Q1 2024 Splunk Inc Earnings Call
Good afternoon, My name is Abby and I will be your conference operator today at.
At this time I would like to welcome everyone to this walk first quarter 2024 financial result conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session if.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
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Star one on your telephone keypad.
Thank you.
Katy White director of Investor Relations you May begin your conference.
Thank you Abby good afternoon, and thank you for joining today's call.
With me on the call are Gary Steele, President and CEO and Brian Roberts CFO .
After market close today, we issued our earnings press release, which is also posted on our Investor Relations website, along with supplemental materials.
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 forecast for our second quarter and full year fiscal 2024, and our future expectations of revenue total air our cloud mix <unk>.
non-GAAP Opex non-GAAP operating margin free cash flow free cash flow margin cloud gross margin and equity compensation usage as well as trends in our markets and our business, our strategies and expectations regarding our business AI acquisitions.
Products technology customers and demand.
These statements are subject to risks and uncertainties and are 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 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.
The Asian 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, and thank you for joining us today to begin our call I am pleased to share. This was delivered a solid start to our fiscal year I am proud of our team's hard work and dedication to helping our customers around the world keep their digital system safe and resilient.
We've discussed on these calls since I joined <unk> just over a year ago, we remain squarely focused on driving durable growth with increasing profitability and free cash flow.
Our Q1 results demonstrate this focus in action as we exceeded guidance across our top and bottom line metrics.
Grew annual recurring revenues, 16% year over year to $3.7 billion to $5 billion $25 million above the guidance provided during our March call total revenues were up 11% to $752 million well above our guidance.
We delivered the 16% IRR growth, while remaining tightly focused on our expense control strategy, reducing non-GAAP opex by 1% year over year.
At the same time, we delivered free cash flow of $486 million in Q1 up 253% year over year and exceeding our guidance by $11 million.
Given our progress on operational efficiency, we're increasing our annual free cash flow outlook.
As we discussed last quarter, we believe IRR and free cash flow are the best top and Bottomline indicators of the health of our business and we're pleased with what we've accomplished during the quarter, Brian will expand on our progress here. During his prepared remarks, our first quarter results demonstrate the strength and momentum of our business although we.
We continue to see delay cloud migrations and expansions and increased deal scrutiny consistent with last quarter, we exceeded our growth target as we focused on delivering compelling value and strong ROI to our customers.
We ended Q1 with 810 customers with $1 million or more in IRR up by 120% from this time last year and 20 since last quarter. This includes 433 customers with cloud <unk> over $1 million.
Up 32% year over year.
Looking at the year ahead and beyond I remain confident that Splunk is well positioned to continue to drive topline growth, while continuing to improve profitability and free cash flow.
Since joining splunk 13 months ago.
Focused on the transformational initiatives needed for us to deepen our customer relationships and extend our market leadership today. The elements of our growth engine are primed and it is even clearer to me that no. Other company can deliver the value we provide at enterprise scale and what we believe is a 100 billion.
And growing addressable market.
Let me personally with four or five customers every week, who consistently tell me that smoke is more essential than ever and driving their digital resilience across cyber security and their entire digital footprint.
<unk> CTO and CIO are under a lot of pressure to make their organizations digital systems more resilient amidst a formidable cyber security landscape greater technology complexity demands for better digital experiences in it.
Budgets that continued to be scrutinized.
Only splunk has the enterprise scale unified product portfolio industry maturity envisioned to meet these needs and our key growth drivers were on full display over the past quarter through many significant customer expansions and competitive wins.
Our dedication to helping customers modernize as shift to cloud on their timeline was evident during the quarter with the signing of the largest public sector cloud agreement and Splunk history.
This eight figure deal added Splunk cloud to an existing splunk footprint at a major U S agency that already included compliance cyber security and advanced threat hunting.
As this agency moves to a hybrid environment, adding splunk cloud will provided with the visibility needs to monitor the many applications and services. It has moved to the cloud or hybrid approach and the cost of ownership benefits of the cloud were critical to winning this particular deal.
<unk> continued investment in meeting government compliance requirements illustrates our commitment to serving our public sector customers in fact over the past few months, we achieved two important designation.
The first is.
As in process as we work towards fed ramp high authorization what are the most rigorous certifications are cloud service provider can achieve in a tier above our current fed ramp moderate authorized status.
The second designation is as pending for state ramp achieving state ramp authorization assure state and local governments and higher education institutions that our technology has achieved a heightened security standard.
Turning to cyber security, our focus on enabling organizations to stay ahead of emerging cyber threats. It was evident in significant security deals during the quarter.
Q1, we expanded our footprint within our global it services and consulting company with an eight figure deal for the extended use of our core platform coupled with the addition of Splunk Enterprise security this deal.
Underscores both the power of our continued partnership with this organization as well as the power of our relationships with Dsos.
Following this thesis directive for more stringent security, we displace the legacy Sim and we will address several use cases, including safeguarding personally identifiable information for the hundreds of thousands of employees worldwide are best in class offering is in perfect alignment with the customers' digital transformation efforts and this dip.
<unk> will enable us to help drive a unified approach for resilience across the customers.
And engineering environments.
On the durability front, we were pleased to see further momentum during the quarter as we continued our strategy to bring the value of our absorbability offerings to our existing customers in Q1, we secured an eight figure deal with a leading financial information services provider. This company has grown from an on premises account to a multi.
<unk> million dollars cloud customer their need for greater resilience across their digital systems resulted in a multimillion every ability deal during the first quarter. This organization has made several acquisitions in recent years and plans to consolidate more than 20 costly observer ability tools that it has a mass down to only split.
<unk>.
We were the only company that was able to demonstrate technical differentiation based on our commitment to open telemetry and that are observed ability solutions could manage that complexity across this organization's multiple business units.
We also made progress on the international expansion during the quarter with notable customer wins across security and observed ability in Q1, we secured a significant deal in Europe for Splunk cloud and slug, It service intelligence or tsi with a multinational semiconductor manufacturing company.
The organization has gained strong momentum recently due to the high global demand and they selected Splunk Absorbability solutions over competitive offerings.
Proof of concept demonstrated that we were the only vendor with a unified deserve ability products that could enable this customer to modernize its manufacturing and service monitoring to resolve incidents faster predict and prevent outages and improve resilience.
Turning to the Asia Pacific region. During Q1, we secured a major cloud deal for Japanese Central Government Agency.
Following a competitive selection process only splunk was capable of meeting this agencies need for flexible and efficient data management rapid issue resolution and streamline operations. This is one cloud and enterprise security deal is the latest in a series of successful contracts with this customer as well as the realization.
Of the government's overall cloud first policy.
We believe that our continued focused on our key growth drivers, including cloud adoption customer expansion international growth furthering our security leadership at accelerating our observed ability business are staging splunk for a solid year.
Since joining splunk one of my top priorities has been to accelerate our product innovation and I'm pleased that today, we have a robust product roadmap well aligned to our customers complex needs across multi cloud and hybrid environments at.
At RSA and in many customer conversations one of the most important topics of discussion is how AI will transform our industry I'd like to share how we're thinking about AI and ml more broadly and where we believe there will be significant benefits for our customers and Splunk let.
Let me start by saying that Splunk has been empowering security and it teams with machine learning for a long time, including with over 200000 downloads of our machine learning tool kit, which we introduced in 2017 earlier.
Earlier this year, we introduced the Splunk App for anomaly detection, which uses ml to detect seasonal patterns and finds anomalies in time series data in just a couple of clicks.
In terms of AI enterprises are just beginning to understand its promise and risks, but we view AI as a definite opportunity when we have been working on since well before the most recent buzz when immediate application is to help make our products easier to use without requiring deep knowledge of SPL or search.
Assessing language, allowing more of our customers to drive better outcomes faster SPL.
<unk> enables organizations to conduct complex analytics and a highly flexible language. This application of AI is table stakes and a clear path to value.
We released a preview of an SPL assistant based on large language models back in 2022, which helps users out plain English questions to query data in Splunk lowering the barrier to entry for more practitioners to drive outcomes with Splunk.
We know that AI requires a contextually relevant rich data set to be beneficial and flexible and highly scalable data architecture positions us to continue delivering the solutions that today's enterprises need we are enthusiastic that AI can help our customers get more value out of Splunk improving security.
And observed ability outcomes around the areas of detection investigation and response.
We fundamentally believe that AI will transform the way the world's largest and most complex organizations keep their digital system secure and reliable not only by augmenting mission critical security and observe ability solutions, but also by helping to shore up the global talent shortage of nearly $3 5 million workers in cyber security.
<unk>.
We view AI as an accelerator to human decision, making not a replacement.
But it can make understaffed teams more efficient.
Looking ahead, we believe AI will bring enormous value by automatically detecting anomalies recommending actions and focusing users' attention where it is most needed based on intelligent assessment of risk.
AI can be a growth driver for splunk as it enhances user experience and outcomes in both our core and premium products. As an example, we see significant opportunity to drive further automation and socks through AI and has sore and other premium Splunk security products.
At that Cop 23, we plan to share how we're advancing our AI strategy to help customers gain more value makes splunk easier to use and accelerate security an observer ability outcomes.
Let me turn now to further innovation on the product front.
During the quarter, we announced general availability of several products that will further augment the value customers get from Splunk.
For example, our enhanced mission control brings together security analytics automation and orchestration and threat intelligence capabilities under one common work surface empowering security teams to stay ahead of cyber threats.
Our 2023 state of security report found that nearly two thirds of stock teams complained about switching between too many disparate security tools and management consoles with little if any integration inhibiting comprehensive and timely investigations in response mission control solved exactly that problem.
What gives visibility cloud also got important upgrades during the quarter. We introduced Splunk incident intelligence to help incident response teams increased efficiency. So they can diagnose remediate and restore services before their customers are impacted.
Next new trace analyzer for APM helps easily identify problems from billions of traces and enlist combinations of metadata.
And I am network explore enables teams to easily monitor and assess their cloud network health and resolve issues faster.
Our continued investment in enterprise greater durability solutions for monitoring across complex hybrid environments further accelerates the value, we deliver to customers with comprehensive visibility and a more unified approach to incident response, only splunk is delivering the full stack observer ability solutions needed to help organizations improve.
<unk> digital resilience.
In Q1, we introduced Splunk edge processor to increase our customers visibility into and control over the volume of content of data before it leaves our network by supporting processing at the edge customers can control the cost of data transfer and storage better ensure that sense of the data does not leave.
They're defined boundaries be confident that they are collecting all the data that they need and ensure that the data ends up at the right destination in the right format, all with the flexibility to scale cost effectively.
We're also driving ongoing innovation with our partners to make it easier for organizations to gain value from Splunk last week, we announced Splunk SAP.
Premiums certified endorsed App for Sap's industry cloud, which is expected to be available for purchase in the.
Store next month.
SAP environments contained business critical information in one of the challenges has been to have the visibility needed to protect against risk and cyber threats through our strategic partnership with SAP. This apple bring security relevant SAP data into the fold of smug security analytics and operations workflows, enabling security.
Teams to monitor detect and rapidly respond to threats impacting their SAP environment.
Looking ahead, we're continuing to invest in ways to make it easier to get data into Splunk gain value and drive resilience. For example, we're making good progress on integrating capabilities from our acquisition of twin wave last year to strengthen our customers' ability to quickly analyze and remediate attacks at.
<unk> 23 in July we will share more about our continued cross portfolio innovation and how we're thinking about AI powered premium <unk> solutions.
Let me change gears from our technology to our talent building the leadership team Splunk needs to steer us through the next chapter of opportunity and growth has been among my top priorities and we continue to invest in our people during the quarter in Q1, we welcome Ms. Wang <unk>, Chief Technology Officer Mitch.
<unk> brings over 20 years of experience and applied research and product development with a focus on AI ml data analytics and enterprise cloud. Most recently she spent more than five years of Google, including three years, leading a team responsible for critical components of the company's AI driven Google assistant I'm looking forward to having men.
Further accelerate Splunk technical leadership and catalyze the development of more World class technology.
In April I appointed Spelunker, Tony Pavlovich, as our new Chief customer Officer.
Tony three decades of industry experience and unrelenting focus on delivering for our customers are already helping ensure that organizations around the world continue to gain amazing value from our products, while enjoying a best in class customer experience every step of the way.
Im pleased with the progress we've made building out a world class leadership team that is aligned behind our common purpose and efforts to deliver exceptional results for customers and shareholders alike.
Outside of our management team Splunk, welcome Yemeni <unk>, President CEO and director of hotspot two our board of directors I'm looking forward to partnering with the harmony and our directors to further accelerate Splunk <unk> market leadership and I'm enthusiastic that the changes we've made to our board composition have positioned us for driving the business.
Forward as we grow in scale over the coming years.
As I wrap up I want to reiterate my appreciation for <unk> around the world for all the hard work and execution to deliver a strong Q1, our team demonstrated once again that only splunk has the deep industry partnerships operational rigor and unified security observed ability solutions needed by the global 2000.
To help keep their digital systems resilience.
Although macroeconomic conditions continue to impact our customers' buying behavior, we still delivered solid <unk> growth along with a significant increase in free cash flow I remain confident that the go to market organizational and workforce changes we've implemented over the past year and our steadfast focus on efficiency set the stage for <unk> to continue delivering.
During the long term durable growth and profitability.
Focus on since joining the company and with that I'll turn it over to Brian to share more about our Q1 results and outlook. Thank you.
Thanks, Gary So let's get to Q1.
As Gary mentioned, the macro environment remains challenging we continue to see more scrutiny on expansions in deals. Additionally, cloud migrations remains sluggish that said, we were able to successfully navigate this economic backdrop and close a solid quarter as we exceeded or met our outlook across all guided metrics. We grew total IRR by 16.
Year over year to $3 75 billion.
Which exceeded our most recent guidance by $25 million.
<unk> grew 29% year over year to $1 815 billion.
Cloud <unk> NR with 120%, which was in line with our expectations given delayed cloud expansions.
Q1, total revenue was $752 million.
Ahead of our guidance range of between 710 and $725 million.
Cloud revenue increased by 30% year over year to $419 million in terms of sequential growth, we want to remind investors that our fiscal Q1 has three fewer calendar days in Q4, and three days equates to over $10 million of cloud revenue.
With regards to cloud gross margin, we continue to make progress on our expense initiatives.
Cloud gross margin reached 73, 6%, which is up nearly 600 basis points year over year and better than our outlook.
In Q2, we expect cloud gross margin will decline towards 73%, while we focus on improving service levels and customer experience. This would still represent a nearly 400 basis point improvement year over year.
We continue to expect that we can achieve cloud gross margin of approximately 74% in Q4.
Given our priority of increasing profitability, we remain laser focused on managing expenses, we continue to identify initiatives and investments that could help us generate additional opex leverage in Q1, we were able to tightly manage head count in contingent labor expenses. Ultimately, we were able to reduce non-GAAP opex by one person.
<unk> year over year, even while driving 16% <unk> growth or.
Our success leveraging opex combined with our revenue beat helped us exceed our guidance on non-GAAP operating margin in Q1, we achieved a positive 3% non-GAAP operating margin ahead of our guidance of negative three to negative 5%.
Let's move to free cash flow in Q1, we generated $486 million of free cash flow, which is $11 million ahead of our guidance as we more than tripled quarterly free cash flow year over year.
Q1 is annually our largest free cash flow quarter, driven by the seasonally high bookings in Q4, which are mostly collected in Q1 for that reason, we recommend that investors evaluate free cash flow on a trailing 12 month basis, which totaled $776 million at the end of Q1 more than quadruple the 179.
<unk> generated over the 12 months ending April 32022.
Before I move to guidance I want to reemphasize that Splunk software license revenue related to term contract volume is recognized upfront. Thus GAAP revenue is highly subject to both bookings mix and contract duration. We believe <unk> is a better indicator of future free cash flow, because we bill both cloud and term software license.
Customers on an annual basis.
I wanted to be Super clear, we're focused on <unk> and free cash flow growth to create shareholder value.
You'll note that in the supplemental slides, we calculate the rule of 40 metric based on AOR growth instead of revenue growth and free cash flow margin as a percentage of IRR.
Now what may be less visible to investors of the long term investments, we're making that we expect to translate into future growth.
These investments stamp both the R&D and go to market organizations.
On the tech side under New leadership, we are focused on accelerating product roadmaps and amplifying value to customers.
Additionally, we're making investments in our field to deepen our international footprint improved coverage ratios and position Splunk to win a new global Greenfield accounts with these actions. We believe we are well positioned to accelerate <unk> growth in fiscal 'twenty five assuming we see an economic recovery and a return to a more rapid pace of cloud.
<unk>.
And with that let's turn to guidance, we continue to experience increased scrutiny on expansions in deals as well as delayed cloud migrations given we're still early in the fiscal year and based on the current market environment. We are maintaining our guidance range that we set last quarter for fiscal 'twenty for <unk> of between $4 one.
Two five and $4 175 billion.
Until we see a positive change the macro environment, we believe it's prudent to keep our arrow guidance unchanged. Despite our solid Q1.
In terms of revenue in Q1 term duration trended slightly ahead of our expectations. We are updating our annual revenue guidance to the top end of our prior range of approximately $3 9 billion.
As a reminder, though duration and mix of term contract volume could significantly impact reported revenue and associated growth rates.
Given the current macro trends, we continue to expect the cloud mix of software bookings will range between 55 and 65% in fiscal 'twenty four but actual mix could vary from quarter to quarter, just as we've seen historically in Q1 cloud represented 58% of software bookings in line with these expectations we continue.
To expect that cloud will begin to represent a majority of total <unk> in the second half of this year.
So, let's move to expenses and the impact on free cash flow. It's important to understand that in addition to looking for opportunities to leverage expenses. We will also make fiscal 'twenty four investments that we expect can accelerate growth during the economic recovery and beyond our objective is to drive long term <unk> and free cash flow growth.
We made solid progress in Q1 on our expense structure and looking forward, we remain extremely focused on increasing our operating efficiency. As a result, we are updating our annual expense outlook as we now expect to manage annual non-GAAP opex growth below the prior 7% outlook, we expect that we get a hold non-GAAP .
Opex growth to roughly between five and 6% a reduction of 100 to 200 basis points from our prior outlook.
It's worth noting that in the second half of the fiscal year, we will face more challenging opex growth comparisons as we begin to comp the cost actions. We took last year in terms of the impact on margins. We now expect fiscal 'twenty four non-GAAP operating margin to increase to between 18 and 18, 5% up one.
100 to 150 basis points from our prior guidance range.
Based on our successful expense management, we're also increasing our annual free cash flow forecast by $30 million. We now expect to generate free cash flow between 805 and $825 million in fiscal 'twenty, four which represents an increase of between 89 and 93% year over year.
As a percentage of IRR. This would represent a margin between $19 five and 19, 8% up from 11, 6% in fiscal 'twenty three.
Let's move to equity as I mentioned last quarter, we have taken and will continue to take deliberate steps to reduce our use of equity compensation and over the next several years get to a lower sustainable dilution rate.
Even though stock based compensation expense is a lagging indicator. We are pleased with the double digit percentage decline in Q1 year over year.
Looking forward, we will outline our capital allocation strategy at our Investor and Analyst Day later this fiscal year.
Worth mentioning that we see potential scenarios to reduce the total share count in fiscal 'twenty five by being disciplined with our use of equity along with future capital allocation decisions.
Let's move to near term guidance in Q2, we expect to grow <unk> by approximately 100 million to $3 85 billion, which represents 15% growth year over year from a GAAP perspective, we expect total revenue between 880 $895 million.
In terms of costs, we plan to manage non-GAAP opex growth to between two and two 5% year over year.
From a margins perspective, this translates into an expectation of a non-GAAP operating margin of between 10 and 12%.
In terms of free cash flow Q2 follows our seasonally slowest bookings quarter and as such similar to prior years, we expect quarterly free cash flow at a dip negative in Q2, which we estimate at negative $15 million. This implies free cash flow of approximately $785 million for.
For the 12 months ending July 31, 2023, which is nearly quadruple the $260 million of free cash flow for the 12 months ending July 31 2022.
We then expect modest positive free cash flow in Q3 with further growth in Q4 again for the full year, we expect free cash flow between 805, and $825 million, which is an increase of $30 million compared to our prior guidance range.
In closing despite macroeconomic headwinds execution in Q1 was solid and we delivered strong operating expense leverage we are focused on driving durable long term growth and increasing our free cash flow and free cash flow margin and with that let's open it up for questions.
Okay.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Pause for just a moment to compile the question and answer roster.
Your first question comes from Raimo.
Raimo Lynn Zhao from Barclays. Your line is open.
Thank you and congrats for a very good start to the year and Gary.
The conference call, you mentioned quite a bit competitive wins, where you kind of demonstrated that you can do.
Can do cloud and <unk>.
And on premise as well and can both with the current.
Situation that customers kind of kind of use the current environment to see maybe a little bit longer.
In there.
How much is that playing to your advantage and and how do you think about that as we are coming out. There do you think there's a fundamental change in thinking and like how much is in cloud and how much is no cloud and how much. It is helping you or do you think it's temporary and how much is helping you. Thank you and congrats again.
Yes, thanks, so much.
I believe that our hybrid approach and supporting customers.
As they want to evolve the cloud on their timeframe has been very important and strategic to us what we what I see what I speak to customers as I see more hesitation today are more thoughtfulness about what's going into the cloud and what staying in there in their own data centers and so I think from a.
Strategic point of view I think it's been advantageous that we have the ability to deliver great value across hybrid environments and I don't see that changing anytime soon I think that will continue to be a strategic advantage for the company.
Okay perfect. Thank you well done.
Your next question comes from the line of Brent Thill from Jefferies. Your line is open.
Thanks, Gary for you didn't raise guidance for the year can you just give us a sense of where the strength youre seeing the confidence.
To do that what areas of the portfolio seem to be shining and so Brian really good expense discipline. Good to see can you just give us a sense of kind of.
What you are modeling and expecting in terms of the overall environment to continue.
The impressive margin improvement that you're seeing going forward.
Yes, so a couple of things so one is.
We saw strength in cyber and as we indicated in our prepared remarks, we see customers taking out legacy systems. As an example that has been fueling growth. We see this opportunity as we were talking previously where customers know that cloud will play a role and they want to make that step, but theres still leaving things on prem.
To deliver a hybrid architecture, that's been strategic and advantageous and then I think the Mattikalli, we're seeing consolidation opportunities and I would just reference back to the example, we gave in the prepared remarks were.
Customer chose our absorbability solution to consolidate down over 20 Absorbability products to Splunk that was that's been a play that we think is very repeatable and that's been working well for us.
And I would just add that in terms of the bottom line, but we are committed to increasing profitability and free cash flow and so we see multiple scenarios to achieve our new increased free cash flow outlook.
A range of different operating environments.
Frank This is just really a continuation of the work that we've already begun and we will always be seeking opportunities to improve how we operate as we grow and as part of this will continue to seek more impactful in efficient ways of operating.
It really which includes.
Changing sort of how we approach expenses, which is having a zero based budgeting mindset really driving better processes looking for opportunities to flatten the organization, which will save money, but also just increase velocity and then finally growing our emerging town centers.
Thank you.
Your next question comes from the line of Brad Phillips from Bank of America. Your line is open.
Wonderful. Thanks. Thanks, so much for taking my question I wanted to ask the question on operating efficiency here in another way, obviously youre seeing real progress here with some efficiency gains opex down 1% <unk> growth of 16 better than your <unk> Guide.
Question is we know you are still investing in the business you've talked about some of those investments, but yet youre generating this kind of leverage. So how are you able to kind of balance the investments that are going into the business, while still delivering on this type of top line.
Sure look we're very pleased with the progress we've made leveraging expenses in Q1, and we just based on our progress and we have a nice slide in the Investor supplement where you can look at the focus areas of what we did in Q1, but we expect the success in Q1 will flow through now to the entire year. So to your point, we continue to make investments.
To leverage our cost, but it is just offsetting a larger portion of the investments now so when you look at the full year from our non-GAAP Opex growth perspective, we think it can be now in the range of 5% to 6%, which is down from 7%, which is driving the increase in margins now up to on a non-GAAP operating margin basis, 18% to 18.
5%, so thats up a 100 to 150 basis points year over year.
Wonderful thanks, so much.
Sure.
Your next question is from the line of Matt Hedberg from RBC capital markets. Your line is open.
Great guys. Thanks for taking my question and I'll offer my congrats on the consistency really good siem.
Ryan you talked about accelerating growth and maybe fiscal 'twenty five obviously, it's probably a macro element to that but just sort of curious when you think about that acceleration in growth.
And do you think you could do you think that can happen and sort of an unchanged macro in other words like company specific drivers give you confidence in that sort of a trajectory.
Yes, I mean, I think it's important to look at the investments we're making if you look at last year on a GAAP basis, we invested $1 billion in R&D and so some of that is coming to fruition. So we really were excited about the product portfolio and really tried to amplify the value for our customers.
Yes, and economic recovery will help obviously helps at all.
All boats will rise and that tied but we feel really good about the product portfolio and then as we discussed on the prepared remarks, we're making a number of investments in our go to market that I think are really important to call out. So we are deepening our international footprint, we're improving coverage ratios.
We're trying to position Splunk now a new.
Global Greenfield accounts and so all of these things will contribute a little bit this year, but it's more about the multi year growth opportunity.
Really good to hear thanks, guys best of luck.
Okay.
Your next question comes from the line of Andrew Nowinski from Wells Fargo. Your line is open.
Great. Thank you and congrats on a great quarter.
Wanted to ask a follow up question on the public sector cloud deal that you mentioned, so I was wondering.
How competitive was that deal is there an expansion opportunity with that specific agency and then do you think there is a way to leverage that.
Various strategic win with other some leverage with other agencies down the road.
Absolutely I think.
So this was they looked at all the alternatives out in the market when they made the decision. So it was a competitive deal.
I think that this is really the starting point, though would really planted a flag and there is plenty of opportunities for expansion.
And we fundamentally believe that broadly public sector represents a very interesting opportunity for us and it's why we've made the commitment to go to fed ramp high which opens the doors to.
Different parts of the public sector and I think it gives us access to more customer opportunities. So we feel very good about that particular win has been a key marquee account that we can then more broadly leverage and the investments that we continue to make we think are also critical to laying the foundation to drive long term.
Growth in public sector.
That's great. Thanks, Gerry and keep up the good work you bet. Thank you.
Your next question comes from the line of Jacob Berridge from William Blair. Your line is open.
Hey, Thanks for taking my questions and I'll Echo the congrats on the great results just generally.
I'm curious, how youre thinking internally about the magnitude of data and workloads that generative AI could create for Splunk.
Secure and monitor over the next few years and then just as a follow up there how do you see AI playing into your migration journey with just maybe more customer willingness to move to the cloud to really get that type of technology.
Yes, great questions.
One of the things that we're very excited about is the advances in AI.
<unk>.
Are open to us given the rich datasets that we hold with customers and one of the things that I'm, particularly excited about is over the past couple of years. We've just seen some very good wins, where customers have been able to leverage AI to get interesting outcomes like in the area of fraud and so broadly speaking we think that we're at the very beginning of this journey, which.
We'll open the doors to many more use cases.
Given the kind of data the richness of data that Splunk holds and the opportunity. There. So we feel like we're just at the very beginning of this and this wave of generative AI just opens a lot of doors at accelerates a lot of activity for us.
Thanks, Congrats again on the great results.
Thank you so much.
Your next question comes from the line of Mike because from Needham and company. Your line is open.
Hi, guys, Matt <unk> on for Mike <unk> from Needham <unk> company. Thanks for taking the question I was wondering how the first quarter tracked versus your internal expectations and if the top line outperformance was tied to a specific customer segment geography or vertical.
Yes, I would say in terms of Q1.
I think across the verticals, we were quite pleased I would say the probably the strongest vertical would be U S. Public sector. We had really strong bookings strength there I think in terms of.
Actually Q1 is why I'd, just add renewals performed very well, which we're very pleased about where we are definitely ahead of our renewable plan.
Awesome I appreciate the color.
Your next question comes from the line of John <unk> from Guggenheim. Your line is open.
Yes. Thank you for taking my question.
Just a follow up to the question is just asked.
Brian We know we realized that <unk> most important top line metric, but we have to manage to revenue to ray and being able to go from one to the other at least model. It is important.
So license was strong and you said renewals were strong.
But we thought it could even be stronger.
I'm just trying to understand is for the on Prem subscription.
That renewal base.
That looks like for the rest of the year and also how would you expect contract duration, which you talked about in your prepared remarks, some of that might trend.
Sure. So what we've said in terms of the renewal opportunity. This year, it's going to grow roughly 20% to approximately $2 billion.
In terms of just the duration I mean talk about duration will come back just again in terms of revenue or duration as you know it's impossible perfectly forecast.
We are expecting duration to be within a similar range to what we've seen in the last couple of quarters, but based on what we've seen we again raised guidance on revenue to the top end of our prior range. So now $3 9 billion.
As it relates to Q1 again, we came in well above the revenue outlook. So we were quite pleased with that.
Trying we have a lot of customers that as they approached renewals. They are still trying to decide if they're going to migrate to the cloud or.
Or not.
And so that's something that we're going to continue to watch.
But again, we do expect that with an economic recovery, we're going to see an acceleration of cloud migrations and I think that's something right now I think.
Investors should realize as any company approaches this opportunity. It's just a matter of when not if for a lot of these workloads and it's.
In this environment a lot of CFO is just do not want to take on additional cost. This year and there is typically a cost to move to migrate to the cloud.
And Thats why we expect with a economic recovery, we're going to see an acceleration.
A reacceleration.
That $2 billion.
Total renewals because I am just curious about the on Prem subscription because thats, where thats the thing that construe, so put those with.
With the revenue recognition rate the upfront portion there.
Yes, the $2 billion is overall and the other thing in terms of in terms of Rec. Given 606, there is an increasing portion of cloud in that renewal mix.
And so relative to that's what's causing some of the drag on <unk>.
Loaded accounting revenue versus true IRR.
Got it okay. Thank you very much Brian .
Right.
Your next question comes from the line of Michael <unk> from Keybanc. Your line is open.
Hey, guys good job on.
Sufficiency.
EBIT margins. The guide is like 18% on revenue for this year I like the thought process of free.
Free cash flow relative to <unk> as a percentage basis.
Towards 20% I was wondering if you could just comment on how are you.
At least philosophically at this point think about those margins longer term about the relationship between the two of them.
Yeah.
So.
I think it's important to stay tuned for Investor day, because we will provide a long term expectations around growth as well as our entire margin structure and free cash flow margins, but I think it is fair to assume we we don't see anything structurally in our business that prevents us from increasing our free cash flow. So again, we expect free cash flow margin to.
Increase next year as well.
If I could just sneak in one technical question.
Ted.
But what was the impact on <unk> billings bookings et cetera.
This quarter from that.
I'm sorry is the question around fed ramp high.
No, let's say because large fed deal that you talked about.
We're not getting into specifics on individual transactions.
Thanks very much.
Your next question comes from the line Keith Bachman from BMO. Your line is open.
Hi, many thanks I wanted to ask.
About the competitive landscape and particularly with an orientation around your traditional business not the observer ability business.
And the context of the question is you did call out.
Some new logo wins.
And I think investors are candidly sort of surprised to hear about new logos with Splunk.
And I was wondering if you could just articulate as you look out.
Over the growth algorithm you had I mean, how much is actually driven by.
New logos.
And which would presumably be largely competitive wins since everything is competitive but if you could just talk a little bit about the competitive landscape and how important are new logos.
And then secondarily you also have you've highlighted the SAP partnership which is a bit different in terms of taking a deep dive was one particular.
Software provider is.
Drew that conclusion is there other relationships that you think will.
Come from.
And competition less 18 in other words will you do more specific partnerships with other.
Large software vendors, if you could just talk a little bit about the strategy there and what the implications are that's it for me many thanks.
I'll, let Brian start by.
Talking just briefly about how much new logos represented in our and our IRR. Yes. So typically when you look at net new IRR, it's roughly 20% we see that consistently we tend to measure that on a trailing 12 month basis, because you could see some volatility but again, that's something that is held now for multiple years and then competitively.
<unk>.
In.
Accounts where were.
Going in and looking broadly of competition.
We've had very good success, taking out incumbent legacy <unk> solutions. So thats been a sales motion that's been quite productive for us.
In those circumstances.
The.
Customer will look at a variety of solutions.
And I think we.
To demonstrate that we can meet the complex scale requirements that organizations have that we offer more flexibility than our competitors out in the market.
<unk>.
And just the broad set of security capabilities, including.
Orchestration and automation threat Intel.
<unk> security analytics all of these things integrated into a single product is a pretty unique offering that doesn't exist in the market. So we our win rate is quite high and we do quite well in those new logo environments.
And then going to your portion shifting gears going to the FAA part one of the things that's Super Cool here is.
If you talk to see so today, they struggled with visibility into what's happening with S&P and so what we've done basically with this app is it increases the level of visibility that security teams have relative to what's happening within SAP and they can bring that into the broader splunk environment and drive broader correlation.
Across their entire security footprint and so it provides visibility that frankly, they just haven't had in the past.
This is we're super excited about this we're happy to be engaged directly with SAP.
They are an important partner to us and could we do this with other vendors that's possible, but I think if you just look at the history of Splunk, which you obviously know well.
We've always been a company that wanted these tas or apps that allowed for integration of data into the broader Splunk environment. I think in this particular case it made sense to do a very strategic relationship and drive a combined go to market. So feel really good about this and excited about the potential here.
Alright, Thanks you.
You bet.
Your last question comes from the line of Gray Powell from BP.
Your line is open.
Hi, This is Jonathan on Sharon can you Paolo. Thank you for taking my question. My question is on board.
Products set.
One is on lithium.
You go to market motion.
So as I recall is that over the next year.
How quickly could that have an impact on your NII growth.
No great question I think the our go to market motion has been one where we're taking.
The observed ability cloud and really working with our existing.
Customers to drive those opportunities and I think it was I think frankly, we.
We've showed up in the last couple of earnings call with some really interesting strategic wins, which we saw again this quarter and so that go to market motion.
Is working well and while we're relatively early there we're seeing.
Very big very strategic wins coming from their go to market motion. So we feel good about it.
Okay.
Okay.
Great.
Answer session, Mr. Gary Phil I'll turn the call back over to you.
Great I want to thank you for joining us on the call today, we had a solid start to a year feel great about the opportunity going forward. We look forward to seeing many of you at Dod Cop 23 in Las Vegas in July take care. Thank you.
This concludes today's conference call you may now disconnect.
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