Splunk (SPLK) Earnings Report: Q1 2017 Conference Call Transcript · full potential, even in our largest accounts. For example, Tesco standardized on Splunk for operational intelligence

CompanyName:SplunkIncCompanyTicker:SPLKSector:T echnologyIndustry:ComputerSof tware&Services

EventDescription:Q12017EarningsCallMarketCapasofEventDate:7.20BPriceasofEventDate:54.93

©2014TheStreet,Inc.Al l R ightsReserved Page1of22

Splunk(SPLK)EarningsReport:Q12017ConferenceCallTranscriptThefollowingSplunkconferencecalltookplaceonMay26,2016,04:30PMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

KenTinsley;SplunkInc;InvestorRelationsDougMerritt;SplunkInc;CEODaveConte;SplunkInc;CFO

OtherPart icipants

RaimoLenschow;BarclaysCapital;AnalystBrentThill;UBS;AnalystPhilipWinslow;CreditSuisse;AnalystMelissaGorham;MorganStanley;AnalystJimFish;Citigroup;AnalystJesseHulsing;GoldmanSachs;AnalystJohnDiFucci;Jefferies&Company;AnalystJerryMatsheim;RaymondJames;AnalystMarkMurphy;JPMorgan;AnalystBrianWhite;DrexelHamilton;AnalystKirkMaterne;EvercoreISI;AnalystBhavanSuri;WilliamBlair&Company;AnalystMattHedberg;RBCCapitalMarkets;AnalystBrentBracelin;PacificCrestSecurities;AnalystSteveAshley;RobertW.Baird&Company;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheSplunk,Inc.,firstquarter2017(sic)financialresultsconferencecall.

(OperatorInstructions)

Asareminder,today'sconferencemayberecorded.

Iwouldliketointroduceyourhostfortoday'sconference,Mr.KenTinsley,CorporateTreasurerandVicePresidentofInvestorRelations.Sir,pleasegoahead.

KenT insley(InvestorRelations):

Thankyou,Operator.Goodafternoon,everyone.WithmeonthecalltodayareSplunk'sCEODougMerrittandCFODaveConte.

Ourpressreleasewasissuedaftercloseofmarkettoday,andispostedonourwebsite.Thisconferencecallisbeingbroadcastliveviawebcast,andfollowingthecallanaudioreplaywillbeavailableonourwebsite.




Onthiscallwewillbemakingforward-lookingstatements,includingfinancialguidanceandexpectationsforoursecondquarterandFY17;transactions,products,servicesmix,aswellasthemixbetweenperpetualandratabletransactions;investmentsininternationaloperations,andexpectedgrowthininternationalbusiness;plannedinvestments,includingproducts,services,sales,andfacilities;marketandusecaseopportunities.Thesestatementsreflectourbestjudgmentbasedonfactorscurrentlyknowntous,andactualeventsorresultsmaydiffermaterially.

PleaserefertodocumentswefilewiththeSEC,includingtheForm8-Kfiledwithtoday'spressrelease.Thosedocumentscontainrisksandotherfactorsthatmaycauseouractualresultstodifferfromthosecontainedinourforward-lookingstatements.Theseforward-lookingstatementsarebeingmadeasoftoday,andwedisclaimanyobligationtoupdateorrevisethesestatements.Ifthiscallisreviewedaftertoday,theinformationpresentedduringthiscallmaynotcontaincurrentoraccurateinformation.

Wewillalsodiscussnon-GAAPfinancialmeasures,whicharenotpreparedinaccordancewithGenerallyAcceptedAccountingPrinciples.AreconciliationofGAAPandnon-GAAPresultsisprovidedwiththepressreleaseonourwebsite.

Withthat,letmeturnitovertoDoug.

DougMerritt (CEO):

Thankyou,Ken.Hello,everyone.Welcometothecall.Itisgreattobetalkingtoyouabouttheopportunityinfrontofus,asIclippastmytwo-yearanniversaryatSplunk,andsixmonthsintheCEOchair.IjustcamebackfromourannualPresident'sClubevent,wherewecelebratedourfieldteam'ssuccessindeliveringastrongFY16.Theteamisenergized,andasalways,ourcustomersareournumberonesourceofinspiration.

AtClub,wehadthechancetoofficiallywelcomeournewChiefRevenueOfficerSusanSt.LedgertoSplunk.Iamveryexcitedtohaveherjointheexecutiveteam.Welcome,Susan.

WedeliveredasolidQ1,with$186millionintotalrevenue,up48%overlastyear.Oursuccesscontinuestocomefromacombinationofourexistingcustomersexpandingtheirdeployments,andfromaddingmorethan450newcustomerstotheSplunkfamily.Weseethewaveofdigitaltransformationimpactingeveryindustryandeveryenterprise.Theamountofdatabeinggeneratedisexploding,andthattrendwillcontinue.

Splunkisthebestsolutiontoenablecustomerstoeasilyandcosteffectivelycollect,analyze,andgetmaximumvaluefromthatdata.OurstrategyalsoremainsthesameTobetheubiquitousmachinedatafabricbyinvestinginourdataplatform,creatinghigh-valuesolutionsthatleverageourplatformandbuildingastrongecosystem.

Aspartofthisstrategy,wewillprovidecustomerswithbest-in-classsolutionstargetingspecificusecasesdeliveredbyourpartnersandbyourmarketgroups.InIToperationsandapplicationsdevelopmentanddelivery;security,compliance,andfraud;businessanalytics;andtheInternetofThings.

OurcommitmenttoexpandourproductportfoliocontinuedinQ1.WeannouncedthegeneralavailabilityofSplunkEnterprise6.4,anewSplunkCloudrelease,andthelatestversionsofSplunkEnterpriseSecurityandSplunkUserBehaviorAnalytics.

OneofthemanynewcapabilitiesinEnterprise6.4includesnewinteractivevisualizations,anopenlibraryonSplunkbase,wherecustomersandpartnerscandevelopandsharetheircustomvisualizations.Weenhancedpredictiveanalytics,improvedqueryperformance,andmadeaseriesofplatformsecurityandmanagementimprovements.




Wealsoreducedthecostofhistoricaldatastorageby40%to80%.Forexample,acustomerthatisindexing10terabytesperdaywithadataretentionpolicyofoneyearcansaveover$4millionofstoragecostsoverfiveyears.Iftheyretaintheirdatausageorreplicatedata,theirsavingsmultiplyfurther.OurcustomerTransUnionputitsimply.Quote,thepreviousversionofSplunkEnterprisedoubledourperformance,andnowthenewstorageoptimizationcapabilitiesinSplunkEnterprise6.4cansignificantlylowerourstoragecosts,endquote.

Inaddition,weintroducedtheappforAkamai,whichallowscustomerstomonitorandanalyzethereal-timeperformanceavailabilityandsecurityoftheAkamaiCDNservice.Ourupdated--weupdatedourappforServiceNowtoprovideinsightsintoincident,change,andeventmanagementprocessesinServiceNowinstances;andthenewestreleaseoftheappforAWS,whichhelpscustomersgainend-to-endvisibilityacrosstheirAWSenvironment,includingcriticalsecurity,operational,andeconomicinsights.

Wealsoannouncedourfreeadd-onfortheGoogleCloudPlatform,whichenablescustomerstoanalyzeandmonitortheirsecurityandreliabilityoftheirGCPservices;andMicrosoftAzurecustomerscannowpurchaseAzure-certifiedSplunkEnterpriseclustersinminutesthroughtheAzuremarketplace.

Toincreasedevelopervisibilityintotheirdev/opsandapp/devenvironments,weannouncedtheavailabilityofthePuppetEnterpriseappforSplunk.CustomerscannowuseSplunktocorrelatethedatafromPuppetenvironmentswithmetricsandeventsfromacrosstheappdeliverychain.Thisreducescomplexity,andimprovesthevelocityandqualityassoftwareproductreleases.

WealsoannouncedthatthelatestreleaseofDockerincludestheSplunkloggingdriver,socustomerscaneasilygetdataoutofcontainersformonitoring,troubleshooting,andsecurityinsights.Ourinnovationcontinuestodeliver.Congratulationstotheentireproductsanddevteams.

Onthepartnerfront,IampleasedwithourstrategicalliancewithAccenture.TheyareexpandingtheirbenchoftrainedSplunkpractitioners,andwearecollaboratingonvaluecreationandprogramdeliverytobringnewsolutionstomarket.AccentureisleveragingSplunkasaplatformtodeliverapplicationstoenhanceservicedeliveryofferings,includingtheirintelligentautomationplatformforapplicationservicedelivery,andtheirnewcyber-defenseplatform.

HawaiianTelcomisoneofAccenture'sfirstclientstotakeadvantageoftheirintelligentapplicationmanagementserviceswithSplunk.Thereal-timeinsightsfromSplunkenablestheHawaiianteamtobemorestrategicandproactiveonaday-to-daybasis,whichultimatelyimprovestheircustomerservice,andincreasesproductivity.

SplunkisnowanEMC)selectpartner.EMC)customersnowhaveasimplewayofpurchasingEMC)solutionsandSplunkproducts,globalsupportandservices,andeducation.IntegratingSplunk'splatformwithEMC)solutionswillenableourjointcustomerstomaximizethevalueofmachine-generateddata.WeannouncedouralliancewiththeHerjavecGroup,whereSplunksolutionsareattheheartoftheirnewmanagedsecurityserviceprovideroffering.

Ofcourse,wedoallthisforourcustomers,whoarerecognizingthatthemoredatatheyputintoSplunk,themorevaluetheycanrealize.ThatiswhyIcontinuetobelievethatweareveryearlyincapturingourfullpotential,eveninourlargestaccounts.Forexample,TescostandardizedonSplunkforoperationalintelligencewithanenterpriseadoptionagreement.TheretailerexpandeditsusecasestoincludesecuritybypurchasingbothESandtheSplunkappforPCIcompliance.TescoalreadydrivesvalueacrossitsbusinesswithSplunkEnterprise,withbenefitsincludingaccelerateddevelopmentcyclesandimprovedperformanceandcustomerexperienceonTesco.com.

IamalsoreallypleasedwiththerapidgrowthofSplunkCloud,wherewesawordersmorethandouble




yearoveryear.Forexample,FamilysearchhassignificantlyexpandedtheiruseofSplunktosupportarecordincreaseinsystemtraffic.

Thisexpansionwillalsoensureasmoothtransition,astheymigratedatatoAmazonwebservices,vitaltransactionsthatSplunkCloudalreadymonitors.FamilysearchleveragesthedatagatheredinSplunkCloudtomonitortheirAWSusageandexpenseswiththeSplunkappforAWS.FamilysearchalsousesSplunkCloudtovalidatethecontinuousdeliveryofitswebsiteservices.

OktaexpandedSplunkCloudandESlicenseforHIPAAcomplianceforthehealthcaremarket.OktahasalreadyhasbeenusingSplunkCloud,NES,andIToperationsandsecurity.SplunkCloudhelpsOkta'sITteamensureitsownintegratedplatformisoperatingatpeakperformance,andthesecurityteamleveragesCloudandESforthreatintelligence,includingtheabilitytoeasilydetectandquicklyrespondtosecurityincidents.

Traveltechnologygiant,Sabre,willreplaceitslegacySIMwithSplunkCloudandEStoensurethesecurityoftheirhospitalityandtravelnetwork.Sabre,whichprovidestechnologytohundredsofairlinesandthousandsofhotelsandtravelagencies,choseSplunkbecauseit'seasiertomanage,scalesbetter,andcanmoreeasilyunderstandcomplexdatasources.OthercustomerschoosingSplunkCloudinQ1includeChicagoPublicSchools,Z illow,ThermoFisherScientific,andacooperativegroupintheUK.

Wealsocontinuetoseemomentuminourmarketgroupsolutions.WehadgreatcustomerwinsinITopsandappdelivery,includingtheUSCourts,whoselectedSplunkEnterpriseastheplatformfortheirloggingserviceproject,anationwideinitiative.

ThisservicewillbeprovidedtohundredsofUScourtstohelpthemmeetthejudiciary'sITsecuritylogmanagementpolicy.TheUSCourtsalsoexpandeditslicensetointroduceSplunkasadataplatformtonewdepartmentsandusersintheUSCourts'administrativeofficeandtheirprogramoffices.USCourtsalreadyusesSplunkESandsecurity.

GoodDataexpandedSplunkEnterprisetohelpsupporttheirgrowingglobalcloudservicesplatform.Applicationdevelopers,operations,andcustomersupportteamsrelyonSplunkforIToperationsandapplicationdeliveryinGoodData'scloud-basedplatformforISPsandenterprises.OthercustomerwinsinITopsandappdeliveryincludeClemsonUniversity,Chipotle,andtheUniversityofVirginia.

WeareseeingincreasedmomentumforourITserviceintelligence,orITSIsolution.Customersarepleasedwithhoweasythissolutionistoinstallandconfigure,andhowquicklythey'reabletoimproveservicelevelsandcustomersatisfaction.ExistingSplunksecuritycustomerWorldBankGroupinvestedinexpandingtheirdeployment,andaddedITservicesintelligenceastheymodernizedtheirenterprisemonitoringoffering.Theyanticipateincreasedvisibilityintothehealthoftheirkeyapplicationsandservices,aswellasusingITSItoreplacetheirlegacytools.OthercustomersselectingITSIinQ1includetheCityofLosAngelesDepartmentofHealthServicesandtheCoca-ColaEnterprises.

Ourperformanceincustomerwinsinsecuritycontinuestobestrong,aswell.Oneoftheworld'slargestglobalfinancialservicesfirmsreplaceditsSIMwithSplunkES,choosingSplunkoverseveralcompetitors.SplunkEnterpriseisalreadytheplatformforIToperationsatthisbank,withprovenvaluedeliveredacrossmultipleteamsandhundredsofusers.

LeadersattheDartmouthHitchcockMedicalCenterarestrategicallyprioritizingsecurityinlightofaseriesofrecenttargetedattacksonhealthcareorganizations.Aspartofthisplan,DartmouthsignificantlyexpandeditsuseoftheSplunkplatformtoprotectitspatientsandstafffromcyber-attacks.IttripledthevolumeforSplunkEnterprise,ES,andtheappforExchangetomonitorandprotectadditionalsystemsinthehospital.




AndDenverInternationalAirportstandardizedonSplunktostrengthenitssecurityposture.DENisusingSplunktodetectcyber-attacksandinsiderthreats.TheairportisalsoplanningtoutilizeSplunkinoperationsandapplicationsteamstogaingreatervisibilityandunderstandingoftheirinfrastructure.OthercustomerwinsinsecurityincludeUABHealthSystem,JetstarandLGATelecom.

WewereveryproudtoseeSplunkproductsandpeoplecontinuetoreceiveindustryrecognition.SplunkwasrecentlynamedoneofthebestplacestoworkintheBayAreafortheninthconsecutiveyearbytheSanFranciscoBusinessTimes.Ijustwanttotakeamomenttothankouremployees.I'veneverseenagroupofpeoplesocommittedtoourcustomers,cultureandcompany.

I'mproudtobepartofsuchanamazingteam.Insummary,itwasasolidquarterandstarttoourFY17,thankstoallofourcustomersandpartners,andthankstoeveryonethatworksatSplunk.

NowletmeturnthecallovertoouresteemedCFODaveConte.

DaveConte (CFO):

Allright.Thanks,Doug.Goodafternoon,everyone.Thanksforjoiningthecall.

Q1wasagoodstarttoFY17,withrevenuesof$186million,a48%increaseoverQ1oflastyear.Licenserevenuestotaled$101million,up41%overlastyear,andconsistentwithourexpectationsoflicenseasapercentageoftotalrevenue.

AsDougdescribed,weremaincommittedtocustomersuccessandadoptionofourplatformandsolutions.Onceagain,inQ1morethan70%ofourlicensebookingscamefromexistingcustomers.Wealsoaddedover450newcustomersinthequarter,andrecorded318ordersgreaterthan$100,000.

InQ1,drivenlargelybythegrowthofourcloudbusiness,ourratablemixwas51%.Althoughit'searlyintheyear,wemaintainourfull-yearratablemixestimateforsoftwarebookingsofbetween40%and45%.Look,we'llobviouslykeepyoupostedifourexpectationschange,asmixcontinuestovarysubstantiallyquartertoquarter.

Aswediscussedonthelastcall,wesawanuptickinlicenseASPsinthesecondhalfoflastyear,reflectiveoflargecustomeradoptionorders.Consistentwiththeseasonalnatureofourbusiness,ASPsinQ1returnedtopreviouslevelsofaround$50,000,atthehighendofour$40,000to$50,000historicrange.WewillcontinuetomonitorASPsonafull-yearbasis,andwillletyouknowifthereareanyupdatestoreport.

InQ1,internationaloperationsrepresented26%oftotalrevenue,consistentwithpreviouslevels,andcomparableonayear-over-yearbasis.Weplantocontinuetomakeinvestmentsinourinternationalbusiness,andlookforwardtocontinuedgrowthandglobalexpansion.

Oureducationandprofessionalservicesrepresented9%ofrevenueinQ1,atthehigherendofourrangeof5%to10%,andconsistentwithprioryearsfromaseasonalperspective.Remember,sincewegenerallyrecognizerevenueonserviceswhenthey'redeliveredandbilled,servicesbookingstypicallydonotflowthroughthebalancesheetasdeferredrevenue.

Turningtomarginsandotherresults,whichareallnon-GAAP,Q1overallgrossmarginwas85%,consistentwithourexpectations,andreflectiveofourgrowingcloudbusiness.

Operatinglosswas$1.4million,representinganegativemarginofabout1%.Q1netlosswas$2.6million,andEPSwasanegative$0.02pershare,basedonaweightedaveragesharecount131.5millionshares.Cashflowfromoperationswas$36million,whilefreecashflowwas$32million.Andweendedthequarterwithjustover$1billionintotalcashandinvestments.




Nowlookingforwardtotherestoftheyear,weexpectQ2totalrevenuesofbetween$198millionand$200million,withpositivenon-GAAPoperatingmarginbetween2%and3%.WithourQ1performanceandQ2outlook,wenowexpecttotalrevenuesfortheyeartorangebetween$892millionand$896million,upfromourpriorguidanceof$880million.

RememberthatwedenominaterevenuegloballyinUSdollars,andthereforehavenoforeignexchangeexposuretoourrevenueline.Aswecontinueourinvestmentsinmarketgroups,productteams,thefield,andSplunkCloud,wemaintainourfull-yearnon-GAAPoperatingmarginestimateofaround5%.

AsI'vesaid,andaswesawinQ1results,operatingmargintargetsincludetheimpactofanincreaseincostofservicesfromourrampingcloudbusiness.Additionally,we'llcontinueexpandingourservicescapabilitiestailoredfortheusecasesandsolutionsthatalignwithourmarketgroupfocus.Wehaveseenclearevidencethatcustomerswhoutilizeourserviceshaveahigherlikelihoodtodeploymoreofoursoftwareovertime.

Giventheseinvestments,inthemediumtermweexpecttoseeoverallgrossmarginhoveraround85%,whichiswithinourlong-termtargetof85%to90%,onourwaytolong-termoperatingmargintargetofatleast25%.

ForEPS,remembersinceweexpecttobeprofitableonanon-GAAPbasisforthebalanceoftheyear,foryourEPScalculationsyoushoulduseafullydilutedsharecountofapproximately136millionsharesinQ2,accretingabout2millionsharesperquarterthereafter.

Wewillcontinuetorunthebusinessonapositiveoperatingcashflowbasis,andcontinuetoexpectthatfull-yearoperatingcashflowwillbeapproximately23%ofourupdatedrevenueoutlook,withthequarterlylevelsfollowingthetrendwe'veseenoverthepastseveralyears.

AsImentionedonourlastcall,FY17willbeanunusuallyhighCapExyearforus,asweexpectthebulkofourSouthBaycampusbuild-outcoststobeincurredthisyear.

Whencombinedwithglobalfacilityexpansionstoaccommodateourgrowingemployeebase,we'replanningforapproximately$50millionto$60millionintotalCapExthisyear,weighted$15millioninthefirsthalfand$35millionto$45millioninthesecond.TogiveyouasenseofrecurringCapExlevels,withouttheSouthBayproject,ourCapExwouldbeinthe$16millionto$18millionrangefortheyear.

Inclosing,ourteamcontinuestoexecuteonourmissiontodeliverexceptionalvaluetoourcustomers,andwe'recommittedtoimprovingthecustomerexperiencethroughcontinuedinvestmentsinourproducts,solutions,andoverallglobalreach.

We'reofftoagoodstart,andIamenthusiasticaboutouroutlookfortheremainderofFY17.Thanksmuchforyourtimeandinterest.

Withthat,wewillopenitupforquestions.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

RaimoLenschow,Barclays.

RaimoLenschow(Analyst-BarclaysCapital):

Hi.Thanksfortakingmyquestion.Congratulationsonagreatstarttotheyear.Ihavetwo,oneforDoug




andoneforDave.

Doug--no,let'sstartwithDoug,yes.Ifyoulookatthe--wewereallnervousaboutthewhat'sgoingoninthespendingenvironment,etcetera,andwesawprofitwarningsfromagoodfewguysinQ1.

Canyoutalkalittlebitaboutthelinearityinthequarter,andwhatyousawinthedifferentregions,aswell?

ThenI'vegotonefollow-up.

DougMerritt (CEO):

Thanksforthequestion,Raimo.WhatwesawinQ1wasconsistentwithwhatI'veseeninthequartersIhavebeenhereinthefield.There'salotofchatterthatwe'reallhearingaroundtheworld,andalotofnervousnessthatiscomingthroughthenewschannels;butfromourcustomerengagements,itwasaprettytypicalquarter.Wetendtobe--tohaveadecentchunkoftherevenuecominginthelast30to45days.Idon'tthinkitwasunusualinanyway.Thedealcharacteristicslookedrelativelysimilar,aswell.


Perfect.

DaveConte (CFO):

Raimo,it'sDave.ParticularlywhenwethinkaboutitfromaQ1perspective--welookatourQ1overQ1andlookatlinearity.Itwasfairlytypical.


Okay,perfect.Aquestionforyou,Dave.Ifyoulookatthespendingthisquarter,itlookedliketheonenumberthatreallyacceleratedwasR&D.Canyoutalkalittlebitaboutwhat'sgoingonthere?Salesandmarketing,etcetera,wasinlinewithwhatIwasexpecting,whileR&Dseemstobetickingup.What'sgoingonthere?

DaveConte (CFO):

Nothingmorethanourcontinuedfocusonexpandingtheproductportfolio.Wehavebeenbrutallydeliberateaboutourinvestmentthesisonproductmarketgroups,whichultimatelytranslatestoproductsandsolutions,andofcoursefieldcoverage.

Whenwelookattheimpactofthoseinitiatives,there'snothingspecific,otherthancontinuingtoinvestandhavingtherightpeopletodeliveronthem.


Allright,perfect.Thanks,congratulations.

DaveConte (CFO):

Thanks,Raimo.Appreciateit.

Operator :

BrentThill.

BrentT hill(Analyst-UBS):




Goodafternoon.Doug,canyoutalkalittlebitaboutthearrivalofSusan,andhowherviewofthego-to-market?Issheanticipatingtomakeanychanges?Iknowyou'vespentthelasttwoyearscementingthesalesforce,soyoueffectivelywouldn'tthinktherewouldbealotofchange.Canyoumaybewalkthroughherarrival,andhowshe'sseeingtheorganization?ForDave,Ihadaquickfollow-up.

DougMerritt (CEO):

Absolutely,Brent.Thanksforthequestion.There'salotofthingsthatweallloveaboutSusan.Oneofthecoreonesisherrepeatexperienceinscalingcompaniesfrom$100millionto$8billion-plus.Aswe'vetalkedaboutformytwoyearshere,andI'msurewellbeforewithGodfrey,thegrowthratesareimportanttoustomaintainatSplunk,andthatmeansalotofscalethatwe'vegottodrive.

InmyfirstweekandahalfofinteractingwithSusanwhileshe'sbeenonthejob,theconstantframingthatshehasdrivenwithallofourconversationsishowdowetakethegoodnessthatwehave,aswereallyhavebuiltaphenomenalsalesmachinehere,notfumblethehandoffinanyway,whichwasmynumberonepriorityinmyfirstfewcallswithyouguysishonorwhatwe'vedoneandmakesurewedon'tmissabeatonthecustomerrevenuefront;butcontinuetothinkthoughtfullyandstrategicallyabouthowdoweprepthisCompanyforthatsamecontinuedgrowththatwe'veexperienced,sowecanreallyexecuteonthemarketopportunitythat'sinfrontofus.


Okay.Dave,ontheopmargin,Iknowyou'renotmakingmuchchangethere.We'veseenprettymodestmarginimprovement.Oneofthequestionswegetisthereapointwhereyoufeelthatyou'vegottherightinvestmentsin,you'regoingtostartgetsomebetterscaleonthebottomline?Obviouslyyouwon'tgethugescalethisyear,butasyoulookout,canyouhelpuswalkthrough?Iknowyou'renotgivingguidancefor2018,butthere'salotofquestionsaroundthebottomlinehere.

DaveConte (CFO):

Sure,yes.Ifyourecallfromthelastcall,Ihadarticulatedthatourpointofviewaroundmarginexpansioncertainlyinthe--forFY17andtheninthemediumtermfromtherewouldbe100to200basispointsayear,withalong-termmarginobjectiveofatleast25%.ThequestionsthatIgetis,wellgeezDave,ifIdothatmaththenyou'renotgoingtogettoyourlong-termtargetforlikeadecade.

Thewaywethinkaboutitisasalotoftheseinitiativesgettothattippingpointwhereyougofromlotsoffixedcoststoscalabilityandwhatyou'readdinginthevariablecostcomponent,weseethetrajectorymoreofahockeystickintermsofmarketexpansion.We'llgo100to200basispoints,andthensayona--ifyoudrewthatlineonafive-yeartrajectory,therewouldbeahockeysticktowardstheendthatacceleratesusto25%.

Now,ifweseedynamicsasitrelatestocapturingtheTAM)thatsayboy,youknowwhat,weshouldaccelerateourinvestment,wewillletyouknow.Butmoreimportantly,ifwestartgettingthatcriticalmassthenwe'llacceleratethemarginexpansion.Butourinvestmentportfolio,whichagainItrytobeveryexplicitaroundourmarketgroups,oursolutions,ourplatform,andimportantlyourcloud,isaprettybroadcanvasthatweareputtingmoneyatworkaround.


Great,thanks.

Operator :

PhilipWinslow.




PhilipWinslow(Analyst-CreditSuisse):

Hi,thanksguys,andcongratsonagreatquarter.Ijustwanttofocusontheplatformside.Iknowyouhavebeenworkingontryingtopenetratedev/opsteams,andalsobringonthirdpartyISPs.Aswegointothisyear,Iwonderifyoucouldgiveusanupdateonwherethatstands,andwhatinitiativesyouhaveinthepipeline?Thenonequickfollow-ontothat.

DougMerritt (CEO):

Thanks,Philip.We'vehadplatformanddevelopersasoneofourkeyinitiativesformultipleyears,andwekeepchippingawayatthatinitiative.Everyquarterwegetmoredev/opsinthesoftwaredevelopmentlifecycle.Splunkingwins,whichIthinkisgoingtobeacontinuedfocusforus,andispartofthecharteroftheIToperationsapp/devmarketgroupthatRickFitzheadsup.

He'sbeendoingareallynicejobthere.We'vebroughtonsomeadditionaltoptalentunderneathhimtomakesurewe'recommunicatingeffectivelyacrossourcustomerbasethewholelifecyclethatyoucouldandshouldbeusingSplunkinandaround,soyougetfullbenefit.

Aswetalkedaboutinthiscall,thePuppetdelivery,theappforPuppet,theintegrationwithDocker,we'realeading-edgedevelopmentorganization.Welovewheretheworldisgoingwithmicro-services,containers,andthehighvelocityofcloudapplicationdevelopment.WearecommittedtoourpartnershipwithAWS,andouroverallperspectiveinthemarketplaceonensuringthatwekeeppushingforwardsolutionsinthemarketplacetohelpwiththatdev/opsworld.


Gotit.Thenafollow-upquestionforDavehereonthegrossmarginside.It'sgreatnewsthatyoutalkedaboutdoublingthenumberofSplunkcloudcustomers.Obviously,thatprobablyshowsupinsomeofthatratablepercentageat51%thisquarter.Fromagrossmarginperspective,Iwonderifyoucouldjustprovidesomemorecolorthereonthe85%.Howmuchofthatisthecloudimpact,andhowshouldwethinkaboutthisnearandlongterm?

DaveConte (CFO):

Sure.Hi,Phil.Clearly--andIthinkI've--again,I'vecommentedonthisinthepast.Today,atourlevelofscaleintermsofcloud,it'sadragonourgrossmargins.Nowfromalong-termmodelperspective,weactuallyhadalways--allthewaybacktotheIPO,wehadanticipatedagrossmarginrangebetween85%and90%,withtheplantointroduceourcloudoffering.We'reactuallyexecutingaswewouldexpect.Aswethinkaboutthisfiscalyear,Ithinkaboutitasatroughyearintermsofthemarginprofile,asthatcloudbusinessinparticulargetstoalevelofcriticalmasswherewestarttogainoperatingleverage,whichwillflowthroughboththegrossmarginandtheopmarginlines.


Gotit.Thanks,guys.Congratsagain.

Operator :

KeithWeiss,MorganStanley.

MelissaGorham(Analyst-MorganStanley):

Great,thanks.ThisisMelissaGorhamcallinginforKeith.IjustwantedtofollowuponthatdiscussiononSplunkCloud.YoucontinuetonoteverygoodgrowtheveryquarterinSplunkCloud,soI'dhavetoassumethatit'sgoingtobefairlymeaningfulforyouall,atleastonabillingsbasis.Isthereanywaythat




youcouldhelpussize--Iknowyou'renotgoingtogiveustheexactamount,buthelpussizehowbigthatbusinessisforyoutoday,andhowweshouldexpectthemixofenterpriseversusCloudtoprogressmovingforward?

DaveConte (CFO):

Hi,Melissa,it'sDave.We'renotatthestagewherewe'regoingtospecificallyquantifythesizeoftheCloudbusiness.Ithinkpartofthe--itscontributionisobviouslygrowing,andyoucanseeitintermsofthecostlinewehavebeentalkingabout.Butcloudrevenue--itdoesn'tnecessarilyreplacelicenserevenue,butfromanaccountingperspectiveitdoesn'thitthelicenseline.

What'sinterestingaboutitscontributionisgivenournumberofcustomerswhenwelaunchedCloudwasprobably10,000-plus,andourup-sellratesintermsofgreaterthan70%ofbookingscomingfromtheinstallbase,theopportunityfortheCloudbusinesstogrowasapercentageischallenged,becauseourinstallbaseofcustomerscontinuetobuymoreandmoreofouron-premsoftware.Butaswecontinuetoprogressthroughtheyear,we'relookingfortherightopportunitytogiveyouguysmorecoloraroundspecificsonthesizeoftheCloudoffering.Asthosematerialize,wewillofcoursesharethemwithyou.


Okay,great.ThenonequickoneonthecommentaryonASPs.Iknowitwasdownquarteronquarter,andthere'scertainlyseasonalitythere,andyousaiddifficultcomparables.Ijustwanttoclarify,wasthatlargelydrivenfrommixshiftincustomercontractsandseasonality,versusanysortofdiscountingthatwashappeninginthequarter?

DaveConte (CFO):

Yes,it'sactuallyinteresting.Wehadthesignificantup-tickinthebackhalf,whichwehadtalkedabout.YouguysknowIwasreluctanttodeclareanewrange.Itmadesensetowait,becausesomanyofourlargetransactionscomeinthebackhalfoftheyear.Infact,lastyearwedidIthinkeight--threeeight-figuretransactions,allinthebackhalfoftheyear.

What'sinteresting,thoughofcourse,isourpreviouslyexpectedrangeof$40,000to$50,000.We'reatthetopendofthatinaQ1,whenwetypicallydoourfewestnumberoflargeorders.We'reprettyhappywithwheretheASPsarefornow.Wewillseehowtheytrendovertime.


Okay,thankyou.

Operator :

WalterPrichard,Citigroup.

JimFish (Analyst-Citigroup):

Hi,guys.ThisisJimFishcallingforWalter.Onequestion,onefollow-up.Areyouguysseeingmorebudgetcompetitionasyoucompeteforbudgetwiththelikesofothernext-genvendorssuchasServiceNow,NewRelic,orAppDynamics?

DougMerritt (CEO):

Nothingnotable.Weactually,ironically,allthreeofthosearecustomersofSplunk.Wewere--IthinkwhatI'veseeniswetendtobeboughttogether.There'smoreandmorego-to-marketinitiatives,especiallywithinourchannelandpartnergroup,whereforthemtoaddthevaluetheyneedtoadd,they




thinkthroughhowdoIcombineSplunkwithPaloAlto;howdoIcombineSplunkwithServiceNoworwithotherofferingstomakesurethatIcandriveavalue-addedpackageintothecustomerbase.ButIdon'tsee--wehavesuchavarietyofbuyingcenterswegoafterrightnow.Idon'tseethiszero-sumgamehappeningatthispoint.


Gotit.ThenperhapsmoreforDave.Dave,canyoutalkmoreaboutthedynamicsthatdrovethat51%ratablelicensebookingsinthequarterversuswhereit'sbeen?Iknow,IthinkitwasmentionedthatCloudwasabigdriver,butanythingelseinthequarter?

DaveConte (CFO):

No,Ithinkit'sacombination,right?Whathasalwaysmadethepredictabilityofourmixchallengingisindividuallargetransactionscanskewthepercentages.That'salwaysthecase,mostlyinaseasonallysmallishQ1.Whenyoulookofthecompositionofourtransactionsonwhatisthatseasonallysmallnumber,ahandfuloftransactions--inthiscase,someCloudtransactions--skewedthepercentageupward.


Gotit.Thanksguys.

Operator :

JesseHulsing

JesseHulsing (Analyst-GoldmanSachs):

Yes,thanksfortakingmyquestion.OneforDougandoneforDave.Doug,onCloud,becauseyoumentioneditafewtimesinthepreparedremarks,whataretheusecasesthataredrivingthesebigorders?Aretheysecurity,aretheyIToperations-focused?Aretheysomethingelse?Doesitlooksimilartotherestofyourbusiness?

DougMerritt (CEO):

Rightnowitlooksreallysimilar.IfIjustgobackandthinkatsomeofthebigorders,thesix-andseven-figureordersthathavecomethroughonCloud,they'reamixbetweenIToperationsandsecurity.Thispastquarter,insomeofthepreparedremarks,wetalkedaboutsomebigSIMreplacementwins.IthinktheyareimmediatelygoingtoCloudandtryandgetquickaccelerationinthistransitiondoneeffectively.

Thenthey'rewaitingtoseearetheygoingtostayinCloud,ortheygoingtopullthatbackon-prem--whichgoesbacktothathybridnaturethatwehavewithinSplunk,wherewe'recompletelyagnostic,andit'suptothecustomertofigureoutwheretheirstrategicdirectioniswiththeirITlandscape,andwewillsupportensuringthatsinglepaneofglassandeffectivevisibility,whetherit'sCloud,on-prem,oramixtureofboth.


Gotyou.Doug,I'mgettingsomein-boundsfrominvestorsonstock-basedcomp.Itwasupquarteroverquarterasapercentageofrevenue.Howdoyouexpectthattotrendthroughtherestoftheyear,andwhatshouldwethinkaboutasatrendlineoverthenextcoupleofyearsforthatasapercentageofrevenue?




DaveConte (CFO):

Hi,it'sDavehere.YoumightrecallfromtheAnalystDaythatweshowedourhistoryofhowstock-basedcompensationhadaccumulated.Inparticular,backin2014wehadananomaloussituationwherewehadourannualfocalprocessoccurredatthesametimethatthestockpricewasatafairlyhighlevel,whichwe'restillamortizingthoseexpensesonaquarterlybasis.

Thewaywethinkaboutit,ultimately,isaroundwhat'sourdilutionrate.Fouryearsago,2012whenwewentpublic,ourdilutionratewasover10%.Lastyearisdownto6%.Whenwelookforward,wethinkthatanormalizedlevel,regardlessofhowmanyheadswe'readdingtothebusiness,shouldbesomewhereinthat3%to5%.Ithinkagain,that'showwemeasuretheeffectivenessofourstockplans.Intermsoftheabsolutedollarsthatarehittingthestock-basedcompensationexpense,thosewillstayataheightenedlevelforabit,andthenthey'regoingtostarttofall.Inabsolutedollarsandofcourseasrevenueincreases,theywillfallasapercentageofrevenue.


Operator :

JohnDiFucci,Jefferies.

JohnDiFucci(Analyst-Jefferies&Company):

Thankyou.IhaveaquestionforDougandthenafollow-upforDave.Doug,thenewcustomercountstilllooksrespectableat450,butit'sbeentwoyearssincethatnumberhasbeenbelow500.Canyoucommentatallonthat,especiallygivenalltogethertoplinemetricslookverystrong?

DougMerritt (CEO):

Sure,John.Wehavetalkedforthepastyearthatthisnewcustomerinitiativeiskindofastair-steppedtypepiece,andweexpectthat400to550bandforawhile.Wedon'tincludeanumberof--theinitiativesthatweputinplace,becausethey'redifferentthantheSplunkEnterprisecustomersthatwecount.We'vegote-commercecapabilities,wherecustomersarecominginandduringmonthlypurchasesfromus.We'vegotourSplunkLightproduct,whichcontinuestomakegainmomentum.Wedonotpollutethecompares;wekeepthoseout.Butallthose,we'reexpectingapay-offovertime.

Myexpectationsare,andhopesarethatwe'llseethebreak-outfromthebandthatwe'vebeeninoverthecourseofFY17,aswehavesignedonmorepartners,aswe'vedeliveredsomeofthesenewproductslikeLightandwhatwe'redoingwiththecloudrightnowandthequickertransactionvolumesthatcanoccurthere,andhowwecanreachbroadercustomerbasesbecauseofthat.Let'sstaytunedandsee.

DaveConte (CFO):

John,it'sDave.You'llrecallthatthestair-stepthatDougdescribed,we'veseenthattrendgofrom200to300overasix-to-eight-quarterperiod.Thenitwent300to400overasix-to-eight-quarterperiod,thenit's400to500.Infact,lastyear'sQ1--thistimelastyear,wealsoreportedover450newcustomers.

We'restillonthatsamestair-steptrajectory,butabigchunkofit,inaddictiontotheproductinitiativesthatDougjustdescribed,goesbacktoourcoverageinthefield.Wehavegreatsuccesswithourinstalledcustomers;buthavingtheappropriateamountofresources,bothourdirectfieldcoveragemodelaswellasthatchannelecosystem,thosearereallyimportantinvestmentsthatweneedtocontinuetofocusonsothatyou'llseethe--thenyou'llseethatnexttierintermsofthestep-ladderupintermsoftotalcustomeracquisition.





Mydata,andIgoback,it's500to600backtotheApril2014quarter,whereitwas400?It'slikesomeofthosee-commercecustomersandsomeoftheother--wouldtheynormallyhavebeencountedifthey--ifyoudidn'thavethisnewgo-to-marketapproach?Isthatwhatyou'resaying,whyit'salittlelower?Idon'tknow,450isn'tthatmuchlowerthanfive.Youhavemoresalespeoplenow,morego-to-marketresources.Itjustseemslikeitwouldbe--notbealittlelower,maybealittlehigher?That'sall.

DaveConte (CFO):

Well,John,themetricthatwegiveisalwaysmorethan.Wedescribeitasmorethan.Iwouldn'tsayitwasfor450exactly.NowIwouldn'tsayitwasmorethan500,either.It'ssomewhereinthemiddle.Ithinkthespikesupanddownhasbeenprettyconsistentseasonally,ifyoulookatQ4lastyearversusQ1thisyear.Thereisapatternthatwehaveseenandit'soveranumberofyears.I'mnotatallconcerned.Infact,we'reverysatisfiedwithourcustomeracquisitionthisquarter,andwiththelastyear.Wejusthavealotofthingsthatwe'reworkingonthatwethinkwillultimatelyresultinreachingthenextstepoftheladder.

DougMerritt (CEO):

Themorewe'resatisfied,Iwanttoseeitgoup(laughter).


Yes,gotit,guys.Okay.Thenquickly,Dave,ifIcould,it'sanotherquarterofgreater-than-40%licensegrowth.It'sbeenover3.5yearswhereyouhadlicensegrowthinthe40%,whichobviouslythat'ssupportedbycontinuedstrongtractionofsalesinthefield.Buttheconsistentlyis--it'sunprecedented,atleastfromwhatI'veseen.

Howmuchofthis--I'mtryingtofigurethisout.Howmuchofitisfromsmoothingofyourfinancialswiththatratableportionofthelicensejustkeepsongrowing?Idon'tevenknowifyoucananswerthatrightnow,butit'ssomethingwe'regoingtotrytofigureout,becausewekeepgettingaskedthatquestion.Isit--isthereanylightyoucanshineonthat,Dave?

DaveConte (CFO):

Ifyouwanttolookbackoverbeginningoffiscalyeardeferredrevenue,short-termdeferredrevenueandthenwhatwasthesubsequentyear'sdeliveryofrevenue,obviouslythecomponentofdeferredrevenuethathaslicensedhasgrownoverthelastfourorfiveyearsasourratablemixhasincreased.There'sdefinitelyacorrelationbetweenabsoluteshort-termdeferredsubsequentyearsrevenueandthecomponentofshort-termdeferredthatislicensedthatcontributestothelicenserevenueline.

Ithinkwhat'schanginginourbusiness,andit'ssomethingthatwe'retryingtobethoughtfulabout,isbacktotheCloudcontribution.TherearecomponentsofdeferrednowthatareCloudbecominga--it'sstillademinimusnumberfromadisclosureperspective,butithasadirectimpactonlicenserevenue.Again,Cloudrevenuedoesnotflowthroughthelicenseline,itflowsthroughtheservicesline.Whenwethinkaboutrevenuecomposition,andasourratablemixcontinuestoincludeagreatercomponentofCloud,that'sgoingtocauseachangeintheprofileoflicenserevenuegoingforward.


Okay.Thanksalot,guys.

Operator :

MichaelTurits,RaymondJames.




JerryMatsheim(Analyst-RaymondJames):

Hi,guys.[JerryMatsheim]forMichael.Clearlythere'salargemarketopportunity.Atthesametime,thefull-yearguideimpliesroughly30%OpExgrowth.Canyougiveusanideaofwhereandhowyou'reinvestingtodriveincrementalrevenuegrowth?ThenIhaveafollow-up.

DaveConte (CFO):

Well,thisisDave.IcantellyoufromallofmyES/devpeersthatwe'renotinvestinginitenough.Look,ourprioritieshavealwaysbeenthesame,anditstartswiththeproduct.Whydoesitstartwiththeproduct?Becausethat'showyoudrivethebestcustomersatisfaction.Weintendtocontinuetosatisfythedemandsofourcustomersintermsofgivingthemaccessfromtheirdata.Wealwaysstartwitharewemakingtherightinvestmentsintheproduct?

Afterthat,it'sinthefield.Dowehavetherightcoveragesothatwecangooutthere,articulateourvalueproposition,andexpandourfootprintintermsofinstalledcustomersandthenewonesthatwejustspentabunchoftimetalkingabout.Thoseareourpriorities.

Whatwehaveaddedsince--overthelastfiveyearsago,fouryearsagowhenwewentpublic,newinvestmentsthatareadjacenttothosefundamentalsarethemarketgroups,becausehavingtheappropriaterepresentationandsubjectmatterexpertisearoundtheusecasesthatmattermosttoourcustomersisreallyimportant.HavingHaiyanSongjoinaroundsecurityandRickFitzjoinaroundITOAisabsolutelycriticalbacktoprimedirective,whichisensuringthatwe'resatisfyingthecustomer'sneeds.

Theotherelementthat'sadjacent,ofcourse,ishowdowedeliverourproductsandsolutions,andthatequatestoCloud?That'sareallyimportantinvestmentforus,becausewhilepeoplewanttotalkalotabouttheCloudmomentum,whichweallrecognizeiscriticallyimportant,customers'workloadsare--it'sabinaryenvironment.Theyhavealotoftheirdatathat'sbehindafirewall.Theyhavealotoftheirdataandworkloadthatlivesinacloud.

It'sabsolutelycriticalforusintermsofhowwesatisfycustomersthatweofferthemacloudsolution,andultimatelysomethingwe'reveryproudofthatwethinkisofcourseuniquetous,andthat'shybridsearchacrosstheirdatalocation.Regardlessofwhereyourdatalives,youcanleverageyourSplunkinstancetodosearchesandcorrelations.

It'sreallyimportant,toansweryourquestion,thosearethepillarsofourinvestmentmodelProduct,coverage,specializationandsubjectmatterexpertise,andthenreachingallthevariousdeliveryrequirements,allbacktosatisfyingthecustomer.


Okay.Thenlookingatthe2Qrevenueguide,itappearstobeseasonallyweakeratthemid-point,up7%quarteroverquarterversus11%quarteroverquarterguidelastyear.IsthereanythingspecificweshouldbeawareofthatwouldleadtoaslightlyweakerF2Qseasonality?

DaveConte (CFO):

No,Iwouldn'treadintothat.


Gotit.Okay,thankyou.

Operator :




MarkMurphy.

MarkMurphy(Analyst-JPMorgan):

Yes,thankyouverymuchfortakingmyquestion.Dave,itwasnicetoseethereboundintheshort-termdeferredrevenue.IwaswonderingifyoucouldjustwalkusthroughtheunderlyingdynamicthatdrovethatnumbertoreboundverynicelyhereinQ1.I'mwondering,wasitdealmix,isitachangeindurations,orjustsomeotherstrengthinthebusiness?

DaveConte (CFO):

Hi,Mark.Thanksforthequestion.Again,theshort-termnumberinQ4wassohighlyimpactedbythedurationandtypesoftransactionsthatwehad.Again,afeweight-figuretransactionsobviouslycansignificantlyskewthecompositionorthegeographybetweenlong-termandshort-termdeferred.WhenyouturntoourseasonalQ1,IthinkitwasamoretypicalbehaviorintermsofthetypesoftransactionsweweredoingversustheendofQ4.Ithinkthatcomparisonis--itwasmoreuniformthisquarter,andwejusthadsomereallyexcitingtransactionsinthefourthquarterthatthrewitoffalittlebit.


Okay.Thenasafollow-up,Dave,IwantedtofollowuponpartofJesse'searlierquestion.Ithinkpartofwhenpeopleareaskingaboutthestock-basedcomp,Ithinkpartofwhatwe'reobservingiswe'rewonderingifthetrendtowardfocusingmoreonGAAPearningsresultsacrossthewholelandscapeoftechnologycompanies,itwassomethinghighlightedintheWallStreetJournal.Thenthere'sspeculationthattheSECwouldcrackdownmoreonsomeoftheadjustedearnings,whichagainwouldbroadlyaffecttheentiretechnologylandscape.

Ithinkwe'recurious.Ifallofthatintensifies,istheresomethingyouwoulddotorespondtothat,perhapspullingbackalittleonthenewRSUissuance,orareyoumorethinkingalongthelinesthatthenaturalroll-offofthestock-basedcompexpensethatyoudescribed,thatitwillessentiallytakecareofitself?

DaveConte (CFO):

Thanks,Mark.Idothinkthenaturalroll-offisgoingtomitigatetheconcernaroundSBC.Again,weareveryfocusedonwhatistheappropriatetotalrewardspackageforouremployees.IthinkImentionedonthelastcallthelastfiscalyear,weexpandedourheadcountabout48%,about700employees.

It'sabsolutelycriticalforusintermsofgoingandcapturingthatTAM).AsDougmentioned,whereweareintermsofearlyearnings,areweinmiddlerelieforistheclosercomingin?Weareonthebatter'sboxhere.We'reveryproudofourpriorfiscalyear'srevenuelevels.Wethinkthat'safractionofthesizeoftheCompanythatwehavetheopportunitytobe.

Again,wefocusontheabsolutedilutionlevelandwherethatshouldtrend.Thecombinationofthattrendinglowerdilutionlevelwiththerunoffofpreviouslyrecordedstock-basedcompisgoingtohavetheabsolutenumbertrenddown,andofcoursethepercentageisgoingtotrenddown,aswell.

AsitrelatestotheSEC,weareveryattentivetoensuringthatwehavetherightdisclosuresandtherightcompliancearoundanyadjustmentswemakebetweenGAAPandnon-GAAP.Ithinkwetakeitveryseriouslyandwetakegreatprideinensuringconsistencyinournon-GAAPresults.IreallythinkiftheSECisdoingtherightthingtosaylook,whencompaniesareoutthereexercisingandreportingdifferencesbetweenGAAPandnon-GAAP,whatlevelofconsistencyaretheyapplyingtothoseadjustments,andwhatshouldbeconsideredrecurringversusanon-recurringitemthatyouwouldexclude,oracashversusanon-cashitem,likestock-basedcompthatyouwouldexclude.Wepayalotofattentiontotheconsistencyofourdisclosuresaroundnon-GAAP.





Great.Thankyouverymuch,andI'lladdmycongratsagain.LikeIsaid,itwasverynicetoseethereboundandaccelerationinthebillings.

DaveConte (CFO):

Yes,thankyou.

DougMerritt (CEO):

Thanks,Mark,appreciatethat.

Operator :

BrianWhite,Drexel.

BrianWhite (Analyst-DrexelHamilton):

Yes,hi.Doug,onthebigdealsinthequarter--itlookedlikeitgrewover40%yearoveryear,andactuallyaccelerated.Ithinklastquarterwasjustover20%.Whatdidyouseeintermsofbigdeals?Thisisgenerallyasoftquarter,soitgoesdownsequentiallyfromtheJanuaryquarter,butitacceleratedingrowth.Whatdidyouseeinthebigdealmarket?

DougMerritt (CEO):

IfIlookbackatmytwoyearshere,andevengobackfurthertothreeorfouryearsago,asix-figuredealwasareallycompellingdealfortheCompany.Everyonecelebratedwhenwedid$0.5million,orgotcloseto$1million.Overthepasttwoyears,we'renowroutinelyexpectingsevenandeveneight-figuredeals.

Ithinkthatwe'redoingabetterandbetterjobofevangelizingthepowerofSplunkformultipleusecaseswithinaCompany.Thattendstomovethewholeballupintosix-figuredealsbeingthenorm,withsevenandeightbeingrealdisplaysofpeoplethatnowhavegonewalltowallwithSplunk.WesawacontinuationofthatinQ1,withourexisting70%--over70%ofoursalescamefromexistingaccounts,andalotofthoseaccountscontinuingtoexpandusageofSplunkinternally.


Okay.Ifyoucouldaddalittlecolor,Isawthesepartnershipswithacoupleofthebiggeststoragevendors,EMC)andalsoNetApp.NetAppmadeanannouncementwithworkingwithSplunk.WhatdoesthistellusabouteitherthestoragemarketorwhatSplunkisdoingintermsofpartnershipsinthestorageindustry?Thanks.

DougMerritt (CEO):

We'vedefinitelyhadaveryspecificandfocusedstrategyoverthepastfewyearsongettingmuchmore--gettingahigherlevelofcommittedname-brandpartnersthateitherdistributesSplunkorbundlesSplunkwiththeirofferings.WhatIthinkthatwe'veseenwithateamthat'sreallyfocusedonthisismorerealizationbyvendorslikeCisco,EMC),andNetAppthatSplunkisagreatadditiontothepackagestheyputintotheiraccounts.Itprovidesvisibility,analytics,assurance,inthecaseofNetApporEMC)onthecorestoragesolutions,ortheinfrastructuralsolutionsthatthoseguysaredistributing.

Butitalsocanbedifferentiatinginthetypesofappsorvisualizationsorbundlesthattheyproduce,tomakesurethattheyarekeepingacompetitiveadvantage,andprobablymostimportantly,servingtheircustomerneeds.That'sreallythepartthatweusewiththesepartnersisarethey--[Barney]relationships




arenotofmuchvalue.We'vegotalotofbrandnameandalotofmarketingmomentumfortheCompany.Wewantrealcommittedrelationshipsinthefield,wheretheirrepsideallyarebothcommissionedandquota-creditedforbundlingSplunkorincludingSplunk,athey'rereallyaddingvaluewithwhatthey'redeliveringtotheircustomerbase.


Okay,great.Thankyou.

Operator :

KirkMaterne.

KirkMaterne (Analyst-EvercoreISI):

Thanksverymuch.Doug,IwanttopullonthatsamethreadyouwerejusttalkingaboutwithyourpartnersintermsofyoursigningAccentureupasasystemintegratorpartneris,Ithink,aprettybigstepforwardforyouguys,givenyouhadtocarryallthewaterintermsofgettingSplunkouttherejustafewyearsago.Canyoutalkabout--andmaybenotAccenturespecifically--butAccenture,youhadtherelationshipwithBoozthatyouannouncedlastyear.

Canyoustarttogetsomegreaterleveragefromasalesperspectiveasyouhavethispartnernetwork,Iguess,pickingup.Isthatsomethingthatcanstarttopositivelyimpactyouguysthisyear,oristhatsomethingthat'sgottotakeatleast12to18monthsbeforewestarttoseesomeoftheleveragefromthisbroaderpartnerchannel?Thanks.

DougMerritt (CEO):

Thanks,Kirk,andthanksfornoticingtheAccenturepiece.Iwassurprisedwedidn'tgetmorenoticeofthatwhenweactuallymadethatannouncement,becauseIrememberbeforejoiningSplunkhearinghowwe'resoeasytoinstallandsomuchimmediatevaluethatnoneofthoseSIseverpayattentiontous.

That'sbeenanotheroneofthosekeyinitiativesinthepartnergroupsishowdowegetAccentureandtheothermajorSIsaroundtheworldtounderstandthatthereisarealpracticetheycandeveloparoundSplunk.WemightbeeasiertoinstallandinitiallyconfigurethansomeofthemorecomplexERPpackages,butit'saverystrategicoffering,andtheycanactuallybuildalotoftheircriticalinitiativesaroundSplunkthatarethehigh-value,high-margininitiatives.

WhatI'mexcitedabouttheAccenturerelationship,obviouslyit'sagreatbrand,lovethecompany,greatgroupoffolks.Havingthembackingusfromago-to-marketandSIperspectiveisagoodpositiveboost.Buttheyarewrappingusintodifferentcoreofferingsthattheydelivertotheiraccountbase,inadditiontoclassicSIsystems-integrationtypework.Agoodexampleofthatistheirapplicationout-sourcingbusiness,whereSplunkisbecomingacriticalinfrastructuralcomponentforthosecontractsalreadyunderwraps.

Hawaiiantelecomisoneofthoseexampleswegavethisquarter,wasoneofthosefirstcustomers,wherenotonlydoweprovidetheopportunityforthecustomer,HawaiianTelecom,togetbettervisibilityintotheirlandscape,butAccentureisloweringtheircostofservingasthey'redeliveringacapabilityintoHawaiian;andtheyhavetheabilitytogeneratebrandnewservicesbecauseofthecorrelationsanddifferentnewofferingsthatcanbecreatedthatSplunkisdrivingastheintelligenceenginearoundthatapplicationoutsourcinginitiative.It'sthesamethingwiththeircyber-securityinitiativethey'repushing,aswell.





CanIjustaskyouonefollow-up,onequickfollow-uponthat.WhenyouthinkaboutIOT,youguysseemtobeprettyuniquelypositionedinthatbroadermarket.However,thereisalwaysthattensionbetweendoyouwanttodevelopthesolutionsyourself,orhopefullyhaveapartnerbasebuiltontopofyou.Whenyouthinkaboutthatparticularopportunity,areyouleaningonewayortheotherintermsofthebestwaytobreakinorhelpexpandthatmarket?Thanks.

DougMerritt (CEO):

Heavilyleaningtowardspartner.EveninwithsecurityandIToperationsandapp/devwherewe'vegotalotofstrength,it'sstillaprominentpartnerlean.Ithinkit'sevenharderwithIOT,becausetheverticalandgeographicspecificityissomuchhigher.Youreallyneeddomainexpertise,Ithink,toservethosecustomerswell.It'sgoingtobeverydifficultandanunfairaskofSplunktohaveenoughdiscretemanufacturingversusprocessmanufacturingversushealthcareandhospitality.We'vegottoturntothepartnerchannelforthat.

Onthatvein,forallofyouthataretunedintotheIndy500racethisweekend,staytunedandtakealookatwhereSplunkmightpopupthere.Therewillbesomeannouncementsaftertheweekend,whenwe'reallowedtotalkaboutsomeofthebenefitthatwe'redrivinginthatvenue.


Great.Thanks,andcongratsonthequarter.

Operator :

BhavanSuri,WilliamBlair.

BhavanSuri(Analyst-WilliamBlair&Company):

Thanks,guys,andcongrats.Letmeaddthattothelistthere.Justtodiveintothepremiumproductshere,youhavetalkedalotaboutsomeofthesecuritystuffandobviouslythecorebusinessandthenotherthings.WhenyoulookattheUBAandsomeofthepremiumproducts,howarethose--howistheup-takethere?Maybeacoupleexamplesofhowthat'slayeringontopotentiallydriveARPUexpansionatsomeoftheaccountsthatareaddingintothecoreplatform?

DougMerritt (CEO):

Ithinkthatcontinuedprogression,yes,hasbeensowonderful--theenterprisesecurityproduct--toseethatgaincriticalmassandtraction.Insecurity-leddeals,it'sbecomingalmostastandardthatweincludeenterprisesecurityaspartofthatunderlyingSplunkEnterpriseplatformengine.Ithinktheopportunity,I'mthrilledwiththeuserbehavioranalyticsadd-on,becauseitaddsawholedifferentdimensiontobehaviorallybasedanalyticsandinsiderthreatthatESbyitselfwouldn'tbeabletoprovide.

IthinkequallythatITservicesintelligenceinitiativethatweannouncedayearagoorthreequartersagoanditsbeingdrivenintothemarketplace.It'sthatsameforourexistingITopscustomers,we'reseeingalotofinterestaswegobackintothemtoup-levelhowthey'redefiningservicesacrossourITopslandscape,andgettingeffectiveanalystEricvisibilityonthequalityofthoseservices.

ButallthreeofthosestillIwouldviewaslower-levelextensionsofthecoreplatform,withabilitytodelivermorespecificsolutionsontop.They'realmostenablingsolutionswithinthosemarketsegments,goingbacktoourpushforpartnerinvolvement,andcontinuingtorefinetheplatform,soit'seasierandeasierforthirdpartiestodevelopapplicationsanddrivetheirownrevenuewithinSplunk.Ithinkthat's--inthelong-termbasis,that'sgoingtobethebiggerleverforus,asfarasexpansionoffootprintandanytypeofARPUenhancement.





Gotit.Thenonequickoneforme.ObviouslySplunkLighthasbeenoutforalittlewhile.Youguyscommentedonitnowbeingincludedinthecustomercount,etcetera.Doyouanticipateashift--andobviouslythesmallcustomersmaynot--butastheygroworastheyincreaseusage,doyouanticipateashiftfromSplunkLighttomoreoftheenterpriseplatform?Couldthatplayoutatall,orarethesetwofairlydifferentsegments,intermsofhowyou'recharginghowtheproductdelivers?

DougMerritt (CEO):

WeactuallyhaveseenSplunkLightasanentry,leadingsometimeswithindaysorweeks,sometimesonalongerbasis,toalicensedtouseSplunkEnterprise.Butreally,thewholefocuswashowdowereachallsegmentsofpotentialusers?Howdowemakeiteasierforaone-to-five-personITteamthat'sgoingtohaveaverydifferentskillsetandbandwidthcapabilitytogetthesamevaluefromSplunkthata100or10,000-personITgroupisgettingfromus.

They'redifferentsegments,buttheyhavegotsimilarneeds.It'smoredrivingeaseofuse,evenhigherandquickertimetovalue;moresimplicityintheproduct,turningoffsomeoftheconfigurabilityofbellsandwhistles,sothatit'slesscomplicatedinthewayit'sdeliveredandconsumedbythoseguys.


Gotit.Thanksguys.Thanksfortakingmyquestions.

Operator :

MattHedberg.

MattHedberg (Analyst-RBCCapitalMarkets):

Great,thanks.Congrats,guys.Afollow-upquestionontheUBApriorquestionhere.ObviouslythereseemedliketherewasalotofmomentumcomingoutofRSAfromthatparticularproduct,alotofbuzz.I'mcurious,whenyoulookatthecompetitivelandscapethere,competitionisnevereasy.Doyoufindmorewhitespacewhenyou'relookingatsecuritydealsthansaycore[ITOM]?

DougMerritt (CEO):

Whatdoyoumeanbymorewhitespace,asfaras?


Doyousee--thecompetitorsinITOM,andit'sfairlywelldefined.CertainlyinITSMandsomesecurityaspectsitismoredefinable.Doyousee--youguysaremorethanITSM.Doyouseethecompetitivedynamics--Idon'twanttosayeasier,butdoyouseemoreofanopportunitytherewhereyouhaveadifferentiatedsolution?

DougMerritt (CEO):

Igetwhatyou'resaying.WhatIthinkwe'reseeingwithUBA,it'sadifferent--itisamorewide-openarea.It'savery--it'saprettyuniquevaluepropthatwe'redriving.Butit'sabrand-newemergingmarket,wherethereis--justlikewithany1.0productorearlyproduct--thereisasmucheducationandevangelismandprovingthatthereisvaluebeforeyoustarttogettheokay,Igetthevalue,nowIjustwanttodobusinesswithyou.Ithinkwe'vegottentowithenterprisesecurityandtheSIMmarket.

Peoplenow,it'stakenalongtimeforustobeseenasatrueSIMandsecurityplayer.Butwe'renowbeing




practicallyincludedinallSIMRFPs,whetherit'sagreenfieldoraplacement.Ithinkwe'rewaybehindthatinsomethinglikeuserbehavioranalytics.Themarketisstilltryingtofigureouthowimportantisit,andcanasolutionreallyprovidetheinsightsandcapabilities.Iexpectthattochange.Wehaveseenthatchangeinthelasttwoorthreequartersaspeoplearestartingtocomeuptospeed;buttherestillalotofevangelism.

Again,longterm,ourapproachfromourownsolutionsandjustasimportantly,athird-partypartnersolutions,ishowdowecoverasmuchend-to-endcapability,giventhecomplexsecurityandcomplianceandfraudneedsthatourcustomershave,sothattheygetasinglepaneofglass,effectiveanalytics,andtherightvisibilitytomakesurethatwecankeepallofourinformationandbusinessessafe.


Youbet.That'sperfect.Thanksalot,guys.

Operator :

BrentBracelin.

BrentBracelin (Analyst-PacificCrestSecurities):

Thankyoufortakingthequestion.IjustwanttogobacktotheCloudimpactongrossmargins.Giventhemomentumyou'reseeing,doubling,obviouslywedown-tickedontheservicesmarginsbelow70%.Howareyougenerallythinkingaboutthat?Isthenewrange65%to70%ifwecontinuetodoublehere?HowshouldwethinkaboutCloudgrossmargins?

DaveConte (CFO):

HiBrent,it'sDave.Wethinktheminimumfromasteady-stateCloudmarginis70%.Weobviouslyhavesomemilesaheadofustogetthere,butthat'sourminimumthresholdintermsofexpectation.


Okay,veryhelpful.LastquestionfrommeisreallyaroundITSI.We'restillearlydays.Youdidtalkaboutthreeexamples.Coca-Colaseemslikeaprettyhigh-profileexamplethere.Relativetoyouradoption,isthisontrackwiththepaceofadoptionyouthoughtitwouldbeon,oraheadofwhereyouthoughtitwouldbeon?HelpusunderstandthepaththatITSIisontoday,andthepotentiallookingoutacoupleyears?

DougMerritt (CEO):

IthinkthatITopsandapp/devteamhasdoneafantasticjobwithITSI.I'dsayit'sprobablyaheadofwhereweexpected,butthere'shighexpectationsforthegroup.Theyhavereally--theyexecutedreallywellfromtheverybeginning,makingsurethatwedidtherightco-developmentworkwithourearlypartners.Wehadtherightbetaandtestingandnewproductintroductionprogramssothatwhatwewereconfidentinthefeaturesthatweredeliveredandwewouldn'tletourcustomersdown.There'sstillalot--it'sstillaveryearlyproduct.

Thereisbothafeatureexpansionnecessaryattheproduct;butIthinkjustasimportantly,thesurroundingservicesandeducationaroundtheproductthatweareexpandingonconcentriccircletypevisual,makingsurethatourpartnersunderstandhowtoimplementandhowtoconfigure.Thencustomerscomeuptospeedonwhatdoesittaketodefineaservice,andhowdoyoukeepitcurrentandeffective.Butit'sreallybeenawonderfulthingtowatch.IhavetocongratulateRickFitzandtheentireteamoverandoveronathoughtfulandcustomer-firstapproachforhowwerollsomethingoutwiththe




fewesthiccupspossible.


DealsizesonITSIarecomparabletowhatyou'veseeninthepastonES,aswell?

DougMerritt (CEO):

Thatisagoodquestion.Dave,aretheyabithigher?

DaveConte (CFO):

Theytypicallyare--they'resimilaronSKUs.They'retypicallylarger.


Slightlylargerdeals.Okay,veryhelpful.Thankyou.

Operator :

Thankyou,andwehavetimeforonemorequestionfromthelineofSteveAshleywithRobertWBaird.

SteveAshley(Analyst-RobertW.Baird&Company):

Perfect,gettingunderthewire.Doug,I'mgoingtotipmyhat.YoutellustotuneintotheIndianapolis500andseewhatkindofbenefitswe'redriving.That'sveryclever.Ithoughtthatwasquitegood.Youcanseethesalessideofyouthere.Intermsofthesecuritybusiness,numberone,inthepastsometimesyou'vegivenuswhatpercentagethatmight'vebeeninthetotal?

Myquestion,mysecondquestion'sonthesecuritybusiness.Lookingforsomecoloronhowconcentratedordiversethatbusinessisintermsofusecases?Arethereahandfulofusecasesthatdominatethatbusiness,orhaveyouseenawidedispersionofusecases?Isthereanycoloryoucangiveusaroundthatonthesecurityside?Thanks.

DougMerritt (CEO):

Wheneverwetalkabouttheamountofrevenuegoingtooneofthesemarketsegments,everyoneofthesecallsI'vealwaystriedtocaveatthat,that'stheinitialsaleofSplunk.Whatweexpect,aswesawwithabunchoftheusecasesorcustomerexamplesIgave,isthatbecauseweareaschemaatread,andknowthatdatayouputinhashardened,thatassecurityisgettingbenefit,theircolleaguesinIT/opsortheircolleaguesorapp/dev,ortheirlineofbusinessITfolksaretryingtoservemarketingorsalesneeds,canlookover,interrogatethedatathatthesecuritygroupmayhaveaccumulated,andseeisthereabenefitforthemwithoutanyadditionalcosts.

That'sstilloneofthose--IrepeatthatsomanytimesatSplunk,becauseafteralmost30yearsintheITindustrystartingwithastrictrelationaldatabaseclient/serverworld,thatstillblowsmymindthatyoucanasktotallydifferentquestionsofthesamedataandgetcompletelydifferentanswersanddifferentvalueoutofit,withoutevertouchinganythingakintoanETLstackorcraftingawholenewschemaandre-purposingthedata.

Whatwesawthisquarterisagaininthe40%-ishrangeofthesenewdealsbeingsecuritybased.Withsecurityontheconcentration,Ithinkwe'vebecomerelativelywell--peoplenowassociateSplunkwiththesecurityoperationscenterdashboardandaSIM-likesetofcharacteristics.Fromafirst-salebasis,thatseemstobealotofwherewearefocused.

Butasweallknow,thesecuritylandscapeisincrediblydiverse,andtherearesomanydifferentuse




cases.Securityis50,000-footterm,andveryfarawayfromthegroundlevelofwhatourcustomersaredealingwith.Wewillenterinoneofthose--nowwithESwithaSOC-typeapplication,butthendiveintoawholehostofmorespecificusecasesastheytryandfilluptherepositoryofcomprehensivesecuritydata.

SteveAshley(Analyst-RobertW.Baird&Company):

Perfect,thankyou.

Operator :

Thankyou.ThisdoesconcludetheQ&Asessionfortoday'sconference.IwouldliketoturnthecallbackovertoMr.KenTinsleyforanyclosingremarks.

KenT insley(InvestorRelations):

Great.Thankyou,Operator,appreciateyourhelptoday.Thanksforeveryone'sparticipation.We'reavailabletonightifyouhaveanyquestions.HopeyouhaveaniceMemorialDayweekendandenjoytheraceonSunday.

Operator :

Ladiesandgentlemen,thankyouforparticipatingintoday'sconferencecall.

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