On top of that our business is now led by cloud executives with proven track records of scaling cloud businesses of 10 plus billion dollars.

Which we obviously are very focused on becoming over the coming years and we're poised to work closely with our customers as they continued their transitions of the cloud.

Our position is exceptionally strong I've never been more bullish on our growth outlook and thank you again have a great evening.

Yeah.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Yeah.

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Thank you for standing by and welcome to the Splunk, Inc. First quarter 2022 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask the question during the session you'll need the press star 1 on your telephone as a reminder, today's program may be recorded.

I would like to introduce your host for today's program, Ken Tinsley, Vice President of Investor Relations. Please go ahead, Sir great.

Great. Thank you Jonathan 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 web page as well.

This conference call is being broadcast live via webcast and following the call an audio replay will be available on the website.

On today's call, we will be making forward looking statements, including financial guidance and expectations, such as our forecast for our second quarter as well as future expectations of revenue mix renewals duration RPM growth cloud growth and gross margin as well as trends in our markets on our business and our expectations regarding our acquisition.

<unk> products technology strategy customers and demand with 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 the assumptions relate to matters that are beyond our control on changing rapidly, including the impact of COVID-19, pandemic on our business and that of our customers and the overall economic environment.

Related to this uncertainty certain customers have in may in the future continue to decrease or delay spending commitments, particularly for certain high dollar and long term contracts.

Please refer to the documents, we file with the SEC, including the form 8-K filed with today's release those documents contain risks and other factors that may cause our actual the 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 measure 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 the website.

With that let me turn it over to Doug.

Thank you, Ken and thanks to everyone on the call for joining us cause of.

Great start to our new fiscal year, and our business fundamentals have proven strong as ever.

We have now turned the corner of into the second half of the journey, we embarked on just over 2 years ago to become a cloud first company.

But more than 50% of soccer bookings now coming from cloud or financial model is rapidly evolving into the out of a true SaaS business.

We are navigating our business through multiple simultaneous transformations deliver of customer success, while becoming the leading data platform in the cloud.

We do that by being the hyper focused on our customers' needs.

Transforming our business and pricing models.

Our portfolio of products and cloud services.

We're optimizing how we engage to liver and measure of value to our customers.

Helping our customers make the transition to cloud is our highest priority.

In Q1, we ended with the cloud era of more than $877 million up 83% over last year.

We're honored to see the high interest on our cloud offerings, and we will continue to focus on maintaining our high growth cloud trajectory and accelerating the transition where possible.

Also for the first time more than half of our net new cloud <unk> utilized workload based pricing.

Rolled out this pricing structure to ensure that value is aligned to the cloud consumption model.

Workload pricing delivers flexibility on data types of volumes and data value on.

All of which are critical for improved business outcomes as customers move to the cloud.

Surpassing the 50% Mark as the strong indicator at the new pricing mechanism is being embraced by our customers.

As of Cod first company, we are aggressively investing in the right people with the right leadership skills required to drive us to this important phase of growth.

On the last year, we've attracted incredible talent, while continuing to invest in leaders from within.

We welcomed over a dozen new executives from cloud companies like AWS sales force Google at the top box not a desk among others.

Most notably in April we welcome Teresa Carlson as President and Chief growth Officer, and just last week, we welcome Sean based as our president of products and technology.

The <unk>, Sean have extensive experience scaling hyper growth cloud businesses from their experience is of both AWS and Microsoft.

Our ability to attract such high caliber talent is the massive testament to where we are at the company today.

And to the opportunity that lies ahead.

Im excited as part of a <unk> Sean to take our customers. The next level by scaling and driving in both of our company and our cloud growth.

In the past year data increasingly became an essential service.

In cloud adoption accelerated rapidly.

This occurred just as we entered a pivotal moment in our transformation to the cloud and we were prime to help our customers through the unprecedented precedented dynamics of this past year.

These macro market conditions play to the strength of our platform.

We continue to enhance our offerings to the.

The liver and engaging experience across the Splunk platform, but the cloud native solutions purpose built for Iot.

Security and observer ability teams.

Beginning with our observer ability of portfolio, which has the most extensive the breadth and depth of any modern architecture on the market.

This has enabled our cloud business to accelerate even further by expanding into previously untapped departments within the enterprise.

On April Gartner named US the visionary in their 2021 magic quadrant per application performance monitoring or APM.

Paired with our strong placement and Giga <unk> radar for cloud of durability, and which we are a leader and the only outperformer.

Seeing growing market recognition for our vision in APM, and our leadership and observer ability.

At the beginning of May we announced general availability per Splunk observed, though the cloud the only full stack analytics powered and enterprise grade observer ability of solution.

At our launch event in the showcase that are observed body cloud brings together the world's best in class solutions for infrastructure monitoring APM real user monitoring synthetic monitoring log of investigation and incident response.

Developers on site reliability engineers are sru's can now get all of their answers in 1 elegant interface like unified metrics traces on logs all collected in real time without sampling and of any scale.

I'd like to take a moment to recognize our product design team for their dedication to delivering of completely re imagined and user experience for our customers and the splunk observe though the cloud.

We now offer 1 of the markets most integrated and easy to use observed the other platforms for developers Sru's cloud ops and the leadership.

A number of customers blue apron wrapping quantum metric on Lenovo just M. A few are already finding success with the Splunk observer ability of cloud.

As 1 of many examples of care Dot com relies on our solution to holistically understand their entire environment, allowing developers to quickly find and fix errors improve application architecture and accelerate future releases.

But the Splunk observed low to cloud as a single platform to fulfill all of its observe other needs keratoconus accelerated their mean time to investigate and resolve incidents from more than an hour to less than 10 minutes, creating a much better customer experience.

Our customer success, but the splunk observed by the cloud builds on our ongoing expertise in serving customers specific needs.

For example on the largest not for profit and medical care providers in the U S.

And at their use of Splunk enterprise to better monitor and scale of critical applications across their hospitals and medical offices.

They rely on our platform the streamline their operations through real time analytics, and AI ops capabilities detecting the resolving issues before the impact of 12 million plus members in helping to scale services keep up with the extraordinarily high demand brought on by COVID-19.

Turning to security now more than ever the pandemic world right for phishing attacks malware and attempted breaches.

Clear that security is a data problem alright.

Alright knock your all of the state of scared of Airport just released last week.

And on the overall greatest challenge organizations face rising cloud complexity.

Particularly as the shift to hybrid architectures continues to expand into a multi cloud ecosystem.

As I shared during my keynote at last month's RSA conference organizations see the unified data centric view across their cloud environments paired with the right analytics and insight from our class ecosystem for intelligent detection and response.

That's among the top reasons for our acquisition of true Star, which extends our leadership in security analytics through cloud Native intelligence.

As a cloud delivered solution designed to prioritize data within today's threat landscape true star is perfectly suited to enhance the level of cloud security that our platform offers today.

First of our also shares our belief and heightened automation set sock teams can prioritize more critical work.

In addition, it's API enabled customers to bring data driven intelligence into all stages of incident response.

Finally true starts relationships with technology partners across the security of communities equip customers with immediate access to the latest threat information and scared of research.

I'm pleased to report to be closer of truth of our acquisition late last week.

We look forward to our customers seeing the powerful effects of having true start within the Splunk family to further accelerate time to value and resolution per security teams.

Many customers turned to us last quarter for security, including Deloitte, Canada.

1 of Canada's largest professional services firms and cyber security service providers to low.

Canada use of Splunk cloud and Splunk Es as its Sim platform to consistently detect and respond to the evolving threat landscape.

In addition to the use of Splunk internally. They also maintain our long time strategic partnership with us to develop the cyber intelligence center with full of visibility across their security tools, including anti virus tools on site of security operations implementation services and more helping delight safeguard their customers and their personal information from cyber.

Threats.

Splunk is also providing mission critical services to the U S Department of defense.

Working in close partnership with <unk> technology, we're providing the D O D with asset management and cyber security software as part of a core enterprise technology agreement.

This designation value.

At $833 million of index over the next 10 years as part of the Dod's well respected enterprise software initiative.

As always we thank all of our customers and partners for their continued commitment to bring data securely to every question every decision and every action.

In closing as organizations continue to reinvent themselves on the cloud we are providing our customers with end to end visibility across any environment and at any stage of their cloud journey.

As 1 of the many reasons why today more than 90 of the Fortune 100 are our customers.

As I mentioned at the start we have rounded the corner on our business model transition.

You may now of a deep bench of tenure the cloud leaders to operating scale.

We will continue to develop and recruit the best cloud talent to meet the high demands of our customers.

We have an industry leading portfolio of.

Security and observed the Ot products and cloud services to capture the massive market opportunity in front of us.

Our hard work of the past few years has set us up to the next phase of our growth and we couldnt be more excited about where we are day and what lies ahead.

I want to thank our spelunkers, their tenacity and resilience and helping us make these transitions and staying focused on the needs of our customers.

I also want to once again, thank our customers who are the reason we exist their belief in the power of Splunk gives us absolute confidence and conviction in our value proposition and the massive potential of that data has to help every organization thrive in the data age.

That unheard of or Jason.

Thanks, Doug and good afternoon, everyone. Thanks for joining US Q1 was an excellent start to the year with total <unk> of $2.47 billion up 39% year over year.

Claudia <unk> was $877 million of 83% over last year, and we ended the quarter with 537 customers with <unk> greater than $1 million of 46%.

Of these 203 had cloud there are over $1 million nearly twice as many as the year ago period.

Our cloud business momentum remains strong as our cloud era of growth has exceeded 70% in each of our last 6 quarters and we expect strong growth to continue as we outlined on our last analyst day cloud growth is driven by 3 primary components.

Our existing cloud customers expanding their date of volumes that you can see on our consistently high Dv an R. R.

Second our new customers opting for initial deployments in cloud and.

And third our existing on Prem customers moving to cloud.

Contributions from these sources fueled $67 million and net new cloud <unk> in Q1 of 74% over last year.

For your reference we've added a slide in the supplemental deck to depict the strength of net new cloud era of generation. We believe these trends are highly durable and will continue to drive sustainable long term cloud growth.

Back to the quarter. We ended the period with total of our appeal of $186 billion of 8% over Q1 of last year and the portion of <unk>, which we expect to recognize as revenue over the next 12 months was $1.2 billion of 21% from last year.

With the substantial base of purpose of term conversions coming up for renewal of this year. We expect total of our appeal growth rates to return to double digits in the second half of the year.

On the P&L Q.

Q1 cloud revenue was $194 million of 73% over last year, reflecting continued acceleration of customer adoption of our cloud platform.

Total revenues were $502 million in Q1 of 16% and beginning to reflect a more comparable average year over year term contract durations as we lapped the first anniversary of the pandemic.

On margins, which are all non-GAAP.

Gross margin was 60% in Q1 of slightly from last year with continued progress towards our long term target of at least 75% as we realize the benefit from scale and elasticity of the platform.

Total gross margin was 72% down on the year over year basis due to the greater proportion of revenue contribution coming from the cloud.

Operating margin was negative 35% in Q1 slightly below plan due to higher infrastructure cost and performance based compensation expenses from bookings outperformance as I've said operating margin is impacted by lower revenue recognized from shorter average term contract duration and grown the clawbacks.

Turning to guidance.

Part of this year, we've seen continued improvement in the demand environment and customer engagement remains high.

We expect to end Q2, with the cloud <unk> of $950 to $960 million and total IRR of between $2.5.9 and $2.61 billion.

On the income statement the cloud transition will continue to drive variability in our revenue on operating margin results. In Q2, we expect total revenues of between 550 and $570 million, depending on cloud mix with the non-GAAP operating margin of approximately -25%, reflecting our normal seasonal pattern.

On cash flow recall that 2 years ago, we shifted to annual invoicing from upfront cash collection and our standard contract terms the.

This caused the temporary timing of disruption in cash collections and cause negative full year operating cash flow.

We are now starting to lap the impact of contracts, which will yield a return to full year positive cash flow.

The closing Q1 was a great start to fiscal 'twenty, 2 and we're pleased to have the most challenging phase of the transitions behind us. The overall demand environment is strong and with our product and services innovations plus new high caliber field and product leadership with the recent Sean are set up for continued high growth is never.

Been better.

With that let's open it up for questions.

Certainly ladies and gentlemen, if you have a question at this time. Please press Star then 1 on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key our first question comes from the line of cash ranking from Goldman Sachs. Your question. Please.

Alright, Thank you very much.

Doug and team congratulations on the era of number that looks quite solid.

Particularly the cloud number Doug if you could talk about the.

Things that are not going to change for Splunk going forward and think that will change because you're bringing the executive from AWS for a reason arguably some of what should we expect in terms of their expected contributions of what is your mandate from these 2 executives and 1 for you Jason It looks like the cloud mix is improving but we're still seeing some sort of volatility with.

The <unk> day, ladies and free cash flow at what point.

Did those metrics start to settle in and produce the cadence that the investors. Thank you so much on congrats.

Thank you very much for the question.

Yes the.

The consistency.

Theresa and Sean just to add to is a maniacal focus on customers and customer success. We've made that are number 1 kind of corporate priority of years ago.

We made our cloud first transition on number 1 on corporate initiative 3 plus years ago.

To come in after years of focused execution on transitioning our portfolio to be cloud first and then expanding in key in critical areas like all of the great work on her absorbability cloud that just meant ta months ago or a few weeks ago.

What I'm excited about is we have 2 unbelievably well proven leaders that I've sat on top of $10 billion plus.

Portfolios that had been growing.

Fast as fast or faster than any of the incredible growth numbers that AWS overall is posting.

And the.

The scale that they have that they've witnessed the operating rhythm and cadence that they've become part of and driven the partner focus that they have leverage and execute on.

Within their AWS fold and in lives prior to AWS the AWS.

<unk> complements who they are as people very down to Earth humble hardworking. They can go deep as well as stay high.

And the relationships that they bring from AWS from Microsoft and from the many many people to interact with outside I think will be long pain set of dividends for Splunk are partners of our customers our employees as well.

Im really really thrilled to have <unk>.

The them join our ranks, but there are complemented as I talked about by over 15 senior executives that are coming not just made of AWS, but from sales force Google.

Adobe key organizations that are cloud first in their orientation.

These are people much like the recent Sean that have infinite choice somewhere to land. So they understand the company they understand our opportunity and how well positioned we are.

I am excited to fuel the continued benefits that we've seen from the people who have landed and.

The impact on Joel that <unk> and Sean will have.

Jason over to you.

Yeah. Thanks for the question, perhaps on the CRP O and <unk>. So <unk> I think it was the 21% growth in Q1. It was 23 back in Q4, I expect the CRP low numbers to stay in that range.

Because of you have a cloud the <unk>.

<unk>, that's growing much faster or do you have of non cloud thats going much slower.

And so the combination of I think will stay somewhere in the range of that that you've seen for the last couple of quarters total ARPA.

It has been down very much because of the lower duration that we saw last year. We have seen term duration continued to come down a little bit I do expect to see total ARPA.

Accelerate.

Pretty significantly well into the double digits.

By the end of this year.

But it's going to take a while as we're lapping a lot of these duration changes, which which did decrease throughout the year last year.

Wonderful look forward to the cloud journey. Thank you so much great numbers. Thanks, guys. Thanks cash.

Thank you. Our next question comes from the line of Brent Thill from Jefferies. Your question. Please.

Doug on a lot of questions about the go to market this year and how you've optimized the sales team now on <unk>.

To be of cleaner model.

Can you just walk through the changes you made in Q1, and how you think the rest of the year on unfolding.

Jason I know you had guided to negative 30% op margins I think you came in a little worse. So I think investors are asking.

What what was the delta between your plan on what happened on.

On the operating margin side.

<unk>.

Thanks, Brian Okay.

I will kick it off.

Talked about in the last call.

We have moved the sales force a couple of years ago from total contract value to last year annual contract value and this year, we're separating out incremental expansion versus renewal.

Ultimately, we want to get to is a consumption based metric so as we've talked about these transformations.

Getting to a portfolio that is cloud native surplus and really represents what we want and 1 day and expect deliver of our customers is key and then of lie on the rest of the organization is critical as well.

Yes.

Excited about the experience that <unk> brings as well as other key additions that we've had.

To ensure that we not just have the right metrics and focused areas for our sales teams, but that we have the right processes scale support and complimentary teams to make sure that our sales teams are successful and that the engage most effectively with net new customers in.

Many many customers are on prem that still need to convert to our cloud offering.

As we focus on the value add the high return on investment that customers get when they move to cloud and they move to workload or entity based pricing.

Which is a resounding success within our customer base right now.

Jason on the op margin.

Yes, so there are 3 factors.

On why the operating margin came in a little lower than what we were expecting let's say first we did outperform on our Q1 targets specifically on the IRR, which did lead to our quota carrying reps, earning higher commissions.

Second we are I think it's good but we are a little higher than where we expected in some of the critical areas of quota carrying reps and software developers.

And then lastly, we did have higher opex related to cloud deployment costs for a bunch of the new products and services that were launched in Q1.

And so those were I think largely mostly kind of 1 time impacts I don't expect to see the increased cost.

Flow through.

For the rest of the year.

Great. Thanks for the color.

Thanks, Brian Thanks, Brian.

Thank you. Our next question comes from the line of Raimo <unk> from Barclays. Your question. Please.

Thank you.

Doug.

Doug you mentioned the opposite of of the logic the Operability cloud to a couple of weeks ago will go into the 8 can you talk a little bit about first feedback how are customers using edge like was it is it a broad based adoption of more on logs et cetera.

How do you see that there and then a follow up for Jason on the duration.

Where are we on that journey.

On.

Of Northern region. So we kind of of close to the level that we're seeing now or is there more to come. Thank you.

Thanks very much.

Yes the.

The focus of the observed the the cloud was to drive clear on effective integration across the different components that Inc.

Collection makeup that durability of suite.

From APM too.

Digital experience management management, and monitoring to synthetic monitoring et cetera.

The team has done an incredible job driving really rapid and effective integration and then just as importantly renewed and revitalized.

Unified user experience for our customers.

I think he gave care dot com is 1 of the deeper dives on my prepared remarks.

They're really focused on the totality of the.

On the different capabilities that we've brought to bear with us from sort of really suite customers can pick and choose but ultimately as you are driving high volume of net new application capabilities on a cloud first basis.

Developing an AWS or other clouds, you really need the entire observe ability cloud to get that job done effectively which is why we've been so focused on making sure that we've got the breadth and depth of features that drive that effective performance the.

The application development teams the Dev ops teams the same reliability engineering teams and cloud ops teams.

The organizations are so dependent on as they transition to a digital first set of companies.

On the the contract duration piece I'd say first for cloud.

Turning multiyear agreement is continually.

The remaining our primary motion and our compensation plan does include incentives to drive this outcome, where possible I would say that the Q1 impact was impacted because we did have some shorter.

Duration deals that were related to expansion and we wanted to co term those with the existing contracts. So I do expect to see the term upside of the the cloud duration go back up into the kind of mid to high twenties.

FERC term, we do continue to work with customers on the right timing of the eventual migration to cloud.

In many cases customers are choosing to extend the term contracts over a shorter period than they've done historically as the anticipated moving to cloud.

So as a result, I do expect to see some downward pressure throughout the year on term durations.

Good thank you.

Thanks, Raimo, thanks very much.

Thank you. Our next question comes from the line of Matt Hedberg from RBC capital markets. Your question. Please.

Oh, Hey, guys. Thanks for thanks for the questions and well done as well on the <unk> side.

Kind of of 2 point of question I guess for Doug on.

Obviously with all of these breaches. It strikes me that you guys are on a really good position to help both the public and private sector.

With your Sim broader security solutions.

It feels like the ability to sift through the noise is more important than ever so I guess could you talk to.

Would we be in front of the bit of of Sim cycle and secondarily, obviously, the Dod contractors is great is there even further opportunity from from the U S government.

Great questions, Matt So I'll start with the and then work back which was yes. It was great to see that Dod contract obviously.

On multiple years of focusing on success with that total contract to realize all of the benefits there.

The latest cyber set of initiatives that president Biden pushed out I think for <unk>.

Helpful and definitely I think.

Are going to continue to drive not just the right behavior on opportunity for public sector organizations, but I think dramatically benefit the commercial as well.

But we are we're really excited about the public sector business.

Our long tenure there not just in the U S. But in other major countries around the world and obviously <unk> says general go to market skills are fantastic, but the leverage that she is able to exert on the public sector business should be a big boost to them as well.

Yes, none of us are happy other than maybe the hackers and people that are on the other end about the cyber the negative cyber activity we're seeing.

It is.

Something that is obviously extremely important for every organization around the world to get their arms around and I agree with you completely.

That we have taken a data as the security problem.

Roche has a very unique stance 7 to 8 years ago that the world is slowly starting to swing toward the dilemma for anyone that wants to do that is you must be able to be the heterogeneous collection service. The average C. So it's dealing with well over 50 ocwen of 100 or more different vendors.

Specific solutions that make up the landscape and.

The cloud has the.

Ability to enhance the security posture. It also creates even more divergent data sources and more surface area that you've got to pay attention to so being the data driven agnostic collection vehicle.

For customers.

I think is a very important position our sim products are key but as we all know Sam keeps expanding and we've dramatically re factored our security suite to not just include Sam but insider threat capability orchestration automation.

You just saw we G.

8 of our emission control framework very open approach to integrating all tooling that exists out there for Sox.

G 8 are sort of capability as a cloud oriented offerings. So we're focusing very aggressively on continuing to keep pace with the breadth and depth that sox and cyber teams need including the addition of the true star.

Set of capabilities and that that awesome company that actually closed late last week.

And while we don't want the ambulance chasing in any way.

This environment.

It is definitely.

Making the security front and center for Ceos and boards of directors.

Super helpful color. Thanks, a lot of guys.

Thanks, Matt.

Thank you. Our next question comes from the line of Keith Bachman from Bank of Montreal. Your question. Please.

Yes. Thank you of 1 for Doug and 1 for Jason If I could Doug I wanted to start with you in terms of trying to understand better your deployment capabilities from what I mean by that is.

You, obviously went through a business transition, where you're offering both on cloud and on premise on migrating customers to use your cloud capabilities, but I wanted to reverse that lens and ask you where you are actually are deployed is it more on for on premise of situations like at bank of Montreal vs. We're interacting with say <unk>.

Cloud deployments at the customer level and the reason I'm asking it is just some concern to us more and more workloads shift to the cloud that is all of those on.

On premise deployment shift to the cloud that you might lose a little bit of.

Share in that process, so again, not asking how your customers subscribing to you, but where you are where splunk as the attaching too if you will and then of a follow up for Jason.

Sure so.

When we talk about our cloud solutions I mean, the way that the language of pardon me of the shift to is we are of SaaS organization, we are providing splunk because of service to our customers.

The SaaS deployment is truly best in class of this point in time. It is cloud native silver less very very effective in the job their performance as you can see from our growth rates.

So the number 1 value prop that we are focused on the customers is why would you do low value very difficult work in an area that it could be managed for you and not only of can you get a better TCE O, but youre going to get much higher quality delivery because of the many many of.

People that we deploy around our automation frameworks of our cyber liability on cloud apps capability et cetera.

The data sources, just continuing to grow.

The cloud, it's nice to talk about the <unk>.

AWS cloud of the GCB clouded the Azure cloud, but there are hundreds of services within those cloud environments. The services are continuously changing as they need to to be competitive that means that the API is the data flows that the turbulence within that environment. Our high all of those are additional sources of streaming data or data at rest of for Splunk.

As well as the multitude of tools that are third party of live in those clouds as well as all of the different tooling and hardware components that are self managed by organizations.

That goes kind of back to the sweet spot of data volumes continue to grow.

Our <unk>, but again it was very clear and consistent within our cloud framework shows that the additional products that we're releasing things like the of durability of cloud. In addition to the growth around data and complexity within our customers.

As a good positive trend.

We're trying to counteract that with customers of being much more efficient with how we deploy our solutions. So they can do more at the same cost knowing that those other factors are going to increase the envelope that they have to deal with.

Okay. So Doug just put words.

Consider splunk is indifferent to the data sources, whether it be on prem or cloud absolutely, yes, it doesn't matter to us at all.

Okay.

Okay.

Jason 1 for you the cloud gross margins.

The <unk> dollars are going up but sequentially your cloud gross margins of declines again modestly but from Q3.21.

And so I just wanted to try to understand what are the reasons that the cloud gross margins of decline for the last couple of quarters and how should we be thinking about those cloud gross margin specifically as we think about the next couple of quarters. Thank you.

Thanks Keith.

I guess the short answer to your question is in Q4 as well as Q1 Theres been new products that we've released specifically on Splunk observe ability cloud.

That have led to some movement in.

In gross margin, Unfortunately down, but we don't see that as long term.

So I would expect that we are certainly on track to hit our long term drug about 75% cloud G. M. Our expectation I think we said last quarter was we hope to end this year at 70%.

Exiting the year and Thats currently what we still plan for.

Okay, great. Thank you.

Thanks Keith.

Thank you on our next question comes from the line of Kirk <unk> from Evercore ISI. Your question. Please.

Yes, thanks, very much and congrats on the solid quarter I guess, Doug. The first question would be for you 6 months ago, we sort of got more aware of the fact that as customers are moving over from termed the cloud that there might be some shrinkage.

Shrinkage of the deal the deal terms things like that.

Of your hands around that you of a big base of renewals coming up have you been able to sort of get in front of those sort of at the kind of discussions the customers want to have your better prepared for at this point of time. It seems like that's happening, but I just wanted to get your view on that and if anything has changed maybe over the last 6 months.

On that regard.

Good question Curt.

So yeah, we are part of the of headwinds we're seeing within the term business is.

As we've seen across Splunk term or cloud the.

Current customer expansion rate has always been a very positive factor for our air on revenue, but if you're sitting in term and youre unsure.

When youre going to go to cloud and what that looks like the expansion rate for term customer is probably going to be muted, while they're trying to establish what their cloud footprint looks like the positive tailwind is the move to cloud by itself even on a flat basis.

Ex size on term on the exact same size on cloud is a better it goes out the the arrow goes up because of the overall billing of cloud that includes the infrastructure that we're passing through to the customer and the.

The majority of customers that's a per.

The the vast vast vast vast majority.

Step up when they move to cloud because of that nature of expansion of data and expansion of use cases with splunk the.

Number 1 focus area pad 3 said immediately as Doug into that she's building on from what the team was doing.

But I think we can get better at is being Super Crystal clear on what a blocker is for on Prem customers against cloud and making sure that we have not just rate sales motions, but we've got the right technical support the right pro serve the right partners and any appropriate incentives to assure them.

That they are trading of cloud is going to be smoothed as we've seen it be for thousands of customers now so that they can get on the same value basis that we see with those native cloud customers get them the workload based pricing.

Much more friendly metric and see the number of users go up the number of use cases go up in the.

The overall ROI of continuing to positively if that customer from.

So when we're looking out Q2, Q3 Q4 that number 1 vector is how many of those customers are currently on Prem are going to move to cloud.

Complement that with the roughly we said last call roughly a third of how they are driven from new customers.

And then as Jason said in his prepared remarks, we've clearly got of DB NRI of that's positive as well so we're not wholly dependent on the cloud the on <unk>.

From the cloud transition that's it that's it.

The benefit of our installed base, but it's definitely a factor that's really important for us okay.

Okay.

Jason 1 for you I realize the income statement profitability measures are kind of masked by the the transition, but when we think about you all coming out of this of normalizing a little bit I mean every sort of other enterprise software company has seen some benefits from remote work, whether it's real estate savings, whether it's less travel I mean is there any reason that sort of.

Overall efficiency of the business model shouldn't be higher as we normalize on sort of just the revenue transition versus where you were say a year or 2 ago. I mean are you seeing some of the same benefits I guess, we're seeing in companies that frankly are already sort of it.

For the cloud.

And the cloud revenue model.

I'm hopeful, but I think it's early.

Since really hard on anyone's returned to work and therefore, hasnt really returned to travel.

It's hard to know exactly how the market will actually react I do think it's certainly reasonable to think that with the productivity gains we have seen that we should be able to flow that through that said. We also have 1 of the bigger cloud transformations in recent history going on so I don't know.

Any benefits we get on Opex.

Is probably going to be.

Dwarf the unfortunately by whatever the revenue recognition impacts of the transformation.

Okay. Thanks, guys. Thanks.

Thanks Kurt.

Thank you. Our next question comes from the line of Brad Sills from Securities.

The Securities your question please.

Hey, guys. Thanks for taking my question wanted to ask about of comment you made Jason earlier that part of the reason for the duration.

You know move as Youre seeing of higher higher mix of co term deals.

What's driving that is it just simply customers coming back more as more kind of mid term and expanding at a greater rate than in the past and if so where does that incremental demand coming from.

So it's we had we had a couple of big deal.

This last quarter that were that were co term deals Inc.

In cloud and so the that was why we saw such sort of kind of a pronounced reduction in cloud duration.

You know it certainly of the durability suite is 1 of the key drivers.

For for that.

That said.

I don't know that this is.

This is expected to continue we'll see it's just with the large deals they happened.

Pretty.

Frequently our expectation is that you will see cloud duration get back up to the kind of mid to high twenties.

Through the balance of this year.

Got it great. Thanks, and 1 more if I may please just with this latest release in the observer ability it sounds exciting.

How far along are you with the integration of some of the recent acquisitions plumber rigor of mission that Theres a lot on there that you guys of acquired and I know theres been a lot of work on integrating that thank you so much.

Yes, absolutely absolutely.

That release was the integration of all of those acquisitions release.

With the unified UI now now the cash continues there.

There are still additional features across infrastructure monitoring APM synthetic monitoring et cetera that we are intent on on adding.

Got to make sure the observer ability of Swedish lit up and all the key regions of the world and available locally within those different bands.

Got to make sure of that it is.

It fits into the compliance frameworks that different entities federal government is a good example of.

Our bound by.

And we've got to continue to focus on driving ease of use on <unk>.

Bye Bye bye.

So it's.

We're really really excited we're way ahead of where we thought we'd be with the help of some key acquisitions, but also really focused execution from our engineering teams.

To drive that unified footprint. It is really clear from the analysts at this point in time that we are way ahead of everybody else on breadth and depth of functionality.

Now, it's about driving awareness getting more at bats, and continuing on on those key focus areas that I just walked through.

That's great. Thanks, Doug Thanks, Jason.

Thank you Brad.

Thank you and our final question for today comes from the line of Gregg Moskowitz from Mizuho. Your question. Please.

Alright, thanks for taking the question so Doug it's actually a good segue to my question on Observer ability of cloud do you expect that this is going to help you land a lot more net new logos going forward and then for Jason naturally. This is a very different pricing model for you and that it's all Ho space what impacts do you anticipate this happening on the on the molecule and color.

Thanks.

Awesome, Thanks, Craig So I'll still a bit of Jason Thunder on.

We are really focusing with our solutions observer ability of securities on it.

A.

Simple single metric around entities.

So that if all your focus on of that suite, you know how to license it and its value tied in as clear for the end user and then we have continued to focus on a single metrics of the platform pushes that workload based pricing metrics so low.

Very very intently to our customers' customer success is number 1 priority we don't like your data volume metric. So we've focused on that we have delivered and we're excited to see the momentum we're getting on with NTT based pricing on our solutions workload with the underlying platform.

And then just totally of playing on the beginning of your question value, which was net new logos Ken look us.

We had said.

Last call that roughly a third of of how they are from new customers. We are seeing some positive trends with new customers.

Set for a couple of them.

So the key lever on beginning to see.

More dramatic increase in net new accounts was going to be having a easy button around cloud.

The are beginning to see that theres more work with more value.

On the observed though the suites certainly as the new buyer within existing customers. We have not had a strong set of initiatives around that type of ops team and all the people just from the Dev ops team. So we're excited to leverage our position within security and it too.

To reverse over the Dev ops ultimately all 3 of these entities SEC ops ops Dev ops have to work together the end customer doesn't care about the individual individual jobs of those tech.

The tech leaders they care about the the solution. They are getting so tie those together is really important we think that we are unique.

Only vendor that can effectively serve all 3 independently or on a combined basis.

And we are absolutely internally measuring and very very focused on net new customer count increases as our whole cloud portfolio continues to perform.

Alright, it makes sense very helpful. Thanks, Doug.

Thanks, Greg.

The queue. This does conclude the question and answer session of today's program I'd like to hand, the program back to Doug Merritt for any further remarks.

Great. Thank you we really appreciate all you tuning in today.

We are really proud of the progress we've made on every front, we have turned the corner on our journey to become a cloud first company really clear corporate initiative from multiple years and are proud of that execution.

Take a cloud first approach in everything we do from delivering high value of our customers to working with our partners and really ensuring that there is high value opportunities for our partners as we move to cloud as well as which features and capabilities, we're delivering from a cloud first basis.

I believe that we've never been better aligned with our market opportunity than we are right now.

On top of that our business is now led by cloud executives with proven track records of scaling cloud businesses of 10 plus billion dollars.

Which we obviously are very focused on becoming over the coming years and we're poised to work closely with our customers as they continued their transition to the cloud <unk>.

Of our position is exceptionally strong I've never been more bullish on our growth outlook and thank you again have a great evening.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.