Q3 2022 Splunk Inc Earnings Call

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Speaker 1: Have a good day, and thank you for standing by, and welcome to the Splunk, Inc. third quarter 2022 financial results conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation,

Good day, and thank you for standing by and welcome to the Splunk, Inc. Third quarter 2022 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation.

Speaker 1: there will be a question and answer session. Please be advised this call is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your host today, Ken Tinsley, Vice President of Investor Relations and Corporate Treasurer. Please go ahead.

There will be a question and answer session. Please be advised this call is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your host today, Ken Tinsley, Vice President of Investor Relations and corporate Treasurer. Please go ahead.

Speaker 2: Thank you, Operator, and good afternoon, everyone. With me on the call today are Graham Smith, Jason Child, Sean Vice, and Teresa Carlson.

Thank you operator, and good afternoon, everyone with me on the call today are Graham Smith, Jason Child, Sean Bys and Teresa Carlson.

Speaker 2: After market closed today, we issued a press release which is posted on our investor relations website along with supplemental materials.

After market close today, we issued a press release, which is posted on our Investor relations website, along with supplemental materials.

Speaker 2: This conference call is being broadcast live via webcast, and following the call, an audio replay will be available on our website.

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 forecasts for our fourth quarter and full year of fiscal 'twenty, two 'twenty three as well as our future expectations of revenue mix renewals duration or P O growth cloud growth bookings cloud growth.

Speaker 2: On today's call, we will be making forward-looking statements, including financial guidance and expectations, such as our forecast for our fourth quarter and full year of fiscal 22 and 23, as well as our future expectations of revenue mix, renewals, duration, RPO growth, cloud growth, bookings, cloud gross margin, and operating cash flow.

Margin and operating cash flow as well as trends in our markets and our business, our strategies and expectations regarding our products technology strategy customers demands and markets.

Speaker 2: 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.

These statements are based on our assumptions as to the macro 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.

Speaker 2: Please refer to documents we filed with the SEC, including the Form 8K, filed with today's press release.

These refer to documents, we file with the SEC, including the form 8-K filed with today's press release.

Speaker 2: Those documents contain risks and other factors that may cause our actual results to differ from those contained in our forward-looking statement.

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

Speaker 2: 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.

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.

Speaker 2: 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 Graham. Thank you, Ken.

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 Graeme.

Thank you Ken and good afternoon, everyone.

Speaker 3: Before I talk about our Q3 results and business momentum, I'd like to first introduce myself.

Before I talk about our Q3 results and business momentum I'd like to first introduce myself.

Speaker 3: As you all learned a few weeks ago, Doug Merritt has stepped down as president and CEO and the board has appointed me interim CEO while they conduct a search to identify Splunk's next leader.

As you all learned a few weeks ago, Doug Merritt has stepped down as president and CEO and the board has appointed me interim CEO, while they conduct a search to identify Splunk snacks leader.

Speaker 3: I've served as a member of our board of directors since 2011, taking on the chair role in 2019.

I've served as a member of our board of directors since 2011, taking on the chair role in 2019.

Speaker 3: Since I retired from the CFO role at Salesforce in 2015, I have served and continue to serve on the boards of category leaders and innovators across the SaaS landscape.

I retired from the CFO role at Salesforce in 2015, I have served and continue to serve on the boards of category leaders and innovators across the SaaS landscape.

Speaker 3: Splunk is an extraordinary company. Having spent a decade on the board, I've always appreciated the power of our products, but it's a true honor to be leading its passionate, customer-focused employees.

Splunk is an extraordinary company.

Having spent a decade on the board I've always appreciated the powerful products, but it is a true honor to be leading its passionate customer focused employees.

Well differentiated Splunk technology, when I became a board member.

Speaker 3: What differentiated Splunk's technology when I became a board member, our unmatched, scalable index, is still a critical and unique component of our platform.

Unmatched scalable index is still a critical and unique component of our platform.

Speaker 3: Over the years, we've built on that index to offer an extensible data platform that powers purpose-built solutions for security and observability.

Over the years, we've built on that index to offer an extensible data platform. The palace purpose built solutions for security and observe ability.

Speaker 3: giving tens of thousands of organizations the ability to break down silos and investigate, correlate, and take action on data at incredible scale.

Giving tens of thousands of organizations the ability to break down silos and investigate correlate and take action on data at incredible scale.

Speaker 3: What's more, over the last year and a half, Splunk has become the data foundation upon which our customers have adapted to a remote work environment and navigated the immense challenges and opportunities created by a global pandemic.

What's more over the last year and a half Splunk has become the data foundation upon which our customers have adapted to remote work environment.

Navigated the immense challenges and opportunities created by a global pandemic.

Speaker 3: I want to thank Doug for his innumerable contributions.

I want to thank Doug for his innumerable contributions to Splunk.

Speaker 3: Doug built Splunk's amazing go-to-market muscle in his early years at the company and then took on the critical product and business model transformations which have enabled Splunk to become the global tech leader that it is.

Doug built Splunk Amazing go to market muscle in his early years of the company and then took on the critical product and business model transformations, which are enabled splunk to become a global global Tech leader that it is.

Speaker 3: Under Doug's leadership, Splunk has grown from $450 million in revenue to now nearly $3 billion in annual recurring revenue, propelling us towards a future where every organization can harness the full power of its data.

Under Doug's leadership Splunk has grown from $450 million in revenue to now nearly $3 billion in annual recurring revenue propelling us towards a future where every organization can harness the full power of its data.

Turning to our quarterly results. Our Q3 execution was strong because we continued to deliver high value to our customers around the world.

Speaker 3: Turning to our quarterly results, our Q3 execution was strong as we continued to deliver high value to our customers around the world.

Speaker 3: Q3 was Splunk's first billion dollar cloud quarter with cloud ARR reaching 1.1 billion and growing 75% year over year.

Q3 was Splunk first billion dollar quarter with cloud Arrow, reaching $1 1 billion and growing 75% year over year.

Speaker 3: This was our 11th straight quarter of 70-plus percent cloud ARO.

This was our 11th straight quarter of 70 plus percent cloud Arrow group.

Speaker 3: Our cloud bookings mix jumped to 68 percent, our highest ever, and our cloud dollar-based net retention rate increased to 130 percent.

Cloud bookings makes jumped to 68% our highest ever and our cloud dollar based net retention rate increased to 130%.

Speaker 3: Total ARR grew 37% from the year ago period, keeping Splunk in the rarefied group of multi-billion dollar companies growing faster than 30%.

Total arrow grew 37% from the year ago period, keeping splunk in the Rarefied group of multibillion dollar companies growing faster than 30%.

Speaker 3: In October , we welcome more than 20,000 Splunk customers, prospects, and partners to our .conf user conference.

In October we welcomed more than 20000, splunk customers prospects and partners to adopt Com user conference.

Speaker 3: We showcase Splunk as the data foundation for the hybrid world.

We showcased splunk as the data foundation for the hybrid world.

Speaker 3: And we showed how our customers can unlock innovation by building resilience, improving security, and gaining end-to-end visibility of their data.

And we showed how our customers can unlock innovation by building resilience, improving security and gaining end to end visibility of their data.

Speaker 3: We announced numerous platform innovations to help customers take action on data wherever it originates.

We announced numerous platform innovations to help customers take action on data where Edwards originates.

Speaker 3: We revealed our new ingest actions capability, enabling an organization to take action on data in motion, to redact, filter, and route data to Splunk or to external S3 storage.

We revealed a new ingest actions capability, enabling organizations to take action on data in motion to redact filter and route data to Splunk or two external as three storage.

And just actions, it's just one of the new ways, we are helping our customers manage their high value data more economically.

Speaker 3: Ingest Actions is just one of the new ways we are helping our customers manage

We also highlighted enhancements to Federated search, providing a unified search experience, where the data is in the cloud or on Prem.

Speaker 3: We also highlighted enhancements to federated search, providing a unified search experience, whether data is in the cloud or on-prem.

Speaker 3: This type of hybrid capability continues to differentiate Splunk even as we accelerate our cloud transformation.

This type of hybrid capability continues to differentiate splunk, even as we accelerate our cloud transformation.

Speaker 3: As we all know, security continues to be essential to digital transformation.

As we all know security continues to be essential to digital transformation.

Speaker 3: So at .conf, we also highlighted our capabilities like risk-based alerting, threat intelligence management, and SOAR visual playbook editor to help customers detect, investigate, and respond to threats faster through increased automation.

So we also highlighted our capabilities like risk based alerting threat intelligence management and saw visual playbook editor to help customers detect investigate and respond to threats foster through increased automation.

One of our most important security wins in Q3 was with the U S Navy.

Speaker 3: One of our most important security wins in Q3 was with the U.S. Navy. Our partner, Leidos, and the U.S. Navy expanded their use of Splunk to further secure their mission-critical systems.

Partner <unk> in the U S. Navy expanded their use of Splunk to further secure their mission critical systems, adding splunk for real time monitoring of critical mission systems, which includes cyber security net ops and continuous monitoring.

Speaker 3: adding Splunk for real-time monitoring of critical mission systems, which includes cyber security, net ops, and continuous monitoring.

Speaker 3: Splunk's observability offerings significantly improve performance, productivity, and innovation across complex, hybrid, and cloud-native.

Spunky observe abilities absorbability offerings significantly improved performance productivity and innovation across complex hybrid and cloud native architectures.

Speaker 3: Our newly announced capabilities including Splunk app for content packs, real user monitoring for mobile, and always-on profiling are just a few of the new offerings that are empowering developers, site reliability engineers, and IT professionals to keep systems running and power the next phase of digital innovation.

Our newly announced capabilities, including Splunk App for content packs real user monitoring for mobile and always on profiling.

A few of the new offerings that are empowering developers site reliability engineers and it professionals to keep systems running in parallel the next phase of digital innovation.

Speaker 3: Progressive, the number one commercial auto insurer in America, has expanded their already strong relationship with Splunk during Q3.

Progressive the number one commercial auto insurer in America has expanded their already strong relationship with Splunk during Q3.

Speaker 3: Progressive which is one of the more

Progressive which is one of the more than 90 Fortune 100 companies that we are proud to count those are customers.

Speaker 3: decided to transition to Splunk Cloud with workload pricing during the quarter, gaining full stack visibility with Splunk's entire observability.

Decided to transition to Splunk cloud with workload pricing during the quarter.

Gaining full stack visibility with Splunk and tire observe ability suite.

Our security and observe ability offerings are individually very powerful.

Speaker 3: how security and observability offerings are individually very powerful.

Speaker 3: But the true power of Splunk is when these solutions all come together on our differentiated data platform, providing customers the data foundation they need to thrive in today's hybrid, unpredictable world.

But the true power of Splunk is when these solutions all come together on our differentiated data platform.

<unk> customers the data foundation, they need to thrive in today's hybrid unpredictable world.

Speaker 3: For example, during Q3, the University of Virginia selected the Splunk Cloud Platform for data-driven security and the ability to search, analyze, and visualize data across their IT infrastructure.

For example, during Q3, the University of Virginia selected Splunk cloud platform for data driven security and the ability to search analyze and visualize data across the <unk>.

Structure.

Speaker 3: Also in Q3, a Canadian telco selected Splunk security and observability to help keep millions of users connected through a variety of wireless, TV, and phone services.

Also in Q3, the Canadian Telco selected Splunk security types of ability to help keep millions of users connected through a variety of wireless TV influence services. They.

Speaker 3: They chose Splunk to enable their entire team to observe, understand, decide upon, and act on security incidents from a single platform.

They chose splunk to enable their entire team to observe understand decided upon and act on security instance from a single platform.

Speaker 3: Beyond our product news, we unveiled a number of advancements at Conf to help customers accelerate their cloud migrations to Splunk.

Beyond our product news, we unveiled a number of advancements comp to help customers accelerate their cloud migrations to Splunk cloud.

Speaker 3: We expanded the availability of workload pricing to all of us on cloud.

We expanded the availability of workload pricing to all of our Splunk cloud customers, providing the freedom to put more data into the Splunk platform and the choice to use it when customers want to bring even more value to that organization.

Speaker 3: providing the freedom to put more data into the Splunk platform and the choice to use it when customers want to bring even more value to their organization.

Speaker 3: We also launched our new government logging modernization program, which further equips U.S. government agencies to meet new cybersecurity mandates.

We also launched a new government logging modernization program, which further equips U S government agencies to meet users cyber security mandates.

Speaker 3: Finally, we announced our reimagined Splunk Partner Program and joined an elite group of 10 other software companies as Accenture and Splunk took our partnership to the next level with the launch of the Accenture Splunk Business Group.

Finally, we announced our re imagined Splunk partner program and joined an elite group of 10 other software companies as Accenture and Splunk took our partnership to the next level with the launch of the Accenture Splunk business group.

As we look forward by immediate focus as interim CEO will be on maintaining our momentum throughout Q4 and into fiscal 'twenty three.

Speaker 3: As we look forward, my immediate focus as Interim CEO will be on maintaining our momentum throughout Q4 and into fiscal 23.

Speaker 3: I'm grateful to work alongside a world-class management team who I'm confident will ensure we execute well in our most important new business and renewables quarter.

I'm grateful to work alongside a world class management team to and confident we'll ensure we execute well and our most important new business and renewals quarter.

As we prepare for next year I'm excited to continue building on our strong foundation to best position Splunk for long term success.

Speaker 3: As we prepare for next year, I'm excited to continue building on our strong foundation to best position Splunk for long-term success.

Speaker 3: we have an extraordinary opportunity to enable even more customers to make the move to Splunk Cloud.

We have an extraordinary opportunity to enable even more customers to make the move to Splunk cloud.

Speaker 3: We've seen that customers who use Splunk Cloud are able to reallocate resources to higher value tasks, take advantage of more flexible pricing and scale, and rapidly benefit from our latest product innovation.

We've seen that customers, who use splunk cloud are able to reallocate resources to higher value tasks take advantage of more flexible pricing and scale and rapidly benefit from our latest product innovations.

Speaker 3: I didn't hesitate to step in as the interim CEO at Splunk based on my strong belief in our technology, our employees, and the huge opportunity ahead to help customers turn data into do it.

I didnt hesitate to step in as the interim CEO at Splunk based on my strong belief in our technology, our employees and the huge opportunity ahead to help customers turn data into doing.

Speaker 3: I thank you all for welcoming me today and look forward to answering your questions.

Thank you all for welcoming me today and look forward to answering your questions Jason.

Speaker 4: Thanks, Graham. And adding my thanks and appreciation to Doug for his leadership and partnership of my time here. We've never been in a stronger position to fuel our continued growth. On to the quarter. Once again, our execution was very strong and we ended with total ARR of $2.83 billion, up 37% year over year. Cloud ARR surpassed $1 billion for the first time, ending at just over $1.1 billion, up 75%.

Thanks, Pam and adding my thanks, and appreciation to Doug for his leadership and partnership with my time here, we've never been in a stronger position to fuel our continued growth under the quarter.

Once again, our execution was very strong and we ended with total <unk> of $2 83 billion up 37% year over year.

Cloud <unk> surpassed $1 billion for the first time ending at just over $1 1 billion up 75%.

We ended the quarter was 635 customers with <unk> greater than $1 million up 43%.

Speaker 4: 207 of these customers had Cloud ARR over a million dollars, up 96% over last year.

270 of these customers had cloud air are over a $1 million up 96% over last year.

Our continued focus on customer cloud adoption drove a sharp increase in bookings mix this quarter with cloud accounting for 68% of total software bookings, a 14 point sequential increase and the highest rate we've ever reported.

Speaker 4: Our continued focus on customer cloud adoption drove a sharp increase in bookings mix this quarter, with cloud accounting for 68% of total software bookings, a 14-point sequential increase, and the highest rate we've ever reported.

Speaker 4: This resulted in $130 million of net new cloud ARR, more than double from Q3 last year, and total net new ARR grew almost $200 million, up 41%.

This resulted in a $130 million of net new cloud <unk> more than double from Q3 last year and total net new AR grew almost $200 million up 41%.

As we've called out before RVO bookings has been skewed by shorter overall contract duration related to our customers' transformation to cloud as well as the change in our field compensation plans, specifically intended to drive <unk>.

Speaker 4: As we've called out before, RPO bookings has been skewed by shorter overall contract duration related to our customer's transformation to cloud, as well as the change in our field compensation plans specifically intended to drive average term contract duration downward, which in the near term we see trending to between 18 and 24 months.

Average term contract duration downward, which in the near term, we see trending to between 18 and 24 months.

Speaker 4: By shortening contract durations, we found that customers will engage sooner on a Splunk cloud adoption or expansion strategy.

By shortening contract durations, we found that customers will engage sooner on splunk cloud adoption or expansion strategy.

Speaker 4: With these factors continuing to normalize, RPO bookings is becoming a better indicator of bookings momentum. And in Q3, total RPO bookings was $804 million, up 56% over last year.

With these factors continuing to normalize our appeal bookings is becoming a better indicator of bookings momentum and in Q3 total <unk> bookings was $804 million up 56% over last year.

On the P&L.

Speaker 4: Q3 cloud revenue was $243 million, up 68% over last year, reflecting acceleration of customer adoption of our cloud platform.

Q3 cloud revenue was $243 million up 68% over last year, reflecting acceleration of customer adoption of our cloud platform.

Speaker 4: Total revenues were $665 billion in Q3, up 19% and somewhat muted from shorter-term contract duration.

Total revenues were $665 million in Q3 up 19% and somewhat muted from shorter term contract durations.

Speaker 4: Professional services and education accounted for 8% of total revenues in the quarter.

Professional services and education accounted for 8% of total revenues in the quarter.

On margins, which are all non-GAAP.

Speaker 4: Cloud gross margin was 65% in Q3, up three points from last year, as we realized leverage from scale and elasticity of the platform.

Cloud gross margin was 65% in Q3 up three points from last year, as we realized leverage from scale and elasticity of the platform.

Speaker 4: Total gross margin was 77%, down slightly on a year-over-year basis due to the greater proportion of revenue contribution from cloud.

Total gross margin was 77% down slightly on a year over year basis due to the greater proportion of revenue contribution from cloud.

Speaker 4: Operating margin was negative 10% in Q3, significantly better than planned due to our bookings and top line outperformance, plus some expense savings from converting .conf to fully virtualized.

Operating margin was negative 10% in Q3 significantly better than planned due to our bookings a topline outperformance plus some expense savings from converting dot comp to fully virtual.

On the balance sheet, we ended the quarter with $1 $6 billion in cash and investments after the repurchase of five 5 million shares of our common stock for an aggregate $808 million. Since we began our repurchase program in July we have repurchased a total of $6 9 million shares at an average price of $145 20.

Speaker 4: On the balance sheet, we ended the quarter with $1.6 billion in cash and investments after the repurchase of 5.5 million shares of our common stock for an aggregate $808 million.

Speaker 4: Since we began our repurchase program in July , we have repurchased a total of 6.9 million shares at an average price of $145.23 per share, more than offsetting the potential dilution from the conversion of the notes we issued to Silver Lake Partners early this year and completing repurchases under the billion dollar authorization.

<unk> per share more than offsetting the potential dilution from the conversion of the notes we issued to silver Lake partners earlier, this year and completing the repurchases under the $1 billion authorization.

Turning to guidance.

Speaker 4: The demand environment remains strong, and customer engagement is excellent, especially for existing customers planning their hybrid deployments, as you can see in our higher cloud.

The demand environment remains strong and customer engagement is excellent, especially for existing customers planning their hybrid deployments as you can see in our higher Cognex <unk>.

Speaker 4: We believe cloud momentum will continue, and we're now expecting approximately 70% mix in Q4, higher than we previously expected.

We believe cloud momentum will continue and we're now expecting approximately 70% mix in Q4 higher than we previously expected.

Speaker 4: Based on this, we're increasing our cloud ARR target to between $1.325 and $1.35 billion at year-end, while our total ARR target remains in the $3.085 to $3.135 billion range.

Based on this we're increasing our cloud era target to between one three to five and $1.35 billion at year end, while our total air our target remains in a 3.085 to $3 $135 billion range.

Speaker 4: On the income statement, the cloud transition continues to drive variability in our revenue and operating margin results. With significantly higher anticipated cloud mix in Q4, revenue growth will be tempered just as we've seen in several prior quarters.

On the income statement the cloud transition continues to drive variability in our revenue and operating margin results with significantly higher anticipated cloud mix in Q4 revenue growth will be tempered just as we've seen in several prior quarters.

Speaker 4: With our highest ever projected cloud mix of 70%, we expect total revenues of between $740 and $790 million in the fourth quarter.

With our highest ever projected cloud mix of 70%, we expect total revenues of between 740 and $790 million in the fourth quarter.

Speaker 4: On the expense side, while we have been realizing gradual leverage in our cost of services line, the pace of cloud gross margin expansion has been slightly lower than planned.

On the expense side, while we have been realizing gradual leverage in our cost of services line. The peso cloud gross margin expansion has been slightly lower than planned.

Speaker 4: For Q4, we are expecting cloud gross margin will be roughly in line with Q3 as we continue to migrate our installed base onto the newest version of our.

For Q4, we're expecting cloud gross margin will be roughly in line with Q3 as we continue to migrate our installed base onto the newest version of our services.

Speaker 4: For OPEX, our overall expense run rate is slightly better than planned, and we expect a non-gap operating margin of between minus 2 and minus 8 percent in Q4.

For Opex, our overall expense run rate is slightly better than plan and we expect our non-GAAP operating margin of between minus two and minus 8% in Q4 for.

Speaker 4: For the full year, higher cloud mix is driving lower total revenues and therefore pushing operating margins lower to between negative 15 and negative 70.

For the full year higher cloud mix is driving lower total revenues and therefore, pushing operating margins lowered to between negative <unk> 15 and negative 17%.

Speaker 4: Our outlook for full year operating cash flow is unchanged at approximately $100 million.

Our outlook for full year operating cash flow is unchanged at approximately $100 million.

Speaker 4: Looking further out, as we start thinking about next year, we expect customer demand will remain strong. For Fiscal 23, our initial view of total ARR is approximately $3.9 billion, with our cloud business reaching at least $2 billion of ARR by year-end.

Looking further out as we start thinking about next year, we expect customer demand will remain strong for fiscal 'twenty three our initial view of total arrow is approximately $3 9 billion.

With our cloud business, reaching at least $2 billion of IRR by year end.

Speaker 4: To highlight our accelerating growth, it took us three years to grow Cloud ARR from $200 million to $1 billion, and now we expect it will take us only 15 months to grow up from $1 to $2 billion.

To highlight our accelerating growth it took us three years to grow cloud air or from $200 million to $1 billion and now we expect it will take us only 15 months to grow up from $1 billion to $2 billion.

Speaker 4: In closing, Q3 was another strong quarter following an excellent first half. The overall demand environment remains robust, and our continued push on cloud adoption is accelerating our transition into its final phase. As a team, our relentless focus is on customer success, and we're set up well for a strong finish to the year. With that, let's open it up for questions.

In closing Q3 was another strong quarter following an excellent first half the overall demand environment remains robust and our continued push on cloud adoption is accelerating our transitioned into its final phase as a team our relentless focus on customer success, and we're set up well for a strong finish to the year with that.

Let's open up for questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone to Joe Your question press the pound key.

Speaker 1: Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by, we'll compile the Q&A roster. And our first question comes from Cass Rangan from Goldman Sachs. Your line is now open.

These standby, we compile the Q&A roster and our first question comes from Kash Rangan.

Goldman Sachs. Your line is now open.

Speaker 5: Thank you very much, Graham. Very good to reconnect after a long time. And I'm curious to get your thoughts on the CEO search. What are the attributes is the board looking for? And I also wanted to call out the tremendous cloud performance of the quarter. The 68 percent is a significant metric. You're guiding to 70. And that, I guess, becomes a question for Jason. As you project that out, 20 percent of your error are

Thank you very much Graeme very good to reconnect after a long time.

And I'm curious to get your thoughts on the CEO search what are the what are the attributes.

Is the board looking for and I also wanted to call out the tremendous cloud performance of the quarter to 68%.

Significant metric you're guiding to 70.

That I guess becomes a question for Jason as you project that out 'twenty.

20% of your ore in the next fiscal year is going to exceed 50% is going to come from cloud what does that mean for the longer term cash generation potential of the business, how much more confident or not.

Speaker 5: and the next fiscal year, 50% is going to come from cloud. What does that mean for the longer-term cash generation potential of the business? How much more confident or not are you with respect to the longer-term cash generation of the business as a result of the cloud transition, which is playing out even more quicker?

With respect to the longer term cash generation of the business as a result of the cloud transition, which is playing out even more quicker than we expected kudos. Thank you.

Well, thank you Kash yeah good.

Speaker 3: Well, thank you, Cash. Yeah, good to reconnect. I think we chatted earlier. You predicted I'd be back at some point six years ago, and it turned out I am, but probably not in the circumstances we necessarily thought.

Good to reconnect I think which added earlier.

You predicted IP back at some point 60 years ago, and it turned out I am but probably not in the circumstances, we necessarily thought.

No it's great by the way.

It's great to be back.

Energizing.

In terms of the CEO search I think the board is off to a fast start we are finalizing the spec we've already engaged a head hunter. So when we're running fast and obviously, we want to have a great process.

Speaker 3: a headhunter so we're running fast and obviously we want to have a great process.

Speaker 3: From a point of view of attributes, I think clearly someone who has operated a business at multi-billion dollar scale, I think is really important.

From our point of view of attributes I think clearly someone who has operated a business businesses multibillion dollar scale. I think is really important and then probably I would personally also think someone who is very comfortable.

Speaker 3: I personally also think someone who is very comfortable, you know, basically setting the vision for a technology product, not an app, a technology product.

You know basically setting the vision for a technology product not an apple technology product and someone who can do a great job of trends, leading the technology needs of customers in the business value I think those are really important skills.

Speaker 3: and someone who can do a great job of translating the technology needs of customers into business value. I think those are really important skills.

Speaker 4: for the CEO to have. Jason, do you want to go on to the second part of the cash quiz? Yeah, yeah. So on the cloud, kind of gross margin and impact on, you know, overall impact

For the CEO to have Jason do you want to.

The second part of Casuals.

So on the on the cloud kind of gross margin and impact on <unk>.

Overall impact on cash generation.

Speaker 4: I know we had said previously that we expect, you know, we had a long-term target of a 20% cash yield or operating cash flow divided by ARR.

I know we had said previously that we expect we had a long term target of 20% cash yield or operating cash flow divided by <unk>.

Speaker 4: We still do believe that that, of course, will occur in the future. The timing, we're still working on. And there's kind of three primary levers. You pointed out the cloud mix. That certainly is one piece. Today, our cloud is at about 65% gross margin. We do, of course, our on-premise at 95%. We do expect that to go up over time. We're still kind of working on the nuances of the large-scale cloud.

We still do believe that of course will occur in the future. The timing, we're still working on and there's kind of three primary level level levers you pointed out the cloud.

Good mix that certainly is one piece today, our cloud is that about 65% gross margin.

We do and of course, our on premise at 95%.

Do we do expect that to go up over time.

We're still kind of working on the nuances of.

The large scale cloud migrations, where we have to first focus on meeting customer success, and then second work on the margin optimization.

Speaker 4: We have to first focus on meeting customer success and then second work on the margin optimization.

Speaker 4: The second piece is

Second piece is.

Speaker 4: tuning the first piece was cloud mix, the second piece was cloud gross margin, and then the third piece is really on the operating expense.

Tuning the cloud gross margin. The first piece was cloud mix. The second piece was cloud gross margin and then the third piece is is really on the operating expenses.

Speaker 4: You know, the last two years we've had limited cash flow or negative cash flow because of changing our invoicing approach. We're now past that. We're past that. So our inflow will be tied to ARR. It's the outflow that'll be tied to that cloud gross margin, cloud mix.

The last two years, we've had limited cash flow or negative cash flow because of change in our invoicing approach, we're now past that.

We're past that so our inflow will be tied to.

It's the outflow that will be tied to that.

Cloud gross margin cloud mix.

Speaker 4: And we're working through those pieces. I hope to be able to provide a much more, you know, more specific update to what that target will be next quarter. But we're still very confident in that 20% number. It's just a little more work to do on predicting the timing of these three different factors.

And we're working through those pieces I hope to be able to provide much more.

A more specific update to what that target will be next quarter.

But we're still very confident in that 20% number it's just a little more work to do on predicting the timing of these three different factors.

Thank you so much.

Thanks, guys.

And thank you and our next question comes from Brent Thill from Jefferies. Your line is now open.

Speaker 1: And thank you. And our next question comes from Brent Phil from Jeffries. Your line is now open.

Good afternoon, Graham, maybe just get your perspective on.

Speaker 6: Good afternoon, Graham, maybe just get your perspective on where you see the biggest opportunities, obviously been involved with the company for quite some time. Where are you seeing?

Where do you see the biggest opportunities obviously been involved with the company for quite some time.

Where are you seeing perhaps the biggest greenfield.

Speaker 6: perhaps the biggest greenfield where you think you can have a bigger impact. And quickly for Jason, I think there's been some frustration from investors about, you know, the mismake approach is relates to where the numbers are at. I understand that the cloud mix is moving around, but where do you feel we're at in terms of the cloud mix and where you expect that to settle out now relative to the guide?

Where you think you can have a bigger impact and are quickly for Jason I think there's been some frustration from investors about the midst make approach as it relates to where the numbers are I understand that the cloud mix is moving around but.

Where do you feel we're at in terms of the cloud mix and where you expect.

That to settle out now relative to the guide and just curious if if we're now kind of past pass the point now where you feel that that cognex has really taken over and we should we should expect less volatility in the quarter to quarter numbers. Thanks.

Speaker 6: I'm just curious if we're now kind of past the point now where you feel that that cloud mix has really taken over and we should expect less volatility in the quarter-to-quarter numbers.

Speaker 3: All right. Thanks Brent. Also good to reconnect. Obviously early days but I think the three things I'm already looking at are

Alright, Thanks, Brent also good to reconnect.

Obviously early days, but I think the three things I'm already looking at.

Speaker 3: You know, I think moving customers to the cloud is obviously a key focus for the company making that transition super successful. But I think it's pretty clear that once we move customers to the cloud, you know, the workloads only increase over time. So I think there's a lot of upside in the future from expansion within accounts. And obviously, we have many of the biggest accounts in the world.

I think.

Moving customers to the cloud is obviously, a key focus for the company, making that transition super successful.

But I think it's pretty clear that once we move customers to the cloud workloads only increase over time. So I think there's a lot of upside in the future from expansion within accounts and obviously, we have many of the biggest.

Accounts in the world.

Speaker 3: quite amazing. If you sort of look at our large account growth, you know, up 96% year-on-year with 270 customers with more than a million dollars of cloud. So a lot of opportunity there. I think international clearly is more or less kept pace with America's as a region. But I think over time, I would hope we could accelerate that. It feels like there's a huge opportunity in Europe and Asia-Pacific.

It's quite a meeting if you sort of look at our large account growth up 96% year on year with 270 customers with more than $1 million of cloud so a lot of.

A lot of opportunity there I think international clearly is more or less kept pace with Americas.

As a region, but I think over time, we I would hope we could accelerate that it feels like there's a huge opportunity in Europe and Asia Pac.

Speaker 3: There were some really exciting deals in Q3 in both those regions.

There was some really exciting deals in Q3 in both those regions.

Speaker 3: And then I think the third area I pick is obviously observability. I think we were a little late to launch our product, but I think it's important to understand as we think about observability, there's clearly metrics and tracing that we

And then I think the third area I'd pick is obviously observe the ability I think we were a little late to launch a product, but I think it's important to understand as we think about observe ability, there's clearly metrics and tracing that we.

Speaker 3: that we've tended to focus on as the outcome of the acquisitions we did a couple of years ago. But we also have logging that's related to observability and ITSI that's really under part of that umbrella. So I think our overall business there is good. We're happy with the growth rate, but clearly it's a huge market and I think there's room for us to do even better in that area.

We've tended to focus on those.

The outcome of the acquisitions, we did a couple of years ago, but we also have logging slated to observe ability and an <unk> thats really really under that umbrella. So I think all.

Overall business. There is good we're happy with the growth rate, but clearly it's a huge market and I think there is.

Room for us to do better even better in that area.

And then on the on the.

Speaker 4: the cloud mix assumption. So, you know, we saw 68% all-time high last quarter. And as I mentioned in the prepared remarks, about 70% is our expectation for Q4. You know, we said previously, we don't know where it tops out, probably 80% to 90% range, probably. But again, you know,

The cloud mix assumption. So we saw a 68% all time high last quarter and as I mentioned in the remarks prepared remarks about 70% as we are.

Expectation for Q4.

We've said previously we don't know where tops out probably 80% to 90% range, probably but again.

Speaker 4: Customer success really is our primary motivation, so we're gonna do whatever works for customers.

Customer success really as are our primary motivation and so we're going to do whatever works for customers.

Speaker 4: The path from $70K to $80K and $90K, obviously, we're not that far away, so the volatility on

The path from 70 to 80 to 90, obviously is a we're not that far away. So the volatility on cloud.

Speaker 4: cloud or overall revenue and operating margin should continue to dissipate or minimum, I'm sorry, get smaller. If you look at revenue growth last year, we were what, minus five or 6% for the year. First three quarters of this year, we've been in the kind of high teens to 20% range. So we are coming out of it. You also saw RPO bookings at, you know, plus 56% year on year, you know, current RPO bookings also strong. So the metrics are normalizing. That said, you know, when you have a big step up in a single quarter, like we did this last quarter, you know, it does cause a little more pressure on the revenue number. You know, that said, that's why really the best number to focus on really is ARR. I think for probably the next year, that will be continue to be steady ARR, cloud ARR and then cashflow. And then I think by 24, you'll start to see the revenue and gap metrics start to come more in line and have less volatility than they've had in the recent quarters.

Overall revenue and operating margin should continue to dissipate or minimum im sorry to get smaller.

If you look at revenue growth last year, we were what minus five five or 6% for the year first three quarters of this year, we have been in the kind of high teens to 20% range. So so we are coming out of it you also saw <unk> bookings at plus 56% year on year current RVO bookings also strong. So so the metrics are norm.

<unk>.

Said when you have a big step up in a single quarter like we did this last quarter. It does cause a little more pressure on the revenue number.

That said Thats why really the best number to focus on really is <unk>.

For probably the next year that will be continue to be steady <unk> cloud <unk>.

And then cash flow and then I think by 'twenty four you'll start to see the revenue and GAAP metrics start to come more in line and have less volatility than they've had.

In the recent quarters.

Great. Thank you.

Speaker 7: Great, thank you.

Brian.

Speaker 1: And thank you. And our next question comes from Michael Kurtz from KeyBank. Your line is now open.

And thank you and our next question comes from Michael <unk> from Keybanc. Your line is now open.

Speaker 8: Hey guys, a grand welcome and congrats on the role and where you're setting off to with Splunk.

Hey, guys.

Graham welcome Congrats on Unreal.

And we're setting up to explode so.

Speaker 8: So, I just wanted to ask you, Jason, a bit more about the cloud transition, especially from the CFO's perspective. You know, you're moving also to a new platform, and that platform is multi-tenant and should really help with those cloud gross margins. So, what's been the progress here today on moving over to that newer platform? And why are we seeing that slowdown in that expansion of cloud?

I just wanted to ask you, Jason a bit more about the cloud transition, especially from the CFO perspective.

You're moving also do it in the platform and that platform is multi tenant should really help with those.

Gross margins so.

What's been the progress year to date and moving over to that to that newer platform and why are we seeing the slowdown in the expansion of cloud gross margins.

Speaker 4: Michael, thanks for the question. This is Jason. You know, the expert on kind of all things around the cloud infrastructure migration and some of the challenges and opportunities that we have, really, Sean Vices is the guy that is the expert on that. So, I'd love to actually have Sean take over. Sure.

Michael Thanks for the question this is Jason.

The expert on kind of all things around the cloud infrastructure migration and some of the challenges and opportunities that we have really shine devices is the guy that is the expert on that so I'd love to actually have Shawn take.

Sure.

Speaker 9: So this is Sean Bice and it's nice to meet everybody. For those who I haven't spoken with before, I've pretty much spent most of my career in data. I was at Microsoft for about 17 years, led SQL server for many of those, as well as building Azure data in the early days. Plenty of scars from going from a box software company to a cloud company. And then I spent the last

So this is Sean buy side and it's nice to meet everybody for those who I haven't spoken with before.

Pretty much spent most of my career in data that Microsoft for about 17 years led sequel server for many of those as.

Well as building Azure data in the early days plenty of scars from going from a box software company to a cloud company and then I spent the last.

Speaker 9: five years, you know, running Amazon data services. So, in that context, we were able to build some of the largest data services in the cloud today. So, that's things like DynamoDB or Amazon Aurora, Amazon RDS.

Five years.

Running Amazon data services, so in that context, we were able to build.

Some of the largest data services in the cloud today, So that's things like Dynamo DB or Amazon Aurora Amazon Rds.

Speaker 9: So with that backdrop, when Splunk started, a lot of customers basically start with a smaller workload. And the reason they start with a small workload is it's pretty simple to take that, you put it in Splunk Cloud, and really what you're doing is learning how Splunk Cloud operates and understanding the differences between that and something on-premise.

So with that backdrop, when Splunk started a lot of customers basically start with smaller workload and the reason they start with a small workload as it's pretty simple to take that you put it in Splunk cloud and really what Youre doing is learning how splunk cloud operates in understanding the differences between that and something.

On premise.

Speaker 9: And then as these customers have gone on that journey, they gain confidence, they become familiar, and what we see today is customers now bringing massive workloads. And when they bring these massive workloads, we have to basically work

And then as these customers.

<unk> gone on that journey, they gain confidence they become familiar and what we see today is customers now, bringing massive workloads and what they bring these massive workloads, we have to basically work really close with them to fine tune our systems to ensure that they're getting the exact capacity when they.

Speaker 9: really close with them to fine-tune our systems, you know, to ensure that they're getting the exact capacity when they need it. And then, of course, they're not being charged for any capacity when they don't need it. And then the last thing that I would say on this,

You need it.

Then of course, they are not being charged for any capacity when they don't need it and then the last thing that I would say on this.

Speaker 9: You know, having built some of the largest systems in the cloud with data, you know, you cannot let customers, you can't take any risk or chance of

Having built some of the largest systems in the cloud with data.

Cannot let customers you can't take any risk or chances.

Speaker 9: of getting something wrong, because the type of workloads that run on these foundational data systems, they just can't afford.

Getting something wrong, because the type of workloads that run on these on these foundational data systems. They just can't afford it.

Speaker 9: any interruption. If you interrupt Netflix, literally hundreds of millions of people are not watching videos. Or if you interrupt the rideshare application, you could have tens of millions of people that just can't order or track a car.

Any interruption, if you interrupt Netflix literally hundreds of millions of people are not watching videos or if you interrupt a rideshare application you could have tens of millions of people that just can't order our track a car. So so the point of that is you got to spend you got to be very very.

Speaker 9: So the point of that is you've got to spend, you've got to be very, very intentional and diligent around how we build those systems.

Intentional intelligent around how we build those systems.

Speaker 9: that effectively automate and run everything underneath the covers. And that's basically why we're a bit behind on cloud margin.

Actively automate and run everything underneath the covers and Thats basically.

We are a bit behind on cloud margin and then the last thing I would say is we're always going to make incremental progress and we will always keep you updated along the way.

Speaker 9: And then the last thing I would say is we're always going to make incremental progress and we'll always keep you updated along the way.

Okay. So from a from your perspective, Jason is it more question on the cloud gross margins themselves are not expanding or just simply that you are moving faster on that mix shift.

Speaker 8: Okay. So, from your perspective, Jason, is it more a question of the cloud gross margins themselves are not expanding or just simply that you're moving faster on that next shift?

Speaker 4: Well, I would say that because of the things that Sean said and the larger workloads, the cloud gross margin is moving a little slower than what we've said previously.

Well I would say that.

Because of the things that Sean said and the larger workloads to the cloud gross margin is moving a little slower than what we had said previously.

Speaker 4: but then when you compound that with the fact that the cloud mix has accelerated pretty significantly in the last quarter, you have kind of the double effect. We still are confident about being able to get to the 70 plus percent margin that is basically industry standard when you look at the benchmarks. It's just a matter of working through all these large migrations and making sure we're first focused on the customer success aspect and then working out the optimization second. Okay, thanks guys.

But then when you compound that with the fact that the cloud mix has accelerated pretty significantly in the last quarter.

Kind of the double effect.

Still are confident about being able to get to the 70 plus percent margin that is basically industry standard.

You look at the benchmarks, it's just a matter of working through all of these large migrations and making sure. We're first focused on the customer success aspect and then working out the optimization second.

Okay. Thanks, guys.

Thanks, Michael.

Okay.

Speaker 1: And thank you. And our next question comes from Raymo Lenshao from Barclays. Your line is now open.

And thank you and our next question comes from Raimo <unk> from Barclays.

Line is now open.

Speaker 10: Hey, thanks, and Graham, all the best here on your new adventure. Two quick questions, one for Jason. Can you talk a little bit about the duration? Because that's obviously coming down. Is there kind of a level that you feel comfortable at, kind of the right level?

Hey, Thanks, and grandmother bacterial in Europe.

Sure.

Adventure.

Two quick questions one for Jason can you talk a little bit about the duration because that's obviously coming down is there a kind of a level that you feel comfortable as kind of the right level and then related with that.

Speaker 10: And then related with that, as we think about more cloud, you're becoming more and more a cloud company, if you look at the new booking, is there a level where that kind of levels out? Because like there are industries, I'm thinking financial services or whatever, it still will have on premise.

As we think about more caution you're becoming more of a cloud company. If you look at the new booking is there a level where that kind of levels out because like there are industries I'm, taking financial services or whatever it still will have on premise and so if I think about the 74. Your guide for Q4, we actually coming closer to a level where.

Speaker 10: And so if I think about the 74 you guide for Q4, are we actually coming closer to a level where the numbers get more stable? You seem to be hinting at that. But in theory, we should be getting close to that actually now.

The numbers get more stable you seem to be hinting at that but like.

<unk>.

But you shouldn't be getting close to that actually now in the state.

Speaker 10: The stabilization of numbers and guidance should come soon. Just speak to that please. Thank you.

Utilization of numbers in guidance should come soon and just speak to that please thank you.

Speaker 4: Thanks, Ramon. I guess first on the duration impact, you know,

Thanks very much.

I guess first on the duration impact.

I think we said last quarter.

Speaker 4: I think we said last quarter that we we've seen it bounce around a bit on term and and the primary reason is, you know, we think it's actually.

We've seen it bounce around a bit on term.

The primary reason is we think it's actually.

Speaker 4: helpful to not incent our sales team to try to drive up durations for term. We actually want it going down because we know that the vast majority of our customers want to make.

Helpful too.

Not incent, our sales team to try to drive up duration for term, we actually wanted to we want to go down because we know that.

The vast majority of our customers want to make there.

Speaker 4: you know, their migration to either hybrid or full cloud deployment. So, we only compensate for 12 months and not beyond that. So, that's kind of the best lever to kind of manage it. And so, as a result, we're really focused on what works best for our customers. We do see some, I guess,

Migration to either hybrid or a full cloud deployment. So so we only compensate for 12 months and not beyond that so so that's kind of the best lever to kind of manage it and so as a result, we're really focused on what works best for our customers, we do see some.

I guess.

Speaker 4: you know, variableness to the duration number just based on what the mix of customers in a quarter is. I think the range that you've seen for the past couple quarters of as high as 24-ish and then as low as 18-ish is a pretty good range for the near term. We'll let you know if we see anything different, but that's, I think, a pretty good range to focus on going forward. In terms of the stabilization,

Yes.

Variable Miss too to the duration number just based on what the mix of customers in a quarter is I think the range that you've seen for the past couple of quarters of as high as 24 ish and then as low as 18. This is a pretty good range.

For the near term.

We'll let you know if we've seen anything different but I.

I think a pretty good range to to focus on going forward.

In terms of the stabilization.

Speaker 4: Yeah. So, the reason we provide the bookings mix that's cloud is because that's kind of the lead indicator. And I know you've kind of done a lot of this modeling, Ramo, and you've seen that whatever that bookings mix is, that's on a TCV basis, by the way, when you flow that into ARR, it takes roughly about a year before you see the bookings mix translate to a similar ARR mix.

So the reason we provide the bookings mix.

Mix.

That's cloud is because thats kind of a lead indicator and I know you've kind of done a lot of this island raimo and you've seen that whatever that bookings mix is that's on a TCE basis by the way when you flow that into <unk>. It takes roughly about a year before you see the bookings translate to a similar IRR mix.

Speaker 4: And then the revenue mix ends up being even a little after that. So I think you're going to see the numbers start to, you know, they've been stabilized in this year, they'll even stabilize more next year. I think 24 is when they'll be, you know,

And then the revenue mix ends up being even a little after that so I think youre going to see the numbers start to they've been stabilized and this year they'll even stabilized more next year I think 24 is when they'll be.

Really hopefully kind of done with a lot of the transformations that you're seeing.

Speaker 4: really, hopefully, kind of done with a lot of the transformations that you've seen. You know, that said, I think, you know, you've seen already quite a bit of stabilization with, you know, positive high teens to 20-ish percent revenue growth, RPO bookings back to positive, actually 56 percent, you know, and current RPO also, you know, in line in the 30-ish percent range. So I think we're seeing it, but I think you'll continue to see it normalize over the next year or so.

That said I think.

<unk> seen already quite a bit of stabilization with positive high teens to 20% revenue growth <unk> bookings back to positive actually at 56%.

<unk> also in.

In line in the 30% range.

So I think we're seeing it but I think the.

Youll continue to see it normalize over the next year or so.

Thank you.

Thank you very much.

Speaker 11: thank you

Speaker 1: And thank you. And our next question comes from Matt Heidberg from RBC Capital Markets. Your line is now open.

And thank you.

And our next question comes from Matt Hedberg from RBC capital markets. Your line is now open.

Oh, Hey, thanks for taking my questions guys.

Speaker 4: Oh, hey, thanks for taking my questions, guys. You know, I guess for either of you, could you talk about new cloud customer adoption? You guys talked about workload pricing for all at Conf. Are you seeing acceleration? Obviously, you're seeing strong results out of your cloud business, but are you seeing acceleration in new customer additions on the cloud side?

I guess for either of you.

Could you talk about new customer new cloud customer adoption, you guys talked about workload pricing for all of the comp.

Are you seeing any acceleration, obviously, you're seeing strong results out of out of your cloud business, but are you seeing acceleration in new customer additions on the cloud side.

Okay.

Okay.

Hi, I'm going to take that this is Teresa Carlson for those of you have not met me I've been here, it's black from the <unk> and I'm, the President and Chief growth Officer before coming here I spent 11 years at Amazon Web services, where I founded our public sector business, our aerospace and satellite.

Speaker 12: Hi, I'm going to take that. This is Teresa Carlson. For those of you who have not met me, I've been here at Splunk for almost seven months. And I'm the president and chief growth officer. Before coming here, I spent 11 years at Amazon Web Services, where I founded our public sector business, our aerospace and satellite business, and I ran our industries. And prior to that, I was at Microsoft for almost 10 years, where I ran our federal government business.

And I ran our industries and prior to that I was at Microsoft promise 10 years for Iran. Our federal government business. So.

Speaker 12: So our win rates overall continue to go up. We show improved win rates across the board. And on the cloud in particular, we have 270 customers with cloud ARR greater than a million, which is that 96% year over year.

Our win rates overall are continue to go App, we show improved win rates across the board and on the cloud in particular, we have 270 customers with cloud IRR greater than a million, which is that 96% Gary every year and what we've also seen is not just that.

Speaker 12: And what we've also seen is not just that, obviously, with a 68% cloud mix, a net new cloud of 107%.

Obviously, the 68% cloud mix and net new cloud, 107%, what we saw that our customers now that have been termed are moving to cloud. So that's a big trend.

Speaker 12: What we saw is that our customers now that have been term are moving to cloud. So that's a big trend. And then the pipeline of that trend of them wanting to go faster. Someone earlier asked about financial services.

Then the pipeline at that trend of them wanting to go faster than one earlier asked about financial services and how does that like and if they are using a combination add on prem and cloud that what what we see here and what I saw in my previous world today, but yes is that actually just scrap.

Speaker 12: And how does that like end if they're using?

Speaker 12: a combination of on-prem and cloud, but what we see here and what I saw in my previous world of AWS is

Speaker 12: that actually just grows. So the opportunity is new wins, but in addition to that, it's new net new workloads across the board. So it's very positive, both on net new growth of existing customers moving to cloud and then.

So the opportunity is new wins in addition to that as need net new workloads across the board.

Very positive.

On net new growth.

Existing customers moving to cloud and then new customers overall that want to get that are cloud first.

Speaker 12: new customers overall that want to get that are cloud first.

Got it thanks, Bruce actually maybe a follow up for you and glad to hear you in the room and good to hear your voice.

Speaker 4: Got it. Thanks, Teresa. Actually, maybe a follow up for you. Glad to hear you're in the room and good to hear your voice. As we start to think about turning the calendar to fiscal 23, is the sales force where it needs to be in terms of both, I guess, capacity and productivity relative to your ARR guide next year?

As we start to think about turning the calendar to fiscal 'twenty three is the salesforce, where it needs to be in terms of both I guess capacity and productivity.

Relative to.

To your <unk> guide next year.

Speaker 12: Well, let me start with productivity. Our productivity is really high. So I feel fantastic about our productivity. And some things that I don't know, if you are aware of it, Splunk, that I actually think is a competitive differentiator that I had not used in the past, but we had kind of two motions in our selling organization. We have a team that focuses on net new, and we have a team that focuses on renewal and adoption.

Well, let me start with productivity our productivity is really high so I feel fantastic about our productivity and some things that I don't know.

Aware of its blank that I actually think is a competitive differentiator that I have not used it in the past, but we had kind of accumulations in our selling organization. We have a team that focuses on net name and we have a team that focuses on renewal and adoption.

Speaker 12: And I have found since I've been here that that has been a huge help in terms of working with our customers directly and moving them faster because you have these two motions in parallel you're working with customers.

I have found to have been here that that has been a key account in terms of working with our customers directly and moving them faster because you have these two motions in parallel you are working with customers. So I feel really good about that however, just in general in the industry, we're not we're not immune to what's happened.

Speaker 12: So I feel really good about that. However, just in general in the industry, we're not immune to what's happening in the industry with people leaving.

And the industry with people, leaving.

Speaker 12: I think the good news for both Sean and myself is we were growing so fast at AWS. We didn't know anything but rapid hiring and onboarding. So we're just employing that. And what we've all decided as a leadership team here is within our go to market, we are not going to slow down. So we are going to rapidly.

I think the good news for best Shine and myself is we were growing so fast it David Yes, we didnt know anything that rapid.

Tiring and Onboarding. So we're just employing that and what we've all decided as the leadership team here is within our go to market. We are not going to slow down. So we are going to rapidly recruit hire and train as fast as possible and then the other thing that we're getting is we're taking that approach around the world will look at regional.

Speaker 12: recruit, hire, and train as fast as possible. And then the other thing that we're doing is we're taking an approach around the world to look at regional growth.

The case, what Graham said, we're seeing great growth around the world not just getting you asked though we're really taking approaches around the world with our sales and technical or get focused on what matters to them, but I feel good we're in great shape right now I just want to keep moving fast.

Speaker 12: Because what Graham said, we're seeing great growth around the world, not just in the U.S. So we're really taking approaches around the world with our sales and technical orgs to focus on what matters to them. But I feel good. We're in great shape right now. I just want to keep moving fast.

Thank you.

Speaker 1: Thanks, Matt. Thank you. And our next question comes from Kirk Maturin from Evercore ISI. Your line is now open.

Thanks, Matt.

Thank you and our next question comes from Kirk <unk>.

Evercore ISI your line is now open.

Speaker 13: Yeah, thanks very much. Maybe just to start, I'll follow up with Teresa while we have her. Can you just talk about the performance of the federal business this quarter? Obviously, a big quarter usually for federal, some of the trends maybe you're seeing in that particular industry, and then I have just a follow-up for Graham and Jason. Thanks.

Yes, thanks, very much maybe just to start off with Teresa.

Can you just talk about the performance of the federal business. This quarter, obviously, a big quarter in Chile for federal.

The trends, maybe youre seeing in that particular industry and then I have just a follow up for grant and then Joseph Thanks.

Speaker 12: So, our federal business, it did well, and we expect to have actually a very good key for a federal also. One of the things, I think you remember last quarter we announced that we had FedRAMP, and that's actually really helped our pipeline. We had quite a few customers, actually, that were...

So our federal business. It did it did well and we expect to have actually a very good Q4 is better off though one of the things I think you remember last quarter, we announced that we had fed ramp and that's that's actually really helped our pipeline. We had we had quite a few customers actually that were ready to go waiting on February.

Speaker 12: Ready to go, waiting on FedRAMP, so we're seeing them now start their pilot, which will go into production. You also heard about LIDO, so I'm super excited about that one, and that was also a result of our ability to have FedRAMP, so we expect to get net new programs. But just in general, not even just with slant, with my years of working with federal government, I've actually seen a trend where the government's actually moving to buying throughout the year, not just in the end-of-the-year quarter, because of everything that's happened with CR, and they're also moving to a lot more OTAs.

So we're seeing them now start their pilot, which I'll go into prediction. You also heard about light is that super excited about that win and that was also a result of our ability to have fed ramp. So we expect to get net new programs, but just in general not even just for flat with my years working with federal government I've actually seen a trend.

And where the government is actually moving to buying throughout the year not just in the end of the year quarter because of everything that's happened with CR and there also netting to a lot more otas.

Speaker 12: So our federal business is strong and I think with FedRAMP, you'll even continue to see that get stronger. Hopefully, because I'm here, I want to see it get stronger because I like that business.

Business is strong and I think with fed ramp you're leaving continue to feed that gets stronger hopefully because I'm here I wanted to just get stronger because I like that business.

Speaker 13: That's really helpful. And then Graham, I was wondering if maybe you could just give a bit of a view from a board member that's stepping in as CEO . Obviously, there's a lot of very frustrated shareholders, I'm sure some are on the call with you. You know, how does the board thinking about, you know, I guess,

That's really helpful and then Graham.

Maybe you could just give a bit of a view from a board member that stepping in as CEO, obviously theres a lot of very frustrated shareholders I'm sure. Some are on the call with you.

How does the board thinking about I guess things are at.

Speaker 13: things that are at your disposal, buybacks, things like that, to try to bridge the stock between where you are today and where obviously you hope to be. Obviously the optics are what they are, but I think there's a pretty big disconnect in the market between your optimism, obviously, and where the stock's trading. I was wondering if you could just provide maybe a little perspective on that, if you would. Sure.

Your disposal buybacks things like that to try to.

Bridge the stock between where you are today and where obviously you hope to be obviously the optics are what they are but I think theres a pretty big disconnect in the market between your optimism, obviously and where the stocks trading I was wondering if you'd just provide maybe a little perspective on that.

Sure. Thanks, Scott good to reconnect.

So mitra.

Speaker 3: So, you know, my job right now is clearly to keep the company focused on all the things we can control in the near term. You've seen good momentum improving.

My job right now is clearly to keep the company focus on all of the things we can control in the near term you're seeing good momentum improving.

Speaker 3: Competitive win rates over the quarters this year. I think you know really strong Q3 results We're focused on obviously great Q4 and getting off to a fast start next year. Those are all things we can control There's lots of obviously internal improvements. We can make just as part of running a business that that I think Certainly play to my strengths

Win rates over the quarters this year.

Really strong Q3 results with focus on obviously, great Q4, and getting off to a fast start next year.

Those are all things we can control there's lots of obviously internal improvements we can make just as part of running a business that I think certainly play to <unk> strengths.

I think.

Speaker 3: Beyond that, I mean, we'll certainly have, you know, a board level discussion on whether there are other things that we might wanna do, but I wouldn't wanna speculate on those now. And yeah, there is a big disconnect. You know, I sort of, I just look at our customer base, our technology assets, frankly our account presence in so many large important enterprises, our global reach.

Beyond that I mean.

Certainly have.

Board level discussion on whether there are other things that we might want to do but I wouldn't want to speculate on those now.

Yeah, there is a big big disconnect.

I sort of just look at our customer base, our technology assets.

Frankly, our account presence.

So many large important enterprises, a global reach the management team here and the employees.

Speaker 3: the management team here, the employees. I mean, I can't begin to describe the disconnect there, I'm afraid. So we'll leave that for time to solve. That sounds good. Thanks for the call. I appreciate it.

I can't begin to describe the disconnect. There I'm afraid so that's that will leave that for the time so.

That sounds good thanks for the color I appreciate it.

Thanks Kirk.

Thank you and our next question comes from Karl Keirstead from UBS. Your line is now open.

Speaker 1: And our next question comes from Carl Kirstead from UBS. Your line is now open.

Speaker 14: Okay. Great. Thanks, Graham. Nice to hear your voice again. I wanted to direct this question to Jason.

Okay, great. Thanks, Graham Nice to hear your voice again I wanted to direct this question to Jason.

Speaker 14: We weren't expecting Fiscal 23 guide on this call, so thank you for providing that. I think that's a positive.

We werent expecting fiscal 'twenty three guide on this call. So thank you for providing that I think that's a positive and I just wanted to ask a few Mike unpack it a little bit and in particular, the $3 9 billion, an IRR and the extent, Jason to which you might be embedding a mess.

Speaker 14: And I just wanted to ask if you might unpack it a little bit, and in particular the $3.9 billion in ARR and the extent, Jason, to which you might be embedding.

Speaker 14: a measure of conservatism for a couple of things, the somewhat murky macro environment out there, but also

<unk> of conservatism for a couple of things to come.

What murky macro environment out there, but also the fact that youre undertaking a siem.

Speaker 14: the fact that you're undertaking a CEO search and you probably have a desire not to...

Search and you probably have a desire not to leave an incoming CEO to tougher guide to meet so to what extent might you be embedding things like that or other factors in your outlook for year end <unk>. Thanks, a lot.

Speaker 14: leave an incoming CEO too tough a guy to meet, so to what extent might you be embedding things like that or other factors in your outlook for year-end ARR? Thanks a lot.

Speaker 4: Thanks, Kirk. I would say first, I think the, you know, clearly the fundamentals are very, very strong. The ARR growth of 37%, RPO bookings of 56%, dollar-based net...

Thanks Kurt.

I would say first I think the.

Clearly the fundamentals are very very strong the arrow growth of 37% <unk> bookings of 56% dollar based net retention of 130%.

Speaker 4: Um, so I think with that strength, um, you know, there

So I think with that strength.

There is still clearly been questions about our long term outlook and so I felt like and I think we felt it was really necessary just to provide an early view for FY 'twenty three.

Speaker 4: clearly been questions about our long-term outlook. And so I felt like, and I think we felt, it was really necessary just to provide an early view for FY23. We are going out five quarters on our ARR guidance, and certainly there is uncertainty. We've talked in the past about most of our customers trying to time their hybrid and cloud transactions.

We are going out five quarters on our IRR guidance and certainly there is uncertainty we've talked in the past about most of our customers trying to time their hybrid and cloud transformation and so.

Speaker 4: So, you know, with that uncertainty, we wanted to provide a number that we felt we had very high confidence on, ensuring we could, you know, hit that number. Clearly we have a $50 million range just on Q4 alone. So as we get through Q4, we'll tighten that range. And as we progress into next year, I think we'll maybe, you know, get a little tighter on what our expectations are. But again, I just thought it was important to have at least an early indicator of a high confidence.

With that uncertainty we wanted to provide a number that we felt we had very high confidence on ensuring we could.

Hit that number.

Clearly, we have a $50 million range just on Q4 alone. So as we get through Q4, we will tighten that range and as we progress into next year I think we'll maybe.

Get a little tighter on what our expectations are but again I just thought it was important to have at least an early indicator of a high confidence number great. I think that's I. Appreciate it and then just if I could ask a follow up really on.

Speaker 14: Great, I think that's appreciated and then Jason, if I could ask a follow-up really on the revenue line.

On the revenue line.

Speaker 14: I think you're sympathetic with all of us, it's tough to model, sometimes you guys beat

I think you are sympathetic with all of US it's tough to model, sometimes you guys beat pretty cleanly other times, it's a little bit lighter as the mix shifts I guess as.

Speaker 14: pretty cleanly. Other times it's a little bit lighter as the mix shifts. I guess as term duration compresses, and as Therese and her team do a good job increasing the cloud bookings mix, I can understand why that might create some pressure on revenues. But in the third quarter actually, your $665 came up pretty appreciably above your guidance. So despite these pressures...

Term duration compresses and as Teresa and her team do a good job increasing the cloud bookings mix I can understand why that might create some pressure on revenues, but in the third quarter actually you were 685 came up pretty appreciably above your guidance. So despite these pressures.

Speaker 14: What caused the revenue upside in the October quarter and why would that necessarily reverse in 4Q? Thanks a lot.

Cause the revenue upside in the October quarter, and why would that necessarily reverse in <unk>. Thanks a lot.

Speaker 4: Yeah, I think the, I mean, you know, the $15 million beat $15 million beat, you know, was

Yes, I think the.

I mean, the $50 million $15 million beat.

It was mostly a combination of factors, but the reality is we're also comping a pretty weak Q3, a year ago I think as we all recall and so the year on year growth was at 19%, but if you were if you were to normalize it would've been closer to I think what the guidance ranges for Q.

Speaker 4: mostly, you know, there's a combination of factors, but the reality is we're also comping a pretty weak Q3 a year ago, I think, as we all recall.

Speaker 4: And so the year-on-year growth was at 19%, but if you were to normalize, it would have been closer to, I think, what the guidance range is for Q4, which is in the kind of single-digit percentage.

Q4, which is in the kind of single digit percentage range.

Speaker 4: Um, and, you know, overall, um, you know, given the, that cloud, we're now expected to hit 70%. Um, you know, the fact that we still have positive revenue growth.

Overall.

Given that cloud, where now expected at 70%.

Fact that we saw positive revenue growth.

Speaker 4: I feel pretty good about. You know, last year we were obviously heavily negative. And so I think during this next few quarters.

Feel pretty good about last year, we were obviously heavily negative.

So I think during this next few quarters.

Speaker 6: You know, you'll just have to continue to rely on ARR as the metric. I'm hoping there's been, you know, I know it's been tough for you guys to reconcile that number to other numbers. But as you now see RPO bookings and current RPO bookings coming much more in line with ARR growth, hopefully that provides a little more comfort around, you know, around the overall top line growth. Yep. Okay. Super helpful. Thank you, Jason.

You'll just have to continue to rely on <unk> as the metric I'm, hoping there's been I know it's been tough for you guys to reconcile that number to other numbers, but as you know see RVO bookings in current <unk> bookings coming much more in line with Arrow.

So hopefully that provides a little more comfort around.

Around the overall topline growth, yes, okay Super helpful. Thank you Chad.

Thanks Carl.

Thank you.

And our next question comes from Brad Sills from.

Bank of America Securities. Your line is now open.

Great. Thanks, guys and maybe a question for Teresa while we have you on please.

Speaker 6: There was, earlier in the year, the cloud release, you delivered on a lot of work integrating the observability suite with Signal and Omnition and Plumber and Rigger. Curious what the customer reception has been since then in terms of interest, pipelines, or even deals with regard to this concept of one suite to run logs, metrics, and traces under one.

There was a earlier in the year the cloud release delivered on a lot of work integrating observe ability suite with signal.

<unk> and Plummer and rigor curious what the customer reception has been since then in terms of interest pipelines or even deals with regard to this concept of one suite to run logs metrics and traces under under one.

Speaker 12: So really positive, you know, we launched as you as you saw we launched in May

So really positive.

We launched as you as you saw we launched in May.

Speaker 12: And I've learned over the years of launching new things and you take things into the field, it takes a little bit of time for the field to get the motion going and how they actually really get their motion down to talk to the customer. But it's gone really well and throughout since May.

And I've learned over the years of launching new things and you take things into the field. It takes a little bit of time for the field to get the motion going and how they actually really get their mentioned down in fact, the kessler, but it's gone really well and throughout since may.

Speaker 12: We're getting more wins, pretty significant actually. We're happy with where we are. We always want to do better, of course, but we're really happy. The motions are good. Customers are really starting to understand observability because observability is this big word that there's multiple workloads underneath. When we start diving in with the customers and sharing the types of workloads and solutions, then they say, okay, tell me more.

We are getting more wins are.

Pretty significant actually we're happy with where we are we always going to be better of course that we're really happy. The motions are good customers are really starting to understand if durability. Because if there are abilities kind of a big word, but theres multiple workloads Bangor knee and so when we start diving in with the customers and <unk>.

During the types of workloads installations, then they say okay tell me more can we ran a pilot. So we're happy the team has good medicine, we have sellers in the field that we have targeted accounts. We're working we have technical specialists in the field and then we're working of course of course really closely.

Speaker 12: Can we run a pilot? So we're happy the team has good motion. We have sellers in the field that we have targeted accounts we're working. We have technical specialists in the field. And then we're working, of course, really closely with Sean's team as we get feedback from customers because in early days of launching, we wanna make sure we're taking that good customer feedback.

<unk> as we get feedback from customers because in early days of launch and we want to make sure. We're taking that good customer feedback. So he and his team can take that and build it ended may feature functionality.

Speaker 12: So, he and his team can can take that and build it into new feature functionality into the next year, but we feel really good about it. And I think we're going to, you're going to continue to see really positive growth in our observability suite.

The next year that we feel really good about it and I think we're going to get you're going to continue to see really positive growth in Europe is that variability sleep.

Speaker 14: That's great to hear. Thanks, Teresa. One more, if I may, just on the contract duration for Jason. The shorter duration that you're seeing here, does that go in tandem with a customer planning to move to cloud? In other words, are they signing shorter duration term deals in anticipation of going to the cloud? Is that kind of a one-to-one relationship when you have that kind of a shorter duration

That's great to hear thanks, Teresa and one more if I may just on the contract duration.

For Jason.

<unk>.

The shorter duration that youre seeing here does that go in tandem with the customer planning to move to cloud in other words are they signing shorter duration term deals with an anticipation of going to the cloud is that kind of a one to one relationship when you have that kind of a shorter duration deal.

Speaker 4: Largely, they're correlated. I'm not exactly sure what the R squared is, but it's definitely high. But yeah, that's why we took away the compensation mechanism for more than 12 months. We know that's what customer intention is. We have, obviously, a lot of cloud, as well as hybrid cloud migrations in place and expect those to continue. So I think they're highly correlated.

And largely they're correlated.

Exactly sure what the R squared is but it is definitely high.

Yes.

Why we took away the compensation mechanism for more than 12 months.

We know Thats what customer intention is we have obviously a lot of cloud as well as hybrid cloud.

Migrations in place and expect those to continue so I think they are they are highly correlated.

Thanks, so much Jason.

Thanks, guys. Thanks, Brian.

Speaker 1: Thank you. And our next question comes from Keith Bachman from BMO.

Thank you and our next question comes from Keith Bachman from BMO.

Your line is now open.

Speaker 14: Thank you. I'd like to ask two questions, one for Graham, then I'll come back to Jason. First on Graham.

Thank you I'd like to ask two questions one for grant and then I'll come back to Jason first on Graham.

Speaker 5: To a previous question, you used the phrase stock disconnect, and it certainly seems to be embedded in the valuation. And one of those I'd like to ask around that.

To a previous question you used the phrase stock disconnect and it certainly seems to be embedded in the valuation on one of those I'd like to ask around that.

Speaker 5: is the leadership change. The last year has been pretty tough, and it seems like Splunk is starting to make a transition where a lot of the metrics are settling out and kind of coming over the hill, so to speak. So why is this the right time for a leadership change? Because the signal it really sends in contributing to that stock disconnect that something's not working. So if you could just speak to that.

Is the leadership change last year has been pretty tough and it seems like Splunk is starting to make a transition where a lot of the metrics are settling out.

Kind of coming over the hill so to speak so.

Why is this the right time for a leadership change because of it.

The signal it really sends and contributing to that stock disconnect that something is not working so if you could just speak to that.

Speaker 3: Sure. It's a great question, Keith. I think if I put my board hat on, the job of the board is to represent the shareholders and ultimately build long-term shareholder value and I think the years

Sure.

It's a great question, Keith and I think if I put my board hat on.

The job of the board is to represent the shareholders and ultimately build long term shareholder value and I hate to use.

We've had very open and Frank and honest.

Speaker 3: We've had very open and frank and honest and friendly discussions with Doug about how long his tenure would be and sort of where is Doug's sweet spot as a CEO .

And friendly discussions with Doug about what how long his tenure would be and sort of.

Whereas Doug Sweet spot.

The CEO and.

Speaker 3: I think most people at some point, there's a zone of operation where all managers at some level have better and more relevant skills. I think as we got to the end of this year, it just became fairly clear that as you look at the next milestones for Splunk, we'll finish this year.

I think most most people at some point.

There's a zone.

Operation with <unk>.

All managers at some level have.

Better more relevant skills and so I think as we as we got to the end of this year.

It just became I think fairly clear that as you look at the next milestones with Splunk will finish this year.

Speaker 3: somewhere around $2.5 billion in revenue, obviously over $3 billion ARR. You look at next year's guidance, the following year, clearly, we're getting to be a really large company at that point.

Somewhere around $2 5 billion in revenue obviously, it's over 3 billion Arrow you look at next year's guidance. The following year clearly, we're getting we're getting to be a really large company at that point.

Speaker 3: We have aspirations clearly to be in the top 10 software companies of all time.

We have aspirations clearly to be in the top 10 software companies of all time.

Speaker 3: And so at some point, when you have that discussion, we got to the conclusion that it was time for a change. So then it's the question of, well, what's the best way to bring about that change? And I think.

And so at some point when you have that discussion.

We got to the conclusion.

It was time for change. So then is the question of what's the best way to bring about that change and I think.

Speaker 3: Ultimately, I think leaving Doug in the role for a long, uncertain period, potentially, while, you know, predecessors...

Ultimately I think leaving Doug in the role for a long uncertain period potentially will predecessors.

Search for US is kind of a tough place to put the CEO in the company.

Speaker 3: search for is kind of a tough place to put the CEO and the company and so the board concluded this was the right route forward. I mean that was our judgment and we stand by it and I think

So the board concluded this was the right report I mean does that that was a judgment.

But and I think.

My tenure on the board and my experience with the management team.

Led us to believe this was this was a good transition plan I'm here for as long as I need to be.

<unk> still here.

Absolutely, helping me with the transition certainly helping to reason with the fourth quarter.

So I think Theres no theres no sort of mystery behind this it was simply a sort of a recognition I think.

That was.

Speaker 3: a time of strength. The company had strong Q4 outlook. Always better, I think, to make that transition at a time of relative strength. I know the numbers are kind of confusing and we spend a fair amount of time explaining those each quarter.

Time of strength, the company's strong great quarters together, we've got strong Q4 outlook.

Always better I think to meet that transition to the time of relative strength.

And I know the numbers are kind of confusing and we spend a fair amount of time, explaining those each quarter.

Speaker 5: But I can tell you the board views the fundamentals of the business, which, you know, to us are ARR growth, cloud growth, you know, those are really strong. And I think we feel the business is going really well. So that's OK. Fair enough. Thank you, Graham, for that answer. Jason, I'd like to come to you on operating expenses and just how we should be thinking about it. So the first three quarters, OPEX is up about 25 percent year over year.

But I can tell you the board views the fundamentals of the business, which to us So arrow growth cloud growth.

These are really strong and I think we feel the business is going really well so okay. Okay fair.

Fair enough.

Thank you Graham for that answer Jason I'd like to come to you on operating expenses and just how we should be thinking about it. So the first three quarters Opex is up about 25% year over year.

Speaker 5: And as we think about next year, you mentioned that it was.

And as we think about next year, you mentioned that it was.

Speaker 5: OPEX is going to be a key contributor to the cash flow, but is there any directional barometers that you can give us on OPEX expenses, because those are within your control. Will that continue to grow in the mid-20% range, or any directional barometers you could give would be helpful. That's it for me. Many thanks.

Opex is going to be a key contributor to the cash flow, but is there any directional barometers that you can give us on opex expenses because those are within your control that the will that continue to grow in the mid 20% range or any directional parameters you could give would.

It would be helpful. That's it for me thanks.

Speaker 4: Yeah, we're, we're, we're, I mean, honestly, we're still going through our annual planning process. And that's why I didn't provide an OCF update. Now, we will definitely get you something next quarter. You know, I did kind of point out the three levers of, of, you know, cloud mix,

Yes.

I mean honestly, we're still going through our annual planning process and Thats why I Didnt provide another update now we will definitely get you something next quarter.

I did kind of point out the three levers of of.

Cognex.

Speaker 4: And that especially is important because of cloud growth and the mixed gross margin, and as well as, you know, the OPEX levers, which really the biggest piece in OPEX really is we have a very large go-to-market function that's having to both support, you know, an on-prem business as well as a cloud business, as well as all the migrations in between. And so we'll work through those details. We'll provide those, get you an update on those assumptions for next quarter. Okay. All right. Thank you.

And that especially is important because the cloud growth and the mix of gross margin.

And as well as the Opex levers, which really the biggest piece and Opex really is we have a very large go to market function that is having to both support and <unk>.

On Prem business as well.

Cloud business as well as all the migrations in between and so.

We'll work through those details will provide those.

Get to an update on those assumptions for next quarter.

Okay alright, thank you.

Thanks Clay in the queue.

Speaker 1: And our last question comes from Keith Wise from Morgan's family. Your line is now open.

And our last question comes from Keith Weiss from Morgan Stanley. Your line is now open.

Speaker 6: Thank you, guys, for sneaking me in here.

Excellent. Thank you guys for sneaking.

Taking me in here.

I.

The numbers are kind of confusing I got it.

Pretty confused here.

Speaker 6: You guys guided cloud ARR 1.1 to 1.11 billion for Q3, you came in below that, you came in at 1.106.

You guys guided cloud air or one one to $1 1 billion for Q3, you came in below that you came in at 1.1.

Speaker 6: right? Or at the midpoint of the range, right? You didn't beat cloud ARR, but your cloud mix is higher than expected when it was like in that, like right in the middle of your guidance range, like,

Great.

At the midpoint of the range, but you didn't be clouded IRR, but your cloud mix is higher than expected when it was like in that.

Right in the middle of your guidance range.

That can be it doesn't sound like overly shrunk quarter like why is the cloud mix higher in revenues lower if you just like in the middle of your guidance range.

Speaker 6: That to me doesn't sound like an overly strong quarter. Why is the cloud mix higher and revenues lower if you're just like in the middle of your guidance?

Speaker 4: OK, so yeah, we had a fairly tight range on cloud. We did deliver net new cloud AR of $130 million, second biggest quarter behind Q4 of a year ago ever. And so yeah, it's $4 million below. So I think on net new, that's, what, 2.5% or something different.

Okay. So, yes, we had a fairly tight.

<unk> range on cloud, we did deliver net new cloud data are of a $130 million.

<unk> biggest quarter behind Q4 of a year ago ever.

And so yes 4 million below so I think on net new that's what two 5% or something different.

Speaker 4: And there's just a lot of moving parts and you know, it's it's I'd call it a very small Very small impact. We we certainly had line-of-sight to You know the overall ARR and the cloud ARR, you know, we came in what five million ahead So a couple percent above overall

Theres, just a lot of moving parts and it's.

I'd call it a very small.

Very small impact we we certainly had line of sight too.

The overall IRR on the cloud.

Came in what $5 million ahead, so a couple of percent above overall.

Speaker 4: and $4 million below the top end of the range, but certainly in our range. So a couple percent below there. I mean, overall.

And $4 million below the top end of the range, but certainly in our range. So a couple of percent below there.

I mean overall.

Speaker 4: The fact that we had really strong net new ARR, I think second best quarter, that's that's kind of what we're most proud of. And we're we're guiding to a pretty significant increase.

The fact that we had really strong net new IRR I think second quarter. That's that's kind of I think what we're most proud of.

We are guiding to a pretty significant increase in this quarter and cloud so so overall.

Speaker 4: in next quarter in cloud. So overall, I realize there's a lot of pieces moving and it's hard to reconcile them, but the overall fundamental strengths, if you look at the slides that we provide, the net new ARR growth speaks for itself.

I realize there's a lot of pieces moving and it's hard to reconcile them.

But the overall fundamental strength if you look at the slides that we provided the net new <unk> growth speaks for itself. So.

I don't know what else to it.

Speaker 6: know what else to write. But I mean, you make the point earlier that this is, again, an extremely easy to compare because you guys had a very poor quarter and three to a year ago. And you like I just don't understand like the.

You made the point earlier that this is again, it's an extremely easy compare because you guys had a very poor quarter and through two a year ago and you'd like.

Just want to understand like the.

Speaker 6: cloud is pressuring your revenue growth, but you didn't exceed your target in cloud. You exceeded your target on non-cloud ARR. So it seems like that would buttress revenue growth.

Cloud is pressuring your revenue growth, but you didn't exceed your targeting cloud.

Exceeded your target on non cloud the IRR. So it seems like that would buttress revenue growth there.

Hey.

I don't understand how Q3 <unk>.

Speaker 6: I don't understand how Q3 aligns to Q4.

Lines to Q4.

Speaker 6: in terms of kind of where you're guiding to on revenue and why revenues have to come down after you beat on non-cloud ARR.

And in terms of kind of where youre guiding to on our revenues and why revenues have to come down after you beat on non cloud.

Speaker 6: Well, because CloudMix is going up to 70% in the quarter and that has the biggest impact. But you didn't exceed your CloudARR target, but CloudMix is ahead of your target?

Well because cloud mix is going up to 70% in the quarter and that has the biggest impact.

You didn't exceed your cloud IRR target, but cloud mixes ahead of your target.

Speaker 4: Cloud Next is ahead of our target next quarter and this quarter it was a little bit ahead.

Cloud mix.

Is that what's ahead is ahead of our target next quarter and this quarter. It was a little bit ahead.

Speaker 4: Cloud mix, now the other thing is cloud mix is on a TCB basis. And so I think, unfortunately, the reconciliation you're doing is a little bit of apples to fruit, or apples to oranges to come close.

Cloud mix now the other thing as cloud mix is on a TCE basis, and so I think unfortunately reconciliation youre doing is a little bit of apples to fruit or apples to oranges.

Yes.

Speaker 6: So what's happening with contract value is different than what's happening within ARR?

So it doesn't have any what's happening with contract value is different than what's happening within <unk>.

Well.

Speaker 4: Well, I mean, they don't directly correlate. They do correlate, but not directly.

They don't directly correlate.

They.

They do correlate but not directly.

Yeah.

Speaker 6: Got it. And then I guess this one's for Graham, just in terms of the CEO transition, I understand.

Got it and then I guess this one is for grant just in terms of the CEO transition I don't understand.

Speaker 6: companies do CEO transitions all the time. We often talk about succession planning way ahead of time and you have plans in place on how you're going to do that succession planning. What seems unusual is doing it in the middle of a Q4. I think it's the timing that people are scratching their heads around. I would have assumed that the board had talked about succession planning and talked about CEO transitions.

Ladies do CEO transitions, all the time right and.

We often talk about succession planning way ahead of time and you have plans in place on sort of how youre going to do that succession planning what seems unusual doing it like in the middle of the Q4 I think it was the timing that people are kind of scratching their heads around.

I would have assumed that the board has talked about succession planning and talked about sort of CEO transition many times in sort of the lifecycle what was the impetus.

Speaker 6: many times in sort of the life cycle. What was the impetus in Q3 to do it rather than after Q4 have something kind of more in place? What was the impetus to do it right after Q3 in the middle of trying to close your biggest quarter of the year?

In Q3 like to do it rather than like after Q4 has something kind of more in place like what was the impetus to do it.

Right. After our Q3 in the middle of trying to close your biggest quarter of the year.

Speaker 3: Well, actually, Keith, I think the end of Q3 is generally the best time to do these kind of transitions. Actually, we did. We've done our previous two sort of transitions, one, you know, Godfrey to Doug, and then before that the head of sales at the end of Q3. I think Q4 generally has a momentum of its own, so I think there's a lot of salespeople who have been working.

Well, Keith I think I think the end of Q3 is generally the best time to do these kind of transitions actually we did we we've done a previous to sort of transitions one.

Go free to Doug and then before that the head of sales at the end of Q3.

Q4, generally hasnt momentum of its own so I think theres a lot of salespeople who are working.

Speaker 3: deals hopefully they bring to fruition in the fourth quarter. So I think there's a momentum in Q4 that probably doesn't exist in any of the other quarters. So I think we certainly looked at that and considered that this was a good time to do it.

Deals hopefully to bring to fruition in the fourth quarter. So I think there's a momentum in Q4 that probably doesn't exist and into the other quarters. So I think we certainly looked at that and consider this was was a good time to do it.

Speaker 3: And of course, yeah, you always want to be able to promote from an internal management team if possible, and certainly Splunk has done that in the past, but we weren't ready to do that at this particular time. So it just didn't work out. Got it. Excellent. Thank you guys.

And of course, you always want to be able to.

Promote from.

Total.

The management team. It is possible certainly splunk has done that in the past, but we weren't ready to do that.

A particular time so it just.

Didn't work didn't work out.

Got it excellent. Thank you guys for taking the questions.

Okay. Thanks Keith.

And thank you Andy.

Speaker 1: And thank you. And now I would like to turn the call over to Graham Smith for closing remarks.

Now I would like to turn the call over to Graham Smith for closing remarks.

Speaker 3: Well, thank you again for joining us. Great to reconnect with many of you from a few years back. I do want to thank Doug again. I mean, I can't, nobody can underestimate just the amount of blood, sweat and tears Doug put into the success of the company and that's absolutely a huge, huge part in the long-term success of the company and navigated some really tough transitions over the last few years, so I want to recognize that.

Alright, well. Thank you again for joining us great to reconnect with many of you from from a fuse back.

I do want to thank Doug again.

<unk>.

Comp nobody can underestimate just the amount of blood sweat and tears, Doug put into the success of the company.

That's absolutely a huge huge part in the long term success of the company.

Navigated some really tough transitions over the last few years, so I want to recognize that.

I come back to.

Speaker 3: Splunk's just an important company in the industry, there's no two ways around that. I talked earlier about the fundamentals, Cloud ARR growth, account growth, net dollar...

Splunk is just an important company in the industry. There is no new two ways around that.

We talked earlier about the fundamentals.

They are all growth.

Growth.

Net or dollar based retention rate.

Speaker 3: I think the numbers will start to normalize in this year. I think it'll be really FY24 before they're kind of back to normal. But things will be, I think, clearer as we go through this year. I am really excited and energized to be here. And I think we're all, you know, we have a lot to prove in Q4. And I think we're extremely excited to talk to you back in February for the Q4 call. So thanks so much for joining.

I think the numbers will start to normalize in this year.

It'll be really FY 'twenty four before the kind of back to normal, but things will be clear as we go through this year.

I am really excited choice to to be here and I think we're all.

We have a lot to prove in Q4 and I think.

Extremely excited to talk to you back in February.

The Q4 call. So thanks, so much for joining us today.

Speaker 1: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

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