Q4 2022 Splunk Inc Earnings Call
Thank you for standing by and welcome to Splunk's fourth quarter of fiscal year 2022 earnings conference call. At this time all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session you will need to press star one
on your telephone. Please be advised that today's call is being recorded. Should you require any further assistance. Please press star zero. I would now like to hand, the call over to Ken Tinsley, corporate Treasurer, and Vice President of Investor Relations.
Thank you, operator, and good afternoon, everyone. With me on the call today are Graham Smith, Shawn Bice and Jason Child.
After market close today, we issued our press release, which is posted on our Investor relations website, along with supplemental material.
We also issued a press release regarding our new CEO. This conference call is being broadcast live via webcast and following the call an audio replay will be available on our website.
On today's call, we will be making forward-looking statements, including financial guidance and expectations, such as our forecast for our first quarter and full-year fiscal '23 and our future expectations of revenue growth revenue mix renewals duration RPM growth cloud growth bookings cloud gross margin total gross margin.
Operating cash flow and the metrics we will report on and guide to in the future as well as trends in our markets and our business, our strategies and expectations regarding our products technology customers demand and markets.
These statements are based on our assumptions as to the macroeconomic environment in which we will be operating and reflect our best judgment based on factors currently known to us and actual results or events may differ materially.
Please refer to documents, we file with the SEC, including the Form 8-K filed with today's press releases. Those documents contain risks and other factors that may cause our actual results to differ from those contained in our forward-looking statements.
These forward-looking statements are 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 accurate or current information.
We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non-GAAP results is provided in the press release and on our website.
With that, let me turn it over to Graham.
Thank you, Ken. And good afternoon, everyone.
I'd like to begin by saying we are shocked and saddened by recent events in Ukraine, and we hope that the situation can be resolved quickly.
While we don't have any Splunk based in Ukraine, we do have friends and family members who are affected.
We are monitoring the situation carefully and we will prioritize employee safety and continue to serve our customers in Eastern Europe.
And just to confirm, Splunk withdrew from the Russian market in 2019.
On today's call.
I got a lot to cover, Q4 results, a new Splunk CEO.
The status of our business transformation, normalization of our financials and guidance strategy.
I will be joined by president of products and technology Shawn Bice.
And of course, Jason Child, let's get started.
When the CEO transition was announced back in November, the Splunk Board put its trust in our outstanding team to execute a strong Q4.
I'm very happy to report that the team really delivered. Jason will get into more detail, but I'm delighted with our results. Annual recurring revenue.
Cloud [NRO], cloud DB NRO, revenue operating margin and operating cash flow were all strong.
In addition to a great Q4, I'm equally excited to announce the appointment of Gary Steele, a visionary technology executive and founding CEO of proof point as the next CEO of Splunk effective April 11.
Gary has over 30 years of experience.
And a track record of successfully scaling SaaS operations and growing multibillion-dollar global enterprises.
Over the past two decades. He has led proof points growth from an early-stage startup to a leading security as a service provider to some of the world's best-known organizations.
Gary's software and cyber security expertise deep understanding of recurring revenue models operational focus and unwavering commitment to driving innovation and customer success will be invaluable to splunk on a path to $5 billion and beyond.
I know I speak for the whole board when I say how much we're looking forward to working with Gary and how excited we are to have him on the team.
In addition to this leadership update we're also announcing that our president and Chief growth Officer, Teresa Carlson will be leaving Splunk later this quarter to pursue other career opportunities.
Theresa has made many important improvements to both go to market strategy and operations during her time at Splunk.
I'd like to personally thank Teresa for her contributions and wish you the very best for the future.
Moving to our customer success, we have some exciting new expansion and renewal transactions during the fourth quarter.
Including Fred Loya Insurance, a new Splunk customer and one of the largest Hispanic owned and operated companies in the US.
Who purchased Splunk cloud with workload pricing to further safeguard its customer data and automate security initiatives.
[Bulks,] a provider of cloud content services expanded their commitment to Splunk cloud platform, while also adding Splunk application performance monitoring from our observe ability product group.
One of the leading online travel platforms is migrating from Splunk enterprise to Splunk cloud platform with workload pricing, allowing them to expand the application development reduce costly downtime drive timely new product releases and ensure optimal customer experience as travelers to discover and book.
Hotels, flights and more.
Yes.
The National Health Service in the UK expanded their use of Splunk enterprise, enterprise security and ITSI across
their cloud environment and are now using Splunk for synthetic monitoring to provide richer insights into the end-user experience for UK citizens accessing NHS digital apps.
And finally, one of Japan's largest auto manufacturers expanded its use of Splunk enterprise platform to speed up problem detection and decrease impact investigation in isolation times from hours to minutes boosting efficiency by more than 19%.
Turning to our cloud business transformation, we are very pleased with our execution and progress in fiscal '22.
Cloud represented 62% of our total software bookings compared with 50% in FY '21 and 35% in FY '20.
We continue to make progress on improving cloud gross margin.
And our workload pricing model has gained significant traction since its launch.
In Q4, nearly all of our new cloud business was based on workload pricing.
And at the end of the quarter, more than 40% of total cloud [ARO] was based on this model.
We've also done a great job renewing and expanding thousands of splunk customers during the year.
Moving onto the financials. As you know there are two factors that significantly affect our revenue and bookings growth.
The percentage of bookings from cloud and average term contract duration.
Both of which are driven by customer choice.
For FY '23, we anticipate our cloud bookings percentage will approach 70% for the full year.
And we believe the average term contract duration has stabilized in the range of 18 to 24 months.
Because the year over year changes for FY '23 will be less than the year over year changes for FY '22. The result would be a significant normalization of our financials, Jason will provide more details later.
We're also making some changes to how we provide guidance going forward.
We've heard from many of you that while ARR has been a useful operational metrics during our business transformation.
It's a point in time measure thats difficult to reconcile with revenue.
Now that all revenue growth is normalizing and as close to AOR growth, we've decided to provide only annual guidance for this metric, although we will report the numbers for each quarter retrospectively.
We will also update our annual [ARR] guidance, if and when appropriate.
It's our expectation that by the end of fiscal '23.
We'll be able to dispense with ARR as our reported metrics.
Before I hand the call over to Shawn, I want to close with this observation.
When you walk into any network operations center or security operations center.
They are using Splunk.
You see that our platform is central to our customers' day to day work.
It is not out on the periphery, it's fundamental, it's core.
That's why more than 95 of the fortune 100 use Splunk.
And that's also why we continue to show such strong renewal rates.
I want to thank our customers and our partners for placing their trust in us.
And of course.
I'd like to personally thank all Splunk, a sustained focus on executing so well in our most important quarter of the year.
It's been my great honor to work with you over the past three and a half months.
Now I will turn the call over to Shawn.
Thank you, Graham. It's a pleasure to join today's call and I'm here to share some thoughts about Splunk innovation.
Splunk's mission critical to our customers' operations and we believe three things will grow our significance and opportunity in FY '23 and beyond.
First, customers want a platform they can build on. Second, customers want consistent security and observe ability across any cloud on-prem or edge environment. They don't want disjointed siloed experiences. And third, customers don't want their data merely to be a record of what happened in the past.
They want that data to make things happen in the business now.
Only Splunk offers the combination of an extensible data platform integrated full-stack observer ability and security and end to end coverage for multi-cloud to edge.
We're building on that differentiation and it starts with our flexible and scalable platform that supports an expansive set of use cases.
You can leverage Splunk built search and reporting security and observe ability solutions access more than 2,400 apps available on Splunk base and build custom applications tuned to your specific needs.
We have exciting platform improvements that we'll announce in June at comp 22. So we hope you'll join us for that.
With security, Splunk takes a fundamentally different approach than pure-play security vendors.
We're able to do that because we have a massively scalable data platform with advanced analytics at our core.
Our solutions are complementary to XDR capabilities as XDR solutions only collect a subset of security data.
Leading organization to open to threats hiding in missing data.
With security fundamentally being a data problem, Splunk is best positioned to help protect organizations from ever-evolving threats across complex hybrid environments.
On the observer ability front, we've innovated to provide end to end visibility across infrastructure health application performance and digital customer experience with contextually rich AI-powered investigations.
We recently announced that customers can now integrate splunk logs with broader observer ability telemetry data with log observer connect.
We are gaining significant market traction and last month, we were named a leader in one of only two fast movers and the Giga AUM radar for application performance monitoring.
To sum it up, it's clear that digital transformation is accelerating and requires data-driven innovation.
Innovation can't succeed without a foundation of security and resilience.
With our extensible data platform integrated security and observer ability and future vision, we are uniquely positioned to help organizations achieve all three of these critical outcomes.
We're excited about the opportunity ahead of us. Now I'll turn it over to Jason for more on the numbers.
Thanks, Shawn. Q4 was an excellent finish to a strong year. Most importantly, the significant financial headwinds related to our transformation are now largely behind us.
For the full year FY22, revenue growth accelerated from minus 5% to positive 20%. Our appeal bookings growth accelerated from minus 17% to positive 35%.
Operating cash flow returned positive, reaching $130 million from almost $200 million negative last year and we expect all of these metrics will continue to improve in FY '23.
To be clear, we are setup for the normalization of our core financial measures this year and beyond dramatically simplifying our financial story.
We ended the year with total ARR of $3.12 billion up 32% year over year and Cloud ARR at $1.34 billion up 65%.
We ended with 675 customers with ARR greater than $1 million.
Up 32% and 317 of these customers had cloud ARR over $1 million of 70% over last year.
We continue to drive cloud adoption and developed migration strategies with our customers. As Graham said, cloud mix is likely to increase more gradually from this point.
Our full-year cloud bookings mix was 62% for FY '22. And we estimate that we will approach 70% this fiscal year.
This increase of roughly eight percentage points compared to the 12 percentage point gain we saw from fiscal '21 to fiscal '22.
Now that revenue is normalizing and average term contract duration is more comparable on a year over year basis. Our appeal bookings is becoming a better indicator of overall bookings momentum and will be an important growth metric going forward.
Our confidence in bookings growth is based on the scheduled renewal of approximately $1.5 billion of annual contract value this year and a consistently high cloud DB NRR.
Reached 132% last quarter.
In Q4, our field bookings was $1.4 billion.
Up 38% over last year.
Onto the P&L.
Q4 cloud revenue was $289 million up 69% over last year, reflecting continued customer adoption of our cloud platform.
Total revenues were $901 million in Q4 up 21% and significantly higher than planned due to more term contract volume and longer average duration than we estimated.
Professional services and education accounted for 5% of total revenues in the quarter.
On margins, which are all non-GAAP.
Cloud gross margin was 67% in Q4 up five points from last year, as we realized leverage from scale and the elasticity of the platform.
Total gross margin was 82% down slightly on a year over year basis due to the greater proportion of revenue contribution from the cloud.
Operating margin was 16% in the quarter significantly better than planned due to our bookings and topline outperformance.
Turning to guidance.
With most of the heavy lifting on transformation behind us, we're entering the current year FY '23 with the financial model normalizing. As Graham mentioned, we expect ARR and revenue growth rates will converge this year.
Going forward, we will continue to provide guidance on more traditional operating and profitability metrics revenue operating margin and cash flow.
As Graham also noted.
As Graham also noted.
Although we will maintain our full-year ARR targets and update you quarterly on actual ARR throughout the year, we expect to retire ARR as a core metric at the end of fiscal '23.
We ended the year with 18 customers with ARR greater than $10 million up from 10 last year and all indicators point to continued strength in the demand environment.
Based on this strength, we are maintaining our total ARR outlook of $3.9 billion.
And cloud ARR of at least $2 billion by the end of this fiscal year.
We expect total revenues of between 3.25 and $3.3 billion, which will follow our seasonal trend of 40% first half 60% second half.
On the expense side, we expect cloud gross margin to gradually expand towards 70% by the fourth quarter as we continue to migrate our cloud customers to the newest version of our services.
Improving cloud gross margins should drive expansion of total gross margin nearing 80% for the year.
Non-GAAP operating margin should also expand to between breakeven and positive 2% as a result of expense leverage and strong revenue growth.
On the cash flow side with our customer base now on annual billing cycles, our full-year operating cash flow should rebound sharply to at least $400 million in fiscal '23.
Near term for Q1, we're expecting total revenues of between 615 and $635 million with a non-GAAP operating margin of negative 20% to negative 25%, reflecting our normal Q1 seasonality.
In closing Q4 was a great finish to the year.
NAND environment remains strong and with the impacts from our business transformation, mostly worked through our setup for continued growth with a much simpler financial model is excellent.
Let's open it up for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of Brent Thill of Jefferies. Your line is open.
Question for Grand and Sean as it relates to the security element of your story. If you could just give us a sense of what youre seeing in the pipeline.
I believe so.
And the path to securities.
A very large driver between 40 and 50% of revenues, maybe Jason can follow up and just provide a little more color around what's happening in this particular segment. Thank you.
Sure I mean, just at a high level Brent it's clearly still the biggest and most important driver of our business today I think it's approximately.
50%, but Jason can follow up later Sean.
What would you say in terms of kind of what we're seeing around customer activity.
Yeah.
Customer activity is.
With cyber security being heightened right now.
We anticipate demand from customers to to really increase as they look to strengthen their posture.
With heightened risks that's all around us today.
And there is no no question I think customers are not confused at all that cyber security is business critical.
And really what customers are always talking about is how quickly they can detect and resolve things.
So for example, there's customers that will share stories, where without Splunk enterprise security.
On average their time to resolve an incident would take about a week.
And then with the Splunk enterprise that week would then turn into a day so they become much more efficient, they're using splunk analytics in the context of problems and they can resolve it quicker.
And then we have another capability that customers are thrilled about its called rules based alerting so.
Going from a week to a day with rural Rural based alerting you go from a day to 10 minutes and that is how quickly customers are able to resolve those issues and we have over 2000 automated actions built into our system drag and drop visual playbook editors and it really just underscores how mission.
Critical <unk>.
Thank you.
Thanks Brent.
Thank you. Our next question comes from Kash Rangan.
Goldman Sachs. Your question please.
Hey, Thank you very much congratulations on many fronts there.
Granted team how are you thinking about the sales leadership TTM transition, obviously <unk> been very nicely in the space of the last 10 months or so.
<unk> got guidance, which we certainly appreciate youre through the tougher parts of the transition.
When what are the next milestones to look for a GPM leader in the transition involved since you have targets that you've laid out in the interim before you find a new head of TTM. Thank you so much.
Sure Kash.
As I said in my prepared remarks, we're super grateful for his.
His time here.
It's unfortunate.
To see you go but I'm sure she'll do something exciting.
Going forward.
Clearly, we've got an interim position.
For about five weeks before.
Before Gary stops my intent is certainly I'll just I'll be managing go to market directly just for that period, and then I think gary's approach will very much be priority I know we've already discussed it is what it made a lot of customers in the hill wanted to get a lot of employees and leaders.
And so I don't I don't know at this point if his intent would be to to necessarily replace that rolled the chief growth officer, whether he'll he'll have another structure.
I think it would be premature to take.
Give you any kind of a.
Temp to the and insight into where his mine will be I'm sure he'll just wanted to hear.
He'll want to ingest a lot of data before.
Before we make any decisions.
Well. Thank you so much Greg.
Thanks, guys.
Thank you. Our next question comes from Raimo <unk> of Barclays. Please go ahead.
Thanks, and congrats to the new leadership announcements.
Can we talk a little bit on the cloud momentum that you're seeing there what are customers actually doing is that kind of moving existing workloads in the cloud are you seeing starting to see some expansions into signal. So people are using it for infrastructure monitoring and APM. So just just to get an idea of like how.
Much of that is net new versus like a conversion over from on premise. Thank you.
Yeah. This is Sean.
What I would say where customers the way customers typically start off as they'll if they're new to Splunk cloud they'll take a smaller workload.
And then they'll get familiar with the cloud how it works what to expect et cetera.
But what we see as customers.
Get comfortable and they build some confidence than really big workloads come over.
And that's a that's a.
It's a good sign of what they believe that on the platform and once they land their customers will absolutely start to expand and start using different capabilities. There is theres quite a few customers that think about our observe ability and security tools like going hand in hand.
It allows them to see things and and Thats, a pretty common thing and then of course.
Our platform is so extensible you'll.
Youll find virtually every customer basically building custom applications for whatever use case.
They have in their business. So we start off pretty small and that we grow big and then they start to Theyre, all really looking to manage things and that's how they end up using more capabilities from our product portfolio.
Perfect on Raimo, just to give you a little more customer.
Info certainly.
The names, we talked about in the prepared remarks.
Bulks is using observe ability.
So as the NHS the largest travel company is the large automotive manufacturer. So I'm, just giving you a flavor of.
Some of our wins and expansions this quarter overall, we've been very pleased if we look at observe ability. This year. If you remember we really only launched the integrated observe ability suite in may of this year. So we don't have a full year, but the growth has been certainly the fastest of any of our product groups and with with Deloitte.
With kind of where we ended the year and obviously you've got aggressive goals for next year.
Perfect. Thanks, that's really clear and then Jason one for you now that we should finally got used to or are we kind of moving on at the end of the year, which is kind of probably is a good thing, but just to kind of understand the logic. So the idea is at the end of 'twenty free we haven't so much cloud, which meets its all really properly rottable that we do.
Or any more to understand the dynamic in the business. The right is that the right way to think about it.
Yeah, Yeah, Ray, but I'd say the first thing is the.
We're really just not going to guide on it for the rest of this year were not taken it away. It's just.
Now that we're actually seeing the full normalization of revenue to <unk>, which is something that I know you guys have been asking about for a while.
Now now now is the time to make that transition again, we will still provided as you know it is pretty tough to do the reconciliation to <unk> to revenue in fact, it's not really fully possible.
Without.
Very amount of granular detail.
The other thing is as <unk> is a little hard to forecast and the reason it's hard to forecast is that <unk> is actually impacted by cloud mix.
I think as we've told you guys in the past customers, who choose to move to cloud get an average of about 1.5 X lift.
In <unk> due to it being a fully hosted service.
So overall, our plan is with normalization occurring this year that focusing on GAAP metrics.
Like what you would normally would look at for for companies that are enterprise or SaaS.
Is now kind of the right time since we're in the kind of the last phase of our transformation.
Perfect. Thank you congrats.
Thank you very much.
Yes.
Thank you. Our next question comes from Brad Zelnick of Deutsche Bank. Please go ahead.
Excellent. Thank you so much and congrats on all the progress guys and congrats on being able to attract Gary.
Into the CEO seat I mean really great hire.
My question for you Jason.
It's really good to hear the 400 million plus operating cash flow.
You have mentioned for fiscal 'twenty, three how should we think about the trajectory of cash flow from here now that we're coming out the other side of the transition.
Well, yes, so really as you.
I think followed the story for a few years now.
The last year of kind of normalized cash flow was about 296 billion in 2019, and then as we started seeing actually I was I'm, sorry, FY 'twenty.
And then of course, we move to.
Move to change our collections from upfront to annual upfront to kind of conform with industry standard and so so really what youre going to see now is this next year is the first full year I am sorry. It was FY 19 that was $296 million in these cycles to negative in 2020 , one and then a pause.
Will your of normalization in FY 'twenty, two with $128 million.
Next year, the first full year of normalization at 400 million you should expect to see it go up from there in terms of.
What the magnitude is.
That's kind of more of a timing question I think in the past I've told you that getting back to a 20% cash yield as a percentage of IRR or revenue is.
Is where we've been before the transformation and expect to get to after the transformation.
We'll need to wait until we provide multiyear kind of targets before I can give you the exact timeframe.
Helpful. Jason I really appreciate it maybe one quick follow up is.
To follow on Ramos question we've.
We've seen you guys, giving great disclosure over the years.
What should we focus on because if you really don't lead us.
He is going to come up with their own calculation of all the numbers, we do get but what should we really look at as the leading indicators for the business at this point.
Well for growth I think revenue in <unk> bookings.
Or just basically RPM bookings.
Very similar to what billings was before 606. So I think those are the two best growth measures and then ultimately operating margin is starting to come back in line, that's still going to take another year or two to fully normalize.
I would say cash flow is is the best measure for kind of efficiency of the business until you see that full normalization on operating margin.
Awesome, Thanks again guys.
Thank you.
Yeah.
Thank you. Our next question comes from Phil Winslow of Credit Suisse. Your line is open.
Hey, Thanks, guys for taking my question and congrats on a strong close of the quarter and particularly outside of just the cash flow guidance for this coming year wanted to focusing on the observer ability obviously, you've had a lot of investment there in terms of just organic R&D.
R&D in inorganic acquisition, but I guess the question is does Shaun.
Do you hear about sort of why why Splunk is wondering where these customers. What is the feedback that you hear back and then from your perspective.
On a product side, what are kind of the focus points going forward for the observer ability sweep and then just one follow up for Jason.
Yeah.
<unk>.
Typically when a customer is looking at observe ability, they're usually in the cloud.
They are building.
New cloud application and when I say build cloud application, it's usually a micro service architecture.
So instead of an old monolith has a single app their stitching together a whole bunch of components that would make up an app and really there's no human being that's going to be able to understand all of that and thats why they need tools and observe ability.
Particularly RF observe ability has built and distributed tracing and then.
Anyone who is trying to run a huge app in the cloud that's component base for micro service architecture. They go straight to observe ability. They use distributed tracing we have full fidelity measurement, which means.
Operator can literally see every single event and that system understand the relationship between all the components and they can basically manage the environment with ease that's what draws people into it.
And then when we think about the road ahead.
My answer to this will always be the same it's what customers need us to do we partner with customers. All the time theyre the ones that create a road maps and so anytime we look at our roadmap together, it's always working backwards from our customers.
Yeah.
Got it and then Jason just a question for you looking at sort of the sales productivity and capacity in terms of just productivity and ramp time wondering if you guys just update on there and then as you're thinking about just sort of go to market capacity in fiscal 'twenty, three or how should we think about just the.
The potential increased investment there.
Thanks, Bill I guess in terms of productivity.
We've seen pretty significant gains in productivity last year, and we expect to see that next year as well and the reason why is because the renewal base is growing so significantly in.
Efficiency on a renewal is much higher for other sales motions.
And so the renewal base went from $6 million to $700 million last year, it's going to be around $1 $5 billion. This year.
The one that provides I think.
Higher confidence in our forecast for next year, then really than we've ever had.
And then two it does provide for pretty significant efficiency gains.
So does that answer your question.
That's helpful. Thank you.
Thanks Bill Thanks.
Thanks Bill.
Thank you. Our next question comes from Keith Bachman BMO. Your question. Please.
Hi, many thanks I was just going to try to put into Gram last quarter I'd ask you about why it was.
Perhaps the appropriate time for Doug good transition.
My summary of your answer was skill sets and really about scaling the business.
And when I think about.
So Gary is going to run at two point was about half the size of what Splunk is for what Splunk is guided to be so I'm just wondering.
Yes.
It doesn't seem like <unk> was the scaled determined perhaps but if you could just give a little color on why you think Gary is the right person to lead Splunk at this juncture and then I have follow up for Jason. Please.
Sure No I think so.
Great question, and obviously, a highly relevant question I think the three things I talked about on the call last time.
Good fit from sort of values point of view culture, someone who knows how to drive performance with culture.
Certainly building companies at scale experience and global companies et cetera, and then.
Then strong operational skills, along with that and then the third thing I'd talked about was the ability to translate what is relatively complex technology into business value I think that's it.
Really important scale in the markets, which we operate in.
No.
We had great candidates, we had both internal and.
Great into Atlanta external candidates and I think it's.
Always tough to sort of decided in the end what your priorities are but I think the.
Basically where we come back to with carriers. He's he certainly a builder he's shown amazing operational.
<unk>.
Resilience is basically to take a company from zero to over $1 billion proof point. He certainly has worked in large scale companies both at Sun and HP. So he understands how multibillion dollar.
Enterprises work, but then we get enormous enterprise software experienced SaaS experience cyber security domain experience.
Just all of the things that.
Ultimately blend together, we think to provide.
The right leader for Splunk so.
I certainly view them as a strong operator, and maybe Sean I know, Sean adjacent or talk to them showing that if you. If you wanted to add any any comments to my assessment of Gary.
Yeah.
When I first met Gary.
I found somebody who is a careful listener.
Very customer centric.
He definitely struck me as an operator in terms of rolling up the sleeves I felt like you had good judgment and then he of course has a long track record of managing boards and working with investment communities.
And I was hired by by Doug and I thought I was going to be working for Doug.
But the reality the reason I'm here today.
I'm going to be here is because of Gary he he's he seems like an outstanding leader, but that's why I'm here.
Okay, well, thank you for that answer and I'm glad I'm glad you're committed.
Jason was just kind of wanted something.
Thank you.
No you go ahead and ask your question and then Jason can cover both of them.
Okay Fair enough, Jason I did want to transition.
The billion and a half.
Of renewals that are up for this year and just wanted to try to understand how that manifests and and revenues and so.
Is that mostly the perp to term that was written three years ago and does that in your mind is that mostly go into cloud.
Just how should investors be thinking about that opportunity and how it will manifest itself in terms of the metrics that we will see.
Okay. So I guess first let me add on our pile onto Graham and Sean's answer on.
Gary what I would I mean, they covered most of the aspects the only thing I would add as I thought.
Yeah.
Very definitely.
Strong operator, very strong alignment on values and culture.
I think the one thing that also was really unique and helpful. As he has gone through a transformation.
That is a.
As you all know it is kind of a full contact sport.
Yeah.
While we are in the last phase still having that experience I think is helpful as well.
Okay. So second on your on your question about the renewals. So on the 1.5 renewals those are really customers, who may have already made the perp to term conversion.
And those customers are now coming up for their first term renewal.
And.
While we.
First way to predict what the mix of cloud is going to be for those customers I would look to kind of what our current cloud mix is if I look at this.
This last year, we were at 62% little higher in the back half.
If you look at the.
If you look at the kind of 60.
<unk> I think we said next year, we expect it to be approaching 70% you should assume that that renewal base is going to be likely right in right in line with that percentage of moving to cloud.
Okay, alright, many thanks.
Thanks Keith.
Thank you. Our next question comes from Matt Hedberg of RBC capital markets. Please go ahead.
Hi, guys. Thanks for taking my question and download from my congrats to Gary as well it'll be great working with him again.
One for me Graham I guess sure Sean with the success of Splunk Cloud you, obviously talked a lot about the success of that in your prepared remarks I'm wondering if you can comment on if that's starting to help accelerate new customer ads and really any comment maybe on just how fast your overall customer base, it's growing I know theres a huge expansion opportunity, maybe just that growth of that customer base.
Yes, I'll take that I think.
Clearly we've added.
I think a similar number of customers in the in the low thousands each year, we have not been a customer new logo kind of machine I think there is an opportunity for splunk in the mid market that we havent really fully.
Going after and I think Thats, certainly something that I would imagine you'd be on Gary's list of opportunities.
There are some technical things we might have to do.
Go after that.
They're relatively straightforward.
And I think in our go to market motion, where we're very much focused on larger and larger enterprises. So I think there is opportunity.
I think I'd leave it at that and then since you know Gary give him a couple of quarters and then and then ask him that question again.
Great. Thanks, a lot Graham.
Thanks, Matt.
Thank you. Our next question comes from Michael <unk> of Keybanc. Your line is open thanks, guys and congrats on lots of fronts.
Jason for you back to the issue.
Obviously, it's great to simplify.
I guess my question is if you get rid of they are in terms of guidance and then eventually.
What do we do about the volatility that alright. Thanks visited we still get in revenue relative to duration and mix as we could see.
This quarter, so and that's not that that would impact <unk>.
<unk> bookings as well, which is equally impacted by duration. So how can you help us to get the right model.
And then rectify any discrepancies when those things happen.
Well I mean, we are providing a lot of metrics right now and I mean, youre still going to get all of those I mean, youre still going to get <unk> again, we're not pointed away.
And again I think I've heard for most of you guys that you can't reconcile AOR to the other metrics anyhow as its performance or its an operating metric and not even a GAAP or non-GAAP metric.
So that's part of the reason why we think it makes sense now that you are finally seeing normalization in revenue with <unk>. So in terms of RPM bookings, we do provide duration you can duration adjust our appeal bookings.
I mean, we don't provide that.
Did do it for example in this quarter you actually would have a slight increase I think it would've been 42% instead of 38%.
But we provide the numbers so that you guys can try.
Try to do whatever reconciliations you want to do but overall as I said earlier I think revenue in <unk> bookings really are the best measures to evaluate our growth and that's pretty consistent I think with most others in software.
And then.
Maybe for Sean and <unk>.
Jason combined.
I understand you thought the cloud gross margins would flatten here and it looks like you do exited 70%. So is that indicative of some success with solving some of the challenges you've had with the rollout of the new SCP platform in terms of scaling and elasticity.
Yes, Jason I'll go ahead and start.
The team is making good progress on.
We're trying to iterate make progress every single week.
So you are seeing some success there and just as a reminder, like when our customers start they usually start with small workloads.
The really big ones show up and the reason.
These really big complicated workloads are so important.
As we have to fine tune our system and then we have to make sure that we're getting these workloads exactly what they need when they need it.
And not charging them for anything that they don't use so when you think about that.
The type of work that we're doing just imagine that fine tuning.
Behind the scenes from a customer's point of view the clouds, just working on scaling just fine.
But that that's that's what we are steadily making progress toward.
Yes.
I don't know there is a whole lot to add other than as I said in the prepared remarks, I do expect us to get to approaching 70% by Q4 next year.
That the puts and takes or how many large scale cloud migrations do we have in and then how quickly can we tune and really optimize the elasticity.
Those migrations.
We're trying to make sure we're giving ourselves room.
Because overall this is generally.
I'd say more of an execution challenge that an innovation challenge, we know how to do it. It's just a matter of you really need to get those large scale migrations done and then be able to have a stabilized cloud mix and thats. When you can really work on tuning gross margin.
Thanks.
Thanks, Mike.
Thank you. Our next question comes from Gray Powell with <unk>.
Your line is open.
Great.
Yes, congratulations on the strong results and I'm excited to see dairy joining the team where we're a big fan of his work gets a proof point as well.
So yes, I just wanted to follow up on the.
The $1 5 billion in ACB, that's up for renewal this year and I know you've touched on it already but I just want to make sure I'm thinking about it correctly. So it sounds like most of that is on trend today, you called out like a one five times multiplier when on Prem goes to cloud and you talked about call it 70% of booking.
<unk> B from your cloud form factor so are those sort of like the moving parts, we should be thinking about when this comes up for renewal and then also how should we think about additional upsell or cross sell of new products on that opportunity just because.
I hear that it's relatively easy to sell more products in the cloud form factor than it is on Prem.
So so yes, just anything that you can help us.
Fine tuned the thinking on that ACB up for renewal.
Yes, I would say on the on the $1 5 billion of renewals. It is the vast vast majority of it is is it's not entirely on prem but it's.
Almost almost all on Prem.
These are customers that first converted from perp to term roughly three years ago in a cloud mix at that time was very very small.
And so in terms of the portion as you said I think the factors right should you assume that they are converting at roughly somewhere in this 70 ish percent range and should they be getting roughly 1.5 X lift.
Largely right. The one thing to factor in though is that as Sean said earlier most of these customers don't just lift and shift everything at one time, they tend to move it more gradually and they move some workloads over.
And it really just depends on whatever makes the most sense for them.
And so that's part of what makes it tough to predict exactly what cloud mix is going to be.
Those I think the factors you identified and hopefully the color I provided make it clear as to.
How and why we're so confident in the growth trajectory for next year.
I just wanted to.
To add a couple of observations from phone calls I've been only customers this quarter.
I think.
We are.
As we said in our prepared remarks, we are still obviously, leading with cloud and over time, we absolutely expect to have a higher and higher percentage of our overall business on cloud, but the reality is when you talk to large customers when you talk to banks and <unk>.
Large enterprises.
Jason has just been describing it is just not a simple Copa it's like one point there on the term and then the next minute everything's on cloud so.
Just wanted to emphasize in the Big picture here is that we're making incredible progress on cloud.
But equally there's going to be a bunch of large customers, who will take quarters and maybe years in some cases, we'll there'll be in this hybrid.
Environment, maybe there'll be an hybrid for a long time and that's one of our many strengths at Splunk that we alone can handle those hybrid environments perfectly.
Understood. Okay. Thank you very much.
Great.
Thank you.
Thank you. Our final question comes from Fatima <unk> of Citi. Your line is open.
Good afternoon, and thank you for taking my questions.
Jason I wanted to draft off of Greg's question earlier with respect to the inputs and variables.
Consideration for it.
Or renewable HCV business.
I wanted to ask you about the impact of workload pricing specifically to that.
Cool.
Renewables and how is that.
Sort of manifesting in terms of maybe lower <unk> as customers sort of recalibrate and the resources that youre using and how payers are paying you for.
Splunk Enterprise and then I have a quick follow up.
Yes so.
Yeah, what I would say is that.
Okay.
Of the of the renewal.
Alright.
Sure.
Sorry could you repeat the question.
Sure Yeah, just at the variables.
Variable is involved with the one.
$1 $5 billion in ECB, that's up for renewal.
I'd imagine another consideration as customers are electing to move on.
A workload pricing format, alright, yes pricing structure. So how is that how should we think about that sort of dovetailing impacting negatively or positively to data our renewal and congrats profile.
Okay, great. So what I would say is that I think as Graeme said in their prepared remarks.
Substantially all of our new cloud business is adopting workload based pricing we have.
<unk> also said in the past that of any customer that adults workload based pricing.
They're putting in between 152 times more.
Data into Splunk than they were before.
So what that means is.
I think it's better for us and better for customers customers are effectively paying maybe at a lower price effectively on whats being adjusted on a per terabyte basis, but theyre, putting more in so the effect of price ends up being about the same.
Which was really kind of the whole objective what we're trying to do is get folks not to restrict or limit data that they put into splunk to try to only because we are perceived as expensive and they were just using us for some of the most critical workloads and theyre trying to find a cheaper alternative otherwise. So so as a result, there really is no impact.
On the kind of overall net ASP relative to where it was before theyre just pain, maybe a slightly lower price per terabyte than they were before or if you convert terabytes into workloads. If you will because it takes a little bit of math to do that but does that makes sense.
Absolutely that's very clear. Thank you for that and then just the last one for me if I may just with respect to.
Kind of hiring environment.
That has become increasingly competitive I wanted to get your perspective on what you're seeing in terms of wage inflation, what's sort of baked into your full year.
Operating margin targets and maybe specifically on your free cash flow or operating cash flow.
Guidance for fiscal 'twenty three.
Much of an influence.
Stock based comp as a result of some of the east.
Competitive hiring.
Environment backdrop, and that's it for me thank you.
Sure. Adam This is Gregg I'll take those I think generally like.
Pretty much every other company that I can name.
We've seen an uptick in attrition certainly over over the last four to six quarters.
I don't consider Splunk is being anywhere near that.
The top of that list I think we we've done a good job.
Retaining.
Retaining employees I think I think the news of Gary's appointment will be.
Super.
Motivational for employees and obviously for people who are considering joining the company.
So I don't I don't I think we.
We've budgeted a few percentage points more on our annual focal nothing dramatic, but I think we certainly had to to put something in there that's baked into our cash flow forecast I think it's all we've taken appropriate steps and I think I think we'll find that we'll find out if it was enough as we go through the year.
It's clearly a very competitive hiring environment, but ultimately <unk>.
People stay at companies because they believe in the mission of the company they like to be.
The ball so.
I like the team they work with.
They feel they're learning and developing in their roles I think ultimately there is only so far you can chase people with with with cash compensation. So.
I'm not really sure I have got anything <unk>.
Illuminating to describe on the on the stock comp basis, So I think.
I'm not exactly sure. What your question was maybe you want to do you want to have another shot at it on the stock comp side.
Sure Yeah, just the influence and where we should expect stock based compensation levels to trend over the course of this year, just specifically percent just on the comments you just made.
It's an important driver contributing factor anyway to operating cash flow.
Yes.
<unk> is at the end of its evergreen in terms of its stock plan. So it will be actually going out to shareholders.
In the middle of this year to get approval on the new plan. So I think generally you would expect stock based comp to probably trend down over time.
Not trend up but I think beyond that we haven't really given any guidance specifically around around stock comps. So I think that's all I can really say.
Fair enough I appreciate that detail. Thank you so much thanks for Tamar.
Thank you at this time I would like to turn the call back over to Graham Smith for closing remarks, Sir.
Alright, well. Thank you before I do anything I, just want to thank Jason for being an absolute trooper.
It may or may not be apparent to you guys, but Jason is not in the office with US. He is in a biohazard suit somewhere down in San Jose He or she is COVID-19. So.
<unk>.
Absolutely pushed through it to be on the call today. So thank you Jason much appreciated.
I think I predicted on the last call I said I'd be pretty shortly on this call might be disappointed if I was on the next one.
No.
<unk>.
Satisfied with my guidance on that and I think youll.
Youll, obviously youll have a great time, working with with Gary in the quarters to come it's been a blast for me working here for the last four months.
Clearly you're going to see Super boat show the board.
Think splunk is very well set up I talked about the operating plan how important it was to get the operating plan.
And the guidance really as well for the company set up FY 'twenty three and I think the think Splunk is incredibly well positioned and I know Gary.
As a leader who will capitalize on all the assets of the company the technological and the people assets of the company to continue to drive growth for many years to come so thanks for all your support and.
Look forward to talking to you maybe in the callback. So I appreciate the time. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yes.
Okay.
Thanks.
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Okay.
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Okay.