Q1 2023 Splunk Inc Earnings Call

Thank you for standing by and welcome to Splunk first quarter 2023 financial results Conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone as a reminder, today's program is being recorded.

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

Thank you operator, and good afternoon with me on the call today are Gary Steele and Jason child.

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

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 looking statements, including financial guidance and expectations, including our forecast for our second quarter and full year fiscal 2023.

And our expectations of revenues renewals operating margin operating cash flow and rule of 40 scale.

As well as trends in our markets and business, our strategies and our expectations regarding our business products technology customers demand and markets.

These statements are subject to risks and uncertainties and based on our assumptions as to the macro microeconomic environment and reflect our best judgment based on factors currently known to us actual events or results may differ materially. Please refer to documents, we file with the SEC, including the 8-K filed with today's press release those docs.

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

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

We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non-GAAP results is provided in the press release and on our website. So with that let me turn it over to Gary.

Good afternoon, I'm thrilled to join my first block earnings call reconnect with many of you and talk with those of you I haven't met yet.

It's been an amazing six weeks for me, it's a rapidly come up to speed on the business and the opportunities in front of us.

I'd first like to thank Splunk Chair Graham Smith for leading the team during our CEO transition I recognize that such periods of uncertainty can create distractions, but this team stayed focused and drive solid execution in the quarter I'm excited to report that we grew total revenues by 34% to $674 million and cloud revenues by <unk>.

66% to $323 million, reflecting strong customer demand in bookings momentum.

Jason will dive deeper into the numbers in a few minutes I'd like to start by sharing what inspired me to join Splunk, what I've learned so far and my initial priorities.

Coming from a cyber background I've always admired splunk for the role that is played in providing the largest companies in the world unparalleled visibility that is essential to security teams to understand what's happening in their environment. Given this data centric approach I also fundamentally believe that there was so much more that can be done in that.

<unk> given the complexity of an ever growing attack surface and an unrelenting threat environment. Additionally, through my discussions with the board walkers and customers I began to understand the true power of this platform and the value, it's bringing to organizations that are leveraging it for durability as well as many other U.

S cases.

What I came to learn is that Splunk is the technology underpinning empowering many of the largest companies in the world.

Splunk is the system of record that's deeply embedded within customers' businesses and provides the foundation for security and resilience. So they can innovate with speed and agility.

All of this translated to a massive untapped unique opportunity for them, which I believe we can drive long term durable growth, while progressively increasing operating margins and cash flow.

Over the past couple of years of Splunk transformed itself to a cloud company. It also positioned itself on a growth path with the critical ingredient variants to grow from over $3 billion in <unk>, two 5 billion and beyond.

Underlying all of this is a loyal customer base that continues to expand their usage of Splunk.

For example in Q1, our cloud dollar based net retention was over 130% a metric that is best in class among all SaaS companies.

With the proliferation of digital and cloud transformation security I T and Dev ops teams are faced with an ever evolving threat landscape.

Increased complexity from piling on more and more tools across hybrid and multi cloud environments.

And the silos created by all these data sources and fragmented teams that lead to inefficient detection and resolution.

There is an enormous market opportunity to help customers navigate this new reality.

One provides an insight into all data across the entire organization to ensure our customers' security resilience and agility to innovate.

For example, a global it services provider and new Splunk customers selected us in the first quarter for a multimillion dollar deal to oversee their knockin sock with a focus on improving security and cyber resilience. This customer like many of our largest saw the value in having highly scalable unified solutions for <unk>.

Security and observer ability on a common platform, there's three year cloud deal replace their legacy Sim.

As another example, a global apparel company extended their use of Splunk during the quarter with a multimillion dollar order why their tech ops organization has already been standardized on Splunk for cloud based logging and observe ability their security organization was using a different security platform that lacked adequate scalability and insight.

Into organization wide data.

The customer expanded splunk across both tech ops and security in parallel this decision enabled them to gain value from the same data, but for different use cases, which reduce their total cost of ownership, while broadening visibility across their system.

My third story is a workload pricing deal we were selected as the best cloud based solution for growing financial services company, serving millions of consumers delivering a scalable and efficient solution that provides greater visibility we replace their long existing Tim provider.

This deal underscored, our platform's ability to consolidate customers existing tools to reduce outages and mitigate business risk to help protect in customers.

The common thread that runs through these customer stories is there a unique ability to get full fidelity real time visibility into their data, which are versus their on prem and multi cloud environments at virtually unlimited scale and velocity our customers use splunk to immediately realize actionable insights irrespective.

The use case be it security.

Ops Dev ops are countless other operational challenges.

And let me be very clear on this point, we offer unique technical attributes that no. Other company provides our customers deeply trust splunk with the security of their most critical business processes, which is why we've earned the right to support broader aspects of their organization and based on that trust customers commit to Splunk.

The long term I look back at our 100 largest customers in each of the last 12 quarters and on average our retention rate with these customers is over 99%.

Delivering such high value continues to earn us industry recognition.

Already this year Gartner has named US the top market share leader across security and it operations and the only vendors to support all three approaches to AI ops, including data and analytics tools AI ops features and AI ops platforms.

We've also been recognized by constellation Giga, ALM and research in action for leading the observer ability market.

I have been overwhelmed by smokers passion and high energy and we have an exceptional base of talent, serving our customers I continue to meet with our teams around the world to understand our go to market and product opportunities from these conversations I see an opportunity for more streamlined processes across the company in.

In line with this my first priority has been to increase internal speed and agility across our people and organizations.

Flattening, our org structure will help us do that.

Just that following the departure of treats a carlson we did not backfill of her role as president of go to market. Today. We're also announcing the departure, Sean Bice president of products and technology, and we will not backfill his position either.

I will be hands on with the go to market and product leadership teams with an emphasis on scaling efficiently where we can we appreciate your contributions here, Sean and wish you. The best of luck in your next endeavor.

Last week, we announced the Petro <unk> has joined the company as our general manager of EMEA.

Petro brings over 25 years in leadership roles with Salesforce, Microsoft and others and she'll oversee go to market strategy in the region welcome Petra.

We've also added our newly appointed Chief customer Officer, KDB Yaqui to our executive leadership team as a tenured splunk or Katy leaves 200 people on our customer success and professional services teams.

To help customers deploy splunk and accelerate their time to value.

The other top line priorities for me our business execution of this strategy.

We have to know what customers need in order to execute well and so I've set the personal objective with the field to meet with 100 customers. In my first 100 days of Splunk, It's an ambitious goal I realize but it is imperative for me to get deep and broad knowledge of how our customers view, our engagement along with the value and services levels. We.

Deliver these inputs will be critical to product and go to market decisions.

I look forward to meeting with customers over the next several months as they travel worldwide and during our annual customer bad Dot Com. This June 13th through 16th at the MGM Grand in Las Vegas join us in person or virtually to hear our exciting product announcements and how customers like stripe Papa John's Rei, New bank Heineken and many.

Other industry leaders use splunk to stay secure and resilient as they innovate with speed and agility.

In closing I am eager to build upon the exceptionally strong foundation that many splunk visionaries before me have built as our recent momentum demonstrate this is the best time to be here at Splunk, we have an enormous opportunity to grow our business into a global enterprise software and services provider and I'm excited to lead this.

Team during their path.

$210 billion in revenue and beyond my sincere thanks to each and every spanker at all of our customers for your continued commitment now I'll turn the call over to Jason.

Thanks, Gary Q1 was a good start to the year with total revenues of $674 million up 34% over last year and cloud revenue of $323 million up 66%.

Total revenues were significantly higher than expected, reflecting more normalization in our model plus higher term contract volume, mostly from several very large renewals.

Q1 cloud revenue was also up sharply over last year, reflecting continued customer adoption of our cloud platform.

Professional services and education accounted for 7% of total revenues in the quarter.

As I said last quarter with revenue normalizing and average term contract duration more comparable on a year over year basis. Our appeal bookings is becoming a better indicator of overall bookings momentum in Q1, <unk> bookings was $491 million up 32% over last year, reflecting strong customer demand.

Our customer retention and expansion rates continue on their very impressive track, thanks to our strong product and services value proposition as well as our customer centric support approach.

Our cloud <unk> was 130% in Q1 and has been remarkably steady at this level since we first disclosed it several years ago.

We ended the quarter with total <unk> of $3, two 1 billion up 30% year over year, and Claudia or a $1 $4 billion of 60%.

We had 690 customers with <unk> greater than $1 million up 28% and 329 of these customers had clouded IRR of one for $1 million up 62% over last year.

On the margins, which are all non-GAAP cloud.

Cloud gross margin was 68% in Q1 of seven points from last year as we continued to realize leverage from scale and elasticity of the platform.

Total gross margin was 75% up three points year over year, and reflecting the sharp improvement in cloud margin.

Operating margin was negative eight 5% in the quarter significantly better than planned due to our top line outperformance and some modest expense optimization.

For our EPS calculation, although it doesn't apply this quarter. It's important to note that we've adopted ASU 2020 that show six which includes the share impact attributable to our convertible notes. So for modeling purposes. If you estimate of GAAP or non-GAAP net income position in any future period, you should add $22 3 million shares to your fully.

Diluted weighted average share count.

Turning to guidance.

For Q2, we expect total revenues between $735 and $755 million with a non-GAAP operating margin of between negative eight and negative 11%.

Looking further out due to our outperformance in Q1, plus the strength of our renewal base and solid execution, we are increasing our full year revenue expectation by $50 million to between three three and $335 billion and we now expect non-GAAP operating margin of about 2%, which is at the top of our previously guided range.

We are maintaining our total <unk> and cloud are our full year targets and we're reaffirming our operating cash flow expectation of at least $400 million for the year.

So with revenue normalizing and cash flow now, reflecting our changing customer and bill in terms from three years ago traditional growth and profitability metrics are becoming more meaningful.

This year, we're tracking to around 35% on a rule of 40 scale based on Ocs, which is a nice step up to the 25% last year and demonstrating the earnings power of our model.

In closing execution in Q1 was solid and we're set up for a great year.

With the impacts from our business transformation, mostly behind us the growth of our business and leverage in our model are becoming clearer.

With that let's open it up for questions.

Certainly ladies and gentlemen, if you have any questions. At this time. Please press Star then one if your question has been answered and you'd like to move yourself from the queue. Please press the pound key our first question comes from the line of Kashagan from Goldman Sachs. Your question. Please.

Congratulations on the quarter over quarter, Gerry nice to meet you and I am curious to get your perspective on when you look at Splunk as a business in the past I know you've talked about your ambition to to get the company to five maybe even $10 billion in revenue what are the things that excite you. The most about Splunk. If you can just expand on that that'd be great and also.

A very interesting time in the markets.

Everybody is worried about capital.

Traction in GDP inflation that sort of thing.

What is your overall sense as to how the Splunk portfolio.

Could hold up in the event of a.

More challenging cross card outside.

Labor market inflation rates et cetera, sorry for that along with your question.

Just to get your perspective thanks.

The problem cash and nice to meet you.

On the first part of the question the things that really excite me here are one how deeply embedded splunk is in some of the largest companies in the world the way in which we underlie everything theyre doing from a security perspective, and how they're running their operations is incredibly impressive and it really plays out in.

Our.

Dollar based net retention.

So I think that we're just in a very unique position, where we're delivering tremendous value to customers and I think there is so much more that we can do in the market.

I'd say that was the number one thing that really got me excited when I got here.

Roughly six weeks ago now going to your question about the macro environment one of the things that I am personally encouraged by is that while there is lots of turbulence and a number of factors in the macro.

Environment. The reality is that given the security environment that we're living in.

With increasing concerns about what might happen relative to Ukraine. The continued concern about ransomware and other issues Splunk sits right at the center of providing the visibility that security organizations need to understand what's happening and so while there could be.

Less than favorable market conditions, we're really mission critical and the value that we're delivering and you extend that more broadly to the underpinning of all of their critical apps I think we're in a very good position to weather whatever storm might be ahead.

Wonderful congrats and look forward to the journey ahead. Thank.

Thank you so much thanks Kash.

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

Gary welcome Congrats on the role.

During the quarter on the license component was very strong.

Versus cloud I'm, just curious if you could.

Walk through perhaps what you saw on that and in for Jason maybe if you could just address.

The security versus non security components of the story I would assume the security business.

Business continues to do very well like your peers have been doing can you talk about the non security aspects of the business are you seeing the same level of strength there any color would be helpful. Thank you.

Yeah, I'll start and I'll, let Jason jump in here.

So.

From a mix perspective, we saw strength, both in cloud and an on Prem.

We're seeing many of our large customers work through the details.

Migration to cloud as we look across the whole year, we're very much encouraged by.

The level of momentum and interest we see there and I'll, let Jason speak to some of the specifics as it relates to the exact number.

Yeah and in terms of the security business.

<unk> durability platform those businesses continue to do well, but security is still the largest percentage of the business.

Thank you.

Thanks, Brian .

Thank you. Our next question comes from the line of Brad <unk> from Deutsche Bank. Your question. Please.

Great. Thank you very much and congrats as well on a strong print and welcome Gary Gary just related to how deeply embedded and strategic you see splunk.

Moving to its customers I wanted to double click a bit more on the leverage that you see in the model and to protect the potential you see there because you talked about the efficiency and productivity of the investments <unk> made some and I think your reputation reputation along these lines preceded itself.

And we got the examples of maybe not back filling.

Some of the roles and departures, but anything else you can share would be really helpful. Thanks.

Yeah, a couple of things so one is.

The role that we're playing for these mission critical customers and the role that plays.

It has tremendous it puts us in a really unique position, where theres tremendous future opportunity and as we think about the long term model here and I indicated this in the prepared remarks I do believe that we have tremendous opportunity for long term durable growth, but importantly, increasing cash flow increasing.

Hello, and cash flow margins overall operating margins overall and I think there is efficiencies to be had in the organization as I indicated were taking a first step by flattening. The organization I think thats one step forward in helping us operate more efficiently with more agility with more speed and decision, making and I think over the <unk>.

Long haul that does translate into a lot of financial benefits for our shareholders.

Excellent. Thanks, so much.

Thanks, Brad.

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

Thank you.

And Craig to talk again.

My question was if I listen to you today.

Do you see like your first.

Yes.

<unk> conference call.

This does seem to be a little bit more focused on security.

Can you maybe talk a little bit about <unk>.

How penetrated you see Splunk like you can bring that kind of security lens to it.

And also like how much of that is due to the fact that in this more volatile time.

We have obviously the situation that security spending will probably still be prioritized over other areas just a little bit of your take on that one. Thank you. Yes. It's a really good question nice to talk to you again.

I believe coming from a cyber background that Splunk has always had a very unique position, but I also believe there is more that we can do to create a tighter partnership with customers and ultimately derive more value from.

The security buyers and so I'm personally very optimistic given the role that we play today and how we're positioned in those customers and to your point I fundamentally also believe that security will be much more resilient than other things other areas.

If theres more turbulent economic conditions so.

I'm really excited about the opportunity the role that we play in.

And the fact that we're giving customers visibility they can't get from any other set of capabilities. So that uniqueness for me gets me very excited about the future and the role that we can play with security I think what you are hearing partially is my voice just coming from a security background I think we can elevate and emphasize.

Some of those things within Splunk and.

There is short term opportunity there.

And then one follow up for Jason.

Look.

The question I'm getting from investors is around cloud and software.

Software companies or beaten race, where if you look at your quarter like cloud, where it's kind of reconfirm is there anything that you.

Want to point out in terms of from a macro perspective that you're seeing there or is it just kind of early in the year just what's the take on on the guidance on the different drivers for the guidance. Thank you.

Sure, Yes, I would say first as it comes to cloud very happy with the performance in Q1 cloud mix of 57%.

Just up a tick a year ago.

But but really the motion for our cloud business really is tied very much due to or to the renewal base and our renewal base is the smallest in Q1 and it really starts to go throughout the year. So so I would call we did reaffirm cloud guidance for full year.

At reaching the $2 billion number which puts us in a pretty unique place.

And already implies strong growth.

But we do expect as you see the cloud mix growth throughout the year I think we said last quarter and no change to our assumption that we expect cloud mix to be approaching 70% by year end.

That will continue to see to see strength in the cloud business.

That's super helpful. Congrats from me and all of that correct.

Thank you thanks very much.

Thank you. Our next question comes from the line of Phil Winslow from Credit Suisse. Your question. Please.

Hey, guys. Thanks for taking my question and congrats on a great start to the year and Gary very excited to be working with you again.

I'll start with <unk>.

With you obviously, we've had a lot of questions on this call about security, but the other splunk built.

Solution on top of the platform observer ability wondering if he goes to sort of your view on sort of what splunk brings to the secured.

The market relative to some of the competitors, what really stood out to you and how sort of the integration of all of those acquisitions coming in than going up.

Follow up for Jason on the numbers.

Got it.

So what are the things that has been really interesting to me is to see the leverage that we're getting from these traditional security customers into observed ability. So the.

The market opportunity is very simple and that when something.

It goes bump in the night and Theres an application failure.

Companies want to know is that a security issue or is that just an application failure and its really looking at a lot of the same data so we benefit from.

Being able to have that insight and through that.

Leverage we're seeing lots of interest extending logs into metrics and traces to have a broader.

More fully.

A full view of what's happening from a durability standpoint, so I feel like there's tremendous leverage and to your point relative to.

Product.

We're really the only vendor today out with Lord logs metrics traces all integrated so our progress on that has been tremendous.

And while we're still early in the market, we had some very nice wins in the quarter and we're seeing the leverage that we have extending our footprint with the platform into the traditional observer ability market. So we feel really good about that positioning and I think it represents a really nice growth opportunity over the coming years.

Yes.

And then Jason.

A question for you I don't forget this question on the <unk> number in the cloud obviously Super Super strong and you still have continued growth in the non cloud base, how much of the cloud DVR growth is coming from people sort of lifting and shifting from on Prem or is that still the vast majority of just call. It net new in other words.

A clean sort of apples to apples GB in our number.

Yes, I mean, so overall, our overall <unk> is growing within a few hundred basis points of the cloud deep in our rate that's been consistent for a while if you then unpack how much of the cloud business.

Is growing in kind of on a durable basis without migrations, it's a little harder to figure that out, but but our analysis indicates that it's maybe a couple of hundred basis points of tailwind, but but not a material impact on the overall <unk> number.

So in other words the growth dynamics are sort of dependent on the cloud itself versus <unk>.

Migration, great that's right awesome, thanks, guys keep up the good work. Thanks.

Thanks, Joe.

Thank you. Our next question comes from the line of Keith Weiss from Morgan Stanley . Your question. Please.

Thank you for taking the questions. This is Sanjay Singh with Morgan Stanley on for Keith gave me congrats on the role and look forward to working with you again I have two questions one for Jason and then.

One for you Gary Jason on the guidance I was wondering if you could walk us through maybe some of the underpinnings of the assumptions around guidance with respect to.

Closure rates or any other sort of metrics.

And to what degree did you provide an extra layer of conservatism recruited and just given all the sort of macro uncertainty.

Going out in the market just walk us through those assumptions.

And then for Gary.

Question is really around.

What you sort of see the opportunity on the go to market side, I mean, you talked about flattening the organization in terms of how SaaS.

SaaS should should Splunk moved to cloud versus continuing to make this more of a choice for customers. What's the what's the right balance for that when we think about the context of kind of improve operating margins.

Cash flow sort of the pace of her.

The decision to move to cloud I'd love to get your at least your initial thoughts on that.

Mentioned.

Okay. So on the first question I'm, not going to be able to unpack it probably to the level that you would like for modeling, but I will tell you there's kind of four primary pieces.

So as we look at either whether it's <unk> or net new <unk>.

Whatever we start with an overall renewal rate, which we've consistently had a very very very high percentage of the 90% range and then we factor in what is our expectations on expansion and as you've seen with the deviantart or that number has been relatively consistent. We then have to layer in the new logo expectation.

<unk>, which that that's probably a little harder to do especially.

If there is a slowdown in macro and then lastly expectations on churn, which is I guess kind of the inverse of that renewal rate, but that's usually been a pretty consistent single digit percentage number so across all those dimensions, we're not really seeing big changes, which is why we're reiterating the guidance and didn't change.

For full year.

And if something changes, we'll let you know that.

At this point.

Feel very good about the Q1, we delivered with a strong <unk> bookings of 32%.

The revenue growth highest revenue growth we've had in three years.

So overall feel like the fundamentals are in very very good position.

And to the other part of the question what are the interesting things to think about is the way in which our largest customers wanted to deploy.

And one of the things I've learned in my six weeks here is we see tremendous value in being able to support customers that have multi cloud hybrid environments, which is almost every single large customer theyre operating across multiple clouds and they continue to have significant operations on prem and so.

Our ability to be able to.

Bring all that together under a single architecture provide federated search so they can search from a single instance across all those environments is something that's super unique but in saying all of that it does create more complexity and what percentage. It will ultimately be cloud because we do believe that over the long haul these large customers will.

Turning to maintain present again in the cloud and on Prem. So we're not as hung up on what that exact number is because we understand that these large incredibly strategic customers have complex environments that they need to be able to leverage splunk in this broad hybrid world.

Now.

To your question about efficiency on go to market side I do believe that by flattening. The organization, we can drive a level of agility and decision, making that helps us get closer to our customers improves the customer experience that ultimately I think will be more in tune with helping them.

Advanced their architectures and this and this what is a very complex world and ultimately we financially benefit from that.

I'm feeling incredibly excited about the role that we can play drive customer experience and do it in a more efficient way than we've traditionally done it.

While early days here Super optimistic about that.

Really appreciate the thoughts to your interest and thank you so much. Thank.

Thank you. Thank you.

Thank you. Our next question comes from the line of Patrick <unk> from Evercore ISI. Your question. Please.

Hi, This is <unk> on for Kirk congratulations on a great quarter and thanks for taking the question.

Maybe just one for you could you talk about the potential.

So to get greater scale and efficiency through partners.

And how you're continuing to engage with the ecosystem.

To help you.

Yes, really good question and I think.

An interesting point of leverage opportunity in the business, we've done a tremendous job partnering with some of the largest ESI is in the world. We've seen very good early traction with the with.

With the cloud players.

We also obviously play in the security World with the security resellers and so there is a variety of communities, where we're playing a critical role in I think whats interesting here and the one thing that does differentiate splunk is the opportunity to work with those partners, where they can deliver services on the back of.

Splunk in these complex architectures being security.

Or broader observe ability it really creates a very compelling opportunity for partners and I think we're at the beginning of that journey I think theres a lot more we can do and it's something that I'm frankly super excited about diving in on and supporting the team in those efforts, but we're I think we're very early in that opportunity.

Thank you.

Thanks Rod.

Our next question comes from the line of Steve Conine from NBC. Your question. Please.

Great. Thank you Hey, Gary congratulations on the new role.

Thanks, Dave.

I've got two questions for you.

So one is about comparable with the xdr vendors.

Whats your view of the difference between Xdr, Sam other than having an endpoint.

And then I'll hit you with the next one after that.

Yes, the one thing that I've seen here that I think it's really important is in our Sim world and the broad Splunk platform wherever we're able to take a vast variety of data to provide end to end visibility as to what the heck is happening in these complex environments. So as the <unk>.

<unk> surfaces grown having that broad visibility is absolutely critical whether youre dealing with log for Jay youre dealing with the ransomware issue or youre dealing with some other vulnerability in your environment and what is missing in the <unk> World. It's a limited view.

And so customers absolutely today required that's broad visible view and I think one of the things that <unk> got right way before I got here is not discouraging customers on data so with their workload based pricing getting access to all that data and making it available across multiple clouds as well as hybrid no one else can do that.

And so I think we're in a very very unique position relative to the xdr players.

Got it that makes sense.

And then my follow up is really about the context here.

You have been working in cyber for many years and so I'm curious your view.

I understand the product leverage you get from playing across Ics Dev ops and Sim.

From a customer buying perspective.

Where are the security purchases dependent on budget.

Budgets and where are they separate and is there some difference between the enterprise and smaller companies and how splunk as a go to market work within that dynamic thanks very much.

Yes, really good question, Dave and it's interesting because one of the things that I've seen and I've been doing a lot of customer meetings.

So I've really.

<unk> been trying to get my arms around that exact question and the thing that we see is sort of three fold first of all we always have a strong champion in security because of the role and the dependence of security team has on Splunk.

Second the teams have traditionally gotten a tremendous amount of value, giving them visibility across that broader application environment and then as these new applications had been developed leveraging modern cloud architectures. This requirement on.

I am having broader observe ability is absolutely critical and so we really see kind of a we see two primary buyers, we see <unk>, playing a critical role and we see CTO, playing a critical role and they're oftentimes just working in concert with one another and that leverage is amazing and I just I've seen it in lots of <unk>.

Current customer examples.

Day in and day out so I think we're extremely uniquely positioned here and it represents a tremendous growth opportunity for the future as a result.

Gotcha, great well, thanks, Gary and good luck. Thank.

Thank you I appreciate it thanks, Steve.

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

Great. Thanks, Gerry Congrats and really look forward to working with you again.

Thanks, Matt.

Sure.

So I guess you guys have obviously, a blue chip list of customers and have made a tremendous push with Splunk cloud.

Do you think about accelerating new customer lands, it's been more about upsell into the base, but that new customer land piece, how do you think about that.

Yes, I think it comes in a couple of dimensions I think in the world we're living in relative to the requirements around security I think Splunk plays a critical role and will continue to run the play of getting customers to adopt.

Is the core to their overall security strategy I think that's one two is we're seeing tremendous interest.

On the durability side, we're landing customers in that regard as well and we've got some we had some nice wins a.

A couple of which we've talked about in the prepared remarks. So I think that motion I think there's more work we can do there.

But I think the motion is in place.

Got it Okay, and then maybe for yourself Jason.

Speaking about.

The base, obviously of a large renewal opportunity. This year can you talk about the health of the large deal pipeline and maybe some of the close rates that you saw and maybe some of the assumptions you're making for for Q2.

Yes.

The renewal base.

Certainly the smallest in Q1 of any of the quarters this year.

But.

I'd say in terms of closing deals.

Pretty much were right on track.

In terms of we do track loss rates not seen.

There is no competitive pressure on large deals.

That's really driving anything it's mostly coming down to customers timing what their needs are whether it's a cloud migration and what their capacity needs are.

From that perspective, it's kind of business as usual I am not really seen any any real shifts there I would say this is a pretty significant step up in the renewal base over doubling from.

About $1 5 billion this year and it's going to keep growing throughout the year.

Progressively each quarter, but feel like we have a great start to the year and all of the indications look look strong at this point.

Great. Thanks, a lot congrats guys.

Thank you thanks, Matt.

Your next question comes from the line of Keith Bachman from BMO. Your question. Please.

Hi, many thanks and I also wanted to ask two questions Gary is going to start with you on the first one.

Really great to hear about your orientation on improving.

Margin, particularly free cash flow margin with that said one thing you mentioned was not replacing Sean.

I wanted to hear a little bit more about what the plan. There I think there has been.

Perhaps some go to.

Product development go to market execution issues, and I would call out of sort of ability.

You called out some feedback from the channel on Absorbability is it still requires some integration work and I'm just curious as to what your plan is.

Youre not going to backfill shown how do you make sure that slowed continues to innovate well.

Try to capture opportunities.

Yes, no. It's great question, what are the things I'm actually personally Super excited about is rolling up my sleeves, and working closely with engineering leaders to drive higher speed agility and faster pace of innovation.

And Splunk is here have done an amazing job historically and I think that with some support driving decision, making we can be in a really good position and so I love to get my hands Dirty and work directly with the engineering teams and so.

I think that we're really well positioned to do that with a flatter organization. So I think it is.

It will be a change, but I think it's a very it'll be a very positive change for the company.

Okay understood a critical one.

And my second question relates to that is.

The typical refrain as I'm sure you've gathered from investors is that spoke is losing share that will go on to your competitors that are encroaching accretion we approached you on that.

Space now it's easy to understand how your gross retention is very very high but what's your take from what you've heard from customers.

In terms of workload retention that is to say.

Winning new applications, we're winning new logos as the previous question, but could you talk a little bit about kind of your first quarter view of slope.

How you view the competitive dynamics and spokes ability currently to maintain your customers, but more importantly to keep growing your workloads to keep driving kind of 30 plus percent globally towards that type of growth. That's it for me. Thanks.

Yes.

Good question.

So in the time that I've been here I've probably done.

I don't know.

<unk>.

Maybe 40 customer meetings and in all of those customer meetings every single one of them. We spent time talking about expansion of Splunk.

And new workloads, where they've identified use cases, where they want to leverage the power of splunk to try to drive additional value for them.

So I.

I think the reality is explaining this massive market, which is estimated on our estimate there's about $100 billion.

And of course, there are other players going after that but we are uniquely positioned to go continue to win these workloads given the loyal nature of these of our customers the new customers were signing and the fact that.

We continue to see growth in the workload.

And the workloads that they're putting on Splunk. So I think there is.

There's obviously lots of noise in the market, but I think we're incredibly well positioned and I hear it directly from customers and Thats, where I spent my time over my first six weeks.

Only thing I would add is.

Just to restate the net retention.

I would only has 130 and then overall with them.

A few hundred basis points, so call it high 100 Twenty's and.

And thats, including any competitive evident anything because thats net of churn so.

There may be chatter in the market, but.

Feel pretty good about stacking up the deviantart are against.

Anyone else at our size or close to it and feel like the numbers speak for themselves.

Alright fair enough, Jason many things.

Thanks, Keith Hope you feel better.

Thank you. Our next question comes from the line of Brad Sills from Bank of America Securities. Your question. Please.

Great. Thanks for taking my question and congratulations Gary on your new role and nice first quarter.

Thank you.

I wanted to ask about just the platform itself theres been a lot of effort a lot of investment made in retooling for the cloud adding observe ability.

Do you feel like the platform is at a place now where it needs to be and from here. It's just kind of incremental improvements on those two in particular or are there is there. Some other efforts here that we should be thinking about.

As you continue to.

Broadened the platform.

No I think.

When I look at current state of capabilities today. The one thing I'm encouraged by is the amount of progress that's been made prior to me joining and we're excited next week, we have some exciting product announcements at dot comp, which really play into this exact question. So stay tuned on that.

Wonderful. Thanks, so much and then Jason one for you. Please.

It looks like Youre kind of tracking close to that.

Our margin target this year fiscal 'twenty three that you laid forth a couple of years ago. The operating cash flow margin of IRR is quite a bit lower is that greater than $400 million level is there any reason to think that free cash flow couldnt come back more meaningfully than kind of where you've guided to this year, I guess, where could we see upside.

Italy.

With free cash flow conversion as we move through the year.

Yes, well I would say our free cash flow conversion.

And I think I've talked about in the past couple of quarters. There is a lot of puts and takes and certainly cloud gross margin is probably the biggest driver.

Because there's.

Theres been a lot of complexity on migrations, which has short term margin pressure as you get through the migrations and then once you're past the migration you can kind of dial up elasticity when you have a better.

Better understanding on exactly what utilization looks like kind of on a by customer basis. So so in terms of getting back to the kind of 20 plus percent cash yield.

Definitely.

<unk> of when not if.

I don't have a specific timeframe on that yet at some point, we will be able to give you some better.

Future guidance, but the timing really is going to be tied mostly to kind of the cloud migration and then cloud margin.

And thats when Youll see the cash yield get to that 20 plus percent rate that we talked about a couple of years ago.

That's great. Thanks, so much Jason.

Thanks, Bob Thanks, Brad.

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

Hey, everybody.

So again congrats on joining the company in a role.

One philosophical one for you I think Gary on pricing slump in natural awhile.

Customer feedback has been that pricing is high it's difficult.

Structure soon have made changes.

Do you think do you think are there yet in terms of.

Doing what needs to be done too.

Pricing gets some value.

Broader question for them.

Jason Thank you Ryan.

Yes, I do great question.

The move from ingest pricing just based pricing to work laid based pricing has been incredibly important and strategic to our customers. So it really now is encouraging customers to brought more broadly leverage their data. This is important as we think about the role that observe ability plays as well it's important from a security point of view because you have.

Broader access to all of the data do you really need to have insight into and so.

There is some hangover I think there is some still some staying out there but the.

Feedback on workload based pricing has been very very good and as you think about cloud all of the largest deals are all workload pricing.

Hi.

So I think we've made very good progress.

It's been a journey, but I think we've been making good progress on this.

Great. Thanks, and then the follow up I guess for both of you guys.

For Jason because he's been through this.

With Splunk before but on the macro side just just now.

So the data call comments about consumption getting weaker in this environment.

Just you went through this in 'twenty, where things seem fine at first but in some sense, we could at some point a couple quarters. Later. So are you are you.

Either seeing anything.

Anticipating and changing your tactics in any way such as to anticipate either smaller deals longer sales cycles or because we're hearing from data providers today lower consumption rates.

Yes, that's a good question ill start and Jason will have a couple of comments as well.

It's interesting we watch very closely at the close of the quarter. So.

I joined two weeks prior to that in the quarter. So I had the opportunity to see the dynamics of all deals as they lined up as we close the quarter and we literally heard no one talk about.

Changing financial priorities budgets pulled projects, Paul we heard none of that literally absolutely none of it now we're obviously being cautious given the.

The broader set of market conditions, but we saw no change in buyer behavior as we worked our way through the end of the quarter and Jason I'll, let you dive in yeah.

On an overall basis, we did obviously take up our guidance on revenue and op margin.

But we maintained.

And cash flow and I would say from what I saw in the quarter and what we're assuming as we as we are now well into Q2 is not really any any big changes.

And I think.

Certainly what we saw a couple of years ago was very pronounced.

And very immediate I don't see anything like that.

Our.

Functions really are the growth for the balance of the rest of the year I think the biggest swing factor. We're still trying to understand is to what extent are large scale cloud migrations affected.

And we'll learn more about that as we progress throughout the year, because as I said earlier, the renewal dates really kind of steps up each quarter.

And really kind of peaks in Q4.

But so far haven't haven't really seen any any real significant macro impacts.

Thank you.

Thanks, Michael.

Thank you our final question for today comes from the line of Rob Owens from Piper Sandler Your question. Please.

Great. Thanks for taking my question wanted to add on to Michael's question I guess, just through the lens of head count growth in hiring and whether you're going to hire ahead or you are being a little bit more conservative in this environment. Thanks.

I would say.

CFO perspective.

We're a growth company, we have a forecast that that we're maintaining from a growth perspective. So we're going to continue to be hiring certainly on the selling capacity side and we still do have a platform that we're in fairly well into the process.

Modernizing, but theres still work to do especially on the observer ability side. So we're going to be making investments in those areas and I don't expect that to change.

Anything else Greg.

No and I think Rob.

<unk> could in fact again.

I would say when.

When we look at the overall hiring environment et cetera, we're being thoughtful about it but we're not we're not tapping the brakes at this point.

Alright, thank you.

Thanks, Rob.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Gary Steele for any further remarks.

Let me reiterate that this is the best time to be here at Splunk as our momentum demonstrates we are mission critical to our customers' operations already and there is a massive market opportunity to provide a foundation of security and resilience so customers can innovate with speed and agility.

I'm looking forward to working with customers partners and employees to use splunk to help reach even more mission critical outcomes. Thank.

Thank you all for your support and hope to see you Dot com.

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

Okay.

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Thank you for standing by and welcome to Splunk first quarter 2023 financial results Conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone as a reminder, today's program is being recorded.

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

You operator, and good afternoon with me on the call today are Gary Steele and Jason child.

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

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 looking statements, including financial guidance and expectations, including our forecast for our second quarter and full year fiscal 2023.

And our expectations of revenues renewals operating margin operating cash flow and rule of 40 scale.

As well as trends in our markets and business, our strategies and our expectations regarding our business products technology customers demand and markets.

These statements are subject to risks and uncertainties and based on our assumptions as to the macro and microeconomic environment and reflect our best judgment based on factors currently known to us actual events or results may differ materially. Please refer to documents, we file with the SEC, including the 8-K filed with today's press release those docs.

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

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

We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non-GAAP results is provided in the press release and on our website. So with that let me turn it over to Gary.

Good afternoon, I'm thrilled to join my first earnings call reconnect with many of you and talk with those of you I haven't met yet.

It's been an amazing six weeks for me as I've rapidly come up to speed on the business and the opportunities in front of us.

I'd first like to thank Splunk chair grabbed Smith for leading the team during our CEO transition I recognize that such periods of uncertainty can create distraction, but this team stayed focus on solid execution in the quarter I am excited to report that we grew total revenues by 34% to $674 million and cloud revenues by <unk>.

66% to $323 million, reflecting strong customer demand and bookings momentum Jason will dive deeper into the numbers in a few minutes I'd like to start by sharing what inspired me to giant block what I've learned so far and my initial priorities.

Coming from a cyber background I'd always admired splunk for the role that it has played in providing the largest companies in the world unparalleled visibility that is essential to security teams to understand what's happening in their environment. Given this data centric approach I also fundamentally believe that there was so much more that can be done in that.

<unk> given the complexity of an ever growing attack surface and an unrelenting threat environment. Additionally, through my discussions with the board walkers and customers.

Again, I understand the true power of this platform and the value, it's bringing to organizations that are leveraging it for durability as well as many other use cases.

What I came to learn is that Splunk is the technology underpinning empowering many of the largest companies in the world Splunk as a system of record that's deeply embedded within customers' businesses and provides the foundation for security and resilience. So they can innovate with speed and agility.

All of this translated to a massive untapped unique opportunity for them, which I believe we can drive long term durable growth, while progressively increasing operating margins and cash flow.

Over the past couple of years at Splunk transformed itself to a cloud company. It also positioned itself on a growth path with the critical ingredient ingredient to grow from over $3 billion in <unk>, two 5 billion and beyond.

Underlying all of this is a loyal customer base that continues to expand their usage of Splunk.

For example in Q1, our cloud dollar based net retention was over 130% a metric that is best in class among all SaaS companies.

With the proliferation of digital and cloud transformation security and Dev ops teams are faced with an ever evolving threat landscape.

Increased complexity from piling on more and more tools across hybrid and multi cloud environments.

And the silos created by all these data sources and fragmented teams that lead to inefficient detection and resolution.

There is an enormous market opportunity to help customers navigate this new reality.

<unk> provides an insight into all data across the entire organization to ensure our customer security resilience and agility to innovate.

For example, a global it services provider, a new Splunk customer selected us in the first quarter for a multimillion dollar deal to oversee their knockin sock with a focus on improving security and cyber resilience. This customer like many of our largest saw the value in having highly scalable unified solutions for <unk>.

<unk>, an observer ability on a common platform, there's three year cloud deal replace their legacy Sim.

As another example, a global apparel company extended their use of Splunk during the quarter with a multimillion dollar order while they are tech ops organization has already been standardized on Splunk for cloud based logging in observed ability their security organization was using a different security platform that lacked adequate scalability and insight.

Into organization wide data.

The customer expanded splunk across both tech ops and security in parallel this decision to enable them to gain value from the same data, but for different use cases, which reduce their total cost of ownership, while broadening visibility across their system.

My third story is a workload pricing deal we were selected as the best cloud based solution for our growing financial services company, serving millions of consumers delivering a scalable and efficient solution that provides greater visibility we replaced their long existing Tim provider.

This deal underscored, our platform's ability to consolidate customers existing tools to reduce outages and mitigate business risk to help protect and customers.

The common thread that runs through these customer stories is there a unique ability to get full fidelity real time visibility into their data, which are versus their on prem and multi cloud environments at virtually unlimited scale and velocity our customers use splunk to immediately realize actionable insights irrespective.

The use case be it security.

Ops Dev ops are countless other operational challenges.

And let me be very clear on this point, we offer unique technical attributes that no. Other company provides our customers deeply trust splunk with the security of their most critical business processes, which is why we've earned the right to support broader aspects of their organization and based on that trust customers commit to Splunk for.

Long term I look back at our 100 largest customers in each of the last 12 quarters and on average our retention rate with these customers is over 99%.

Delivering such high value continues to earn his industry recognition.

Already this year Gartner has named US the top market share leader across security and it operations and the only vendors to support all three approaches to AI ops, including data and analytics tools AI ops features and AI ops platforms.

We've also been recognized by constellation Giga, ALM and research in action for leading the observer ability market.

I have been overwhelmed by smokers passion and high energy and we have an exceptional base of talent, serving our customers I continue to meet with our teams around the world to understand our go to market and product opportunities from these conversations I see an opportunity for more streamlined processes across the company in.

In line with this my first priority has been to increase internal speed and agility across our people and organizations.

Flattening, our org structure will help us do that.

The following the departure of treats our Carlson, we did not backfill of her role as president of go to market. Today. We're also announcing the departure, Sean <unk> president of products and technology, and we will not backfill his position either.

I will be hands on with the go to market and product leadership teams with an emphasis on scaling efficiently where we can we appreciate your contributions here, Sean and wish you. The best of luck in your next endeavor.

Yes.

Last week, we announced that Petro Jenner has joined the company as our general manager of EMEA.

Patrick brings over 25 years in leadership roles with Salesforce, Microsoft and others and she'll oversee go to market strategy in the region welcome Petra.

We've also added our newly appointed Chief customer Officer, KDB Aki to our executive leadership team as a tenured spelunker Katy leaves 200 people on our customer success and professional services teams.

Test to help customers deploy splunk and accelerate their time to value.

The other top line priorities for me our business execution of strategy.

We have to know what customers need in order to execute well and so I set the personal objective with the field to meet with 100 customers. In my first 100 days of Splunk, It's an ambitious goal I realize but its imperative for me to get deep and broad knowledge of how our customers view, our engagement along with the value and services levels. We.

Deliver these inputs will be critical to product and go to market decisions.

I look forward to meeting with customers over the next several months as they travel worldwide and during our annual customer bad Dot comp.

June 13th through 16th at the MGM Grand in Las Vegas join us in person or virtually to hear our exciting product announcements and how customers like stripe Papa John's Rei, New bank Heineken and many other industry leaders use splunk to stay secure and resilient as they innovate with speed and agility.

In closing I am eager to build upon the exceptionally strong foundation that many splunk visionaries before me have built as our recent momentum demonstrate this is the best time to be here at Splunk, we have an enormous opportunity to grow our business into a global enterprise software and services provider and I am excited to lead this.

Team during their path.

$210 billion in revenue and beyond my sincere thanks to each and every <unk> and all of our customers for your continued commitment now I will turn the call over to Jason.

Thanks, Gary Q1 was a good start to the year with total revenues of $674 million up 34% over last year and cloud revenue of $323 million up 66%.

Revenues were significantly higher than expected, reflecting more normalization of our model plus higher term contract volume, mostly from several very large renewals.

Q1 cloud revenue was also up sharply over last year, reflecting continued customer adoption of our cloud platform.

Personnel and services and education accounted for 7% of total revenues in the quarter.

As I said last quarter with revenue normalizing and average term contract duration more comparable on a year over year basis. Our appeal bookings is becoming a better indicator of overall bookings momentum in Q1, <unk> bookings was $491 million up 32% over last year, reflecting strong customer demand.

Our customer retention and expansion rates continue on their very impressive track, thanks to our strong product and services value proposition as well as our customer centric support approach.

Our cloud <unk> and <unk>.

<unk> was 130% in Q1 and has been remarkably steady at this level since we first disclosed it several years ago.

We ended the quarter with total <unk> of $3 to $1 billion up 30% year over year, and cloud <unk> of $1 $4 billion of 60%.

We had 690 customers with <unk> greater than $1 million up 28% and 329 of these customers had clouded IRR of over $4 million up 62% over last year.

On the margins, which are all non-GAAP .

Cloud gross margin was 68% in Q1 of seven points from last year as we continue to realize leverage from scale and elasticity of the platform.

Total gross margin was 75% up three points year over year, and reflecting our strong improvement in cloud margin.

Operating margin was negative eight 5% in the quarter significantly better than planned due to our top line outperformance and some modest expense optimization.

For our EPS calculation, although it doesn't apply this quarter. It's important to note that we've adopted ASU 2020 that show six which includes the share impact attributable to our convertible notes. So for modeling purposes. If you estimate of GAAP or non-GAAP net income position in any future period, you should add $22 3 million shares too.

Fully diluted weighted average share count.

Turning to guidance.

For Q2, we expect total revenues of between $735 and $755 million with a non-GAAP operating margin of between negative eight and negative 11%.

Looking further out due to our outperformance in Q1, plus the strength of our renewal base and solid execution, we are increasing our full year revenue expectation by $50 million to between three three and 335 billion.

And we now expect non-GAAP operating margin of about 2%, which is at the top of our previously guided range.

We are maintaining our total <unk> and cloud are our full year targets and we're reaffirming our operating cash flow expectation of at least $400 million for the year.

So with revenue normalizing and cash flow now, reflecting our changing customer and bill in terms from three years ago traditional growth and profitability metrics are becoming more meaningful this year, we're tracking to around 35% on a rule of 40 scale based on Ocs, which is a nice step up to the 25% last year and demonstrating the earnings power of.

Of our model.

In closing execution in Q1 was solid and we're set up for a great year.

With the impacts from our business transformation, mostly behind us the growth of our business and leverage in our model are becoming clearer.

With that let's open it up for questions.

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

Congratulations on the quarter over quarter, Gerry nice to meet you and.

I am curious to get your perspective on when you look at Splunk as the businesses asset I know you've talked about your ambition do to get the company to five maybe even $10 billion in revenue what are the things that exactly that most about sluggish can you just expand on that that'd be great and also this is <unk>.

Very interesting time in the markets.

Everybody is worried about.

Traction in GDP inflation that sort of thing.

What is your overall sense as to how the Splunk portfolio.

Could hold up in the event of a.

A more challenging crosscurrents outside labor market inflation rates et cetera, sorry for the longer term question, but curious to get your perspective. Thanks.

The problem cash and nice to meet you.

On the first part of the question the things that really excite me here are one how deeply embedded splunk is in some of the largest companies in the world the way in which we underlie everything they are doing from a security perspective, and how they're running their it operations is incredibly impressive and it really plays out it plays.

Out in our <unk>.

Base net retention.

And so I think that we're just in a very unique position, where we're delivering tremendous vendors and I think there is so much more that we can do in the market I think I'd say that was the number one thing that really got me excited when I got here.

Roughly six weeks ago now going to your question about the macro environment one of the things that I am personally encouraged by is that while there is lots of turbulence and a number of factors in the macro.

Environment. The reality is that given the security environment that we're living in with increasing concerns about what might happen relative to Ukraine. The continued concern about ransomware and other issues Splunk sits right at the center of providing the visibility that security organizations need to understand what's happening and so.

While there could be.

Less than favorable market conditions.

Or really mission critical and the value that we're delivering and you extend that more broadly to the underpinning of all of our critical apps I think we're in a very good position to weather whatever storm might be ahead.

Wonderful congrats and look forward to the journey ahead.

Thank you so much thanks Kash.

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

Gary welcome Congrats on the role.

During the quarter on the license component was very strong.

<unk> cloud I'm, just curious if you could.

Walk through perhaps what you saw on that end.

Jason maybe if you could just address the security versus non security components of the story I would assume the security business.

<unk> continued to do very well like your peers have been doing can you talk about the non security aspects of the business are you seeing the same level of strength there any color would be helpful. Thank you.

Yeah, I'll start and I'll, let Jason jump in here.

So.

From a mix perspective, we saw strength, both in cloud and an on Prem.

We're seeing many of our large customers work through the details.

Migration to cloud as we look across the whole year, we're very much encouraged by.

The level of momentum and interest we see there and I'll, let Jason speak to some of the specifics as it relates to the exact number.

Yes in terms of the security business consistent with prior periods, it's continues to be around 50% of the business.

It is it is the fastest growing part of the business at least on a dollar basis.

And I would say that the remainder of the business, which is really durability platform. Those businesses continue to do well, but security is is still the largest percentage of the business.

Thank you.

Thanks, Brian .

Thank you. Our next question comes from the line of Brad <unk> from Deutsche Bank. Your question. Please.

Great. Thank you very much and congrats as well on a strong print and welcome Gary Gary just related to how deeply embedded and strategic uses splunk into its customers I wanted to double click a bit more on the leverage that you see in the model and the potential you see there because you talked about the efficiency and productivity.

The investments <unk> made and I think your reputation reputation along these lines preceded itself.

And we got the examples of maybe not back filling.

Some of the roles and departures, but anything else you can share would be really helpful. Thanks.

Yeah, a couple of things so one is.

The role that we're playing for these mission critical customers and the role that Splunk plays.

It has tremendous it puts us in a really unique position, where there is tremendous future opportunity and as we think about the long term model here and I indicated this in the prepared remarks I do believe that we have tremendous opportunity for long term durable growth, but importantly.

Increasing cash flow, increasing cash flow and cash flow margins overall operating margins overall and I think there is efficiencies to be had in the organization as I indicated were taking a first step by flattening the organization and I think thats one step forward in helping us operate more efficiently with more agility.

<unk> with more speed and decision, making and I think over the long haul that does translate into a lot of financial benefits for our shareholders.

Excellent. Thanks, so much.

Thanks, Brad.

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

Thank you.

And Craig to talk again.

The my question was if I listen to you today.

As a new CEO .

Yeah.

First conference call.

Because it does seem to be a little bit more focused on security.

Can you maybe talk a little bit about.

How penetrated you see Splunk like you can bring in kind of security lens to it and also like how much of that is due to the fact that in this more volatile time.

We have obviously the situation that security spending.

Still be prioritized over other areas just a little bit of your take on that one. Thank you. Yes. It's a really good question nice to talk to you again.

I believe coming from a cyber background that Splunk has always had a very unique position, but I also believe theres more that we can do to create a tighter partnership with customers and ultimately derive more value from.

The security buyers and so I'm personally very optimistic given the role that we play today and how we're positioned in those customers and to your point I fundamentally also believe that security will be much more resilient than other things other areas if.

If theres more turbulent economic conditions so.

Im really excited about the opportunity the role that we play.

And the fact that we're giving customers visibility they can't get from any other set of capabilities. So that uniqueness for me gets me very excited about the future and the role that we can play with security I think what you are hearing partially is my voice just coming from a security background I think we can elevate and emphasize.

Some of those things within Splunk and.

There is short term opportunity there.

And then one follow up for Jason.

Look.

The question I'm getting from investors is around cloud and software.

Our companies are doing beaten race, where if you look at your quarter like cloud, where it's kind of reconfirm is there anything that you.

Want to point out in terms of from a macro perspective that you're seeing there is it just kind of early in the year just what's the take on on the guidance on the different drivers for the guidance. Thank you.

Sure, Yes, I would say first as it comes to cloud very happy with the performance in Q1 cloud mix of 57% was just up a tick a year ago.

But but really the motion for our cloud business really is tied very much due to or to the renewal base and our renewal base is the smallest in Q1 and it really starts to go throughout the year. So so I would call we did reaffirm cloud guidance for full year.

Reaching the $2 billion number which puts us in a pretty unique place.

And already implies strong growth.

But we do expect as you see the cloud mix growth throughout the year I think we said last quarter and no change to our assumption that we expect cloud mix to be approaching 70% by year end.

That will continue to see to see strength in the cloud business.

Perfect. That's super helpful. Congrats from me and all of its Gary.

Thanks, Dan. Thank you thanks very much.

Thank you. Our next question comes from the line of Phil Winslow from Credit Suisse. Your question. Please.

Hey, guys. Thanks for taking my question and congrats on a great start to the year and Gary very excited to be working with you again.

Okay.

Yes, we will start with you obviously, we've had a lot of questions on this call about security, but the other splunk built <unk>.

Solution on top of the platform Observer ability wondering if you guys just sort of your view on what sort of what splunk brings to the secured.

Really market relative to some of the competitors, what really stood out to you and how sort of the integration of all of those acquisitions coming and then I've got a follow up for Jason on the numbers.

Got it.

So what are the things that has been really interesting to me is to see the leverage that we're getting from these traditional security customers into observed ability. So the.

The market opportunity is very simple and that when something.

It goes bump in the night and Theres an application failure.

Companies want to know is that a security issue or is that just an application a failure and it's really looking at a lot of the same data so we benefit from.

Being able to have that insight and through that leverage we're seeing lots of interest extending logs into metrics and traces to have a broader.

More fully.

A full view of what's happening from a durability standpoint, so I feel like there's tremendous leverage and to your point relative to.

Product.

But we're really the only vendor today out with Lord logs metrics traces all integrated to our progress on that has been tremendous.

And while we're still early in the market, we had some very nice wins in the quarter and we're seeing the leverage that we have extending our footprint with the platform into the traditional of durability markets. So we feel really good about that positioning and I think it represents a really nice growth opportunity over the coming years.

Okay.

And then just one quick question for you often get this question on the DNR number in the cloud obviously Super Super strong and you still have continued growth in the non cloud base.

How much of that cloud DVR growth is coming from people sort of lifting and shifting from on Prem or is that still the vast majority of just call. It net new in other words.

A clean sort of apples to apples GB in our our number.

Yes, I mean, so overall, our overall <unk> is growing within a few hundred basis points of the cloud <unk> that's been consistent for a while if you do.

Then unpack how much of the cloud business is.

Is growing in kind of on a durable basis without migrations, it's a little harder to figure that out, but but our analysis indicates that it's maybe a couple of hundred basis points of tailwind, but but not a material impact on the overall <unk> number.

Got it so in other words, the good growth dynamics are sort of dependent on the cloud itself versus <unk>.

Migration, great that's right awesome, thanks, guys keep up the good work.

Hey, Thanks, Bill Thanks Bill.

Thank you. Our next question comes from the line of Keith Weiss from Morgan Stanley . Your question. Please.

Thank you for taking for taking the questions. This is Sanjay Singh with Morgan Stanley on for Keith gave me congrats on the role.

Forward to working with you again I have two questions one for Jason and then.

One for you Gary Jason on the guidance I was wondering if you could walk us through maybe some of the underpinnings of the assumptions around guidance with respect to <unk>.

Closure rates or any other sort of metrics.

And to what degree did you provide an extra layer of conservatism recruited and just given all of sort of the macro uncertainty that's going out in the coming out in the market.

Walk us through those assumptions.

And then for Gary.

<unk> is really around.

What you sort of see the opportunity on the go to market side, I mean, you talked about flattening the organization in terms of SaaS.

SaaS should should Splunk moved to cloud versus continue to make this more of a choice for customers. What's the what's the right balance for that when we think about the context of kind of improve operating margins.

Cash flow sort of the pace of her.

The decision to move to cloud I'd love to get your at least your initial thoughts on that dimension.

Yes.

Okay. So on the first question I'm, not going to be able to unpack it probably to the level that you would like for modeling, but I will tell you there's kind of four primary pieces.

So as we look at either whether it's <unk> or net new <unk>.

Whatever we start with an overall renewal rate, which we've consistently had a very very very high percentage of the 90% range and then we factor in what is our expectations on expansion and as you've seen with the deviantart that number has been relatively consistent. We then have to layer in the new logo expectation.

<unk>, which that that's probably a little harder to do especially.

If there is a slowdown in macro and then lastly expectations on churn, which is I guess kind of the inverse of that renewal rate, but that's usually been a pretty consistent single digit percentage number so across all those dimensions, we're not really seeing big changes, which is why we're reiterating the guidance and didn't change.

For full year.

And if something changes, we'll let you know that at this point we.

We feel very good about the Q1, we delivered with a strong <unk> bookings of 32% the the.

The revenue growth highest revenue growth we've had in three years. So overall feel like the fundamentals are in very very good position.

And to the other part of the question.

What are the interesting things.

Think about is the way in which our largest customers wanted to deploy.

And one of the things I've learned in my six weeks here is we see tremendous value in being able to support customers that have multi cloud hybrid environments, which is almost every single large customer theyre operating across multiple clouds and they continue to have significant operations on prem and so.

Our ability to be able to.

Bring all that together under a single architecture provide federated search that they can search from a single instance across all those environments is something that's super unique but in saying that it does create more complexity and what percentage. It will ultimately be cloud because we do believe that over the long haul. These large customers will can.

Turning to maintain present again in the cloud and on Prem. So we're not as hung up on what that exact number is because we understand that these large incredibly strategic customers have complex environments that they need to be able to leverage splunk in this broad hybrid world.

Now to the.

To your question about efficiency on go to market side I do believe that by flattening. The organization, we can drive a level of agility and decision, making that helps us get closer to our customers improves the customer experience that ultimately I think will be more in tune with helping them.

Advanced their architectures and this and this what is a very complex world and ultimately we financially benefit from that.

I'm feeling incredibly excited about the role that we can play drive customer experience and do it in a more efficient way than we've traditionally done it.

While early days here Super optimistic about that.

Really appreciate the thoughts and Jason Thank you so much thank.

Thank you. Thank you.

Thank you. Our next question comes from the line of <unk> Mehta from Evercore ISI. Your question. Please.

Hi, This is <unk> on for Kirk congratulations on a great quarter and thanks for taking the question.

Maybe just one for you could you talk about the potential to get greater scale and efficiency through partners.

And how you're continuing to engage with the ecosystem.

How do you scale.

Thanks.

Yes.

Really good question and I think.

An interesting point of leverage opportunity in the business, we've done a tremendous job.

Partnering with some of the largest deal size in the world. We've seen very good early traction with.

With the cloud players.

We also obviously play in the security World with the security resellers and so there is a variety of communities, where we're playing a critical role I think whats interesting here and the one thing that does differentiate splunk is the opportunity to work with those partners, where they can deliver services on the back of.

Splunk in these complex architectures being security.

Or broader observed ability it really creates a very compelling opportunity for partners that I think we're at the beginning of that journey I think theres a lot more we can do and it's something that I'm frankly super excited about diving in on and supporting the team in those efforts, but we're I think we're very early in that opportunity.

Thank you.

Thanks Rod.

Our next question comes from the line of Steve coming from NBC. Your question. Please.

Great. Thank you Hey, Gary congratulations on the new role.

Thanks, Dave.

I've got two questions for you.

So one is about comparable with the xdr vendors.

Whats your view of the difference between Xdr, Sam other than having an endpoint agent.

And then I'll hit you with the next one after that.

Yes, the one thing that I've seen here that I think it's really important is in our Sim world and the broad Splunk platform wherever we're able to take a vast variety of data to provide end to end visibility as to what the heck is happening in these complex environments. So as the <unk>.

<unk> surfaces grown having that broad visibility is absolutely critical whether youre dealing with log for Jay youre dealing with the ransomware issue or youre dealing with some other vulnerability in your environment and what is missing in the <unk> World. It's a limited view.

And so customers absolutely today required that's broad visible view and I think one of the things that <unk> got right way before I got here is not discouraging customers on data so with their workload based pricing getting access to all that data and making it available across multiple clouds as well as hybrid no one else can do that.

And so I think we're in a very very unique position relative to the xdr players.

Got it that makes sense.

And then my follow up is really about the context here.

You have been working in cyber for many years and so I'm curious your view.

I understand the product leverage you get from playing across Ics Dev ops and Sim.

From a customer buying perspective.

Where are the security purchases dependent on budget.

Projects and where are they separate is there some difference between the enterprise and smaller companies and how splunk as a go to market work within that dynamic thanks very much.

Yes, really good question, Dave and it's interesting because one of the things that I've seen and I've been doing a lot of customer meetings.

So I really.

<unk> been trying to get my arms around that exact question and the thing that we see it as sort of three fold first of all we always have a strong champion in security because of the role and the dependence the security team has on Splunk.

Second the teams have traditionally gotten a tremendous amount of value, giving them visibility across that broader application environment and then as these new applications had been developed leveraging modern cloud architectures. This requirement on.

I am having broader observe ability is absolutely critical and so we really see kind of a we see two primary buyers, we see <unk>, playing a critical role and we see CTO, playing a critical role and they're oftentimes just working in concert with one another and that leverage is amazing and I just I've seen it in lots of <unk>.

Current customer examples.

Day in and day out so I think we're extremely uniquely positioned here and it represents a tremendous growth opportunity for the future as a result.

Gotcha, great well, thanks, Gary and good luck. Thank.

Thank you I appreciate it thanks, Steve.

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

Great. Thanks, Gerry Congrats and really look forward to working with you again.

Thanks, Matt.

Sure.

So I guess you guys have obviously, a blue chip list of customers and have made a tremendous push with Splunk cloud.

Do you think about accelerating new customer lands, it's been more of a upsell into the base, but that new customer land piece, how do you think about that.

Yes, I think it comes in a couple of dimensions I think in the world we're living in relative to the requirements around security I think Splunk plays a critical role and will continue to run the play of getting customers to adopt.

Is the core to their overall security strategy I think that's one two is we're seeing tremendous interest.

On the durability side, we're landing customers in that regard as well and we've got some we had some nice wins.

A couple of which we talked about in the prepared remarks. So I think that motion I think there is more work we can do there.

But I think the motion is in place.

Got it Okay, and then maybe for yourself Jason.

Speaking about the.

The base, obviously of a large renewal opportunity. This year can you talk about the health of the large deal pipeline and maybe some of the close rates that you saw and maybe some of the assumptions you're making for for Q2.

Yes.

The renewal base is certainly the smallest in Q1 of any of the quarters. This year.

But.

I'd say in terms of closing deals.

Pretty much were right on track.

And in terms of we do track loss rates not seen.

There is no competitive pressure on large deals.

That's really driving anything it's mostly coming down to customers timing what their needs are whether it's a cloud migration and what their capacity needs are.

And from that perspective, it's kind of business as usual I am not really seen any any real shifts there.

I would say this is a pretty significant step up in the renewal base over doubling from.

About one 5 billion this year.

And it's going to keep growing throughout the year <unk>.

Progressively each quarter, but feel like we have a great start to the year and all of the indications look look strong at this point.

Great. Thanks, a lot congrats Fay.

Thank you thanks, Matt.

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

Hi, many thanks and I also wanted to ask two questions and Gary is going to start with you on the first one.

Really great to hear about your orientation on improving margin, particularly free cash flow margin with that said one thing you mentioned was not replacing Sean.

And I wanted to hear a little bit more about what the plan. There I think there has been.

Perhaps some go to.

Product development go to market execution issues, and I would call out Absorbability, well you called out some wins and feedback from the channel or an observer ability as it still requires some integration work and just.

As to what your plan is.

If youre not going to backfill Sean.

How do you make sure.

That slow continues to innovate well.

To try to capture opportunities.

Yeah, no. It's a great question.

What are the things I'm actually personally Super excited about is rolling up my sleeves, and working closely with the engineering leaders to drive higher speed agility and faster pace of innovation.

And Splunk is here have done an amazing job historically and I think that with some support driving decision, making we can be in a really good position and so.

I love to get my hands Dirty and work directly with the engineering teams and so I think that we're really well positioned to do that with a flatter organization. So I think it is.

It'll be a change, but I think it's a it'll be a very positive change for the company.

Okay.

Critical one.

Second question relates to that is.

The typical refrain, which I'm sure you've gathered from investors is that spoke is losing share to competitors.

Competitors that are encroaching decreasingly approaching on the.

Space now it's easy to understand how your gross retention is very very high but what's your take from what you've heard from customers.

In terms of workload retention that is to say.

Winning new applications, we're winning new logos as a previous question, but could you talk a little bit about kind of your first quarter he had slowed.

How you view, the competitive dynamics and spokes ability not only to maintain your customers, but more importantly to keep growing your workloads to keep driving.

30, plus percent globally towards you can take the growth that's it for me many thanks.

Yes, no. It's a good question.

So in the time that I've been here I've, probably done I don't know.

Maybe 40 customer meetings and in all of those customer meetings every single one of them. We spent time talking about expansion of Splunk, and new workloads, where they've identified use cases, where they want to leverage the power of Splunk to drive to drive additional value for them.

So.

I think the reality is explaining this massive market, which is estimated on our estimate there's about $100 billion.

And of course, there are other players going after that but we're uniquely positioned to go continue to win these workloads given the loyal nature of these of our customers the new customers were signing and the fact that.

We continue to see growth in the workload.

And the workloads that they're putting on splunk so.

I think there is theres, obviously lots of noise in the market, but I think we're incredibly well positioned and I hear it directly from customers and Thats, where I spent my time over my first six weeks.

Only thing I would add is just.

Just to restate that net retention.

I would only has 130 <unk>.

And then overall, it's with them.

A few hundred basis points, so call it high <unk>.

And thats, including any competitive evidenced anything because thats net of churn so.

And then maybe chatter in the market but.

Feel pretty good about stacking up the deviantart are against anyone else at our size or close to it and feel like the numbers speak for themselves.

Alright dependent on adjacent many things.

Thanks, Keith Hope you feel better.

Thank you. Our next question comes from the line of Brad Sills from Bank of America Securities. Your question. Please.

Great. Thanks for taking my question and congratulations Gary on your new role and nice first quarter.

Thank you.

I wanted to ask about just the platform itself theres been a lot of effort a lot of investment made in retooling for the cloud adding observe ability.

Do you feel like the platform is at a place now where it needs to be and from here. It's just kind of incremental improvements on those two in particular or are there is there. Some other efforts here that we should be thinking about.

As you continue to.

Broadened the platform.

No I think.

When I look at current state of capabilities today. The one thing I am encouraged by is the amount of progress that's been made prior to me joining and we're excited next week, we have some exciting product announcements at dot comps, which really play into this exact question. So stay tuned on that.

Wonderful. Thanks, so much and then Jason one for you. Please.

It looks like Youre kind of tracking close to that.

Our margin target this year fiscal 'twenty three that you laid forth a couple of years ago. The operating cash flow margin of IRR is quite a bit lower at that greater than $400 million level is there any reason to think that free cash flow couldnt come back more meaningfully than kind of where you have guided to this year, I guess, where could we see upside.

Italy.

With free cash flow conversion as we move through the year.

Yes, well I would say our free cash flow conversion.

And then I think it was talked about in the past couple of quarters. There is a lot of puts and takes and certainly cloud gross margin is probably the biggest driver.

Because.

There's been a lot of complexity on migrations, which has short term margin pressure as you get through the migrations and then once you're past the migration you can kind of dial up elasticity when you have a better.

Better understanding on exactly what utilization looks like kind of on a by customer basis. So so in terms of getting back to the kind of 20 plus percent cash yield.

It's definitely.

<unk> of when not if.

Don't have a specific timeframe on that yet at some point, we'll be able to give you some better.

Future guidance, but the timing really is going to be tied mostly to kind of the cloud migration and then cloud margin.

Timing and Thats when Youll see the cash yield get to that 20 plus percent rate that we talked about a couple of years ago.

That's great. Thanks, so much Jason.

Thanks, Pat Thanks, Brad.

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

Hey, everybody.

So again congrats on joining the company in a role.

One philosophical one for you I think Gary on pricing Slumping natural while.

Early customer feedback has been that pricing is high it's difficult, but there is a structure soon have made changes.

Do you think do you think there are there yet in terms of doing what needs to be done to convince customers that pricing give some value.

Broader question for them.

Jason both engineering.

Yes, I do great question.

The move from adjust pricing just based pricing to work late based pricing has been incredibly important and strategic to our customers. So it really now is encouraging customers to brought more broadly leverage their data. This is important as we think about the role that observe ability plays as well it's important from a security point of view because you have.

<unk> broader access to all the data do you really need to have insight into and so.

I think there is some hangover I think there are some still some staying out there but the feed.

Feedback on workload based pricing has been very very good and as you think about cloud all of the largest deals are all workload pricing.

So I think we've made very good progress and it's been a journey, but I think we've been making good progress on this.

Great. Thanks, and then the follow up I guess for both of you guys.

Jason because he's been through this.

With Splunk before but on the macro side just just now.

Another data call comments about consumption getting weaker in this environment and just you went through this in 'twenty, where things seem fine at first but in some sense is weaker at some point a couple quarters. Later. So are you are you.

Either seeing anything worth anticipating.

Japan and changing your tactics in any way such as to anticipate either smaller deals longer sales cycles for because we are hearing from data providers today lower consumption rates.

Yes, that's a good question ill start and Jason will have a couple of comments as well.

It's interesting we watched very closely at the close of the quarter. So.

I joined two weeks prior to that in the quarter. So I had the opportunity to see.

The dynamics of all deals as they lined up as we close the quarter and we literally heard no one talk about.

Changing financial priorities budgets pulled projects, Paul we heard none of that literally absolutely none of it now we're obviously being cautious given the.

The broader set of market conditions, but we saw no change in buyer behavior as we worked our way through the end of the quarter and Jason I'll, let you dive in.

On an overall basis, we did obviously take up our guidance on revenue and op margin.

But we maintained.

And cash flow and I would say from what I saw in the quarter and what we're assuming as we as we are now well into Q2 is not really any any big changes.

And I think.

Certainly what we saw a couple of years ago was very pronounced.

And very immediate I don't see anything like that.

Our assumptions really are the growth for the balance of the rest of the year I think the biggest swing factor. We're still trying to understand is to what extent are large scale cloud migrations effective and we'll learn more about that as we progress throughout the year because as I said earlier, the renewal dates really kind of steps up each quarter.

<unk>.

And really kind of peaks in Q4.

But so far haven't haven't really seen any any real significant macro impacts.

Thank you.

Thanks, Michael.

Thank you our final question for today comes from the line of Rob Owens from Piper Sandler Your question. Please.

Great. Thanks for taking my question I wanted to add on to Michael's question I guess, just through the lens of head count growth in hiring and whether you're going to hire ahead or you are being a little bit more conservative in this environment. Thanks.

Okay.

I would say.

CFO perspective.

We're a growth company, we have a forecast that that we're maintaining from a growth perspective. So we're going to continue to be hiring certainly on the selling capacity side and we still do have a platform that we're in.

Really well into the process.

Modernizing, but theres still work to do especially on the observer ability side. So we're going to be making investments in those areas and I don't expect that to change anything.

Anything else Greg.

No and I think Rob.

<unk> could you talk again.

I would say when.

When we look at the overall hiring environment et cetera, we're being thoughtful about it but we're not we're not tapping the brakes at this point.

Alright, thank you.

Thanks, Rob.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Gary Steele for any further remarks.

Let me reiterate that this is the best time to be here at Splunk as our momentum demonstrates we are mission critical to our customers' operations already and there is a massive market opportunity to provide a foundation of security and resilience so customers can innovate with speed and agility.

I'm looking forward to working with customers partners and employees to use splunk to help reach even more mission critical outcomes. Thank you all for your support and hope to see you Dot com.

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