This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: Thank you for standing by and welcome to Splunk's fourth quarter fiscal year 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's call is being recorded. Should you require any further assistance, please press star zero. I would now like to hand the call over to Ken Tinsley, Corporate Treasurer and Vice President of
spk01: of investor relations. Thank you, operator, and good afternoon, everyone.
spk12: With me on the call today are Graham Smith, Sean Bice, and Jason Child. After market closed today, we issued our press release, which is posted on our investor relations website, along with supplemental material. We also issued a press release regarding our new CEO, This conference call is being broadcast live via webcast, and following the call, an audio replay will be available on our website. On today's call, we will be making forward-looking statements, including financial guidance and expectations, such as our forecast for our first quarter and full year fiscal 23 and our future expectations of revenue growth, revenue mix, renewals, duration, RPO growth, cloud growth, bookings, cloud growth margin, total growth margin, operating cash flow, and the metrics we will report on and guide to in the future, as well as trends in our markets and our business, our strategies and expectations regarding our products, technology, customers, demand, and markets. These statements are based on our assumptions as to the macroeconomic environment in which we will be operating and reflect our best judgment based on factors currently known to us, and actual results or events may differ materially. Please refer to documents we file with the SEC, including the Form 8-K filed with today's press releases. Those documents contain risks and other factors that may cause our actual results to differ from those contained in our forward-looking statements. These forward-looking statements are made as of today, and we disclaim any obligation to update or revise these statements. If this call is reviewed after today, the information presented during this call may not contain accurate or current information. We will also discuss non-GAAP financial measures which are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non-GAAP results is provided in the press release and on our website. With that, let me turn it over to Graham.
spk11: Thank you, Ken, and good afternoon, everyone. I'd like to begin by saying we are shocked and saddened by recent events in Ukraine, and we hope that the situation can be resolved quickly. While we don't have any Splunkers based in Ukraine, We do have friends and family members who are affected. We are monitoring the situation carefully and we will prioritize employee safety and continue to serve our customers in Eastern Europe. And just to confirm, Splunk withdrew from the Russian market in 2019. On today's call, I've got a lot to cover. Q4 results, a new Splunk CEO, the status of our business transformation, normalization of our financials, and guidance strategy. I will be joined by President of Products and Technology, Sean Bice, and of course, Jason Child. Let's get started. When the CEO transition was announced back in November, the Splunk board put its trust in our outstanding team to execute a strong Q4. And I'm very happy to report that the team really delivered. Jason will get into more detail but I'm delighted with our results. Annual recurring revenue, cloud ARR, cloud DBNRR, revenue operating margin and operating cash flow were all strong. In addition to a great Q4, I'm equally excited to announce the appointment of Gary Steele, a visionary technology executive and founding CEO of Proofpoint, as the next CEO of Splunk, effective April 11th. Gary has over 30 years of experience and a track record of successfully scaling SaaS operations and growing multi-billion dollar global enterprises. Over the past two decades, he's led Proofpoint's growth from an early stage startup to a leading security as a service provider to some of the world's best known organizations. Gary's software and cybersecurity expertise, deep understanding of recurring revenue models, operational focus and unwavering commitment to driving innovation and customer success will be invaluable to Splunk on our path to $5 billion and beyond. I know I speak for the whole board when I say how much we're looking forward to working with Gary and how excited we are to have him on the team. In addition to this leadership update, We're also announcing that our President and Chief Growth Officer, Theresa Carlson, will be leaving Splunk later this quarter to pursue other career opportunities. Theresa has made many important improvements to both go-to-market strategy and operations during her time at Splunk. I'd like to personally thank Theresa for her contributions and wish her the very best for the future. Moving to our customer success, we had some exciting new expansion and renewal transactions during the fourth quarter, including Fred Lawyer Insurance, a new Splunk customer and one of the largest Hispanic-owned and operated companies in the U.S., who purchased Splunk Cloud with workload pricing to further safeguard its customers' data and automate security initiatives. Box. a provider of cloud content services expanded their commitment to Splunk Cloud Platform, while also adding Splunk application performance monitoring from our observability product group. One of the leading online travel platforms is migrating from Splunk Enterprise to Splunk Cloud Platform with workload pricing, allowing them to expand their application development, reduce costly downtime, drive timely new product releases, and ensure optimal customer experiences as travelers discover and book hotels, flights, and more. The National Health Service in the UK expanded their use of Splunk Enterprise, Enterprise Security, and ITSI across their cloud environment and are now using Splunk for synthetic monitoring to provide richer insights into the end user experience for UK citizens accessing NHS digital apps. And finally, one of Japan's largest auto manufacturers expanded its use of the Splunk Enterprise Platform to speed up problem detection and decrease impact investigation and isolation times from hours to minutes, boosting efficiency by more than 90%. Turning to our cloud business transformation, we are very pleased with our execution and progress in fiscal 22. Cloud represented 62% of our total software bookings, compared with 50% in FY21 and 35% in FY20. We continue to make progress on improving cloud gross margin, and our workload pricing model has gained significant traction since its launch. In Q4, nearly all of our new cloud business was based on workload pricing. And at the end of the quarter, more than 40% of total cloud ARR was based on this model. We've also done a great job renewing and expanding thousands of Splunk customers during the year. Moving on to financials, as you know, there are two factors that significantly affect our revenue and bookings growth. The percentage of bookings from cloud and average term contract duration, both of which are driven by customer choice. For FY23, we anticipate our cloud bookings percentage will approach 70% for the full year. And we believe that average term contract duration has stabilized in the range of 18 to 24 months. Because the year-over-year changes for FY23 will be less than the year-over-year changes for FY22, the result will be a significant normalization of our financials. Jason will provide more details later. We're also making some changes to how we provide guidance going forward. We've heard from many of you that while ARR has been a useful operational metric during our business transformation, it's a point in time measure that's difficult to reconcile with revenue. Now that our revenue growth is normalizing and is close to ARR growth, we've decided to provide only annual guidance for this metric, although we will report the ARR numbers for each quarter retrospectively. We will also update our annual ARR guidance if and when appropriate. It's our expectation that by the end of fiscal 23, we will be able to dispense with ARR as a reported metric. Before I hand the call over to Sean, I want to close with this observation. When you walk into any network operations center or security operations center that is using Splunk, you see that our platform is central to our customers' day-to-day work. It's not out on the periphery. It's fundamental. It's core. That's why more than 95 of the Fortune 100 choose Splunk. And that's also why we continue to show such strong renewal rates. I want to thank our customers and our partners for placing their trust in us. And of course, I'd like to personally thank all Splunkers for staying focused and executing so well in our most important quarter of the year. It's been my great honor to work with you over the past three and a half months. Now I'll turn the call over to Sean.
spk09: Thank you, Graham. It's a pleasure to join today's call, and I'm here to share some thoughts about Splunk's innovation. Splunk is mission critical to our customers' operations, and we believe three things will grow our significance and opportunity in FY23 and beyond. First, customers want a platform they can build on. Second, customers want consistent security and observability across any cloud, on-prem or edge environment. They don't want disjointed, siloed experiences. And third, customers don't want their data merely to be a record of what happened in the past. They want that data to make things happen in the business now. Only Splunk offers the combination of an extensible data platform integrated full-stack observability and security, and end-to-end coverage from multi-cloud to edge. We're building on that differentiation, and it starts with our flexible and scalable platform that supports an expansive set of use cases. You can leverage Splunk-built search and reporting, security, and observability solutions, access more than 2,400 apps available on SplunkBase, and build custom applications tuned to your specific needs. We have exciting platform improvements that we'll announce in June at Comp 22, so we hope you'll join us for that. With security, Splunk takes a fundamentally different approach than pure play security vendors. We're able to do that because we have a massively scalable data platform with advanced analytics at our core. Our solutions are complementary to XDR capabilities as XDR solutions only collect a subset of security data, leaving organizations open to threats hiding and missing data. With security fundamentally being a data problem, Splunk is best positioned to help protect organizations from ever-evolving threats across complex hybrid environments. On the observability front, We've innovated to provide end-to-end visibility across infrastructure health, application performance, and digital customer experience with contextually rich AI-powered investigations. We recently announced that customers can now integrate Splunk logs with broader observability telemetry data with Log Observer Connect. We are gaining significant market traction, and last month we were named a leader in one of only two fast movers in the gigaohm radar for application performance monitoring. To sum it up, it's clear that digital transformation is accelerating and requires data-driven innovation. Innovation can't succeed without a foundation of security and resilience. With our extensible data platform, integrated security and observability, and future vision, we are uniquely positioned to help organizations achieve all three of these critical outcomes. We're excited about the opportunity ahead of us. Now I'll turn it over to Jason for more on the numbers.
spk16: Thanks, Sean. Q4 was an excellent finish to a strong year. Most importantly, the significant financial headwinds related to our transformation are now largely behind us. For the full year of FY22, revenue growth accelerated from minus 5% to positive 20%. RPL bookings growth accelerated from minus 17% to positive 35%. Operating cash flow returned positive, reaching $130 million from almost $200 million negative last year, and we expect all of these metrics will continue to improve in FY23. To be clear, we are set up for the normalization of our core financial measures this year and beyond, dramatically simplifying our financial story. We ended the year with total ARR of $3.12 billion, up 32% year-over-year, and cloud ARR of $1.34 billion, up 65%. We ended with 675 customers with ARR greater than $1 million, up 32%, and 317 of these customers had cloud ARR over $1 million, up 70% over last year. We continue to drive cloud adoption and develop migration strategies with our customers. As Graham said, cloud mix is likely to increase more gradually from this point. Our full-year cloud bookings mix was 62% for FY22, and we estimate that it will approach 70% this fiscal year. This increase of roughly 8 percentage points compares to the 12 percentage point gain we saw from fiscal 21 to fiscal 22. Now that revenue is normalizing and average term contract duration is more comparable on a year-over-year basis, RPO Bookings is becoming a better indicator of overall bookings momentum and will be an important growth metric going forward. Our confidence in bookings growth is based on the scheduled renewal of approximately $1.5 billion of annual contract value this year and a consistently high cloud DBNRR, which reached 132% last quarter. In Q4, RPO Bookings was $1.4 billion up 38% over last year. On to the P&L. Q4 cloud revenue was $289 million, up 69% over last year, reflecting continued customer adoption of our cloud platform. Total revenues were $901 million in Q4, up 21% and significantly higher than planned due to more term contract volume and longer average duration than we estimated. Professional services and education accounted for 5% of total revenues in the quarter. On margins, which are all non-gap, cloud gross margin was 67% in Q4, up five points from last year as we realized leverage from scale and elasticity of the platform. Total gross margin was 82%, down slightly on a year-over-year basis due to the greater proportion of revenue contribution from the cloud. Operating margin was 16% in the quarter, significantly better than planned due to our bookings and top line out performance. Turning to guidance. With most of the heavy lifting on transformation behind us, we're entering the current year, FY23, with the financial model normalizing. As Graham mentioned, we expect ARR and revenue growth rates will converge this year. Going forward, we will continue to provide guidance on more traditional operating and profitability metrics, revenue, operating margin, and cash flow. As Graham also noted, although we will maintain our full-year ARR targets and update you quarterly on actual ARR throughout the year, we expect to retire ARR as a core metric at the end of fiscal 23. We ended the year with 18 customers with ARR greater than $10 million, up from 10 last year, and all indicators point to continued strength in the demand environment. Based on this strength, we are maintaining our total ARR outlook of $3.9 billion and cloud ARR of at least $2 billion by the end of this fiscal year. We expect total revenues of between $3.25 and $3.3 billion, which will follow our seasonal trend of 40% first half and 60% second half. On the expense side, we expect cloud gross margin to gradually expand towards 70% by the fourth quarter as we continue to migrate our cloud customers to the newest version of our services. Improving cloud gross margin should drive expansion of total gross margin nearing 80% for the year. Non-GAAP operating margin should also expand to between break-even and positive 2% as a result of expense leverage and strong revenue growth. On the cash flow side, with our customer base now on annual billing cycles, our full-year operating cash flow should rebound sharply to at least $400 million in fiscal 23. Near-term, for Q1, we're expecting total revenues of between $615 and $635 million to with a non-gap operating margin of negative 20% to negative 25%, reflecting our normal Q1 seasonality. In closing, Q4 was a great finish to the year. The demand environment remained strong, and with the impacts from our business transformation mostly worked through, our setup for continued growth with a much simpler financial model is excellent. With that, let's open it up for questions.
spk03: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Brent Thiel of Jefferies. Your line is open.
spk05: A question for Graham and Sean. As it relates to the security element of your story, if you could just give us a sense of what you're seeing in the pipeline I believe you've said in the past that security is a very large driver between 40% and 50% of revenue. Maybe if Jason can follow up and just provide a little more color around what's happening in this particular segment. Thank you.
spk11: Sure. I mean, just at a high level, Brent, it's clearly still the biggest and most important driver of our business today. I think it's approximately – 50%, but Jason can follow up later. Sean, what would you say in terms of kind of what we're seeing around customer activity?
spk09: Yeah, you know, the customer activity is, you know, with cybersecurity being heightened right now, you know, re-anticipate demand from customers to, you know, to really increase as they look to strengthen their posture, you know, with heightened risk that's all around us today. And there's no question, I think customers are not confused at all that cybersecurity is business critical. And really what customers are always talking about is how quickly they can detect and resolve things. So, for example, you know, there's customers that will share stories where without Splunk Enterprise Security, On average, their time to resolve an incident would take about a week. And then with Splunk Enterprise, that week would then turn into a day. So they become much more efficient. You know, they're using Splunk Analytics, and, you know, they have context to problems, and they can resolve it quicker. And then we have another capability that customers are thrilled about. It's called rules-based alerting. So, you know, Going from a week to a day with rule-based alerting, you go from a day to 10 minutes, and that's how quickly customers are able to resolve those issues. And we have over 2,000 automated actions built into our system, drag-and-drop visual playbook editors, and it really just underscores how mission-critical Splunk is.
spk06: Thank you. Thanks, Brent.
spk03: Thank you. Our next question comes from Cash Rankin of Goldman Sachs. Your question, please.
spk07: Hey, thank you very much. Congratulations on many fronts there. Graham and team, how are you thinking about the sales leadership GTM transition? Obviously, Teresa had settled in very nicely in the space of the last 10 months or so. And you've got guidance, which we certainly appreciate. You're through the toughest parts of the transition. What are the next milestones to look for a GTM leader and the transition involved since you have targets that you've laid out in the interim before you find a new head of GTM? Thank you so much, Hans.
spk11: Sure, Kash. Well, as I said in my prepared remarks, we're super grateful for Teresa's time here and it's unfortunate to see her go, but I'm sure she'll do something exciting. Going forward, clearly we've got an interim position for about five weeks before Gary starts. My intent is certainly I'll be managing go-to-market directly just for that period. And then I think Gary's approach will very much be, I mean, his priority, I know we've already discussed it, is he'll want to meet a lot of customers and he'll want to meet a lot of employees and leaders. And so I don't know at this point if his intent would be to to necessarily replace that role, the chief growth officer, or whether he'll have another structure. So I think it would be premature to give you any kind of attempt at an insight into where his mind will be. I'm sure he'll just want to ingest a lot of data before he makes any decisions. Well said. Thank you so much, Graham.
spk01: Thanks, Kash.
spk03: Thank you. Our next question comes from Remo Linschau of Barclays. Please go ahead.
spk10: Thanks, and congrats to the new leadership announcement. Dee, can we talk a little bit on the cloud momentum that you're seeing there? What are customers actually doing? Is that kind of moving existing workloads into cloud? Are you starting to see some expansions into SignalFX so people are using it for infrastructure monitoring? and APM, so just to get an idea like how much of that is net new versus like a conversion over from on-premise. Thank you.
spk09: Yeah, this is Sean. You know, what I would say with customers, the way customers typically start off is they'll, if they're new to Splunk Cloud, they'll take a smaller workload and then they'll get familiar with the cloud, you know, how it works, what to expect, et cetera. But what we see as customers, you know, get comfortable and they build some confidence, then really big workloads come over. And, you know, that's a good sign of what they believe in on the platform. And once they land there, customers will absolutely start to expand and start using different capabilities. There's quite a few customers that think about our observability and security tools like going hand-in-hand. It allows them to see things end-to-end. That's a pretty common thing. And then, of course, our platform is so extensible. You'll find virtually every customer basically building custom applications for whatever use case they have in their business. So we start off pretty small, and then we grow big, and then they start to, you know, they're all really looking to manage things end-to-end. That's how they end up using more capabilities from our product portfolio.
spk11: And, Remo, just to give you a little more customer info, certainly of the names we talked about in the prepared remarks, you know, Box is using observability, so is NHS, the large travel company is, the large automotive manufacturer, so I'm just giving you a flavor of some of our wins and expansions this quarter. Overall, we've been very pleased if we look at observability this year. If you remember, we really only launched the integrated observability suite in May of this year, so we don't have a full year, but The growth has been certainly the fastest of any of our product groups, and we're delighted with kind of where we ended the year, and obviously we've got aggressive goals for next year.
spk10: Perfect. Hey, thank you. That's really clear. And then Jason, one for you now that we... Finally got used to ARR. We're kind of moving on at the end of the year, which kind of probably is a good thing. But just to kind of understand the logic, so the idea is at the end of 2023, we have so much cloud, which means it's all very properly routable, that we don't need ARR anymore to understand the dynamic in the business. Is that the right way to think about it?
spk16: Yeah, Rayvon, I'd say the first thing is we're really just not going to guide on it for the rest of this year. We're not taking it away. It's just now that we're actually seeing the full normalization of revenue to ARR, which is something I know you guys have been asking about for a while, now is the time to make that transition. Again, we will still provide it. As you know, it is pretty tough to do the reconciliation to ARR to revenue. In fact, it's not really fully possible without a very amount of granular detail. The other thing is ARR is a little hard to forecast, and the reason it's hard to forecast is that ARR is actually impacted by cloud mix. I think as we've told you guys in the past, customers who choose to move to cloud get an average of about 1.5x lift in ARR due to it being a fully hosted service So overall, our plan is with normalization occurring this year, that focusing on gap metrics, you know, like what you normally would look at for companies that are enterprise or SaaS, is now kind of the right time since we're in kind of the last phase of our transformation.
spk10: Thank you. Congrats.
spk03: Thanks, Raymond. Thank you. Our next question comes from Brad Zelnick of Deutsche Bank. Please go ahead.
spk14: Excellent. Thank you so much. Congrats on all the progress, guys. And congrats on being able to attract Gary into the CEO seat. I mean, really great hire. My question for you, Jason, you know, it's really good to hear the $400 million plus operating cash flow that you've mentioned for fiscal 23. How should we think about the trajectory of cash flow from here now that we're coming out the other side of the transition?
spk16: Well, you know, so really, as you, you know, you've, I think, followed the story for a few years now, and, you know, we really, the last year of kind of normalized cash flow was about $296 million in 2019, and then as we started seeing, or actually that was, I'm sorry, FY20, and then, of course, we moved to, move to change our collections from upfront to annual upfront to kind of conform with industry standard. And so really what you're going to see now is this next year is the first full year. I'm sorry, it was FY19 that was $296 million. And then you cycle to negative in 20 and 21. And then a partial year of normalization in FY22 with $128 million. Next year, the first full year of normalization at $400 million. You should expect to see it go up from there. In terms of what the magnitude is, that's kind of more of a timing question. I think in the past I've told you that getting back to a 20% cash yield as a percentage of ARR or revenue is where we've been before the transformation and expect to get to after the transformation. we'll need to wait until we provide multi-year kind of targets before I can give you the exact timeframe.
spk14: That's helpful, Jason. I really appreciate it. Maybe one quick follow-up is, you know, to follow on Ramo's question, we've seen – you guys have given great disclosure over the years of What should we focus on? Because if you really don't lead us, everybody's going to come up with their own calculation of all the numbers we do get. But what should we really look at as the leading indicators for the business at this point?
spk16: Well, for growth, I think revenue and RPO bookings, which is basically RPO bookings is very similar to what Billings was before 606. So I think those are the two best growth measures. And then ultimately operating margin is starting to come back in line. That's still going to take another year or two to fully normalize. I would say cash flow is the best measure for kind of efficiency of the business until you see that full normalization in operating margin.
spk01: Awesome. Thanks again, guys. Thanks, Brad. Thank you. Thank you.
spk03: Our next question comes from Phil Winslow of Credit Suisse. Your line is open.
spk04: Hey, thanks for taking my question, and congrats on a strong close of the quarter, and particularly also just the cash flow guidance for this coming year. I wanted to focus in on observability. Obviously, you've had a lot invested there in terms of just organic and R&D and organic acquisition, but I guess this question is to Sean. When you hear about sort of why Splunk is winning with these customers, what is the feedback that you hear back, and then From your perspective, from our product side, what are kind of the focus points going forward for the observability suite? And then just one follow-up for Jason.
spk09: Yeah, you know, typically when a customer is looking at observability, they're usually in the cloud. They're building a new cloud application. And when I say build cloud application, it's usually a microservice architecture where So instead of an old monolith as a single app, they're stitching together a whole bunch of components that would make up an app. And really, there's no human being that's going to be able to understand all of that. And that's why they need tools. And observability, particularly our observability, has built-in distributed tracing. And then anyone who's trying to run a huge app in the cloud that's component-based or microservice architecture. They go straight to observability. They use distributed tracing. We have full fidelity measurement, which means an operator can literally see every single event in that system, understand the relationship between all the components, and they can basically manage the environment with ease. That's what draws people into it. And then, you know, when we think about the road ahead, you know, my answer to this will always be the same. It's what customers need us to do. You know, we partner with customers all the time. They're the ones that create our roadmaps. And, you know, so anytime we look at a roadmap together, it's always working backwards from our customers.
spk04: Got it. And then, Jason, just a question for you, looking at sort of just sales productivity and capacity. In terms of just productivity and ramp time, I wonder if you guys can just update on there. And as you're thinking about just sort of go-to-market capacity in fiscal 23, how should we think about just the potential increased investment there? Thanks.
spk16: Thanks, Phil. I guess in terms of productivity, we've seen pretty significant gains in productivity last year, and we expect to see that next year as well. And the reason why is because the renewal base, is growing so significantly. And efficiency on a renewal is much higher for other sales motions. And so the renewal base went from 600, 700 million last year. It's going to be around 1.5 billion this year. So one, that provides, I think, higher confidence in our forecast for next year, really, than we've ever had, one. And then two, it does provide for pretty significant efficiency gains. So does that answer your question?
spk04: That's helpful. Thank you. Thanks, Phil. Thanks, Phil.
spk03: Thank you. Our next question comes from Keith Bachman of BMO. Your question, please.
spk06: Hi. Many thanks. I was going to try to put into Graham. Last quarter I had asked you about why it was perhaps the appropriate time for Doug to transition and transition. you know, my summary of your answer was, you know, skill sets and really about scaling the business. And when I think about, you know, you know, Gary's going to run it, Proofpoint was about half the size of what Splunk is or what Splunk's guided to be. So I'm just wondering, you know, it doesn't seem like Proofpoint was the scale determinant perhaps, but if you could just give a little color on why you think Gary's the right person to lead Splunk at this juncture, and then I have follow-up for Jason, please.
spk11: Sure. No, I think it's a great question and obviously a highly relevant question. I think the three things I talked about on the call last time were good fit from sort of values, point of view, culture, someone who knows how to drive performance with culture. I talked about certainly building companies at scale, experiencing global companies, et cetera, and then strong operational skills along with that. And then the third thing I talked about was the ability to translate what is relatively complex technology into business value. I think that's a really important skill in the markets which we operate in. And as you know, we had great candidates. We had both internal and great internal and external candidates. And I think it's always tough to sort of decide in the end what your priorities are. But I think that basically where we come back to with Gary is he's certainly a builder. He's shown amazing operational basically to take a company from zero to over a billion at Proofpoint. He certainly has worked in large-scale companies, both at Sun and HP, so he understands how multi-billion dollar enterprises work. But then we get enormous enterprise software experience, SaaS experience, cybersecurity domain experience, just all of the things that ultimately blend together, we think, to provide the right leader for Splunk. So I certainly view him as a strong operator. And maybe, Sean, I know Sean and Jason have talked with him. Sean, I don't know if you wanted to add any comments to my assessment of Gary.
spk09: Yeah. You know, when I first met Gary, you know, I found somebody who was a careful listener. He seemed very customer-centric. He definitely struck me as an operator, you know, in terms of rolling up his sleeves. I felt like he had good judgment. And then he, of course, has a long track record of managing boards and working with investment communities. And, you know, I was hired by Doug and I thought I was going to be working for Doug. But the reality, the reason I'm here today and the reason I'm going to be here is because of Gary. He seems like an outstanding leader, but that's why I'm here.
spk06: Okay. Well, thank you for that answer, and I'm glad you're committed. I think Jason was just going to ask something.
spk11: Oh, thank you. Go ahead. No, you go ahead and ask a question, then Jason can cover both of them.
spk06: Okay, fair enough. Jason, I did want to transition to the billion and a half. of renewals that are up for this year. I just want to try to understand how that manifests in revenues. And so, A, is that mostly the term that was written three years ago? And is that, in your mind, is that mostly going to cloud? And, you know, just how should investors be thinking about that opportunity and how it will manifest itself in terms of the metrics that we will see?
spk16: Okay, so I guess first let me add on or pile on to Graham and Sean's answer on Gary. What I would, I mean, they covered most of the aspects. The only thing I would add is I thought, you know, Gary definitely strong operator, you know, very strong alignment on values and culture. I think the one thing that also was really unique and helpful is he has gone through a transformation. And that is, as you all know, it's kind of a full contact sport. And so while we're in the last phase, still having that experience I think is helpful as well. Okay, so second on your question about the renewals. So on the 1.5 renewals, those are really customers who already made the PERP to term conversion And those customers are now coming up for their first term renewal. And, you know, while we, you know, the best way to predict what the mix of cloud is going to be for those customers, I would look to kind of what our current cloud mix is. If I look at, you know, this last year we were at 62%, a little higher in the back half. If you look at the, you know, kind of 60, you know, mid-60s, I think we said next year we expect it to be approaching 70%. you should assume that that renewal base is going to be likely right in line with that percentage of moving to cloud.
spk06: Okay. All right. Many thanks.
spk03: Thank you. Thank you. Our next question comes from Matt Hedberg of RBC Capital Markets. Please go ahead.
spk15: All right, you guys. Thanks for taking my question. And I'll offer my congrats to Gary as well. It'll be great working with him again. Just one for me, Graham or Sean, with the success of Splunk Cloud, you obviously talked a lot about the success of that in your prepared remarks. I'm wondering if you can comment on if that's starting to help accelerate new customer ads and really any comment maybe on just how fast your overall customer base is growing. I know there's a huge expansion opportunity. Maybe just that growth of that customer base.
spk11: Yeah, I'll take that. I think, look, clearly we've added, I think, a similar number of customers in the low thousands each year We have not been a customer, new logo kind of machine. I think there's an opportunity for Splunk in the mid-market that we haven't really fully gone after, and I think that's certainly something that I would imagine certainly be on Gary's list of opportunities. There are some technical things we might have to do to go after that, but I think they're relatively straightforward. And I think in our go-to-market motion, we're We're very much focused on larger enterprises. So I think there's opportunity there. So I think I'd sort of leave it at that. And then since you know Gary, give him a couple of quarters and then ask him that question again.
spk15: Great. Thanks a lot, Graham.
spk03: Thanks, Matt. Thank you. Our next question comes from Michael Tertz of KeyBank. Your line is open.
spk13: Thanks, guys, and congrats and lots of fun. Jason, for you, back to the AR issue. Obviously, it's great to simplify. I guess my question is, if you get rid of ARR in terms of guidance and then eventually, what do we do about the volatility and lack of visibility that we still get in revenue relative to duration and And next, as we could see from what happened this quarter. And that would impact RPO bookings as well, which equally is impacted by duration. So how can you help us to get the right model and then rectify any discrepancies when those things happen?
spk16: Well, I mean, we're providing a lot of metrics right now. And, I mean, you're still going to get all those. I mean, you're still going to get ARR. Again, we're not pulling it away. And I think, you know, I've heard from most of you guys that you can't reconcile ARR to the other metrics anyhow, as it's a performance or it's an operating metric and not even a gap or non-gap metric. So that's part of the reason why we think it makes sense now that you're finally seeing normalization in revenue with ARR. So in terms of RPL bookings, we do provide duration. You can duration adjust RPL bookings. I mean, we don't provide that. If you did do it, for example, in this quarter, you actually would have a slight increase. I think it would have been 42% instead of 38%. But we provide the numbers so that you guys can, you know, I think, try to do whatever reconciliations you want to do. But overall, as I said earlier, I think revenue and RPO bookings really are the best measures to evaluate our growth, and that's pretty consistent, I think, with most others in software.
spk13: And then a Maybe for Sean and Jason combined, you thought that cloud-based margins would flatten here. It looks like you do exit at 70%. So is that indicative of some success with solving some of the challenges you had with the rollout of the new SCP platform in terms of scaling and elasticity? Okay.
spk09: Yeah, Jason, I'll go ahead and start. Yeah, the team has been making good progress on, you know, we're trying to iterate and make progress every single week. So you are seeing some success there. And, you know, just as a reminder, like when our customers start, they usually start with small workloads and then the really big ones show up. And the reason these really big complicated workloads are so important is we have to fine-tune our system. And then we have to make sure that we're getting these workloads exactly what they need, when they need it, and not charging them for anything that they don't use. So when you think about the type of work that we're doing, just imagine that fine-tuning behind the scenes from a customer's point of view, the cloud's just working and I'm scaling just fine. But that's what we're steadily making progress toward.
spk16: Yeah, I don't know if there's a whole lot to add other than, as I said in the prepared remarks, I do expect us to get to approaching 70% by Q4 next year. And the puts and takes are how many large-scale cloud migrations do we have and and then how quickly can we tune and really optimize the elasticity around those migrations. And we're trying to make sure we're giving ourselves room, because overall this is generally, I'd say, more of an execution challenge than an innovation challenge. We know how to do it. It's just a matter of you really need to get those large-scale migrations done and then be able to have a stabilized cloud mix, and that's when you can really work on tuning gross margin.
spk13: Thanks.
spk03: Thanks, Michael. Thank you. Our next question comes from Gray Powell of BTIG. Your line is open.
spk02: Great. Yeah, congratulations on the strong results and, you know, excited to see Gary joining the team. We're a big fan of his work at Proofpoint as well. So, yeah, I just wanted to follow up on the $1.5 billion in ACV that's up for renewal this year. And I know you've touched on it already, but I just want to make sure I'm thinking about it correctly. So it sounds like most of that is on-prem today. You called out like a 1.5 times multiplier when on-prem goes to cloud. And you talked about, you know, call it 70% of bookings being from your cloud form factor. So are those sort of like the moving parts we should be thinking about when this ARR comes up for renewal? And then also, how should we think about additional upsell or cross-sell of new products on that opportunity? Well, I guess I hear that it's relatively easy to sell more products in the cloud form factor than it is on-prem. So, yeah, just anything that you can help us fine-tune the thinking on that ACV up for renewal.
spk16: Yeah, I would say on the $1.5 billion of renewals, it is – The vast, vast majority of it is not entirely on-prem, but it's almost all on-prem because these are customers that first converted from perp to term roughly three years ago, and our cloud mix at that time was very, very small. And so in terms of the portion, as you said, I think the factor is right. Should you assume that they're converting at roughly somewhere in this 70-ish percent range? and should they be getting roughly 1.5x lift? That's probably largely right. The one thing to factor in though is that, as Sean said earlier, most of these customers don't just lift and shift everything at one time. They tend to move it more gradually, and they move some workloads over, and it really just depends on whatever makes the most sense for them. And so that's part of what makes it tough to predict exactly what CloudMix is going to be. But I think the factors you identified and hopefully the call I provided make it clear as to how and why we're so confident in the growth trajectory for next year.
spk11: I just wanted to add a couple of observations from phone calls I've been on with customers this quarter. I think it's you know, we are, as we said in our prepared remarks, we are still obviously leading with cloud and over time we absolutely expect to have a higher and higher percentage of our overall business on cloud. But the reality is when you talk to large customers, when you talk to banks and large enterprises, as Jason's just been describing, it's just not a simple cutover. It's not like at one point they're on term and then the next minute everything's on cloud. So I just want to emphasize the big picture here is that we're making incredible progress on cloud, but equally there's going to be a bunch of large customers who will take quarters and maybe years in some cases where they'll be in this hybrid environment. Maybe they'll be in hybrid for a long time, and that's one of our many strengths at Splunk that we alone can handle those hybrid environments perfectly.
spk02: Understood. Okay, thank you very much.
spk11: Thanks, Greg.
spk02: Thank you.
spk03: Thank you. Our final question comes from Fatima Balani of Citi. Your line is open.
spk08: Good afternoon. Thank you for taking my questions. Jason, I wanted to draft off of Greg's question earlier with respect to the inputs and the variables in consideration for the renewal ACV business. I wanted to ask you about the impact of workload pricing specifically to that pool of renewals. How is that sort of manifesting in terms of maybe lower ASPs as customers sort of recalibrate in the resources that you're using and how they're sort of paying you for Splunk Enterprise? And then I have a quick follow-up. yeah so um yeah what i would say is that um um of the of the uh renewal sorry um sorry could you repeat the question sure yeah just that the um variables involved uh with the uh 1.5 billion dollars of acv that's up for renewal uh you know i'd imagine another consideration is customers sort of electing to move to a workload pricing format for some predecessor pricing structure. So how is that, how should we think about that sort of dovetailing impacting negatively or positively to that renewal and growth profile?
spk16: Okay, great. So what I would say is that, you know, I think as Graham said in their prepared remarks, substantially all of our new cloud business is adopting workload-based pricing. We've also said in the past that if any customer that adopts workload-based pricing, they're putting in between one and a half and two times more data into Splunk than they were before. So what that means is, you know, I think it's better for us and better for customers. Customers are effectively paying maybe a lower price effectively on what's being adjusted on a per terabyte basis, but they're putting more in, so the effective price ends up being about the same, which was really kind of the whole objective. What we were trying to do is get folks not to restrict or limit data that they're putting into Splunk to try to you know, only, you know, because we were perceived as expensive and they were just using us for some of the most critical workloads and then trying to find a cheaper alternative otherwise. So as a result, there really is no impact on the kind of overall net ASP relative to where it was before. They're just paying maybe a slightly lower price per terabyte than they were before or, you know, if you convert terabytes into workloads, if you will, because it takes a little bit of math to do that. But does that make sense?
spk08: Absolutely. That's very clear. Thank you for that. And then just the last one from me, if I may, just with respect to kind of the hiring environment that's become increasingly competitive, I wanted to get your perspective on what you're seeing in terms of wage inflation, what's sort of baked into your full year operating margin targets, and maybe specifically on your free cash flow or operating cash flow guidance for fiscal 23. How much of an influence should stock-based comp have as a result of some of these competitive hiring environment backdrop? And that's it for me. Thank you.
spk11: Sure. Fatima, this is Graham. I'll take those. I think generally, like pretty much every other company that I can name, we've seen an uptick in attrition certainly over the last four to six quarters. I don't consider Splunkers being anywhere near at the top of that list. I think we've done a good job retaining employees. I think the news of Gary's appointment will be super motivational for employees and obviously for people who are considering joining the company. so I don't I don't I think we've we've we've budgeted a few percentage points more on our on our annual focal nothing dramatic but I think we certainly had to to put something in there that speaks into our cash flow forecasts I think it's all you know we've taken appropriate steps and I think I think we'll find that we'll find out if it was enough as we go through the year it's clearly a very competitive hiring environment but ultimately people stay at companies because they believe in the mission of the company. They like the boss, the boss, or they like the team they work with. They, they, they feel they're learning and developing in their roles. I think ultimately there's only so far you can chase people with, with, with cash compensation. So, um, I'm not really sure I've got anything, uh, illuminating to describe on the, on the stock comp basis. I think, um, I'm not exactly sure what your question was. Do you want to have another shot at it on the stock comp side?
spk08: Sure, yeah, just the influence and where we should expect stock-based compensation levels to trend over the course of this year, just specifically pursuant to some of the comments you just made and sort of how it's an important driver or contributing factor anyway to operating cash flow.
spk11: Yeah, Splunk is at the end of its evergreen in terms of its stock plan. So we'll be actually going out to shareholders in the middle of this year to get approval on a new plan. So I think generally you would expect our stock-based comp to probably trend down over time, not trend up. But I think beyond that, we haven't really given any guidance specifically around stock comp. So I think that's all I could really say.
spk08: Fair enough. I appreciate that detail. Thank you so much.
spk03: Thanks, Fatima. Thank you. At this time, I'd like to turn the call back over to Graham Smith for closing remarks.
spk11: Sir? All right. Well, thank you. Before I do anything, I just want to thank Jason for being an absolute trooper. It may or may not be apparent to you guys, but Jason is not in the office with us. He's in a biohazard suit somewhere down in San Jose. He actually has COVID-19, but just absolutely pushed through it to be on the call today. So thank you, Jason. Much appreciated. I think I predicted on the last call, I said I'd be pretty sure I'd be on this call and I'd be disappointed if I was on the next one. So I'm satisfied with my guidance on that and I think obviously you'll have a great time working with Gary in the quarters to come. It's been a blast for me working here for the last four months. Clearly going to stay super involved as chair of the board. I think Splunk is very well set up. I talked about the operating plan, how important it was to get the operating plan and the guidance really as well for the company set up for FY23. And I think Splunk's incredibly well positioned. And I know that Gary is a leader who will capitalize on all the assets of the company, the technological and the people assets of the company to continue to drive growth for many years to come. So thanks for all your support and look forward to Talking to you may be in the callback, so appreciate the time. Thank you. This concludes today's conference call.
spk03: Thank you for participating. You may now disconnect.
Disclaimer