Download - Splunk (SPLK) Earnings Report: Q4 2016 Conference Call ... · PDF fileSplunk (SPLK) Earnings Report: Q4 2016 Conference Call Transcript The following Splunk conference call took place

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

EventDescription:Q42016EarningsCallMarketCapasofEventDate:4.74BPriceasofEventDate:41.65

©2014TheStreet,Inc.Al l R ightsReserved Page1of24

Splunk(SPLK)EarningsReport:Q42016ConferenceCallTranscriptThefollowingSplunkconferencecalltookplaceonFebruary25,2016,04:30PMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

KenTinsley;SplunkInc;CorporateTreasurerandVPofIRDougMerritt;SplunkInc;PresidentandCEODaveConte;SplunkInc;CFO

OtherPart icipants

PhilWinslow;CreditSuisse;AnalystWalterPrichard;Citigroup;AnalystMichaelTurits;RaymondJames;AnalystTomAllen;MorganStanley;AnalystJohnDiFucci;Jefferies;AnalystRaimoLenschow;BarclaysCapital;AnalystBrentThill;UBS;AnalystJesseHulsing;GoldmanSachs;AnalystJasonVelkavrh;RobertW.Baird;AnalystBrianWhite;DrexelHamilton;AnalystMarkMurphy;JPMorgan;AnalystKatherineEgbert;PiperJaffray;AnalystKashRangan;BofAMerrillLynch;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheSplunkIncorporatedfourth-quarter2016financialresultsconferencecall.

(OperatorInstructions)

Asareminder,thisconferencecallisbeingrecorded.

Iwouldnowliketointroduceyourhostfortoday'sconference,Mr.KenTinsley,CorporateTreasurerandVicePresidentofInvestorRelations.Sir,youmaybegin.

KenT insley(CorporateTreasurerandVPofIR):

Great.Thankyou,Crystal.Goodafternoon,everyone.WithmeonthecalltodayareDougMerrittandDaveConte.Weissuedapressreleaseaftercloseofmarkettodayanditispostedonourwebsite.Additionally,thisconferencecallisbeingbroadcastliveviawebcastandfollowingthecall,anaudioreplaywillbeavailableonourwebsite.

Onthiscall,wewillbemakingforward-lookingstatementsincludingfinancialguidanceandexpectations,includingourforecastforourfiscalfirstquarterandfullyear2017,transactionproductandservicesmix,plannedinvestmentsandtrendsinouroperatingmodelresultingfromourinvestments,trendsand




momentuminourbusinessincludinginternationalrevenue.

Thesestatementsreflectourbestjudgmentbasedonthefactorscurrentlyknowntousandeventsandresultsmaydiffermaterially.PleaserefertodocumentswefilewiththeSEC,includingtheform8-Kfiledwithtoday'spressrelease.Thosedocumentscontainrisksanduncertaintiesandotherfactorsthatmaycauseouractualresultstodifferfromthosecontainedinourforward-lookingstatements.

Theseforward-lookingstatementsarebeingmadeasoftodayandwedisclaimanyobligationtoupdateorrevisethesestatements.Ifthiscallisreviewedaftertoday,theinformationpresentedduringthiscallmaynotcontaincurrentoraccurateinformation.Wewillalsodiscussnon-GAAPfinancialmeasures,whicharenotpreparedinaccordancewithgenerallyacceptedaccountingprinciples.AreconciliationofGAAPandnon-GAAPresultsisprovidedinthepressreleaseandourwebsite.

Withthat,letmeturnitovertoDoug.

DougMerritt (PresidentandCEO):

Thankyouverymuch,Ken.Hello,everybody.Welcometothecall.Havingjustflowninfromourannualsaleskickoff,I'mreallyexcitedtobetalkedtoyoualltodayabouttheopportunityinfrontofus.

Asacompany,wetrulydeliveredinFY16andourfieldteam'senthusiasmheadingintoFY17couldn'tbehigher.Itisjustawesome.

Ofcourse,theirenergyoriginatesfromagreatQ4,whereweexceededourplananddelivered$220millionintotalrevenue,up49%overlastyear.Forthefullyear,revenuetotaled$668million,up48%yearoveryear.Thiscomesonthestrengthofourexistingcustomersexpendingtheirdeploymentandbyaddingarecordnumberofnewcustomers.Iamsoproudtobewelcomingmorethan600ofthemtoSplunkfromourmostrecentquarteralone.

Iwouldalsoliketosaythankyoutoourpartnersfromaroundtheworld.Forthefirsttimeatkickoff,wehadthepleasureofhostinghundredsofthemanditwasinspiringtowitnessourcollectiveteamsdrivingthealignmentthatissocriticaltocapitalizingonourmutualopportunity.Icanspeakforeveryemployee,andforourpartners,insayingthatwe'refiredupandthatourcustomersareournumber-onesourceofinspiration.

Icanspendallofourtimetalkingaboutourkickoff,butthereareotherkeyareasIwouldliketocoveraswell,startingwithsomeobservations90dayinasCEO,thenIwillupdateyouonourprogresswithcustomeradoptionandexpansionacrosstheplatformandkeymarketgroups.AquarterintomynewroleatSplunk,IsureyoucantellhowproudIamtobeapartofsuchanamazingteam.

Icouldn'tbemorebullishaboutouropportunityandIamconfidentinourlong-termstrategy.Whatmakesmesoexcitedasimple.Theamountofdataoutthereisexplodingandisprojectedtocontinuetodojustthat.Splunkisthebestsolutiontoallowcustomerstoeasilyandcost-effectivelycollect,analyzeandgetmaximumvaluefromthatdata.

Analystestimatesthatbetween2013and2020,theamountofdatageneratedgloballywillincreasetenfold,doublingeverytwoyears.Thatiswhywefirmlybelievethatbyanymeasureofpenetration,wearejustgettingstarted.ChangingseatsfromHeadofFieldtoCEOmakesmeevenmoreconvincedinourstrategytobecometheubiquitousmachinedataplatform,thatcangrabandanalyzedatafromanywhere.

Inadditiontoourplatform,ourstrategyistoprovidecustomerswithbest-in-classsolutions,targetingspecificusecasesdeliveredbyourecosystemandbyourmarketgroupsinITOpsinappdelivery,securitycomplianceandfraud,businessanalyticsandtheInternetofThings.




Ourapproachalsoremainsthesame,gainentrythroughsolvingonepainpointforourcustomersandthenexpandovertimeintonewusecasesandbuyingcenters.TheuniqueflexibilityofSplunk'sschemaatreadallowsushorizontalvelocitywithinourcustomers.ThatisoneofthekeyaspectsoftheSplunkEnterpriseplatformwhichunderpinsallofourusecases.

Letmeuseacustomerexampletoillustratethisexpansion.Oneofourlong-timecustomersinitiallystartedin2011withamulti-gigabyteper-daylicense.Theincreasethatto10TBin2012.Between2012and2014,theyincreasedtheircapacitytomorethan400TBadayastheygrowfromsingletomultidepartmental.In2015,theyincreasedtheirlicenseagaintoover1.2PBandthispastquarter,theyexpandedtheirenterpriseadoptionagreementwithaneight-figureextension.ThisputsthemonthepathindexPBofdataandaddsSplunkITSI,ES,Hunk,andUBAcenterdeployment.Theyarewellontheirwaytoourjointgoalofindexinganexabyteperday.

CustomersarerecognizingthatthemoredatatheyputintoSplunk,themorevaluetheycanrealize.ThatiswhyIbelievethatweareveryearlyincapturingourfullpotentialeveninourlargeraccounts.Overthelast90days,IhavespenttimewithmanyofourstrategicpartnersandwhatiscleartomeisthatSplunkrelevanceinthetechnologylandscapeisincreasingrapidly.OurpartnershipsaredeepeningwithcompaniessuchasAmazonWebServices,Cisco,PaloAltoNetworks,[BrewsAllen],VerizonEnterpriseSolutions,andEMC,tojustnameafew.

Forexample,wejoinedforceswithVerizontobringthreatdetectionanalyticstoenterprisesandgovernmentagencies.TheywillintegrateSplunkEnterpriseandESintotheirmanagedsecuritiesservicesplatformtoprovidemoreactionable,predictivethreatintelligencetocustomers.

VerizonisalsousingSplunktopowertheiradvancedsecurityoperationscenteroffering.OtherexamplesincludearecentagreementwithEMC,wereSplunkisnowonEMC'spricelistandisbeingsoldbyEMCsalesforce.BuildingourecosystemremainsacriticalfocusareaforSplunkandI'mreallyexcitedbytheprogresswearemaking.

Turningtoadoption,inQ4wesawmanycustomersstandardizeonSplunkastheirmachinedataplatform.Forexample,ourcustomerCardinalHealthmadeamajorexpansionsigninganEAAtostandardizeonSplunkEnterprise.SplunkwillbedeployedacrosstheirinfrastructuretogaininsightsintothehealthandKPIsoftheirITservicesandcriticalcustomer-facingapplications.AndalargeEuropeantaxorganizationsignedanEAAforSplunkEnterpriseandES.

ThisexistingcustomeralreadyusedSplunkforITops,securityandfraudandjustexpandedtouseSplunkforend-to-endmonitoringandreal-timeperformanceanalyticstoimprovecustomerexperience.

OthercustomerswithEAAsinQ4includeSoftBankandEchoStar.Inaddition,wesawmanycustomerswhoareontheirjourneytostandardization,expandtheiruseofSplunkfromsingletomultipleusecases,includingNASDAQ,along-timeSplunkcustomerwhoextendeditsuseofSplunkEnterprisewithamulti-terabyteexpansionandaddedournewestsolution,Splunk'sITServiceIntelligence,orITSI,tomonitorcriticalbusinessservices.Theyalsoaddedouruserbehavioranalytics,orUBA,solutiontobetterdetectandinvestigateadvancedthreats.

[WilliamHill]alsoexpandeditsuseofSplunktodeliveravalueacrossmultipleusecases,includingmonitoringtheonlinegamingplatform,socialmediaanalyticsforcustomerservice,andsecuritycompliance.Long-timecustomerNeustarsignificantlyexpandeditsuseofSplunkEnterpriseandselectedITSItoachieveacentralviewoftheirmachinedata.

Allnewstoreusers,fromexecutivestoapplicationdevelopersandtheirIToperationsteamsnowhaveacompany-widesharedservicelevelviewofcustomer-facingofferings,enablingthemtofixissuesbeforetheyimpacttheircustomers.




We'realsocontinuingtoinvestintheplatformtofurtherenableadoption.Forexample,in2013werecommendedthatourcustomersuse20indexersforatypicaltwoterabyte-per-daydeployment.UsingourlatestreleaseofSplunkEnterprise,ourrecommendationforthesamesizedeploymentisjusteightindexers,enablingmoreusecasesandmoredataandSplunkandmorevalueforourcustomers.Ourproductteamsachievethatwhilesimultaneouslydoublingqueryperformanceandindexingspeed.

Inadditiontoourstrengthinmultipleusecasedeployments,wecontinuetoseegreatmomentuminourmarketgroupsolutions.InITopsandappdelivery,wehadgreatcustomerwinsincludingBloomberg,Geico,FOXNews,Experian,theFederalReserveandKing.com.Q4wasourfirstfullquarterofofferingITSIandtheattractionandinterestwe'reseeinginthemarketisgreat.

Customersarepleasedwithhoweasythesolutionistoinstallandconfigureandhowquicklytheyareabletoimproveservicelevelsandcustomersatisfaction.TELUS,amobileserviceproviderinCanada,deployedITSItohelpimprovesignalqualityoncelltowersandvideoqualityforit'sopticTVcustomers.ITSImonitorshowcellsignalingservicesareperformingandproactivelyidentifypotentialissuesbeforetheyleadtodroppedcalls.TheopticTVteamusesITSItocloselymonitorKPIstogetaheadofpotentialvideoqualityissuesbeforethecustomereverseesthem.

WealsosawinthemarketrecognizeourapproachtosolvingITopsandappdeliverycustomerproblems.IBCnamedSplunktheworldwidemarketshareleaderinitsfirststudyoftheemergingIToperationanalyticssoftwaremarket.Ourperformanceandcustomerwinsinsecuritycontinuestoimpressaswell.ItincludesmedicaldevicemakerBostonScientific,whoexpandeditsuseofSplunkEnterpriseandpurchasedEStouseasit'snervecenterforsecurity.Fanatics,theonlinesportsapparelretailer,alsoanewcustomer,selectedSplunkEnterpriseandSplunkESastheirSIEMsolution.

ShellexpandeditsusesofSplunkEnterpriseandEStoenhancesecurityacrossitsglobalITinfrastructure.Skandiabanken,aSwedishonlinebank,isanewcustomerthatneededasolutiontohelpensurecompliancewithlocalfinancialregulations.ThebankchoseESovertraditionalSIEMvendorsbecauseoftheflexibilitySplunkprovidestomeetsecurityandcompliancerequirements,Splunk'sabilitytoleveragethedataacrossotherpartsoftheirbusiness,aswellasourfasttimetovalue.

OthercustomerwinsinsecurityincludetheUSArmy,LosAngelesPowerandWater,VoyaFinancial,theStateofDelawareandIAC.We'realsotoshowcaseoranalytics-drivensecurityapproachattheupcomingRSA2016conferenceheldnextweekinSanFrancisco.Wearehonoredthatseveralpartners,includingPaloAltoNetworks,willbedemonstratingtightintegrationoftheirtechnologywithSplunkES.Wewillalsobemakingsomeexcitingannouncementsattheconference,sohopetoseeyouallthere.

MovingontoSplunkCloud,wherewesawcontinuedaccelerationwithordersgrowingintripledigitsyearoveryearinQ4.Ourcustomersappreciatethespeed,easeandsecurityofourcloudservice,whichrecentlyearnedISO27001andHIPAAcertificationsinadditiontoourpreviouslyannounced[SOC2sur].Customersarethrilledwiththeflexibilityofourhybriddeploymentmodel,whichissomethingonlySplunkprovides.

CloudcustomerwinsinQ4includeGoDaddy,whousedSplunkCloudtomonitorthehealthofitsworkspaceproductivityplatform,includingemailandcalendartoolsusedbyone-thirdofits30million-pluscustomers.SplunkCloudalsoempowersGoDaddy'scustomercarerepresentativestomorequicklysee,identify,reportandsolveissues,constantlyimprovingthecustomerexperience.

SportingIndex,theUK-basedsportsbettingcompany,willuseSplunkCloudtomonitoritsAWSenvironmentsandgainreal-timevisibilityintohishybridITinfrastructure.PagerDuty,aSaaS-basedincidentmanagementsolution,selectedSplunkCloudtoreplaceacloud-basedloganalyticstoolthatwasunabletoperformtheanalyticstheyrequiredandwascominginatahighercost.




SplunkisbeingusedacrossPagerDuty'sengineeringteamsandthroughouttheiroperationsinfrastructure.OthercustomerwinsinCloudincludeQueenslandDepartmentofEducationandFairfaxCounty,Virginia.

Insummary,itwasafantasticquarterandfinishtoourFY16.I'mincrediblyproudofthewholeSplunkteam.Oursuperbfieldorganizationjustkeepsgettingbetterandstrongeratdeliveringcustomersuccess,andwearebuildinganenviableecosystemforourmarketgroupsolutions.Asweshowedatourlast.conf,ourdevelopmentteamsdeliveredanimpressivesetofinnovationandfunctionalitytoourplatformandtooursolution.

Again,thankstoallofourcustomersandpartnersandthankstoeveryonewhoworksatSplunk.I'mincrediblyexcitedaboutFY17andbeyond.

Withthatlet,meturnthecallovertoourCFO,DaveConti.

DaveConte (CFO):

Thanks,Doug.Goodafternoon,everyone.Thanksforjoiningus.

IampleasedtoreportstrongQ4resultstocaparemarkableyearforSplunk.Theinvestmentswemadeinproductdevelopment,fieldexpansion,ourmarketgroups,andtheclouddroveperformancesubstantiallyaboveourFY16planandexpectations.

Fourth-quarterrevenuewas$220million,a49%increaseoverQ4oflastyear.Licenserevenuegrew44%overlastyear,totaling$141.4million.Forthefullyear,revenuegrew48%to$668millionintotal,ofwhichabout$405millionwaslicenserevenue,a43%increaseoverlastyear.Whencombinedwithouradoptingpricingprograms,ourproductandcloudinvestmentsareallaboutmakingtheadoptionandexpansionofSplunkeasierforourcustomersandallowingthemtogainvaluableinsightsfromtheirmachinedata,irrespectiveoftheirenvironment,datasources,orwherethedatalives.

Onthefieldside,wecontinuetogrowourcapacityglobally.Weendedtheyearwith433quotacarriers,anetadditionof127.Morebroadly,wegrewourtotalCompanyheadcountbyabout700inFY16andendedtheyearwithmorethan2,100totalemployees.

AspleasedasIamwithourprogress,we'restillintheearlystagesinourmarketsandasDougdescribed,wehaveauniqueopportunitytoestablishSplunkasthestandardforourcustomersandtheirdataanalyticsandwe'llcontinueourfocusedinvestmentsinourproductportfolio,thefield,ourmarketgroupsandthecloudtoensurecustomerreachandsuccess.

Inthatcontext,onceagain,morethan70%ofourQ4licensebookingscamefromexistingcustomers,whilewealsoaddedarecord621newcustomersinthequarter.Forthefullyear,weaddedover2,100newcustomersoverallandendedwithmorethan11,000customersglobally.Ourcontinuingcommitmentstoproductinnovationsaroundourplatformandsolutions,aswellasourpricingprograms,areacceleratingSplunkadoption.InQ4,werecorded523six-figureorders.

Forthefullyear,webookedalmost1,500six-figureordersintotal,102seven-figureordersand3eight-figuretransactions.Overall,ourgrowingproductsuite,complementedbyincreasedawarenessandadoptionofSplunksoftware,aredrivingthistypeoflarge-scaleadoption.

JustasinQ3,morecustomersexpandedtheiradoptionofSplunkandwesawanuptickinASP's.Specifically,Q4licenseASPwasabout$80,000,higherthanourpriorlevelsof$40,000to$50,000.Ofcoursewe'repleasedtohavecustomerscontinuingtoexpandtheiruseoftheirproducts;however,asImentionedonthelastcall,itwillbeimportanttomeasureASPsinthefirsthalfofthisyeartoprovideafull12-monthviewbeforedeclaringahighersustainedASPlevel.




Everyone'sfavoritetopic,theratablebookingsmix,continuedtovaryquartertoquarter.InQ4,whichisourseasonallyhighestmixquarter,theratablecomponentoflicensebookingswas53%.

Forthefullyear,ourratablemixwas46%,slightlyaboveourpreviouslyguidedfull-yearrangeof40%to45%andimpactedbyourparticularlystrongQ4results.Internationaloperationscontributedapproximately28%oftotalrevenuesforthequarter,slightlybetterperformancethanpriorquartersasourinternationalteamscontinuetodeveloptheirbooksofbusiness.

Longerterm,weexpecttoseeourinternationalteamscontributebetween30%and40%oftotalrevenues,thoughthiswilltakesometime,giventhegreatsuccessourUSteamscontinuetodeliver.

Greatjoboutthere.Oureducationandprofessionalservicesrepresented7%ofrevenueinQ4,consistentwithpriorlevels.

Now,turningtomarginandotherresults,whichareallnon-GAAP.Q4overallgrossmarginwas89%,downabout100BPsyearoveryearreflectingtheexpansionofourcloudbusinessaswellasservicesaroundourmarketsolution.Q4operatingincomewas$15million,representingapositivemarginofabout6.7%.Q4netincomewas$14.4million,or$0.11pershare,usingthefullydilutedaveragesharecount--averageweightedsharecount,sorry,of133.8millionshares.

Forthefullyear,operatingmarginwas3.8%,slightlyaboveourexpectationduetothestrengthofouroveralltop-lineperformance.Full-yearnetincomewasabout$24million,or$0.18pershare,basedonafullydilutedweightedaveragesharecountof131.8millionshares.

CashflowfromoperationsinQ4was$77million,whilefreecashflowwas$50million.Full-yearcashflowfromoperationswasabout$156millionintotal,orabout23%ofrevenues.Freecashflowwas$104millionfortheyear,reflectingthetotalCapExof$51million,muchofitrelatedtoournewSanFranciscoofficeI'dmentionedpreviously.

AbsenttheSanFranciscobuild-outamounts,ourCapExwasapproximately$18millionfortheyear,consistentwithpriorperiodsanddirectlycorrelatedtoourheadcountgrowth.Finally,weendedtheyearwithjustover$1billionintotalcashandinvestments.

Lookingoverthepastfewyears,ourinvestmentsarepayingoff.AtthebookingsandrevenuescaleweexpectofFY17andbeyond,wearebeginningtoseetheleveragebenefitfromtheseinvestmentsinouroperatingmodel.Forthefullyear2017,we'retargetingnon-GAAPoperatingmarginofabout5%,consistentwithourplanof100to200basispointsofannualmarginexpansionaswecontinuetopenetrateouraddressablemarkets.

We'llcontinuetofocusourinvestmentsondeliveringthebestcustomerexperience.Wewillbedisciplinedabouthowweexpandourproductlinesandensureourcoveragemodeldeliverstop-linegrowthoftheseabsolutelevels.Aswediscussedatourlastanalystmeeting,longterm,webelievethatwecangenerateatleast25%non-GAAPoperatingmarginsaswereachthatscale.

RegardingourFY17operatingmarginspecifically,weexpecttoachievetheseoperatingresultsonfull-yearrevenueofabout$880million,anincreasefromourpreviousguidanceof$850million.WeexpectQ1revenuetorangebetween$172millionand$174million.Subsequentquarterlyrevenueswillcloselyfollowtheseasonalpatternswe'veseehistorically,withroughly42%to58%contributionfirsthalftosecondhalf.

WiththecontinuedinvestmentsI'vedescribedandoverlaidwithourrevenueplan,weexpectnon-GAAPoperatingmarginofbetweenanegative1%to2%inQ1,turningslightlypositiveinQ2andthenrampinginQ3andQ4,consistentwiththeseasonalnatureofourmodel.Remember,sinceweexpecttobean




operatinglosspositioninQ1,youshouldyouuseasharecountofabout132millionshareswhencalculatingEPS.

It'simportanttohighlightthis;ourbusinesscontinuestogeneratesubstantialcashflows.InFY17weexpectoperatingcashflowwillagainbeapproximately23%oftotalrevenues,orabout$200millionintotal,similartoprioryearsinpercentageterms.

AsI'vementioned,thisyearwillbeanotherhigherCapExyearforus,asweexpectthemajorityofourSiliconValleycampusbuildouttobecompletedthisyear.WecombinedwithGlobalFacilityExpansionstoaccommodateourgrowingemployeebase.Weareplanningforbetween$50millionto$60millionintotalCapExinFY17,weightedabout$20millioninthefirsthalfandupto$40millioninthebackhalf.Again,withouttheSanFranciscoandSiliconValleyprojects,ourannualrecurringCapExwouldbeinthe$16millionto$18millionrange.

Inclosing,ourQ4resultsandourfull-yearperformancereallysolid.Ourproductinvestmentsaredrivingcustomersuccess,andourfieldexpansionisenhancingourexecutioncapabilities.OurstrategyisworkingwellandweplantocontinuetofuelthepaceofadoptionaswedrivetomakeSplunktheubiquitousmachinedataplatform.Thanksmuchforyourtimeandinterest.Withthat,wewillopenupforquestions.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

PhilWinslowwithCreditSuisse.

PhilWinslow(Analyst-CreditSuisse):

Hi.Thanks,guys.Congratsonjustagreatquarterandagreatfiscalyear.Justtwoquestionshere.

First,onthepricingside,obviously,youhaveavolume-basedpricingmodelbutwhenyoulookatthe--atyourdealsrightnow,wonderingifyoucouldgiveussomesortofcolorwhatyouseeintermsofjustthepricingenvironment,especiallyasyousignmoreoftheseenterpriseadoptionagreements?

Andthensecondquestion,justonusecases.Iwonderifcouldyoujustdrillintothatalittlebitmore.Whataresortofthesomeofthenewerusecasesthatarereallytickingupthathavesortofsurprisedyouguysthatyouareconfidentandcontinuetocontributetherestofthisyearandnextyear?


Thanks,Phil.Pricinghasremainedconsistentforfourquarters.WiththeEAA,thelargertransactionslikeEAAtransactionsthere,wegotoalotofdepthwithourcustomerstocraftavalueunderstandingonbothsides,andasyouknow,thosearemuchbroaderbasedwithlotsofflexibilityandlatitudeonhowmuchdatacomesin.Butweseeconsistencywithpricingrightnowwithinouraccounts.

Ontheusecases,thetwokindofpredominanttrendsthatwe'reseeingismoreandmorehybridenvironments,aspeoplearecontinuingtomoveworkloadsintothecloudbuttheyobviouslystillhavealotoftheircoreITinfrastructureandworkloadsbeingdoneontheirexistingprivatedatacenters,andthenalotmoremultipleproducttypepacing,peoplestraddlingfromsecuritytoITopsorfromITopsovertosecurity,that'scontinued.

Andtheconstantexperimentationwithmoretheoperationalanalytics,asmarketingprobablyinspecific,getsalittlebitmoreunderstandingofthetreasuresthatcanbehiddeninthebigdatathattheIT




systemshaveaccumulated.

DaveConte (CFO):

Phil,it'sDave.Ithinkanotherelementaroundhowcustomersviewourpricingmodel,withnowhavingcrested100seven-figureordersinFY16,IthinktheawarenessaroundwhatthetopofourpricingcurvelookslikewiththeEAAprogramsweintroducedintheearlierpartoftheyeararestartingtoresonate.Enablingcustomerstoadoptfreelywithpredictiveeconomicsisreallythekey,andastheymoveinthatdirection,andtermsofsingledepartmentaltomultidepartmenttostandardization,thepricingcurveareallyhelpstheminthoseprogramsinparticular.


Actually,Dave,I'mgoingtoaskyouonequickfollowup,beboldhere,askathirdquestion.Obviously,theratablemixhassteppedupprettymeaningfullyagainthisquarter.Anysortofchangeinyourthoughtprocessonratableandjustsortofwhatareyouimplying,sortofgenerallyspeaking,inthefull-yearguidanceinQ1?AndthenIwillwrapup.Thanks.

DaveConte (CFO):

You'vegotit,Phil.Well,asyouknow,we'vebeentogetheralongtime.ThatmixestimateIthinkhaschangedatleastahalf-dozentimesnowfromoriginallywhenwewentpublic,the10%to20%andasweseecustomersadoptingandweenablethemtodoso,it'supto46%forthelastfiscalyear.Lookingforward,though,Istillbelievethat40%to45%ofourFY17licensebookingswillbeoftheratablevarietyandit'simportanttonote,ifyoulookatthefirstninemonthsofFY16,ouraveragemixpercentagewasabout42%,soprettymuchdownthemiddleof40%to45%.Butwehadsuchastrongfourthquarterintermsoflargeordersandasyouguysknow,thenumberofthelargeorderstendtohavethecharacteristicsthatmakethemratable.

That'swhy53%oflicenseinthefourthquarterwasratableandthatskewedtheannualratetojustabove45%.Asalways,aswemovethroughtheyear,seethetypesoftransactionsthatweareexecutingwithcustomers,wethinkthatrateisgoingtochange.Wewilltellyourightaway.ButIthink40%to45%isthewaywe'rebuildingitintoourmodel.


Great.Thanks,guys.


Thanks.

Operator :

WalterPritchardwithCitigroup.

WalterPrichard (Analyst-Citigroup):

Dave,I'mwonderingjustonthedeferredrevenue,IthinkinQ4oflastyearwesawwhatlookedlikeareallystrongquarterbutdeferredrevenuewasn'tquiteastronglastyearinQ4asitwasthisyear.Yousawsomestrengthaswellasstrengthinthelong-termdeferredandI'mwonderingifyoucouldjusthelpusunderstandwhatdrovethatthisyear?

DaveConte (CFO):




Sure.AsImentioned,wehadanumberoflargeorders,over100fortheyear.Asyouwouldexpect,manyofthoseclosedinthebackhalfandinthefourthquarter,specifically.Threeeight-figureorders,Ithinkinceptiontodate,wehadrecordedtwoeight-figureorderspriortothisfiscalyear,somorethandouble.

Okay,morethandoubletwoisnotthathard,butstill,thosetransactionshaveamoredisparitybetweenshort-termandlong-term,soyoucanseetheuptickintermsoflong-termdeferredsasaresultofthelargetransactions.


Gotit.AndthenjustforDoug,ontheIoTinitiative,youhaveaGMinchargeofthat.IthinkweseecleartractionaroundsomeoftheITOMandsecurityinitiatives.IamcuriousifthereisanyupdateonInternetofThings?Anyofthat'sgottobethelargedeals.


It'sbothInternetofThingsandthemoreoperationalanalyticspiecearesomuchfun.Therealwayssurprisingusecases.Andthegoodpart,Ithinkforallofus,customersandSplunk,istheytendtobemuchmoreonthemainstreamofthebusiness,revenueoriented,competitivedifferentiatedorientedsoit'sdefinitelywhereIthinklongterm,wewillseemoreandmorepeopleland.

Theissuethatwe'vebeenhavingforyearsis,howdoyou--whataretheapplicationsthatyoucanbuildonceandusethousandsoftimes,likewe'regettingwithESandITSI,versusareallycoolsingleusecasethatisjustoneoffandso1,000one-offsversusonethatcanbereplicated.

Ithinkthere'ssome--afewpatternsbeginningtoformupinmarketing,withcustomerexperienceacustomerintimacy.Butthevariationwe'reseeingwithinaccountsonhowtheywanttostructurethoseappsisprettybroad,andsoaswefindthepatterns,andIthinkthiswillreally,reallybeaplacewheretheecosystemisbeyondinstrumental,there'ssomuchverticalandcountryandgeo-specificexpertiseneeded,thatIbelievethattherealpatternswillbefoundastapourecosystem.(Technicaldifficulty)


Thankyou.


Thanks,Walter.

Operator :

MichaelTuritswithRaymondJames.

MichaelT urits (Analyst-RaymondJames):

Ijustwanttojumpinonthesecurityside.One,howareyoudoingwiththenewUBAofferingthatyouhavepurchasedandwhatyoubuiltthere?Andalso,obviouslyyou'vebeendoinggreatinsecurityasaSIEMaddition,asaSIEMreplaceforabunchofyears.IsthereanychangetherefromademandperspectiveorareweheadinganykindofpositiveinflectionpointfurthertermsofdemandforSIEMreplacement?


Greatquestions,Michael.Theuserbehavioranalyticsapplication,we'rereallypleasedwithitscontinuedprogress.TheapproachthatwetookwiththeITSIapplication,whichwasaverypatientone-yearnew




productintroductionprocess.Itwaskindofdatareleasedacomfbeforelastcomfbutratherthanrushittomarket,weworkwith,Ithinkitturnedouttobe17eventual,newproductintroductionpartnersinourcustomerbasetokeepiteratingandmakesurethatwhenwefinallyreleaseditlittlebitoveraquarterago,four-plusmonthsago,itwasreadyforprimetime.

Ithinkwehavereallyseenthatpayoffwiththefourth-monthtractionsincewe'veofficiallyunveiledasfullyproductionwithITSI.Andwhatwe'retryingtodothesamethingwithUBA.It'sareallyinterestingareaforus.Obviously,wecaredalotaboutthatareasincewedidasizabletransactionthere.

Andweseealotofenthusiasmwithinthecustomerbaseandwe'vegotasimilarnewproductintroductiontypeofframeworkforitjusttoensurethatgivenhownascentthemarketisandhownewtheproductis,thatwenailinit'scharacteristicsandwedon'tgetaheadofourskis.Sowewillkeepyouinformedaswegetmorereadytogobroad-basedandtakethenewproductintroductionveilawayfromthatproduct.

OntheSIEMpiece,Ithinkwe'vejustseenacontinuedprogressionquarteroverquarter.Iskindoflikearelentlessdrumbeat,wherewe'regetting--wedidn'tevenwanttobeintheSIEMmarketatfirst.GodfreytoldmeallthestoriesabouthowGartnerkeptcomingandaskingtobeinthequadrantandwekeptsaying,hey,wearemachinedataplatform.

We'renotjustaSIEMvendor.AndthentheyeventuallyconvincedustoparticipateandIthinkthathighendandtheentiresecurityandmarketsegmentteam,itisareallystrongteam,justkeepsdoingabetterandbetterjobofmakingsuretheworldknowsthatweareacomplementarySIEMtoexistingSIEMsorpotentiallyareplacementSIEMfortheaccountsthatwanttogothatdirection.Anddespitethestrengththere,Istillseeitasearlydays.Thatpercentageattachratekeepsgoingupwithsecurityusecases,butitstillisbelow30%,whichmeansthatwestillhavequartersandquartersandquarters,Ithink,beforeit'ssomainstreamthatjustispartofparcelofeverysecuritydeal.

MichaelT urits (Analyst-RaymondJames):

Great,thanksverymuch.

DaveConte (CFO):

Thanks,Michael.

Operator :

KeithWeisswithMorganStanley.

T omAllen (Analyst-MorganStanley):

ThisisTomAllencallinginforKeith.Afewquartersago,westartedhearingfromManagementaboutgrowingbeyondjustsecurityandIToperationsandbetteraddressingthebusinessanalyticsmarket.Canyoutalkabouthowthatisshapingup?IstheredifferentmarketdynamicsthatwouldlimitSplunk'stractionrelativetowhatwesawwithotherusecaseslikesecurity?


Thanks,Tom.Youknow,theonlydynamicthat'sdifferentisjustfindingwhatis,asIsaidearlier,whatisthatsingleapplicationorpatternthatcanbeappliedtothousandsofaccounts.Ithinkit'smorebasedonthefactthatinbusinessanalytics,wetalkaboutthatasbeingsomethingthatasalesormarketingormanufacturingorsupplychaingroupisinterestedinusinganalyticsaround.That'sverytraditionallybeenastructuredanalyticsproblem.That'sbeensomethingthattheclassicBIfolkshavebeengoing




after.

Ithinkthereisjustacontinuedheadsetshifttotheunderstandthevaluethatreal-timekindofmoretimeseriesandstate--continuousflowofstate-baseddata,whatitcandoforthosebusinessoperations,andwearealllearningthattogether.IthinkIoTissimilarbutdifferentinthesensethatisjustabrand-newcategory,Ciscostartedtalkingaboutitprettyaggressivelybackin2011and2012.

That'sonlyafewyearsagoandIthinkthatpeoplearestillwrestlingwithexactlywhatdoesitmeantobemoreofasoftwareorservicesvenderontopofbeingaproductsvendorandIthinkweareseeingthatactuallymaybeformupbeforeforbusinessanalytics.Ithasalittlebitmorethecharacteristicsofsomeofthethingsthatwe'veseenwithintheITspaceandaswegetabetterbeadonwhatthosepatternsarewithindifferentindustries,wewilldefinitelyletyouguysknowwhatweseeemerging.

DaveConte (CFO):

Tom,itisDave.Ithinkit'sreallyimportantaswethinkaboutourstrategygoingforwardandwetalkalotabouthowweinvestandenableourplatform.Sowhilewe'recertainlyfocusedonourmarketgroupspecificsolutionsinITOAandsecurity,enablingourcustomerstoleverageourplatformandtheirdataandthendevelopthoseusecasesolutionsandthosepainpointsolutionsaroundanalyticsandIoTisabsolutelycritical.

Youhearustalkalotaboutplatformandsolutionsandyouhearmebedeliberateaboutourcommitmenttoinvestinthatkindofcustomerenablement,butIthinkisparticularlyimportantinthoseemergingmarketsforusbecauseultimatelycustomersaregoingtohelpusdefinewhatarethosemostcriticalthingsthatwecandoandhelpthemsolveinthoseparticularmarketgroupsanditallstartswiththestrengthoftheplatform.

T omAllen (Analyst-MorganStanley):

Great,thankyou.

Operator :

JohnDiFucciwithJefferies.

JohnDiFucci(Analyst-Jefferies):

Thankyou.Doug,youmentionedyourmovefromHeadofFieldtoCEO.IguessSplunk'sevolvedquiteinitsfieldoperationsbutarethereanychangesyouthinkareappropriateinthefieldatthispoint?Perhapsrelativetopartners,that'ssomethingwehearalotaboutandit'ssomethingthatseemslikeasyoucontinuetoevolveandwhatI'mthinkingaboutis,partnersthatperhapscanbuildapracticearoundSplunk.

AndthenIguessastheCEO,too,nowyourrealmismuchbroaderandIthinkasyouthinkofproduct,whenIlookhereyoureleasedalotofnewSplunkproductsthataddressspecifictechnologiesorplatforms,whetheritisAWSorServiceNowor(inaudible).Theyseemtobeproductsthatcanbebroadlyusedfordifferentusecasesontheseplatforms.Shouldweexpectmoreofthisgoingforward?WhatotherthingscanyoudowiththeproductpushinginthebroaderapplicationofSplunk?Sorryformybarking.Ihavealittlecold.


Don'tworry,John.IfIhavetocounteverytimeIwasontheconferenceandoneofmykidsordogbarkedthebackground,itwillbealonglist.





Ididn'tknowyourkidsbarked.


Theydo.You'vebeentomyhouse,Dave.You'veseenthem.

Twogreatquestion,John,thankyou.Comingin,Ihadtwostrongfocusareasonthefieldside.Onewaspartners,howdowestarttogetmoreenactingofthatpartnerchannel.Wewouldhavelotsofchannelpartnerskindofhelpingusfulfillbuthowdowegetthemactuallyhelpingacrosstheentiresalescycle,andinventingaroundus.

Thesecondwashowdowegetmoresolidmotionsontheadoptionandexpansionpiece.Lastyearatthistime,Iannouncedthatcustomersuccessteamandthatwaskindoftheinitiativeoflet'sgetpeopleinplacethatworkwiththesalesteams,postclosetoensurethattheROIthatthesalesteamcrafted,co-createdwiththataccount,actuallygetsactualizedasquicklyaspossible.

We'vegottengoodprogressonbothofthose.AtthisSKOthatIjustflewbackupfromlatelastnight,we--it'sthefirsttimeinSplunk'shistorythatweactuallyinvitedpartnersandtheyweresidebysidewithoursalesteamsthroughthepresentationsandthenwemadeawholebunchofseparatebreak-outtractsforthemtomakesurethey,inadditiontowhattheyjoinedusfor,thattheycouldcontinuetheireducationthroughtheuniquenesswithinthepartnertoolsandprocessesandotherpieces.Ithinkthere'salotofroomtogotherestill.

Apieceofitis,itjusttakes,likewithourownreps,ittakestimeforeverybodytogetrampedupandunderstandallthecapabilitiesofSplunkandwe'vebeenfocusingmoreandmoreresourcesonensuringthat,thatpartnerchannelasthatenablementcharacteristics,butthattheplayingfieldislevelforthemaswellandthatwe'vegottherightculturalchangewithinSplunk.Wedeftlywillnotletupthereforamoment.

AndthenontheappslikeAWSand[Ocimite]andServiceNowandthenalltheothertheappsthatareintheecosystem,one,theSplunkbaseparticipationratewasrelativelystaticaround600appsforabitoftime,andwebegantoincreasefocusonthedevelopmentcommunity.JustafewhoursagoIgotanupdatethatwearenowover1,000appsinSplunkbase,soIthinkthoseeffortsarestartingtopayoff.

Andwhilewecertainlycraftsomeofthose,thevast,vastmajorityofthe1,000aredonebyourpartnersorbyvendorsthemselves.ThatreallyunderstandtheirproductsetsandhowSplunkcantobebroughttobearandthat'sthethird--thenwithinthatpartnerfoldgettingvelocityandtrueeconomicbenefitaroundthoseapplicationsissomethingthat'sgoingtobesuperimportantforusgoingforward.


Okaythankyou.Thanks,Doug.IfImight,andIamsorry,there'snomore--mycoughfeelsbetternow.TheEAA's,Ithoughtearlylastyear,maybewasearlythisyear,youguyscameoutanditsoundedtome--becausepricing,soalastquestiononpricingbecauseit'sthequestionwedealwith,right?Iamnotsureifitismoreofaquestionfromtheinvestmentcommunity,becausenooneelsecanpricethegoods,theirproductsbasedontheamountofdatathattheyprocessorindex,inyourcase.Sotherecouldbesomepeople--itcangetexpensiveasthisproliferationofdigitaldatacontinues.

ButitseemedtomethatyouaregoingtosortofpushdowntheEAAsotheycanaddressnotjustyourlargestcustomers,butsmallercustomers,too.Ithoughtthatmadealotofsensesoyoucan--youwerepushingforadoptionofSplunk.Becauseyouarestillwhatseemslikeataearlystageofaddressingtheopportunities.ButIdon'treallyhearalotaboutthat.Evenwhenyoutalkaboutthem,youdon'treally




talkaboutthatbeingaddressedorbeingpusheddown.

AmIreadingthatwrong?ShouldInotexpectthatandifyouareasmallercustomeryou'rejustgoingtohavetopaybasedontheamountofdatayouprocessandyou'renotgoingtosortofgetitdifferentkindsoftermsthatmightlockyouinforalong,longtime?Idon'tknow.(Multiplespeakers)everyday.

DaveConte (CFO):

Sure.John,itisDave.Iwilltrytobeconcise.Theactivitieswehavearoundpricingspanfromthetopofthepricingcurveallthewaydowntoentrylevelpricing.Notjustforoursolutionsonprem,oursolutionsandourcloudoffering.AlotofthethingsthatwedoaroundtheproductareintendedtohelpfolkswiththeirTCO.Alotofthingswedoaroundourproductthatweareincorporatingisaroundpredictability.

That'spredictabilityintermsofpricingprograms,butpredictabilityaroundsomefunctionality.Customerscanactually--wehelpthemunderstandwhattheircapacityneedsare.Yourquestionis,areEAAsonlyforthoseatthetop,andissomethinggoingtopushdown?Ithinkwethinkaboutpricinginthatmidtierintermsof,lackofabetterterm,atraditionalpricingcurve.Thereisentry-levelpricingatalmostnovolume,andasyoumoveupthevolumecurve,yougetthebenefitofvolumediscountingthatultimatelyculminatesinanEAAtypetransactions.

Wearecontinuouslylookingathowdowecreatetheelasticitythatweneedaroundpricingprogramstoenablethefieldtogetthecustomerwhattheyneed.Weintroducethoseintothefieldallthetime.Ithinktheansweryourquestionis,youdon't--youarenotthinkingaboutitwrong,it'sjustatwhatpacerweenablingcustomerstogettothosebroadertransactionandwhat'stherightscaleforacustomertobewhenyougivethemthatkindofvolumeprice.Sotraditionalpricingcurve,atthetopsitstheEAAsandwe'reworkingouthowyoudothatenablementupanddownthestackintermsofcustomersize.


Okay,Dave,that'shelpfulbutIusedtoalwaysthinkEAAwasaseven-figuredealandmore.That'swhereyoustarttogetintothat.Hasthatcomedownatall?

DaveConte (CFO):

No.Again,wedidover--wedid102seven-figuretransactionsandasareminderforeverybody,a$1milliontransactiondoesnotequalanEAA.AsubsetofthosetransactionsareEAAs.Okay?


Okay.

DaveConte (CFO):

John,appreciateit.Thankyou.


Sorryforthelongquestion.(Multiplespeakers)Thanks.

Operator :

RaimoLenschowwithBarclaysCapital.

RaimoLenschow(Analyst-BarclaysCapital):

Thanks.Let'strymaybeashortquestion.Dave,youbeatrevenuequiteabitthisquarter,butonthe




operatingside,youkindofgettingquitebeatitbythatmuch.Canyoutalkalittlebitaboutthedrivers?Isuspectitisgoingtobebonuspayments,accelerated,etcetera,butstillIwantedtokindofunderstandhowtheleverageiscomingthrough?Thankyou.

DaveConte (CFO):

Hey,Raimo.Thanksforthequestion.You'vegotit.WehadareallystrongfinishtotheyearandItrynottogettooexcited,butareallyimpressivefourthquarter.Iammorethanhappyto--wejustwereatthesaleskickoffandtheexcitementandenthusiasmintheaudiencearoundhowwefinishedtheyearandhowthefieldislookingforwardto2017,FY17isinfectiousforsure.

Itwasprobablymyfavoritepartofthewholeeventwastheawardsnightwhenwegottorecognizeourtopperformers.Andthenthelist,thescrollinglistofallthosefolksthataregoingtobejoiningDougatthePresidentsClubwasamazing,thenumberofpeoplethatreallydeliveredforusasacompanyandforourcustomers.Allofthatgreatsuccess,asyoucorrectlypointout,doestranslateintohighervariablecompensationaroundbonusandcommission.Candidly,thatpayingcommissionsisoneofyourfavoriteexpenseswhenyouaretheCFO.


(Multiplespeakers)theCEO.

RaimoLenschow(Analyst-BarclaysCapital):

Thankyou.Welldone.


Thanksmuch.

Operator :

BrentThillwithUBS.

BrentT hill(Analyst-UBS):

Hey,Doug,justonthesellingenvironment,anythingthatyouarenoticingthat'sdifferentintheoverallenvironmentorwouldyouconsiderittheenvironmenttobemorestandardfromwhatyouhavebeenseeingthelastseveralquarters?


It'scertainlybeenafunmonthinthestockmarket,hasn'tit,Brent?Maybefunisnottherightword.Whatwe'reseeinginthecustomerbaseisnotareflectionofthatatall.WesawsustainedandincreasingdemandthroughQ4,whichIthinkhelpeduswiththatclose.I'mobviouslyonforecastcallsandcalldownswiththefolksallthetime,especiallytogetabeadonthisquarteroftheyearandspendalotoftime--wehadover400partnersatSKOandhadprobably21one-on-oneswithdifferentpartners.

AsfarasSplunkisconcerned,weareseeingcontinuedstronguniversaldemandandasIthinkyouandIhavetalkedaboutbeforeonasDavesaysoverandover,mybiggestconcernstilliscoverage.Howdowegetmorefeetonthestreet,bothwithinourexistingcustomers,sowecanseeincreasedhorizontalvelocity,butjustasimportantly,theaccountsarenotcurrentlySplunklogoedaccounts.Ihaven'tseenanythingyetinmytwoyearsthatindicatesanyothertrendotherthanacceleratinginterestanddemandinSplunksolutions.





Okay,andDave,justonRaimo'spoint,Ithinkalotofthefocusrightnowinthemarketisonthebottomlineandapproachingcloseto$1billionandexitingthatrunrateatamidsingle-digitoperatingmargin,alotoftheotherpeercompaniesthathad$1billionwererunningatdoubleifnottriplethatoperatingmarginlevelwhenyoulookatthehistoriccontextofsomeofthesecompanies.

YoucanlookatSalesforcewhentheycrossedthe$1billionitwasalothigher.Ithinkyou'resendingthesignalthatgrowthisthefirst-classcitizenrightnowbutthere'snothingintheplaybooklongtermthatmakesyoubelieveinherentlythatthisisalessprofitablemodelthanwhatwe'veseenhistoricallyinthesoftwareindustry.

DaveConte (CFO):

No,Ihavenoconcernsatallabouttheleverageabilityofourmodel.Icantellyouthe--Iambrutallydeliberateinmypreparedremarkstoemphasizethedisciplineinwhichwewanttoinvestinproductandinfieldcoverageinparticularandofcoursethemarketgroupsandthecloud.IfIthinkaboutSalesforceandwhatdidtheylooklikewhentheywereat$1billionandthentheirpathto,say,$4billionandthemargincharacteristics,theyhadreachedacertainlevelofscaledeliveringtheirproductSaaSonly,whichisterrific.

We,ontheotherhand,areinthemiddleofexpandingourhybriddeliverymodelfromnotjustatraditionalon-premandthemargincharacteristicsofthatbusiness,butaddinginacloudcomponent,whichwethinkisabsolutelycriticalandDougmentionedit.Hybridenablementforourcustomersisreallydifferentiatingandwereallyarefocusedonmakingsurethatwedeliverthatforcustomers.Ofcourse,thatcomeswithsomeelementofinvestmentthat'sincrementaltowhatSalesforcewasdoingatthetimetheycrossed$1billionorwhatatraditionalon-premsoftwarecompanywouldbedoingatthatsame$1billionmilestone.

Ithinkwhat'sreallyimportantthough,overall,istheTAMissignificantanditcontinuestogrow.Whilewethinkabout$1billioninrevenue,approaching$1billioninrevenue,Istillconsiderthatfractionalintermsofthesharethatwearegoingtogaininthemediumterm.Sowe'regoingtobethoughtful.Wethinkgrowthisthefirst-classcitizen.IntermsofleverageIwilldeclare,wecouldbemorethoughtfultodayanddelivermoremarginexpansion,butIthinkitwouldbeabitshortsightedintermsofcustomercapture.

WedeliverthecashflowleveragethatIthinkisindicativeofthatopportunityandwe'regoingtocontinuetofocusonthebalancebetween,well,what'stherevenuegrowthandwhat'sthecustomeracquisitiontrend,howwegaintherightcoverageinthefield,howmuchcashflowarewegeneratingandultimately,what'sthatopmarginleverage.Asareferencebacktomypreparedremarks,Ididwanttojustsharesomethingwe'dsharedatourAnalystDaymostrecently.Wethinkatleast25%opmarginsatacertainlevelofscaleistherighttargetforustoday.


Thankyou.


Thanks,Brent.

Operator :

JesseHulsingwithGoldmanSachs.




JesseHulsing (Analyst-GoldmanSachs):

Thanks,guys.IguessthisquestionwouldprobablybeforDoug.Iknowit'searlywithITSIandUBA,butyou'vehadthesecuritysolutionoutforawhileandI'mcuriousifyouareseeingmoresuccesswiththesetypesofpremiumsolutionssellingintonewcustomers?Iguessanotherwayofputtingitis,isitdrivingyourinitialASPhigheroryoursales--orshorteningyoursalescycle?Areusingmoresuccesssellingthesesolutionsintoyourinstallbase?Thanks.


Thanks,Jesse.Yes,Ithinkwehavedoneanumberof--one,Ithinkatthe50,000-footlevel,thesolutionsreallyhelpcustomersunderstandthepowerofSplunkmuchmorequicklyandIthinkjustasimportantly,shortentimetovalue.Youcaninstalltheplatform,accumulatethedataandthencreateyourownappontoporyoucaninstalltheplatformandaccumulatedataandgetimmediatebenefit,becausetheappthatwebuiltorourpartnershavebuiltforthataccount.Ultimately,customersarelookingforvaluefromthesesolutions.Anythingwedotoshrinkthattimetovalueisgoodforthemforsure.

Ithinkallowingourteamstogoinitwithapointofview,not,hey,we'rejustheretosolveanybigdataproblembutlet'sstartwithafewareaswherewe'vegotapplicationsorourpartnershaveapplications,we'vegotprovensuccessisoneofthestrongsalesmotionsthatwelikealotandweareproudof.Weareincreasingtheattachandbundlerateofthesesolutionswiththeunderlyingplatform,whichcouldbeacomponentofthatASPincreaseinQ3,Q4.ButIthinkalongwiththatistheselargerdealsweregoinghorizontallyacrosstheorganizationandwe'reseeingvolumesofdataspikeupaswell.

JesseHulsing (Analyst-GoldmanSachs):

Thanks,that'shelpful.

DaveConte (CFO):

ThanksJesse.

Operator :

SteveAshleywithRobertW.Baird.

JasonVelkavrh (Analyst-RobertW.Baird):

Thankyou.ThisisJasonVelkavrhonforSteve.Thankyoufortakingmyquestions.Youmentionedinthepreparedremarksthatyouhadreplaced--oracustomerhaddisplacedacloud-basedtoolbecauseitcouldn'tperforminganalyticstheyrequired.Justcuriousifyoucangivemoredetailonthat,maybethattheusecaseandwhatfeatureSplunkhadthatallowedthatcustomertomeettheirneeds?


That'saverygoodquestionthatIactuallydon'thavethedepthofansweraround.Ratherthanmakeitupforyou,Jason,Ican--whydon'tIlookintowhattheactualdetailsofthereplacementwereandthenoff-linewecan--Icangiveyouthatcome-backcolor.


Okay,that'sgreat.Idohaveactuallyjustonefollow-up.It'sactuallyrelatedtoJohn'squestionsonEAAsandpricing.IguessifyoulookbackatcustomerswhointhepastsignedEAAdeals,howdidtheirgrossandtheamountofdatatheyindexedchangeaftertheysignedthatdeal?I'mjustcuriousiftheremight'vebeenasurgeintheamountofdatathattheywereindexing,possiblyindicatingsomesortof




frictionthatpricingwascreatingthathasnowbeenremoved.

DaveConte (CFO):

It'sDave.Ithinkthatifyoulookatourhistory,wehavehadanumberofwhatwecallEAAcustomerscomebackforanextensionofftheiroriginaltransaction.Iwilldeclarethatifyoulookatthetimelineofhowlongwe'vehadtheseprogramsinplace,thepopulationofthoseisrelativelysmall.Weneedmoretime,Iliketosaymoretimeintherear-viewmirror,tobeabletomakedefinitivestatementaboutwhatbehaviordoweseewhencustomerscomebackandwhatistheirdataconsumption.

Ofthosecustomers,however,whohavecomeback,andwhohavebeenwithusonthatmulti-yearjourney,theamountsofdataaretypicallyordersofmagnitudehigherintermsof,hey,we'vehadgreatsuccess,youguysofbeenhelpfulintermsofgivingusaplatformtoadoptandreallygetleveragefromallofourdata,guesswhat,theamountofdatawehaveithasgrownsignificantlyandthedemandforyourproductisexpandingvirally.Sothecombinationofwhatweallknowisamassivelyincreasingamountofdatacreationandsuccessinsideofthecustomerhasledtosignificantincreasesinhowmuchtheywillconsumewhentheycomebackformore.


Jason,therestillarethenaturalbarriers,though,ofnomatterwhatthepriceofthesoftwareis,there'sinfrastructurenecessarytosupportit.SowhenwetalkabouttheseEAA'sandwhythere'ssetuptimeforthem,isgiventhattheyaregoingtoincurcosts,whethertheyarerentingitinthecloudandallowingustoprovidetheefficienciesthatwedrivethere,therestillisaninfrastructurecostthatgoeswithitandtheyaregoingtoincurpeopleoperationalcosts.

Thereisavaluejustificationnecessaryforwhatproblemareyoutryingtosolve,whatdatadoesitneedandisthatinvestmentinwhateversoftware,infrastructureandpeople,isitgoingtoachievetheROI?Isitworththatinvestment.Soevenwhenwehavetakenthegaugecompletelyoffwiththesemoreunlimitedstructures,therestillisapacingacrosstheorganizationwheredifferentdepartmentsgetanunderstandingofwhattheyneedtosolveandwhatthebenefitofsolvingitis.


Great,that'sreallyhelpful.Andthenonequickveryfollow-up.IsawtheannouncementoftheAtlassiandealthisquarter.TheysignedanEAA.Ijustwantedtoconfirm,theywereacurrentSplunkcustomerbeforestandardizingorweretheyonEAArightoutoftheshoots?


Theywereacustomerwithsmallerspotusageandtheyhadseenthebenefitsof,hey,let'sreallygetasingledataarchitectureacrossthecompanyandcametous.That'soneofthoseexamples,IthinkitwasJohnearlier,therewastalkingaboutgoingdownmarket?Therewasasix-figureEAAforwhatisarelativelysmallsupersuccessfulhigh-growthawesomepartnerorcustomerbutrelativelysmallcomparedtosomeofthesebigfortune2,000brands.


Great,thanks,guys.

DaveConte (CFO):

Thanksalot.

Operator :




BrianWhitewithDrexelHamilton.

BrianWhite (Analyst-DrexelHamilton):

Great.I'mwonderingifyoucouldtalkalittlebit,Doug,aboutthecompetitivelandscapeandalsowhatyou'reseeinginIT.There'sdefinitelybeenalotofcompaniescomplainingaboutITattheendofJanuaryspending.That'sonequestion.Finally,internationallyrevenueswere,Ithinkyousaid28%,butIthinkthequarterbeforetheywereonly23%,sowhat'shappeninginternationally(technicaldifficulty)breakouthere?Thankyou.

DaveConte (CFO):

ThisisDave.Letmetaketheinternationalmix,therevenuemixcomment.Inoticedthesamething,asyouwouldimagine,andsaidboy,that'saniceuptickinternationally.Letmeunderstandthatalittlebit.It'sreallyagooddatapointindicationofcustomermaturityfromourregions.Wewerecertainlyhappywiththeperformance,butthenatureofthetransactionsinEMEAandAPACtendtobethenon-ratablevariety,somorerevenueyieldfromthosetransactions.

Whyisthat?That'sbecausethetransactionsintheAmericas,wherewehavelongertenuredcustomers,thosearethemorematureaccountsthattendtodotheadoptiontypetransactionsthatIreferenced,haveratablecomponentstoit.Theone-quartermixbetween--soyes,mixisalotoffunoverhereandit'sactuallyregionalmix,justtomakeiteventhatmuchmoreexciting,wasreallythereason.Therevenueyieldwithhigheronperpetualtransactionsversustheadoptiontransactionsthatwesawdomestically.AndthenDoug,thequestion(technicaldifficulty)competitive.


AtSKO,thatwashighlightingsomeoftheachievementsfortheyearandoneoftheachievementswasourcompetitivewinrate,whichwasabove85%acrossthecourseofalltheFY16,whichisanawesomefigure.Inallmyyearsofenterprisesoftware,Idon'tthinkIeverseenaconsistent85%winrate,whichwesawthroughoutthecourseofFY16.Wheneverweareengaged,itfeelslikewedoextremelywellandweareabletoclearlydifferentiatetheSplunksolutionversusdataplatformsolutionsorspecificsecurityorITopsormoreverticalbest-of-breedsolutions.

Myconcernonthatwinrate,itisadouble-edgedswordforme.Superproudofit.Ourteamsabsolutelynailitwhentheyareinfrontofthecustomer.Doesthatindicatethatwe'vegotacoverageissueandthereareotherdealshappeningwherewearejustnotpresent?Anywherethatwearepresentwewin,orwhenwewin85%ormoreofthetime.Iwanttomakesurethatwecontinueourinvestmentincoveragethroughpartnerleverageanddirectleveragesothatwekeepthat85%winratebutourpresentinmoreopportunities.


AndjustontheITspending,obviouslyitwasagreatquarterhere,youdonot--youdidnotseeanychangeinkindofsentimentamongyourcustomersintermsofspending?Isthatfair?


WithinourSplunksalescycles,wearenotseeingthat.Inmanycases,wegetdisplacementotherpiecesorthatthey'reseemingtoprioritizespendforSplunkrightnow.


Gotit.Thankyou.





Thanks,Brian.

Operator :

MarkMurphywithJPMorgan.

MarkMurphy(Analyst-JPMorgan):

Okay,thecallisstillgoing.Dave,IwantedtoaskyouonthetopicofEAAs,youhadmentioned,orIthinkDoughadmentioned,ahandfulofthemintermsoflogosinQ4.IguessIamjustcurious,inroundnumbers,whatwasthetotalnumberofEAAs?Wasit20or30,justasaguess?Idon'tthinkIhavemuchfeelforthat.Wouldyoualsotiethatinwithwhatwasdrivingtheratablemixhigheronthe--that53%numberforthequarter?IsthattiedinwiththeEAAs?

DaveConte (CFO):

Mark,yestheratablemixisabsolutelytiedintotheEAAsbutletmejustexpandalittlebitmore,becauseIsaiditearlierandjustasareminder,alargeorderisnotsynonymouswithanEAA.Wedidarecordnumberof$1milliontransactions,ofcourse,threeeight-figuretransactionsandwhenyouseethosetypesofordersatscale,theyhaveadisproportionateinfluenceonthemix.

It'sasimilarpatternthatwe'veseeninthelastcouplefourthquartersaswearefocusingonhelpingcustomerswithadoption.What'sdrivingthathigherpercentageisadoption,forsure.

Now,howmanyEAAsdidwedo?About30wasthenumber.Youwantedaroundnumber;itwasabout30.Buteventhat,otherelementsthatareaffectingmix,again,wehaveafairlystrictdefinitionofwhatwewouldconsideranEAA.That'swhythere's30eventhoughwedid100seven-figureorders.Butmanyoftheseven-figureordersalsohaveratabilityfeatures.

Sowedon'tcallthemadoptionbecausewedon'tthinkthatwe'vereachedthatlevelofmaturitywiththecustomerorenterpriseadoption,wherewewanttotakecreditforthat.Wewanttobedisciplinedwiththatclassification.ButonthoselargeordersthatarenotinsideofthedefinitionofEAA,theystillhaveadoptioncharacteristicsthatleadtoratability.

Ithinkthelastpieceis,Dougmentioneditintermsofordervelocityinthecloud,andwe'rereallyhappywiththeprogressthatwearemakingonthatfront,andofcourseitcontributes.Whenwemeasurethemix,weinclude--againit'slicensebookings,weincludecloudinthatcalculation.


Thankyou.That'sveryhelpful.Justonelastquickone.CouldyoureminduswhatthetrendinCapExisgoingtolooklikeafterwemovethroughtheperiodofhigherinvestment?Doesit--Iguessitsoundslike--areyoutryingtosaythat,thatwoulddropclosertothe$20millionlevel?Iamalsojusttrying,fromamodelingperspectivebecauseitimpactsfreecashflow,I'mjusttryingtounderstandatwhichquarterdowethinkthatelevatedaperiodofinvestmentconcludes?

DaveConte (CFO):

Sure.PriortoFY16,wehadexecutedourtransactiontoexpandinSanFrancisco,soatthestartoftheyearweguidedthatwewoulddoabout$50millioninCapEx.Whatwehadbeenrunningatbeforewasintheanywherefrom$14millionto$15millionannuallyinCapEx,whichisdirectlytiedtoourheadcountgrowth.Thenmidyear,wealsodecidedonourexpansion,ourexpansionintheSouthBayandupdatedeverybodyonthecallthat,listen,FY17isgoingtoinclude$50millionto$60millionaswewrapupSan




FranciscoandwewrapuptheSouthBay.

Oncethat'sdone,wethinknowwithaheightenedlevelofemployees,insteadofbeinginthe$14million,$15millionrangeannually,we'regoingtobeinthe$16million,$18millionrangeannually.


Thankyou.

DaveConte (CFO):

Okay,thanks.


Thanks,Mark.

Operator :

KatherineEgbertwithPiperJaffray.

KatherineEgbert (Analyst-PiperJaffray):

Thankyou.Backtothecompetition,there'sbeensomefearinthisspacebroadlyofverybigvendorscominginandmaybecausingsometurbulenceatthelowend.CanyoutalkaboutMicrosoft,Amazonandevensomeoftheprivatevendors,whatyou'reseeingfromthemifanything?


Thanks,Katherine.Rightnow,Amazonisoneofourbestpartnersoutthere.Weareco-sellingSplunksolutionsintotheAmazoncloud.TheirrepsgetcommissionandquotacreditonSplunk.We'vegotanumberofpeoplearoundtheglobe,wedoandtheydo,thatjustworkonmakingsurethattheirenterprisesalesrepsandourenterprisesalesrepsaredoingtherightaccount,jointaccountplanningandmutuallyfindingopportunitiestogether.

Myhopeandexpectationisthatwecontinuetoworkinthatcooperativemanner.We'vegotquarterlybusinessreviewswithAndyJassyandMikeClayvilleandTerryWiseandtheexecutiveteamupthereandit'saveryproductiverelationshipforbothAmazonandforus.TheircustomerbaseuseSplunkasthe--theytoldusthattheircustomerbaseituseSplunkasthemostrequesteditemwithinthecloud,giventhevisibility,transparencyandsecurityassurancewecangivethosecustomers,manyofwhomarehybridinnature.

Inalltheyearsthatwe'vebeenoutwithSplunk,therehascertainlybeeninitiativesweheard,companieslikeanIBM,ornotsomuchinMicrosoftyet,inOracletodosomethingaroundtheSplunkarena.Sofar,wehaven'tseenanythinginthemarketplace,andwe'refocusedonjustmakingsurethatwecontinuetoimproveourSplunkofferingstocontinuetodrivethathorizontalviraladoptionwithinouraccounts.

DaveConte (CFO):

It'sDave.Ijustwanttopoint--pileontoapointthatwehavemadebefore.Ourwinratethatwespentalotoftimemeasuringhowwedowhenweareinacompeteisenviable.Itis85%acrossallofourcoremarkets.Theconcern,ifthereisone,andwhyIamjustsocommittedtoinvestinginourcoverage,ismakingsurethatwegettoalltheotheraccountsthatwedon'tsee.85%winrateisphenomenalwhenweareengaged,butwe'vegottoexpandourcoverageuniversesothatwecontinuetogetinfrontofthecustomersthatneedoursolutions.





Okay,that'shelpful.Andthenonefollowup.GivenhowstrongQ4was,howisthepipelookingcomingintoQ1?

DaveConte (CFO):

Dougmentionedearlierthatwespendalotoftime,asyouwouldexpect,doingourdiligentleadinguptothecall.Q1isalwaysyourscariestquarter.Alloftheinputfromthefieldhasbeenreflectedintheguidancethatwe'veprovidedforthequarterandfortheyear.Now,Iwouldn'tcallitanunusualstep,butonethatIdon'texercisetypically,isgivensomeofthereportsthathavecomeoutoflateandsomeofthequestionsthatyouheararoundwhat'sthedemandlooklikemorebroadly?

Istheresomesomethingcomingthatweshouldbeconcernedwith.ThisinfrequentstepIwentoutandDougandIwentoutandspokeagreaterlengthswithalotoffolksoutinthefieldtotalkaboutpipelinespecifically.Whataretheyseeingintheiraccounts,andthisisthecase,too,withourpartners,wehadagreateventofthekickoffwithourpartnersandaskingthequestionsabout,whatdoyouseearounddemand.

Iamhappytoreportthatdemandremainsstrong,somuchsothatIamasconfidentineverinourinvestmentphilosophyaroundexpandingcoverage.Wedonothaveenoughresourcestodaydeployedtohandleallofthedemandthatiscomingourway.Sopartnerenablementisabsolutelycriticalforusintermsofgettingthatreachandultimatelytherewillcomeleveragefromthatcontribution,butit'sequallyimportanttocontinuetoaddresourcesthatareSplunkspecifictogetinfrontofcustomers.We'refeeling--IwillletDougpileon.

Iwillrepresentthecollectivelywe.Again,thedemandcurvethatweseeisreflectedinourguidance,andwefeelveryconfidentintermsofjusthowbigthemarketisandthatouropportunity'ssignificant.


Okay,great.Didn'tmeantoscareyou.Thanks.

DaveConte (CFO):

Itwasn'tyou,Katherine,itwasalotoftheotherstuffyouseeonCNBC.

Operator :

KashRanganwithBankofAmericaMerrillLynch.

KashRangan (Analyst-BofAMerrillLynch):

ThegoodnewsaboutgoinglastisIcanaskverylongquestions.Idon'thavetoworry(technicaldifficulty).One,Dave,canyouquantifythatrecognizedlicenserevenue,whatpercentagewasactuallyfromratable?That'sonething.Secondis,ifyoulookatthenumberofcustomersthatarecomingupforEAA,thatis,theyarelegibleforanEAAtypevolume,let'ssayhypotheticallythatallconvertedintoEAA,wouldyoustillbeabletogrowthe32%,33%thatyou'reforecasting?

Ipromisemyfinalthirdandlastquestionis,ifallyourlicenserevenueswerereallylicenseandnot--didn'thaveanysubscriptionorratableelement,whatwouldtheroughmarginprofileoftheCompanylooklike?Insteadofthe3%or4%,whatitwouldlooklike.Thankyou.

DaveConte (CFO):




Kash,youknowwhenyouaskmorethantwoquestionsatatimeIalwaysforgetoneofthem.


Iwillrepeatisyoudon't--

DaveConte (CFO):

Thanks.Igotit.Obviously,withagrowingcomponentinthequarterofratableversusperpetual,therevenueyieldwaslowerthanithadbeeninpriorquarters.Ifthatrevenueyieldwashigher,i.e.lessratable,wewould'vehadanotableamountofincrementalrevenueinthequarterandacorrespondingamountofmarginatthebottomline,forsure.


Anyquantificationatall?Anyroughmagnitude?

DaveConte (CFO):

No,andIknowyou'regoingtohatethis,butwe're--I'mnotgoingto--wedon'tdisclosetodaywhatcomponentoftherevenuewasratable,either.Obviously,youcanseethecharacteristicsbetweenincomestatementandbalancesheetandderivesomerelationshipbetweenhowmuchlicensecontributioniscomingoffthebalancesheetversuscomingfromin-quarterbusiness.Thatsaid,ofcoursethenextquestionwouldbe,well,thenDave,howmuchofdeferredislicense?

Whichissomethingelsethatwedon'tbreakoutseparatelybutIwilltellyouthatitcontinuestobelessthanhalfthebalance.Sothemajorityofthebalanceofdeferredisstillrepresentedbymaintenanceandsomecontributionfromcloud.

Andremember,clouddoesnotflowthroughthelicenseline.Cloudisrequiredtoflowthroughtheserviceline.Sowhilewemightstillbedeliveringsoftwaretoourcustomers,wedon'tgettocallitlicenserevenue.Therewasthemixquestiononhowmuchoftherevenueinthequarterwasratable?Therewasthemargin,whichyoubet,itwould'vebeenhigherifwe'dhadlessratable.DidIcoverallyourquestions,Kash?


Ithinkthelastonewas,ifeverySplunkcustomerbecameanEAAcustomer,canyoustillgrowyourrevenue32%asyouguided?

DaveConte (CFO):

EverycustomerbecameanEAAcustomer,couldwegrowourrevenue?


Hypothetically,youopenedupthepricingmodeltoeverybody,okay?Let'ssayhypothetically.It'snotgoingtohappen,butcanyoustillgrow32%asyouguided?

DaveConte (CFO):

Ihaven'tactuallydonethemath.I'mgoingtodeclaretheanswerisabsolutelyyes.


Itwouldbeagoodmodeling(multiplespeakers).




DaveConte (CFO):

It'sagoodquestion.


WhatweseewiththeEAAcustomersistheycertainlyopenupthefloodgates,andagaingoingbacktotheothercommentsthattheyarestillinfrastructurecostsandothersinvolved.Theycomebackandexpandtheirlicense.

ThatbigtransactionthatItalkedearlieraboutinmypreparedremarksisagreatexample,wheretheyactuallycamebackmorethanayearinadvanceandconsumed--madesurethattheywereabletoconsumesignificantlymoreandthenthatwasatransactionthatwhenitwassigned,peoplekindofthought,ohmygosh.Thatlookslikethisisgoingtocoverthemforever.

DaveConte (CFO):

Thepriortransaction.


Thepriortransaction.Sowhatwe'veseenwith,asDavesaid,thatsmallbodyofrenewalEAAsisthataslongasweandthey,Splunkandthecustomer,continuetoworktogethertounderstandtheusecases,tobuildtherightbusinessvaluewithinthoseusecases,thatthereisapositiveupwardcyclewithinthoseaccounts.


Doug,Dave,andKen,thankyousomuchandcongratsonthequarter.


Thanks,Kash,appreciateit.

DaveConte (CFO):

Thanksabunch.


Youbet.

Operator :

Thankyou.IwouldnowliketoturntheconferencebackovertoKenTinsleyforclosingremarks.

KenT insley(CorporateTreasurerandVPofIR):

Thankyou,Crystal.Appreciateyourhelptodayandthankseveryoneforyourparticipation.Asalways,ifyouhaveanyquestions,pleasecontactusdirectlyandwe'llbehappytohelp.Haveagoodevening.

Operator :

Ladiesandgentlemen,thankyouforparticipatingintoday'sconference.

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