Q3 2023 Splunk Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Splunk, Inc. Third quarter 2023 financial results Conference call.
I would now like to turn the call over to Ken Tinsley, corporate Treasurer, and Vice President of Investor Relations. Please go ahead.
Great. Thank you Martin deep and good afternoon with me on the call today is Gary Steele.
After market close today, we issued our earnings press release, which is also posted on our Investor Relations website, along with supplemental material.
This conference call is being webcast live and following the call an audio replay will be available on our website on.
On today's call, we will be making forward looking statements, including financial guidance and expectations, including our long term growth and profitability and expense reduction efforts forecast, our fourth quarter and full year fiscal 2023.
Our future expectations of revenues total air our cloud are our operating margin and free cash flow as well as trends in our markets and our business our strategies, our expectations regarding our business acquisitions products technology customers and demand.
These statements are subject to risks and uncertainties and based on our assumptions as to the macroeconomic 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 our Form 10-K, and 10-Qs as well as the form 8-K filed.
With today's press release.
These documents contain risks and other factors that may cause our actual results to differ from those contained in our forward looking statements.
These forward looking statements are 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 the 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.
The format for today's call will be a little different with the CFO position opened in the search underway, Gary will provide our prepared remarks, including an overview of results highlights from the quarter and the outlook for the remainder of the year.
We'll then move to a brief question and answer session.
Just a reminder, that most of our financial and operating metrics are provided in the supplemental slides, which are available on our IR website.
And unless otherwise noted financial comparisons made on this call are all year over year basis, So with that let me turn it over to Gary.
Thanks, Ken Good afternoon, everyone and thank you for joining today's call I'm pleased to report that we delivered solid third quarter results demonstrating progress in our disciplined approach to deliver long term durable growth and profitability.
We grew total revenues by 40% year over year to $930 million in cloud revenue, 54% to $374 million. Our topline outperformance was driven by strong term license demand from existing customers underscoring the value of our customers continue to gain from supply some mission critical security.
<unk>, an observer ability solutions powered by our one of a kind data platform.
That said as noted last quarter, we continue to see caution from customers on the timing of their cloud migrations and expansions.
Ongoing macro concerns.
In addition to our top line results, we made good progress on our expense controls, which I'll detail in a moment.
Our revenue outperformance and expense reductions were key contributors to delivering a nearly $350 million.
And free cash flow on trailing 12 month over trailing 12 month basis I'd like to thank the entire <unk> team for their commitment and execution throughout the quarter.
Q3 results illustrate why not the core of the reasons I joined Spike in the first place. So I guess the leader within our massive and growing market opportunity and in the current macro environment. We believe the prioritization of it by just benefiting platforms like ours.
<unk> helps.
<unk> largest and most innovative organizations be more resilient. So they can adapt to respond to and recover from threats disruption and attacks faster and more efficiently.
Within today's economic environment, the evolving cyber security landscape and the ongoing demand for digital transformation.
Provides unparalleled capabilities at scale and the partnership that organizations need to keep their systems secure reliable and performing our differentiated technology is deeply appreciated by our customers who are continuing to invest in the splunk solutions, they need to drive faster insights and actions across secure.
<unk> and <unk>.
Only <unk> delivers a highly scalable and extensible platform organizations required to gain end to end visibility of all their data across on Prem hybrid and multi cloud environments.
Consider our leadership in security in October Gartner named Splunk, a leader for the ninth consecutive year and it's been magic quadrant.
We were again among the identified companies in terms of ability to execute and completeness of vision and Thats. Just one measure of our success, we hear time and time again from <unk> that the breadth and depth of Splunk security solutions are critical for security teams and underpin their security operation centers.
Turning to operations and Dev ops, our portfolio of enterprise grade that sort of ability solutions provides customers with full fidelity monitoring and visibility across their it infrastructures applications and customer facing digital experiences.
It's been recognized for leading the market in AI, AI ops and in Kratos variability by Giga <unk>.
Research and action and constellation Research like was recently rated first in Idc's market share ratings for the it operations analytics software market.
We were also the market share leader by revenue and gardeners 2021 market share report for all software markets worldwide and the health and performance analysis software market sub segment.
Today, our comprehensive product portfolio delivers incredible value to our customers across our core markets. As we look ahead, we are continuing to innovate.
Early next year, we plan to roll out an enhanced unified security console further helping organizations modernize their stock with a unified security operations experience to detect investigate and respond to threats from one common work service. We're also planning to enhance one conserve ability cloud with new features to help customers identify long term.
El issues before they grow into they grow and impact multiple users and with new tools to collaborate more effectively to resolve those issues faster with deep insights into coover data and cloud based networks.
Our security and a durability offerings will also be bolstered by continued innovation in our underlying platform.
To that end, we're focused on increasing access to a wider range of data sources and providing greater control over their redactions filtering and routing of data in motion with edge processor and ingest accidents technology. In addition, enhanced Federated search capabilities will enable customers to access data start.
And third party data lakes.
From one Splunk search bar.
Our performance in Q3 underscores the value customers place and Splunk as well as the focus of our team, particularly given the uncertain macro environment.
As we shared on last quarter's call. We continue to see a slower pace of cloud migrations and expansions as customers remain cautious with their budgets and re prioritize their investments this.
This caution was evident in our cloud DNR, which remained strong but ticked down slightly in Q3 to 127% as we expected.
We remain committed to partnering with our customers to support moving their workloads to cloud on their timeline.
While it is a constant resource intensive undertaking most of our customers continue to acknowledge long term value and transitioning to the cloud in the meantime, given the flexibility of our hybrid deployment model. Many are continuing to support their complex architectures on crab.
So so while we did not see any meaningful change in the pace of cloud expansions that migrations in Q3 customer engagement remained strong and overall demand for Splunk was good.
<unk> bookings were $1 1 billion in the quarter up 37% year over year total IRR was $3 $4 7 billion up 23% and cloud <unk> was up 46% Q1, six 2 billion.
Let's turn to our customers <unk> partners with some of the world's largest and most innovative organizations, including more than 90 of the fortune 100.
I meet with customers every week and I am hearing over and over about their passion for spark and the mission critical role we play in driving their overall business resilience. During the quarter. We are pleased to earn six distinct best of awards from Trust radios, the results of which were determined entirely by customer use.
We had many compelling customer wins during the quarter that demonstrates the breadth of our offering as well as our expertise I'd like to share a few examples with you today.
One of the world's top investment banking and securities firm renewed its on Prem Splunk platform agreement and signed a new three year agreement.
With both Splunk cloud and Splunk observer ability cloud to drive innovation and continuously improve credit card operations.
This customer processes billions of dollars in credit card.
Transactions annually and requires fast paced resilient operational efficiencies.
They turn to slog, because alternatives would have been too risky and require years to implement with five or six key staff.
Our cloud based approach and observe ability technology will help ensure this team can be up and running in a matter of days, which is two or three of their staff.
A department of the U S. Federal government signed a three year multimillion dollar agreement to expand their use of Splunk enterprise security with additional professional service business Splunk Education. This department supports our nation's defenses and we've collaborated with them for more than five years to help ensure they have access to data driven.
Inside the combat threats avoid disruption and mitigate risk across multiple locations.
Plug is deeply committed to supporting our nation's government agencies and I'm looking forward to connecting with many of our public sector customers and partners at Splunk annual Gov Summit event on December 2014, and Washington DC.
We also signed a multiyear multimillion dollar renewal and expansion agreement with a major telecommunications company in Japan.
With data volume growing at an exponential rate this telco leader with struggling with the cost effectiveness of <unk>.
<unk> on Prem data analytics model used in Sam It operations analytics and Dev ops.
We have continued to earn the customer's trust not only because of our unfailing support over the years, but also through the flexible pragmatic cloud upgrade strategy, we develop we bundled splunk cloud and Splunk observer ability into the solution to ensure smooth and smooth and stable transition to the cloud we also advised.
Customer to switch from and ingest based.
Two a workload based license, enabling them to manage their environment without limiting the amount of data base and into Splunk.
Finally, this quarter, we expanded our footprint with the top fortune 100 retailer we work as a trusted advisor with this company for several years and last year, we took them from on Prem to the cloud with a three year multimillion dollar deployment of Splunk cloud SaaS for this quarter when we displaced one of our Sim compare.
<unk> with cloud based cloud based Splunk enterprise security ultimately the competitor lack that requires scale. It couldnt keep pace in today's rapidly evolving security landscape only splunk to provide the capabilities and partnership they need to keep their digital systems resilience.
As we move forward in this uncertain economic environment, we are focused on managing the business with a balanced approach to growth and profitability. The combination of our business transformation plus the operational efficiencies that we're continuing to unlock is leading to good results on the gross margin side, we've made excellent progress managing direct cost over the.
Past several years during the quarter, we continued to deliver steady cloud gross margin expansion driven by ongoing optimization actions working with our cloud service provider partners as well as engineering and cloud delivery improvements that allow us to better align infrastructure requirements to our customers' needs as a result, I am pleased to.
Sure the cloud gross margin surpassed 72% in Q3.
Our highest ever up eight percentage points over Q3 last year and hitting the 70% milestone that we've previously targeted and sooner than expected.
Our sharp are sharply higher cloud gross margin drove a stronger total gross margin of 82% in Q3 up five points over last year.
Turning to our operating expense reduction efforts, we're also making good progress in the four areas. We've identified on last quarter's call contingent labor travel and expenses hiring in real estate.
We began taking actions to reduce our total labor costs by utilizing contingent labor for only the most business critical projects over time, we think there is substantial cost savings here.
<unk>, we continue to limit spend on customer facing travel and support only at our customers and our employees have adjusted to an ongoing culture of expense reduction and efficiency.
Our measured and delivered a deliberate approach to hiring has allowed us to drive efficiencies across our entire business, while still expanding overall sales capacity. For example, we recently realigned the parts of our sales teams that are focused on security and observer ability product areas in favor of single seller model.
This chain of lines. This change aligns directly to feedback from our customers who are increasingly asking for solutions across our unified security has variability platform and to deliver outcomes across security.
Dev ops use cases as a result, we are continuing to hire more quota carriers, while ensuring sellers have access to the right technical and industry expertise.
We've also begun to focus more of our engineering hiring outside of the U S. A 40, <unk> greater access to diverse cost efficient and talent.
Finally, we continue to evaluate our global facilities footprint to identify opportunities to reduce or consolidate office space where possible for example in San Francisco, We recently consolidated operations from two buildings into one and will not renew the lease on one side. This action will result in more than $15 million of cost saves.
It typically takes time to realize cost efficiencies from real estate changes, but we expect to pursue several additional opportunities over the near term, which could result in meaningful savings as early as next year.
Beyond these four areas of focus there are many other opportunities to streamline operations and increased profitability. This. One example is the more expansive approach on transacting in multiple currencies globally. Historically, we denominated all customer contracts in U S dollars and have relied on partners did so our foreign exchange risk.
In exchange for a discount as we continue to Hans our international execution capabilities by Denominating contracts in local currencies weaken assume the FX risk hedging ourselves and capture higher gross value of the underlying contracts.
Overall through our discipline and prioritization, we're making significant progress on cost initiatives, which contributed to a $30 million sequential decrease in total opex in the quarter and a year over year decrease of 2%. We are pleased with our progress on expense control and remain confident we can continue to drive operating leverage.
From high impact cost efficiencies going forward.
We are simultaneously investing in differentiated technology and leadership that are driving long term growth opportunities since joining as CEO in April I've been laser focused on accelerating innovation from our product organization.
In Q3, we welcome Tom Casey, our new SVP and GM of platform as well as Jason Lee our new CSO book.
Tom and Jason are highly regarded in the industry and known for their ability to execute while staying very close to customer needs and feedback.
We're already feeling the difference of having these leaders onboard engaging with customers and leaning in with their organizations and our product roadmap.
On the M&A side earlier this month Splunk acquired twin wave of cyber security startup with unique technology that automatically follows and analyzes complex attack chain that would otherwise require cumbersome manual workflows for security analyst.
<unk> founder and CEO , Mike corn is that serving as SVP and GM of swung security team, bringing in this key talent and technology is further bolstering our world class technical team and I'm excited about what we'll deliver together in FY 'twenty four.
In September we welcomed a new partner leader Gretchen O'hara.
VP of worldwide channels and alliances Gretchen brings decades of experience, leading channel ecosystems building alliances and developing strong teams within weeks of joining Gretchen enter team signed a five year extension to our strategic collaboration agreement with Amazon Web services and just this week.
AWS named Splunk that 2022, ISP partner of the year for North America.
We also welcomed a new chief people officer, Cheryl Kevin's Cheryl has a proven track record of successfully developing and leading people centric strategy at public companies in technology startups I work with shell for a long time and I am confident she.
Brings not only the expertise we need to scale as a global business.
With hybrid with a hybrid and geographically distributed workforce, but also that she is a great fit within spawn CUNY culture.
And while on the topic of executive hiring we're making good progress on our CFO search as you'd expect for a company with our profile an opportunity interest in the role has been high and we've had a great slate of high caliber candidates.
We are taking the time needed to choose the right CFO to help <unk> through our next chapter.
Looking forward towards the end of the year, we're confident in our execution plan and are reaffirming our full year total are our target of $3 65 billion.
We remain cautious on the pace of cloud migrations that expansions given the challenging macro environment. So we're moving to a range for <unk>.
Between one 775 billion and $1 8 billion.
<unk> versus our prior point estimate of $1 8 billion, primarily due to continued uncertainty of cloud mix <unk>.
For Q4, we expect total revenues of between 1.055 and $1.085 billion with a non-GAAP operating margin of between 23% and 26% reflecting expense reductions efforts and continued profitability improvement.
But for the full year, we're increasing our outlook for total revenues to between 345, 5% and three for three.
<unk> 485 billion, reflecting our Q3 outperformance. We're also upping our total op margin expectation from 8% to between 12 and 13%.
We expect higher free cash flow of $420 million from expense savings in the back half of this year.
As I wrap up I want to reiterate my appreciation to our global supply team and further discipline and execution. During Q3 since I joined in April I've been constantly impressed not only by the caliber of our talent, but also the deep customer first mindset across our business I also want to thank bank of tens of thousands of global customers, who trust us with their comp.
<unk> mission critical workloads.
We will continue to deepen our relationships due to support customer security, an observer ability needs across on premise cloud and hybrid architectures.
Finally, as I mentioned the demand environment is strong and we are reaffirming our total <unk> target for the full year.
As a guiding principle, we're committed to maintaining a disciplined approach to optimizing costs and improving efficiency and profitability, while continuing to invest in future growth opportunities that we expect will drive long term value. Thank you again and I look forward to your questions.
The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad. If at any point you would like to withdraw from the queue. Please press star one again, you'll be provided the opportunity to ask one question and one.
<unk> further follow up questions, we will take a moment to render our roster.
Our first question comes from the line of Raimo <unk> from Barclays.
Please proceed.
And thanks for taking my question and congrats and carried like and could you speak to the dynamic on terms of cloud services.
<unk> not.
Not the old, but the people staying on premise and doing it themselves and how do you see that dynamic play out, especially in this environment as well.
You kind of might kind of batten down the hatches and just kind of kind of continue to do what you do versus kind of doing new projects and keep moving to the cloud and how are you spending as a company towards that is that kind of something you wanted to push a little bit more you're happy with where our customers are can you speak to that please thank you.
Yes, you bet.
So as we indicated last quarter, we did see because of macro conditions. We saw some cloud migrations and expansions move out and it was very consistent through Q4, where we saw the same behavior on buying we did not see however, we didn't see any less loyalty to renewal our renewal rate stayed incredibly high.
And so I think what's happening is customers definitely see the value of cloud the narrow theyre going there, but they will pace their migration and they will pace their migration when they <unk>.
Our ready to make that move and I think we've done a good job of clarifying with our customers as well that we are we are very supportive of a hybrid model where customers embrace on Prem. In addition to cloud and we think Thats a strategic differentiator for the company as well so while.
Cloud migrations have slowed down we don't we don't necessarily see that as a big negative in our business.
Perfect. Thank you congrats.
Thanks Raimo.
Our next question comes from the line of Kash Rangan from Goldman Sachs. Please proceed.
Thank you very much.
Gary and team one of the key investment issues with Splunk has been despite the.
Gregg Krug, whether it'd make cash flows and finally, I think and deliberate unbelievable cashless and congratulations on that.
My question is not going to be about cash modes on me, but I just wanted to understand Gerry.
What.
What is that.
What are the chances that the.
And cash flows as a more sustainable thing and what were the things alright. Thank you did a great job outlining the operating margin leverage and free cash flow levers I think saw price a positive retail price how quickly this came to fruition.
Maybe help us understand how philosophically gearing towards free cash flow is more of a longer term thing and one of the levers that we could expect from the company.
As you would give us more cashless depreciated and second more of a technology a product related question.
If the economic environment.
Clarify do you think that cloud business can get back to better growth rate. Thank you. So much and that will have led the market migration.
Migration space, Great cash I'll answer your second question first so the second question.
If the economic environment improves do we think cloud migrations.
Accelerate we do believe that.
I think these are projects that customers absolutely want to do I think theres tremendous demand that they are being thoughtful on their timing based on macro conditions. So should macro conditions change I think.
We will see card migrations accelerated going to your first question on cash flow. There is two things going on here one I think there's sometimes some confusion with our model what are the very powerful very cool aspects of our model is cash flow mirrors, the IRR cash flow mirrors, our IRR simply because whether you are a term life.
Since customer or whether you're a cloud subscription customer you are paying us annually.
So there's lots of vendors in the industry that bill upfront for multiple years, we stopped doing that several years ago. So again I want to reiterate that one of the strengths of our model is the fact that cash flow mirrors, what happens with IRR and so that provides long term durability on cash flow, which personally I am Super excited about.
And I think it can deliver incredible value to investors over the coming years as we've now gotten out.
This transition from the upfront billing to the annual billing and then coupled with that as we've talked about we've had some very focused expense initiatives that we've outlined in the prepared remarks in four categories.
We've been at this I've been with the company about seven months and we've made tremendous progress and Im really proud of what the team has accomplished but we have a lot more that we can do there is more efficiency that can be gained and I think at the end of the day will be we will be better better able to serve customers with that efficiency. So I think it is very much aligned to what customers wanted to see as well.
Super encouraged about the opportunity with cash flow and I think at the end of the day. The power of this business model will be proven out with our free cash flow results.
Great job. Thank you very much game sure. Thank you guys cash.
Our next question comes from the line of Matt Hedberg from RBC capital markets. Please proceed.
Great. Thanks for taking my questions Gary could.
Could you talk you mentioned some of the challenges from a macro perspective, a little bit more color on how the quarter played out was the demand environment fairly stable or did things get will get more challenging towards the end of the quarter and then secondarily how does the how is the U S fed business for you all this quarter.
Yes.
So first on macro conditions, we first started seeing.
A macro change in July .
And so what we did see over the course of the quarter was pretty consistent behavior. So we didn't see more intense macro issues as we got to the close of the quarter. It was very consistent throughout and I think.
Because we had started in July it felt very consistent to us through that entire period and.
And it was really focused again around cloud migrations, which are typically our big projects.
Our associated cloud expansion, that's really where we felt that now is I'll reiterate as I said before we saw great consistency on renewals, we saw no issue getting customers to renew.
It was really much more around cloud, where the macro conditions played a role.
And then to your question on the public sector business. We were very pleased with the results that our public sector team delivered.
We had very good execution in the quarter really proud of what the team put up for us.
We still think there is a tremendous opportunity there we have new leadership in our public sector team that is really helping us drive execution, so super excited about that as well.
Thanks, Gary Congrats.
Thank you thanks Pat.
Our next.
Question comes from the line of John <unk> from Guggenheim. Please proceed.
Thank you.
Gary.
Margins were really strong rate.
I'm just curious so is.
When we think about that sort of.
Conflict, sometimes between growth and margins.
Is that something that we should think a little bit more about if margins continue to be strong in other words is the focus on margins in any way inhibiting growth or is there just simply room for efficiency gains here, while still in advanced investing for ample growth.
Yes.
Do not think at all that we're inhibiting our ability to grow with the cost initiatives that we've put in place.
And I actually believe what we're doing is creating a more efficient.
Business that can scale more effectively that can better deliver for our customers. So I.
I believe anything that we're doing is inhibiting our ability for the business to grow.
Awesome Okay. Thank.
You bet. Thanks, John .
<unk>.
Our next question comes from the line of Brad Sills from Bofa Securities. Please proceed.
Oh, great. Thanks, so much guys I wanted to double click on the efforts to drive efficiencies in sales and marketing it sounds like single cell. Our approach is the direction. You are heading could you just explain a little bit kind of where you are coming from why this might be productivity enhancement.
In the sales and marketing.
Area.
Yes, no great question.
So historically, what we had were distinct sellers for.
Security and observed ability working in conjunction with core sales reps.
And it actually was.
Isn't great from a customer experience because you would have multiple reps needing to interact with customers and so the single seller model supported by the right level of expertise and knowledge is a more efficient way to handle the customers' use cases and help drive the opportunities and so it's just much much simpler.
It's more it's simpler for <unk> and it's actually simpler for our customers and ultimately resulted in nice cost efficiency as well. So it has multiple benefits to it.
Great to hear thanks, Gary.
Thanks, Brett.
Okay.
Our next question comes from the line of Brad Zelnick from Deutsche Bank. Please proceed.
Great. Thanks, so much and congrats on the strong execution in the quarter. Gary we are clearly in an environment, where customers are wanting to do more with less.
And with some of the changes that you are enacting as we think about the go to market and having this single sales.
Point of contact.
I'm just thinking in what ways can splunk ensure that you are the platform of choice for customers to consolidate requirements and is that part of whats inspiring the changes that youre, making in the field as well thanks.
That's exactly right because one of the things that we do see to your exact point is we see customers wanting to find ways to consolidate suppliers. They want to find ways to simplify their environment because it ultimately will be more cost efficient to run and so we see that even today and I would even go back to.
One of the examples that we provided in our prepared remarks were existing customer took out competitive solution that had been using someone else's stem solution and moved to Splunk Siem solution.
I do think that this creates an environment with this revised selling model to capture more of that consolidation.
Awesome. Thanks again.
Thanks, Brad.
Sure.
Our next question comes from the line of Steve Conine from NBC. Please proceed.
Hey, great. Thanks, Hi, Gary Thanks for getting me on here.
I'll ask multi part question is pretty short.
The first part is can you give us a little color on the big revenue beat this quarter was.
To what extent was deal duration.
Factor here and then.
Secondly, you are doing an awful lot as one person here and the ship seems to be stabilizing how are you spending your time and have you been spending your time and how do you expect that to change over the next 12 months what things are you focused on thanks, very much and congratulations.
Yeah, Thanks, Dave so to answer.
The first part of the question on the beat the beat came in two forms. So one wise, we obviously saw.
Less cloud mix and that was that came in at 56%.
And so that was slightly down from our expectations and so you had more term that obviously drives revenue up and then.
The contract term was slightly up as well so the combination of those two things then provided for that broader revenue base.
And then going to the second part of your question, where am I spending time.
<unk>.
Obviously, I'm spending time on driving these cost efficiencies that the priority because I think at the end of the day all of you will want to value. The company on the amazing free cash flow that we will deliver and so clearly focused on that side of things.
But I continue to spend a lot of time with customers and being in market with our sales team to really understand how people are thinking about buying.
And.
Making sure that I'm understanding the role that Splunk is plain and their future plans. So thats. Another critical element and then obviously the third big area for me is to continue to recruit a world class team and I am Super encouraged by what we're seeing on the CFO , Brian and look forward to announcing somewhat soon.
That's great thanks very much.
Thanks, Dave.
Our final question comes from the line of Mike <unk> from Needham <unk> Company. Please proceed.
Hey, guys. Thanks for getting me on here.
I did want to circle up very quickly on the cloud migrations and those expansions that we're talking about and I just wanted to see I know that we're talking about a single seller model and you guys supporting customers in this in this hybrid environment, but is there anything that splunk can do or is doing to get in front of customers and help them.
With these migration paths.
Support those those cloud or metrics that you guys are are moving towards.
Yes.
Good question. So we continue to encourage customers to move to cloud that is clearly a focus of our sellers.
And while we were our mix wasn't.
Sure.
With an.
Exactly what we expected going into the quarter. We're still pleased with the results are still really good cloud momentum and I think the place where we're seeing opportunity is where we can provide some level of incentive around professional services and things like that that help incent customers to move more quickly those are things we continue to explore.
<unk> with our sales team.
Thank you and one other if I could.
It's great to see the cloud gross margins come in.
I guess north of that 70% yes.
A big milestone frankly that was a big milestone for us and I'm really proud of the team and the work that was done to get there get there ahead of time frankly.
So I guess my question is.
I just wanted to stress testing, but was there anything one time there and then the follow up is is there.
70% thought of as being more of a milestone there is more room to push that higher over time.
Yes, no great question. This is not a onetime thing that this is durable.
And we can go farther what you will see though it will take more work to move those numbers so youll see.
Smaller incremental moves, but youll continue to see gross margin move up.
And as you would expect.
We've taken down the low hanging fruit and Thats whats really driven at this point and not that it wasn't a lot of work, but we've gotten through the low hanging fruit and now getting that incremental improvement in gross margin will just take more effort and so youll see it continue to improve but youll see it in smaller increments.
Understood. Thank you for that I appreciate the time.
You bet. Thanks, Mike.
I would now like to turn the call over to Gary Steele for closing remarks.
I want to thank everyone for your time today and joining us our approach to balancing durable growth and profitability is delivering as you can see in our cash flow and our momentum is there is as as they're as strong as we closed the year and set up for a strong next year.
I am, especially appreciative of all of <unk> for their ongoing commitment and execution and for their close partnership with our customers around the world, particularly through this uncertain economic time. Thank you again and have a great day.
Thank you, ladies and gentlemen that does conclude today's call. Thank you for your participation you may now disconnect.
[music].
Yes.