Splunk Inc.

Good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Splunk First Quarter 2024 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star 1 on your telephone keypad. Thank you. Katie White, Director of Investor Relations, you may begin your conference.

Thank you, Abby. Good afternoon, and thank you for joining today's call. With me on the call are Gary Steele, President and CEO, and Brian Roberts, CFO. After market closed today, We issued our earnings press release, which is also posted on our investor relations website, along with supplemental material. This conference call is being webcast live, and following the call, an audio replay will be available on our website. On today's call, we will be making forward-looking statements, including financial guidance and expectations, including our long-term growth and profitability, forecast for our second quarter and full year fiscal 2024, and our future expectations of revenue, total ARR, cloud mix, non-GAAP OpEx, non-GAAP operating margin, free cash flow, free cash flow margin, cloud gross margin, and equity compensation usage, as well as trends in our markets and our business, our strategies and expectations regarding our business, AI, acquisitions, products, technology, customers, and demand. These statements are subject to risks and uncertainties and are based on our assumptions as to the macroeconomic environment and reflect our best judgment based on factors currently known to us. Actual events or results may differ materially. Please refer to documents we file with the SEC, including our Form 10-K and 10-Qs, as well as the Form 8-K filed with today's press release. These documents contain risks and other factors that may cause our actual results to differ from those contained in our forward-looking statements. These forward-looking statements are being made as of today and we disclaim any obligation to update or revise these statements. If this call is reviewed after today, the information presented during this call may not contain current or accurate information. We will also discuss non-GAAP financial measures which are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non-GAAP results is provided in the press release and on our website. So with that, let me turn it over to Gary.

Good afternoon, and thank you for joining us today. To begin our call, I'm pleased to share that Splunk delivered a solid start to our fiscal year. I'm proud of our team's hard work and dedication to helping our customers around the world keep their digital systems safe and resilient. As we discussed on these calls since I joined Splunk just over a year ago, we remain squarely focused on driving durable growth with increasing profitability and free cash flow. Our Q1 results demonstrate this focus in action as we exceeded guidance across our top and bottom line metrics. We grew annual recurring revenue 16% year-over-year to $3.725 billion, $25 million above the guidance provided during our March call. Total revenues were up 11% to $752 million, well above our guidance. We delivered the 16% ARR growth while remaining tightly focused on our expense control strategy, reducing non-GAAP OPEX by 1% year-over-year. At the same time, we delivered free cash flow of $486 million in Q1, up 253% year over year, and exceeding our guidance by $11 million. Given our progress on operational efficiency, we're increasing our annual free cash flow outlook. As we discussed last quarter, we believe ARR and free cash flow are the best top and bottom line indicators of the health of our business, and we're pleased with what we've accomplished during the quarter. Brian will expand on our progress here during his prepared remarks. Our first quarter results demonstrate the strength and momentum of our business. Although we continue to see delayed cloud migrations and expansions and increased deal scrutiny consistent with last quarter, we exceeded our growth target as we focused on delivering compelling value and strong ROI to our customers. We entered Q1 with 810 customers with 1 million or more in ARR, up by 120 from this time last year, and 20 since last quarter. This includes 433 customers with cloud ARR over $1 million, up 32% year-over-year. Looking at the year ahead and beyond, I remain confident that Splunk is well-positioned to continue to drive top-line growth while continuing to improve profitability and free cash flow. Since joining Splunk 13 months ago, I focused on the transformational initiatives needed for us to deepen our customer relationships and extend our market leadership. Today, the elements of our growth engine are primed, and it is even clearer to me that no other company can deliver the value we provide at enterprise scale in what we believe is a $100 billion and growing addressable market. I meet personally with four or five customers every week who consistently tell me that Smunk is more essential than ever in driving their digital resilience across cybersecurity and their entire digital footprint. CISOs, CTOs, and CIOs are under a lot of pressure to make their organization's digital systems more resilient amidst a formidable cybersecurity landscape, greater technology complexity, demands for better digital experiences, and IT budgets that continue to be scrutinized. Only Splunk has the enterprise scale, unified product portfolio, industry maturity, and vision to meet these needs, and our key growth drivers were on full display over the past quarter through many significant customer expansions and competitive wins. Our dedication to helping customers modernize and shift to cloud on their timeline was evident during the quarter, with the signing of the largest public sector cloud agreement in Splunk's history. This eight-figure deal added Splunk Cloud to an existing Splunk footprint at a major US agency that already included compliance, cybersecurity, and advanced threat hunting. As this agency moves to a hybrid environment, adding Splunk Cloud will provide it with the visibility it needs to monitor the many applications and services it has moved to the cloud. Our hybrid approach and the cost of ownership benefits of the cloud were critical to winning this particular deal. Splunk's continued investment in meeting government compliance requirements illustrates our commitment to serving our public sector customers. In fact, over the past few months, we achieved two important designations. The first is as in process as we work towards FedRAMP high authorization, one of the most rigorous certifications a cloud service provider can achieve, and a tier above our current FedRAMP moderate authorized status. The second designation is as pending for State RAMP. Achieving State RAMP authorization assures state and local governments and higher education institutions that our technology has achieved a heightened security standard. Turning to cybersecurity, our focus on enabling organizations to stay ahead of emerging cyber threats was evident in significant security deals during the quarter. In Q1, we expanded up for print within a global IT services and consulting company with an eight-figure deal for the extended use of our core platform, coupled with the addition of Splunk Enterprise Security. This deal underscores both the power of our continued partnership with this organization as well as the power of our relationships with CISOs. Following the CISOs directive for more stringent security, we displaced the legacy SIM and will address several use cases, including safeguarding personally identifiable information for the hundreds of thousands of employees worldwide. Our best-in-class offering is in perfect alignment with the customer's digital transformation efforts, And this deployment will enable us to help drive a unified approach for resilience across the customer's IT and engineering environments. On the observability front, we were pleased to see further momentum during the quarter as we continued our strategy to bring the value of our observability offerings to our existing customers. In Q1, we secured an eight-figure deal with a leading financial information services provider. This company has grown from an on-premises account to a multimillion-dollar cloud customer. Their need for greater resilience across their digital systems resulted in a multimillion-dollar observability deal during the first quarter. This organization has made several acquisitions in recent years and plans to consolidate more than 20 costly observability tools that it has amassed down to only splunk. We were the only company that was able to demonstrate technical differentiation based on our commitment to open telemetry and that our observability solutions could manage the complexity across this organization's multiple business units. We also made progress on international expansion during the quarter with notable customer wins across security and observability. In Q1, we secured a significant deal in Europe for Splunk Cloud and Splunk IT Service Intelligence, or ITSI, with a multinational semiconductor manufacturing company. The organization has gained strong momentum recently due to the high global demand, and they selected Splunk's observability solutions over competitive offerings. Our proof of concept demonstrated that we were the only vendor with the unified observability products that could enable this customer to modernize its manufacturing and service monitoring to resolve incidents faster, predict and prevent outages, and improve resilience. Turning to the Asia-Pacific region, during Q1, we secured a major cloud deal for a Japanese central government agency. Following a competitive selection process, only Splunk was capable of meeting this agency's need for flexible and efficient data management, rapid issue resolution, and streamlined operations. This Splunk cloud and enterprise security deal is the latest in a series of successful contracts with this customer, as well as the realization of the government's overall cloud-first policy. We believe that our continued focus on our key growth drivers, including cloud adoption, customer expansion, international growth, furthering our security leadership, and accelerating our observability business are staging Splunk for a solid year. Since joining Splunk, one of my top priorities has been to accelerate our product innovation. And I'm pleased that today we have a robust product roadmap, well aligned to our customers' complex needs, across multi-cloud and hybrid environments. At RSA and in many customer conversations, one of the most important topics of discussion is how AI will transform our industry. I'd like to share how we're thinking about AI and ML more broadly and where we believe there will be significant benefits for our customers and Splunk. Let me start by saying that Splunk has been empowering security and IT teams with machine learning for a long time, including with over 200,000 downloads of our machine learning toolkit, which we introduced in 2017. Earlier this year, we introduced the Splunk app for anomaly detection, which uses ML to detect seasonal patterns and finds anomalies in time series data in just a couple of clicks. In terms of AI, enterprises are just beginning to understand its promise and risks, but we view AI as a definite opportunity, one we've been working on since well before the most recent buzz. One immediate application is to help make our products easier to use without requiring deep knowledge of SPL or search processing language, allowing more of our customers to drive better outcomes faster. SPL is what enables organizations to conduct complex analytics in a highly flexible language. This application of AI is table stakes and a clear path to value. In fact, we released a preview of an SPL assistant based on large language models back in 2022, which helps users ask plain English questions to query data in Splunk, lowering the barrier to entry for more practitioners to drive outcomes with Splunk. We know that AI requires a contextually relevant, rich data set to be beneficial, and Splunk's flexible and highly scalable data architecture positions us to continue delivering the solutions that today's enterprises need. We are enthusiastic that AI can help our customers get more value out of Splunk, improving security and observability outcomes around the areas of detection, investigation, and response. We fundamentally believe that AI will transform the way the world's largest and most complex organizations keep their digital systems secure and reliable, not only by augmenting mission-critical security and observability solutions, but also by helping to shore up the global talent shortage of nearly 3.5 million workers in cybersecurity. We view AI as an accelerator to human decision-making, not a replacement. But it can make understaffed teams more efficient. Looking ahead, we believe AI will bring enormous value by automatically detecting anomalies, recommending actions, and focusing users' attention where it is most needed based on intelligent assessment of risk. AI can be a growth driver for Splunk as it enhances user experience and outcomes in both our core and premium products. As an example, we see significant opportunity to drive further automation in SOX, through AI-enhanced SOAR and other premium Splunk security products. At .conf23, we plan to share how we're advancing our AI strategy to help customers gain more value, make Splunk easier to use, and accelerate security and observability outcomes. Let me turn now to further innovation on the product front. During the quarter, we announced general availability of several products that will further augment the value customers get from Splunk. For example, our enhanced mission control brings together security analytics, automation and orchestration, and threat intelligence capabilities under one common work surface, empowering security teams to stay ahead of cyber threats. Our 2023 State of Security Report found that nearly two-thirds of SOC teams complained about switching between too many disparate security tools and management consoles. with little if any integration, inhibiting comprehensive and timely investigations and response. Mission Control solves exactly that problem. Splunk Observability Cloud also got important upgrades during the quarter. We introduced Splunk Incident Intelligence to help incident response teams increase efficiency so they can diagnose, remediate, and restore services before their customers are impacted. Next, new trace analyzer for APM helps easily identify problems from billions of traces and endless combinations of metadata. And IAM Network Explorer enables teams to easily monitor and assess their cloud network health and resolve issues faster. Our continued investment in enterprise-grade observability solutions for monitoring across complex hybrid environments further accelerates the value we deliver to customers. With comprehensive visibility and a more unified approach to incident response, only Splunk is delivering the full-stack observability solutions needed to help organizations improve digital resilience. In Q1, we introduced Splunk Edge Processor to increase our customers' visibility into and control over the volume and content of data before it leaves their network. By supporting processing at the edge, customers can control the cost of data transfer and storage, better ensure that sensitive data does not leave their defined boundaries, be confident that they are collecting all the data that they need, and ensure that the data ends up at the right destination in the right format, all with the flexibility to scale cost-effectively. We're also driving ongoing innovation with our partners to make it easier for organizations to gain value from Splunk. Last week, we announced Splunk's SAP Premium Certified Endorsed App for SAP's Industry Cloud, which is expected to be available for purchase in the SAP Store next month. SAP environments contain business-critical information, and one of the challenges has been to have the visibility needed to protect against risk and cyber threats. Through our strategic partnership with SAP, this app will bring security-relevant SAP data into the fold of Splunk Security Analytics and operations workflows, enabling security teams to monitor, detect, and rapidly respond to threats impacting their SAP environments. Looking ahead, we're continuing to invest in ways to make it easier to get data into Splunk, gain value, and drive resilience. For example, we're making good progress on integrating capabilities from our acquisition of TwinWave last year to strengthen our customers' ability to quickly analyze and remediate attacks. At .conf23 in July, we'll share more about our continued cross-portfolio innovation and how we're thinking about AI-powered premium Splunk solutions. Let me change gears from our technology to our talent. Building the leadership team Splunk needs to steer us through the next chapter of opportunity and growth has been among my top priorities, and we continue to invest in our people during the quarter. In Q1, we welcome Min Wang as Splunk's Chief Technology Officer. Min brings over 20 years of experience in applied research and product development with a focus on AI, ML, data analytics, and the enterprise cloud. Most recently, she spent more than five years at Google, including three years leading a team responsible for critical components of the company's AI-driven Google Assistant. I'm looking forward to having Min further accelerate Splunk's technical leadership and catalyze the development of more world-class technology. In April, I appointed Splunker Tony Pavlovich as our new Chief Customer Officer. Tony's three decades of industry experience and unrelenting focus on delivering for our customers are already helping ensure that organizations around the world continue to gain amazing value from our products while enjoying a best-in-class customer experience every step of the way. I'm pleased with the progress we've made building out a world-class leadership team that is a line behind our common purpose and effort to deliver exceptional results for customers and shareholders alike. Outside of our management team, Splunk welcomed Yamini Rangan, President, CEO, and Director of HubSpot to our board of directors. I'm looking forward to partnering with Yamini and our directors to further accelerate Splunk's market leadership. And I'm enthusiastic that the changes we've made to our board composition have positioned us for driving the business forward as we grow and scale over the coming years. As I wrap up, I want to reiterate my appreciation for Splunkers around the world for all the hard work and execution to deliver a strong Q1. Our team demonstrated once again that only Splunk has the deep industry partnerships, operational rigor, and unified security and observability solutions needed by the Global 2000 to help keep their digital systems resilient. Although macroeconomic conditions continue to impact our customers' buying behavior, we still delivered solid ARR growth along with a significant increase in free cash flow. I remain confident that the go-to-market, organizational, and workforce changes we've implemented over the past year and our steadfast focus on efficiency set the stage for Swunk to continue delivering the long-term durable growth and profitability I have focused on since joining the company. And with that, I'll turn it over to Brian to share more about our Q1 results and outlook. Thank you.