Splunk Inc.
Q3 2015 Earnings Call Transcript

Published: 21 Nov 2014

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. And welcome to the Splunk Incorporated Third Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference to our host, Mr. Ken Tinsley, Splunk’s Corporate Treasurer and Director of Investor Relations. Sir, you may begin.

[Ken Tinsley:]

Thank you, Eric. Appreciate that, and good afternoon, everyone. With me on the call today are Splunk's CEO, Godfrey Sullivan; and CFO, Dave Conte. Our press release was issued after close of market today and is posted on our website. This conference call is being broadcast live via webcast and following the call, an audio replay will be available also on our website. On this call, we will be making forward-looking statements, including financial guidance and expectations for our fourth quarter and fiscal 2015 and 2016 years, transaction and product mix, uses of our software, planned product sales and facilities investments, increasing customer adoption in our products and apps, market and use case opportunities. These statements reflect our best judgment based on factors currently known to us, and actual events or results may differ materially. Please refer to documents we file with the SEC, including the Form 8-K with today's press release. 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 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 included in the press release and is available on our website. With that, let me turn it over to Godfrey.

[Godfrey Sullivan:]

Thanks, Ken. Greetings, everyone. Welcome to the call. Another fun quarter in Q3 and as always, big thanks to our customers and partners for their passion and their support. Revenues were $116 million, up 48% year-to-year, license revenues $71.8 million, up 41%, notable customers included, AT&T, SAP, Shazam in the U.K. and Weight Watchers, themes for this call, Cloud, Public Sector, Product Momentum and Markets. First, I want to thank many of you who joined us at this year’s User Conference. We welcomed more than 3,000 attendees and 80 presentations from passionate Splunk customers covering a wide range of very cool use cases. During the keynotes, execs from GE Capital, Coca-Cola North America, NASDAQ and Red Hat described how Splunk powers their future. Coke is using Splunk to push data-driven decision-making across their business and to break down data cartels. Splunk embedded in their Cloud architecture and even mining data from their freestyle machines. GE Capital’s CIO spoke about how Splunk is central to their continuous app delivery process. For GE, we enable rapid app development, help deliver competitive advantage to their BUs. The CIO of Red Hat described their migration of apps to the Cloud and how Splunk is their service assurance platform. And the CISO of NASDAQ talked about Splunk as part of their next-generation security intelligence platform. These are just some examples of the amazing customer stories that come out at conf. If you ever need a shot of adrenaline, just spend some time with our customers. Let’s go to Cloud, where the word of the day is velocity. Our largest transaction in Q3 was for Splunk Cloud, a seven figure order with a leading sporting goods company. They selected us as their next-generation security intelligence platform replacing a legacy SIM. This customer already uses Splunk on prem and wanted us to manage this new project as a service. Orrstown Bank, an east coast community bank is a new Splunk Cloud customer. Our champion there brought us in after having used Splunk for years at J.P. Morgan and we went from POC to production in one week. Intermedia, a one-stop shop for Cloud business applications selected Splunk Cloud for our rich feature set, high security and the ability to scale to match their growth. And from the education market, Chicago Public Schools selected Splunk Cloud for IT ops. Our online sandbox is doing great with thousands of free users and it’s a natural complement to our premium download model. Best news of all, I can tell you, former acting GM of our Cloud business, I am delighted to have replaced myself and welcome Marc Olesen to the team. Marc ran the Cloud businesses at McAfee and Mercury. He fits right into the Splunk culture and has hit the ground running. Just in time to as we had a big presence at the AWS show last week, where we announced Hunk on EMR and our new app for AWS integrated with CloudTrail. Customers are moving production apps to the Cloud and Splunk is a big part of moving to the Cloud with confidence. To summarize, a great quarter for Cloud, our largest customer order, doubling our customer base and strong market momentum with Amazon. Now on the Public sector where our team delivered another record quarter. You would expect strength given that its fiscal year end for federal, but our performance was broad-based federal, state and local. I'm happy to report that we signed an enterprise agreement with the Department of Energy, who have more than 75 sites using Splunk and we are now the standard for operational intelligence at the agency. We also signed an enterprise agreement with the U.S. Postal Service. We purchased a 10 terabyte license for security analytics. They also plan to analyze the data coming off their postal machines. Department of Homeland Security bought a multi-terabyte license to replace a legacy SIM, which is becoming a recurring theme in our security practice. Public sector is a market that is highly dependent on word-of-mouth and where inter-agency references matter. Our Public sector team is delivering customer success that is becoming highly visible in the Beltway. And Federal Computer Week just named us, a hot company to watch. On to the Product update, we shipped Splunk Enterprise 6.2, Hunk 6.2 and Splunk MINT Express. Enterprise 6.2 delivers easier data on boarding, pattern detection and lower TCO through improved hardware performance and easier data management. Hunk 6.2 is now integrated with the Amazon Elastic MapReduce console. It’s easy for customers to analyze data in EMR and S3, and priced by the hour like the rest of that stack. Hunk wins include Comcast, Vodafone Germany and the DoE. One of the ways that we are expanding our addressable market is by taking in more data from more sources than ever before, including mobile, wire, mainframe and sensor. MINT Express gives mobile application developers real-time analytics on app quality, usage and performance. Our App for Stream makes it easy to capture and analyze wire data. Our partner Syncsort released their Iron Stream App for customers who want to analyze their mainframe data. And our partner Kepware launched the Industrial Data Forwarder to send SCADA, sensor and control system data in the Splunk. Use cases include operational improvements, preventive maintenance and security, very strong customer interest at conf for all of these products. Let’s go to market segments, earlier this year, we told you about our move from a purely functional order structural to one that includes market segment teams. Security was our first segment for this structure and Haiyan Song is doing a brilliant job leading this group. It’s prime time for Splunk in security. No one wants to be the next breach headline and Splunk is a critical part of the equation, evidenced by our enterprise security app which had a record quarter with more than 200 orders. Con Edison is a new Splunk customer and selected us to replace the legacy SIM. Beth Israel Medical Center, a teaching hospital for Harvard Medical School is another new security customer. UniCredit in Italy is also a new customer and we are helping them comply with local banking regulations, security, auditing and compliance reporting. Now on to the ITOA market, as we did with security, we are now extending the same market group org structure to our application and IT ops market. I'm delighted to tell you that Rick Fitz has joined Splunk as the exec to lead this market group. Rick is well known in this marketplace having been SVP of Product Management for CAs Service Assurance products, as well as similar experience at Network General and BMC. Customer selecting and expanding their use of Splunk for operational use cases included ADP, Abacus International and Zulily. One of our new customers in Q3 for IT ops is Oscar Health, where the support teams now have real-time dashboards on metric such as resolve issues by agent, top issues resulting in tickets and unresolved ticket status. One more fun customer story, this one in business analytics. I hope you got a chance to see a Niners game in the new Levi’s Stadium. As a season ticket holder, I can tell you that one of the really cool things is the Levi’s Stadium mobile app. Splunk is helping bring to life the business benefits of this app which was created by the VenueNext team. And their goal is to elevate every aspect of a fan’s experience on game day. Splunk is powering the real-time data and analytics dashboards on game day. So thanks to the data feeds, the venue operator knows what food and drinks are being ordered, parking lot availability, wait lines at concession stands, network performance and even how fans are -- how many fans are entering the stadium using mobile tickets. Customer like this are what makes Splunk so much fun. There are common threads across our business analytics customers. Most common use cases are customer experience, product analytics, digital marketing and business process analysis. They use Splunk to mash up, unstructured machine data with structured business data. For example, matching customer IDs in the logs with the customer profile in their CRM system and as a result, they get real-time analytical trending without the need for ETL or the latency issues involved in data warehouse reporting. Let’s switch gears and go for a moment to higher Ed. You may recall in Q1, we announced a partnership with Internet2. This agreement enables member universities to buy Splunk with a pre-negotiated contract and subscription pricing. In Q3, we signed our largest I2 order today of 1 terabyte order from the University of Illinois. Even as a Baylor bear, I’m glad to welcome the Fighting Illini to Splunk. At the academic level, more than hundred universities have now made Splunk part of their instruction or their research programs. Most recently, Georgetown, Northwestern and the University of Oxford. I’m very excited to see the progress we're making in education. Before closing, I want to take this opportunity to welcome Mark Carges to the Splunk Board of Directors. Mark formerly served as the CTO of eBay and also former GM of products at Weblogic. And I’m thrilled to have Mark joining our Board. Thanks again to our customers and partners for another really fun quarter. Our success is merely a reflection of their success and their enthusiastic support. And I also want to thank many of our investors who are taking the item to attend our events, meet our customers and learn more about our business. Thanks again, over to Dave.

[Dave Conte:]

Thanks Godfrey. Good afternoon everyone. Thanks for joining the call. As you can tell by the press release, Q3 was a solid quarter, led by strong delivery from our field organization and our public sector team in particular. Third quarter revenues were $116 million,a 48% increase over Q3 of last year. License revenues grew 41% over Q3 last year, totaling $71.8 million. Once again in Q3, more than 70% of our license bookings came from existing customers in the form of upgrades and expansions. We continued to see about two thirds of our upsells coming from horizontal expansions into new use cases within the enterprise. We added over 500 new customers, recorded 290 orders greater than $100,000 and again, closed with more transactions than in any other prior quarter. Just to clarify, the users trying Splunk in our Cloud Sandbox environment are not included in our total customer count and have not contributed to revenue. Just as we’ve anticipated, the mix of ratable transactions continues to vary substantially quarter-to-quarter, generally following seasonal trends and driven by customer buying behavior, adoption transactions and the consumption of products that are recognized ratably such as Hunk and Cloud. The mix in Q3 was approximately 40%, including the contribution from these types of transactions. Of course, this was significantly impacted by the seven-figure Cloud transaction that Godfrey described earlier. Excluding that order, the Q3 mix would have been 34% ratable. Given that Q4 is traditionally our highest volume and highest velocity bookings quarter, we expect the full-year mix will likely be closer to the high-end of our 25% to 35% range. As we continue to gather more data points on drivers affecting mix, we’ll share them with you and revise our expectation for mix in future periods accordingly. In particular, the early indicators of success from our Cloud offering, which is of course traditional SaaS and therefore ratable suggest that long-term mix could go even higher. It's possible that the contribution from our Cloud business could represent 25% of the total in the medium term. Obviously this will be a significant driving force behind the construct of our revenue and cost model going forward. In Q3, international operations represented approximately 21% of total revenues in line on a year-over-year basis. We’ll continue to make investments in our international business and look forward to continued growth and expansion of Splunk globally. Related to this expansion, we ended the quarter with 280 quota carriers and we’re on track to end the year in the range of 300 to 310 in total. Recall at our analyst meeting last month, I mentioned the evolution of our go-to market strategy and aligning our field organization with continued focus around market groups, industry verticals and global expansion with partners. This evolution will impact how we structure and scale the field organization in the future. We’ll continue to update you as this evolution progresses and what are the appropriate metrics around go-to market investments. Regarding services, education and pro serve represented 8% of revenues in Q3, in the range of prior and expected levels of between 5% and 10%. Remember since we generally recognize revenue on services when they are delivered and billed, services bookings typically do not flow through the balance sheet as deferred revenue. Turning to margins, which are all non-GAAP. Q3 overall gross margin was 89% in line with prior quarters. Operating income was about $3 million, representing a positive margin of approximately 2%, better than our expectations due to higher than forecasted revenues. In addition to your excellent field execution, it’s also important to note the velocity coming from our products group. As Godfrey mentioned, we announced several important product enhancements at .conf and I’m please with our continued investment in this area is translating into more customer success. Q3 non-GAAP income was $2.4 million and EPS was a positive $0.02 per share based on a fully diluted share count of the 126.9 million shares. Cash flow from operations was one $24 million and free cash flow was $20 million positive. And we ended the period with about $960 million in total cash and investments with zero debt. Now looking forward to the rest of the year, we expect total revenues of between $135 and $137 million in Q4. Consistent with prior years, we expect Q4 will be our most profitable quarter of the year with positive non-GAAP operating margin of between 4% and 5%. With our year-to-date performance and our Q4 outlook, we now expect total revenue for the year to range between $438 million and $440 million, up from our prior guidance of $423 million and $428 million in total. We now expect to generate positive non-GAAP operating margin of between 1% and 2% for the full year as we continue our investment in our market groups, product teams and Splunk Cloud offerings. Remember, because we expect to be profitable on a non-GAAP basis in Q4 and the full year, you should use a fully diluted share count for your EPS calculations for these periods. We will continue to run the business cash flow positive and with our overachievement year-to-date, it now looks like operating cash flow will be closer to 21% to 22% of total revenue for the full year. Looking forward a bit further, I thought it would be helpful to give you some insight on how we're thinking about next year, which is fiscal 2016. With current inputs and visibility, we expect total revenues of approximately $575 million next year, the seasonality trend following fiscal 2014 and 2015 patterns. At this level of overall growth, we expect to remain in investment mode as we continue to expand the product portfolio and our field reach globally and we’ll continue to run the business with these investments in mind. As a result, we expect full-year non-GAAP operating margin will be comparable with this year’s performance. In closing, our team continues to execute on our mission to deliver exceptional value to our customers. Q3 was solid and I’m enthusiastic about our outlook for Q4 and fiscal ‘16. Thanks much for your time and interest. With that, let’s open it up for questions.

[Operator:]

[Operator Instructions] And our first question comes from Raimo Lenschow from Barclays. Ken Tinsley Eric, go to the next question please.

[Operator:]

Our next question comes from Brent Thill from UBS. Please go ahead. Brent Thill Good afternoon. Godfrey, on the security side, I was curious if you could just walk through what you saw in the quarter. I know this has been an important vertical for you and certainly from the User Conference, there was a lot of excitement around. How did that perform and what are you seeing in terms of some of the dynamics in that end market that you are serving? Godfrey Sullivan Hey Brent. So security is one of those markets where you don’t want to brag too much because it's such hard work protecting companies against all the stuff that’s coming our way. But what’s really happened in the market is that everyone's sort of gets now that success in security is about big data analytics. It's not about a static rules engine on top of a relational database setting or it’s about being able to analyze data and look for patterns and trends. And if there was any really pretty interesting stuff that came out of all our customer presentations on this topic, it was how they were finding things that they never knew they have and almost of them would say yeah, we had been attacked. And we’ve actually been breached in some way and we never actually knew it until we had Splunk analyze all the data. So this market is moving pretty quickly in our direction just because it is clearly an analytics play, not a reporting play. I think it was probably close to 40% of our business in the quarter. So it was very strong for us. Brent Thill Okay. And for Dave real quick, you mentioned that the conference more leaner price lists that is easier for your clients to understand. I am curious how that’s starting to resonate in some of the early sales cycle with that? Dave Conte Yes. So as you recall, Brent, we modified our pricing at the entry-level, the lower SKUs where we doubled capacity earlier in the year. We haven't formally modified the rest of the pricelist. But if you look at that curve now, you can see that is clearly more linear. Importantly, what we did is we published it on our website. It wasn't transparent to customers, so they were left to their own devices to extrapolate cost at higher data volumes based on entry-level pricing SKUs. So that was an important step. We are looking at other programs that we’ve talked about in terms of how we enable adoption and give customers the predictability that they need in terms of TCO on the software, that’s something that we haven’t formalized yet in terms of external visibility. Godfrey Sullivan In addition to publishing the price list and really, I think that’s reduced the angst quite a bit because you can see what the general pricing is for year. You’ve got the larger data volumes. The other one pricing action that we took in the quarter was the announcement of Hunk, which is now available in Elastic MapReduce stack available on an hourly basis consistent with that. So that’s another easy way for customers to get started. Brent Thill Okay. Thank you. Godfrey Sullivan Thanks Brent.

[Operator:]

Our next question comes from Phil Winslow from Credit Suisse. Please go ahead. Siti Panigrahi Thanks guys. This is Siti Panigrahi for Phil. Congrats on another good quarter. Godfrey Sullivan Thank you very much. Siti Panigrahi Just wanted to touch on the deal size, looks like you had another good quarter in terms of not just deal size metrics. So could you guys give us some more color there just what we are seeing the customer new and existing deal sizes? But also and as you try to upsell the content to other and some of these add-on modules and in fact Cloud too, just how that’s impacting you deal sizes and how should we think going forward? Thanks Dave Conte Yeah. Thanks for the question. It is Dave. When we look at -- obviously we get metrics around large orders in the quarter. But I also mentioned that we, in the second consecutive quarter recorded our total -- the total number of transactions exceeded any number in the past. So when you look at the combination of large orders and total transaction velocity, there is a certain amount of consistency in terms of ASPs. I’d say for three years running, ASPs were consistently between $30,000 and $40,000. Now over the last say, couple of quarters, I will admit that there's been a slight uptick in terms of ASPs overall, but not anything that I would point to say we've established a new trend. We are watching it and if we think that trend is uptick then, I'll give you guys that update. In terms of overall order size and how other products are affecting that, I don't think there's a direct correlation between average order size because of new products or not. Typically customer still come in, they may try to free download. Obviously thousands of customers are trying Splunk in the online sandbox and they may start small, that’s a typical order for a new customer and then go and expand their use in the single use case or horizontally. Again, we talk about upsells and two thirds of upsells, seeing horizontal expansions in the enterprise and over 70% of license bookings being upsells. So we see a tremendous amount of expansion from customers in terms of use of the core product. Inherent in those upsell statistics are the consumption of incremental products like Hunk and like our ES app for security, so initial sale, ASPs, no direct correlation. Upsell and expansion in the enterprise, clear correlation in terms of consumption of extra products. Siti Panigrahi That’s helpful. Thank you. Godfrey Sullivan Thank you.

[Operator:]

Our next question comes from Ed Maguire of CLSA. Please go ahead. Ed Maguire Hi. Good afternoon, everyone. I was wondering if you could comment on how the market group’s structure maybe impacting sales cycles. In other words, now that you’ve combined a lot of domain knowledge, is that resulting in shorter sales cycles for you? Godfrey Sullivan Hey Ed. Nice to hear your voice. Well, couple of comments on that. One is that, if high-end is any reflection of how this will turn out, we are off to a really good start because the field had that lady on airplane almost nonstop since she started. She’s like the most popular person in Splunk Inc, more to go with customers, especially to a security customer. In fact, they never even call me anymore. I’m kind of waiting for the phone to ring. But it helps to have full tour experts in their field. And so I’m just thrilled that Mark is here to help us with Cloud leadership and Rick Fitz has joined, coming with just two decades of experience in IT, OA segment. It helps a lot to have people who are able to come as a subject matter expert at an exact level. So, I couldn't be happier about it and I’m just impatient for us to get further along. So, I would argue that it will help us shorten sales cycles by having the field, have resources at their disposal that can help them in that content. Ed Maguire Great. And I actually was intrigued by the managed security services deal you announced on Cloud and whether this is a harbinger of potential service type solutions that either you or your partners may start to offer? Is this the beginning of potential new business model for partners or even Splunk managing applications? Godfrey Sullivan All of the above. So it's really interesting to watch the Cloud activity evolve. We have everything from small users who are coming online, they came to the online sandbox and use it for a while and then convert that to a paid piece of business, which is relatively low touch all the way to some very sophisticated projects like the one I talked about today, which was our largest transaction of the quarter and you can bet that was a very intense solution-oriented POC with a lot of proof points involved along the way as in can you do this to our satisfaction as a service provider and that's what I see. I think it was probably year or two ago when I was asked the question, how do I think this Cloud would play out? I put to that then and to this day, I believe that it will be more about solutions than it will be about just raw indexing. And so I believe our MSPs will be -- our partners will be great evidence of using Splunk as an integrated technology, providing a solution like helping customers outsource their app monitoring to remote datacenter call the Cloud. To do that with confidence, you need both technology and expertise. So, I really do believe that this movement to the Cloud is going to be very much a solution discussion, not just an indexing discussion great. Ed Maguire Great. Thanks so much. Godfrey Sullivan Thanks Ed.

[Operator:]

Our next question comes from Raimo Lenschow from Barclays. Please go ahead. Raimo Lenschow Hey. Thanks. Let me talk and congratulations on the quarter. I was at the SplunkLive! Event in New York and one of the things that came across the service that you -- it seems there is more line of business people at these events and it seem almost like you are getting into different bunches as well. Is that kind of just wrong observation or can you just talk on that theme a little bit? Thank you. Godfrey Sullivan Hey Raimo. Welcome back to the queue. We couldn’t hear you that first time through but thanks for your comments. Well, a couple of comments on that one, which is I gave a presentation a couple weeks ago to a group of about 25 Fortune 100 level CIOs and one of the PowerPoints that I had in that was an org chart, a CIO org chart. And I showed them all the different departments that report somewhere to them that we serve and how many different solutions we provide to those different buying centers. And I think they were a little shocked at how many places we are in their organizations. And it was funny as the conversation went around the table, every single one of them would start up the conversation about saying, well, my team loves Splunk but here is what they are doing with it. And there were so many different examples and pretty soon we all kind of came to that same conclusion that -- a, we are starting to move out into the line of businesses now and not just inside the CIOs organization, and, b, we are in so many places that I think one of them accused me of selling crack and this was really about Splunk sales drugs and then the customer ultimately has to pay for it. And it was done with great humor and with affection. But it shows again the challenge we have of how much our field organization has to learn in order to be able to service the market opportunities we have. And it also to some degree reflects on the need for more partners because the amount of specialization that our technology enables is more than we can candle. So yes, to your comment about New York, we had 500 people there at the SplunkLive and some fantastic customer presentations. And thanks to you guys who attended. And it’s just more market opportunity, and yes starting to move over in the lines of business. Raimo Lenschow Perfect. Thank you. Godfrey Sullivan Thanks, Raimo. Dave Conte Thanks, Raimo.

[Operator:]

Our next question comes from Keith Weiss from Morgan Stanley. Please go ahead. Keith Weiss Thank you, guys, for taking my question and again congratulations on a very nice quarter. I wanted to delve into sort of sales productivity a little bit. You guys saw accelerating billings growth in the quarter on tougher comps which is no easy feet. And it seems to be on sales headcount or growth that isn’t quite up to where the billings growth is. So it seems like you guys are seeing improving productivity of that sales force. So I want to, a, sort of vet that with you, is that true statement, is sales growth productivity improving? And what do you think is driving that? How sustainable do you think that’s going to be on a going forward basis? Godfrey Sullivan Hi, Keith. Thanks for the comments. And our ASPs are creeping up a little bit in spite of the fact that our sales rep hiring process is just a couple of points lower than where we have been historically. And I think the words that you heard and said a couple of times during the call were signed enterprise agreements with large customers. So at the same time that we have a lot more activity, higher volume activity in terms of more new customers coming in at the low end because of our price moves which is great, more customer -- I mean we are bringing in more customers into the company. We are also writing more large contracts for enterprise adoption with our big customers. So you kind of add all that up and stir it up and you get a slightly higher ASP and healthy billings even though the headcount growth was slightly lower than what our trendline has been. So we still expect in the year what the 300, 310 something like that. So we continue to invest, but next year we also have to invest. Doug Merritt will say over and over we have to continue invest in technical resources in the field because our customers need, they are buying solutions and they need people out there who understand how to help them get that done. So the mix coming up this year is going to be just a little different than it’s been prior in terms of more technical resource, but I think it’s a good thing for us long term. Dave Conte Keith, its Dave. We’ve talked many times about productivity and all the steps that we take around enhancing productivity and what is time to full productivity at Splunk is longer than it is I think for a typical enterprise software selling environment. Again, it’s to Godfrey’s earlier point as he explained the feedback from the group of CIOs, the breadth of applicability of our product across so many use cases in several markets, i.e., hence our investment in market groups and having Haiyan and Rick joined the company. It’s a really unique selling environment and certainly one that’s challenging to create consistency across the sales organization and the need for those technical resources is not a new topic and we’ve talked about it a long time. As a real gate in terms of the rate at which we hire pure quote is as much govern by the rate at which we have fully enabled sales technicians in the field. While we are proud of the ease of download and immediate usability of Splunk, when you get into multiple used cases and data sources, complexity grows. So the pace that we add resources is a daily challenge. It’s one that Doug and I are always -- I am referring about in terms of the rate at which we invest, in which region, in which country, what types of skill sets. Haiyan was in the room. He should say of course they should all be security. And now that next year I know Doug and I are going to be referee in those two. Say well no, no, they own Internet or IOIA. No, no they are all security cell. We have got a lot of green field ahead of us in terms of getting that critical math in the field. So that we can actually kind of plow through some of these fits and starts that we experience around time to productivity or sales cycles because we are just stripped so thin when we get into specific use cases by region or country. Keith Weiss Got it. And then if I guess me one more and in terms of the enterprise adoption agreements, you talked a little bit about at Analyst Day about trying to sort of improve the process if you will getting those little bit more standarized. Could you talk to us about any progress that you have mad there in terms of getting the selling motion for those a little bit more standarized in the sales force? Godfrey Sullivan Well, we certainly made progress in terms of how we are structuring the program and getting feedback from our field reps as well as select customers in terms of the ease of consumption of the way we want to introduce the concept, but we haven’t formally rolled it out. I think we will do that Keith at our sales kickoff program, which happens at the beginning of next fiscal year, that’s kind of target date. So once we formalize it communicated it to our folks then I will share with all you. Keith Weiss Excellent. Sounds great. Thank you guys. Godfrey Sullivan Thanks, Keith.

[Operator:]

Our next question comes from Kirk Materne from Evercore ISI. Please go ahead. Kirk Materne Thanks very much and thanks for taking the question, guys. I guess Godfrey, I was kind of curious about your comments on analytics. And I was curious if you could give us an idea of where do you see the analytics business in 12 or 24 months I guess vis-à-vis what you’ve seen with security in terms of another sort of opportunity that maybe as a standalone business unit onto itself. I guess where do you think we are along that journey because obviously the move to put security as a standalone unit really helps sort of I think accelerate that businesses growth and I am just kind of curious what’s you think the opportunity for analytics is in bank? Godfrey Sullivan Yeah, thanks, Kirk. I couldn’t agree more with you. I am so impatient on this stuff and it just takes time to build organizations, but I am delighted that Rick is here and I think a year from now we will have enormous progress even better than what we do in our core business around ITOA and the very next one after that in my humble opinion is the whole business analytics piece. And the reason I feel so strongly about it is because it’s a natural outgrowth of our customers who start with us using security or ITOA used cases. The more data they put in and the more they understand what’s possible what kind of value can be gained from looking at times series data pretty soon everybody goes well look at this. I didn’t realize this, but I can do x or y and it’s a natural outgrowth of where we start in IT or security. And so it just makes sense for us to put more horsepower behind it. So yes sorry I could on, you get me cranked up on this and I could talk about it for a while. But I think the short answer is yes. I believe that that will be the next one and I am as equally impatient on that as everything I do. Kirk Materne If I could just a really quick follow-up. Obviously, you guys had a pretty big presence at AWS this year, how do you AWS as a potential channel for you guys? Is that something that get ultimately be meaningful in terms of bringing new customers to Splunk through AWS when you look out three or five years? Godfrey Sullivan I do. I believe it’s an important relationship. We have a lot of customer interest in moving production apps to the Cloud, AWS with love to transition or grow from and they are already but grow from the sort of place that’s known for dove test and burst mode ue to having ongoing production environments there. That’s a major objection for them. And I believe Splunk is one of the companies that can really help them, so it’s a natural partnership. And I believe there will be a lot of good to comes out of it. So we are bullish about it and so are they. Cloud is just another way to grow. I guess if anything I still struggle a little bit if I am a field person for Splunk and now I need to go to a customer and have a solution conversation with them. It can’t be about let me tell you about Splunk enterprise. Now that’s to be about what problem are you trying to solve it and we have a variety of ways to help you saw it. We can solve it for you by some of our core products. We can help you in the Cloud. We have solutions software. We have MSPs and we have partners. There is a variety of ways to skin every cat and I think one of the growth dimensions for our field organization is coming here is learning how to help customers evolve and consider all those good choices. Kirk Materne Great. Thanks and congrats on the quarter. Godfrey Sullivan Thanks very much.

[Operator:]

Our next question comes from Greg Dunham of Goldman Sachs. Please go ahead. Greg Dunham Hi, yes. Thanks for taking my question. I wanted to follow up on combination of Brent and Ed’s question and really is there anyway to kind of disentangle the benefits that you are getting from a market backdrop in security moving to big data analytics versus what are you doing from an organizational standpoint, specifically the changes that and having a dedicated functional organization and security Is that having a bigger impact today or those changes more on the comp? Godfrey Sullivan I would say that the security market group, which was only formed in February or March, is now starting to really hit its stride. So if I think that any organization it takes really a year to sort of form up and gets its motion going, but the Haiyan’s team is looking at every thing about the strategy of being the best possible solution in that market and that goes all the way from product definition out to go-to-market structure, partners, ecosystem and other apps and other companies that help make that up, because Splunk isn’t the only technology that it takes to be a part of the modern security or defense architecture. There is a number of other companies in technologies that make up that total formula. But for us to have a strategist like Haiyan, who understands all those dimension and can help us invest in the right places in order to be the best possible player in the security market is a really, really good thing. And so be able to take that model and copy and paste it over to our other major usage area, just makes absolute sense for the company, but it takes a little bit of time for them to form up. So I always think that between six months and a year after formation, those groups will be having a high impact on the business, and of course, the reason why the Cloud has been so good as because I was the acting manager that’s clear. Greg Dunham Great. Clearly. And then one more, friendly, in the international growth, that wasn’t a strong has been in last couple of quarters. Are you -- are there plans to do anything to maybe ramp up the investments there or get back only more, or what do you see specifically in a quarter? Thanks. Godfrey Sullivan Yeah. I think, international was about even with Q3 of last year and down a couple of points from the prior quarter. And I would say it had more to do with the strength in the U.S. than it did with anything else, because those guys had very healthy growth year-to-year. Their ever present challenge is trying to figure out how to grow faster than the U.S. In some quarters, most quarters they do and every now and then they get -- they want to take a second back seat to the U.S. So our largest order of the quarter that I mentioned earlier, well, that was the U.S. order. I mean, those kinds of things do matter in the numbers. Dave Conte Well, and we had a particularly strong quarter in the Public sector. Godfrey Sullivan Public sector, yeah. Greg Dunham Right, right. Dave Conte Federal year end and… Godfrey Sullivan Yeah. Dave Conte I mentioned in my prepared remarks year-over-year the contribution internationally was actually the same as Q3 the prior year. Q3 tends to be that dip quarter for those guys. I think, again on, I think, the Public sector and all that. But anyway, they’ll be back in next quarter. Greg Dunham Okay. Thanks. Dave Conte That’s fine. By the way it is a real challenge for the CFO to negotiate with the GM of Cloud around investments, he was also the CEO. So, Marc, I’m really glad you’re here, you out there listening.

[Operator:]

Our next question comes from Brent Bracelin from Pacific Crest. Please go ahead. Brent Bracelin Thanks. I had two follow-ups if I could on Cloud and security. On the Cloud side, you talked about growing Cloud over the medium-term to 25% of revenue. I guess, Dave maybe, if you could quantify where Cloud is today, is this 5%, 10% of revenue and then Godfrey, as the acting manager of Cloud. I wondered if you could provide a more color on the seven figure Cloud transaction? Is this an anomaly or are you seeing a preference shift where the appetite for Cloud option is increasing or decreasing? Anymore color there would be helpful? Dave Conte Yeah. Hey. It’s Dave. Just to clarify the statement about the medium-term is 25% of the business. So, clearly, the revenue contribution would be lower than that and it's significantly below 10% today as you would expect. Is it continue to ramp ratably recognized compared to our on prem business, which again back to mix, excluding Cloud transactions, 34% of license was ratable this quarter, which means 66% was not. So from a revenue contribution perspective, I see a long tail before Cloud becomes material number that we would be disclosing. Brent Bracelin Sure. That makes sense. Godfrey Sullivan Yeah. In terms of the… Brent Bracelin Probably on the transaction, yeah. Godfrey Sullivan Yeah. So, okay, I want to talk a little bit about that transaction and then, I want to talk a little bit about how the overall landscape is, I see it shaping out. So on this one particular transaction, it was very much a solution sale. So this is the customer who knows us and we already have a good reputation with them, actually in a business analytics use case and they had a very specific need to. They want it basically to move their stock to a place where it could be managed for them as a service. So we effectively stood up a very large scale like of 10 terabytes plus POC on Amazon and because they didn't have to go through all the months of procuring hardware and standing it up and testing it and doing all that, they didn’t have it ready. We were able to shorten a cycle from interested in doing the POC, to doing the POC from months down to a couple of weeks and Amazon was a great partner in terms of helping us get ready for that. Once we did the POC, then all the focus was on the software. It wasn’t about having to tune the stack or all the stuff that you do on the datacenter side that was also -- we took care of all that. So during a POC there, the 100% of their focus was on just the software functionality. Did it work correctly? Did it provide the solution that they were looking for and were there analysts able to concentrate on the security usage while we ran the thing for them. And that’s kind of how it worked out and of course, the beauty of having started that POC in Amazon was that once we finished the POC, you’re effectively ready to provision and move to operations with just a flip of the switch. So it’s actually quite an interesting study in terms of how you can shorten a cycle time for a POC by having us kind of do it for you. And so it's a one-off right now because it was a specific project, but I think it is the harbinger of how future customers will want to focus on using the software, not on managing the software. So, I think we'll see more of that but no, that was a particular project. Now on the landscape side, the market is really evolving into a few segments and one is customers who have most of their hardware and software on prem and are just starting to do some Cloud stuff. They are sort of -- that’s one pretty big segment around the world. And for that, we can solve all their on-prem needs and help them as they experiment in a Cloud. There are other customers. sort of at the other end of the extreme who do everything in the Cloud and really just want us to mash up all the data that’s in the Cloud, so they can quarterly analyze that and then there is sort of the middle ground. And part of the beauty of Splunk being able as very flexible software is that we can handle almost any mix of that customer needs. So, we can handle international, we can handle domestic, we can handle any mixture of Cloud plus on prem. It just means that we have to go in and ask the customer, where are you going, and what upcoming projects and how they manage because we can map to combination of those. We’re in pretty good position to help them get from wherever they are to wherever the mixture of where they want to go. It’s pretty fun. Brent Bracelin Helpful color. I leave it there. Thanks. Godfrey Sullivan Thanks Brent. Dave Conte Thank you.

[Operator:]

Our next question comes from Daniel Ives of FBR Capital Markets. Please go ahead. Jim Moore Yeah. Hey guys, this is Jim Moore on for Dan Ives. Great quarter. Godfrey Sullivan Thank you. Dave Conte Thank you. Jim Moore Can just give us an idea, maybe some of the puts and takes, what you guys are thinking about ‘16 initial guidance and I guess just vis-à-vis, the 40% of business in the quarter was security and then the strong Cloud performance? Dave Conte Sure. As you guys know, we start with what we expect will be our capacity in the field. And as I mentioned in the prepared remarks, we’re in the midst of the planning phase and we’re measuring what those investments look like in terms of mix of direct quarter participants inside, outside industry specialists that align to the markets or verticals, what’s the momentum we expect from Cloud and how will that affect the geography on the income statement between revenue and deferred revenue? And of course, impact on margins given that there are obviously, cost in terms of delivering the service. So all of the components are currently in the mixture and we’re staring at them in terms of the operating plan. From a revenue perspective though, its tied back to capacity, customer velocity and the big variable, the one that absolutely drives me crazy and I know you guys love it too is what’s that mix going to look like, what’s going to be ratable, what's going to be upfront and what is it on an annual basis and what is it quarterly? Obviously, if there's less ratable upfront, you’ll get more revenue as a tail through the back half of the year. So those are the inputs that I’m staring at today. Capacity mix and overall customer velocity and then mix of product as well. It’s not just accounting but the velocity we’ve seen Cloud is an impact on that today. Operating expense and the details and the investments, we’re going to continue to invest in the product groups. We’re going to continue to invest in our field coverage model. We’re going to continue to invest in our services. So, we’ll sprinkle a little bit into G&A to make sure we can scale the organization but we are not. Well, now that the GM of the Cloud is back to being in full-time CEO, I will probably get a little more scrutiny on the G&A investments. But we’re still going through that whole process and measurement. But I think the important message around topline and margin is we’re in investment mode and we’re going to continue because we think that our penetration of the TAM is at the very earliest inning. Jim Moore Very helpful. Thanks for the color. Godfrey Sullivan Thanks Jim.

[Operator:]

Our next question comes from Derrick Wood of Susquehanna. Please go ahead. Derrick Wood Great, thanks. And nice job in the quarter. Godfrey Sullivan Thanks Derrick. Derrick Wood Just wanted to talk about the Cloud and the growing demand that you are seeing there. I mean, as you look at the land portion of the deal, is it mostly a greenfield machine data project or would you expect the installed base to may be look at shifting some on-prem over to the Cloud and I guess if the ladder, how do you manage that process from both a customer contracting standpoint as well as a commission payout standpoint? Godfrey Sullivan Okay. Gosh, when I look at the mixture of Cloud transactions in Q3, they pretty much mirror our On-prem activity that is the ratio of say app -- that are app monitoring type used cases, IT OPs and securities. If you just think about the big tree, the mixture of what we are doing in the Cloud roughly equated to that. If you take out the one large transaction which was a security trend like you’d screw up all the metrics if you used that one? But if you take that one out then the rest of the pattern diagram looks pretty much like our core business. It’s just these were customers who prefer to go Cloud. They came to us from a variety of different advantage point, some were Sandbox conversions, some came in to our field organization -- well and the rest of them all came into our field organization, some through the inside sales team, some through the outside sales team. So just a really nice mixture of where they come from. So the question of converting on-prem deployments to Cloud used cases. We are seeing the very beginnings of customers who are starting to move their on-prem apps either future build or even current ones to lower cost infrastructure. And it’s no more complicated than if you and I want a cup of coffee, we plug our coffeepot into the wall, but we don't expect to have to spring wiring or build power station in order to get electricity. And so is the Amazon become sort of the utility grid provider. It’s a lot easier for customers just to not do that, but to go run their apps and just pay for the infrastructure by the year -- or whatever the charge structure is. So we haven't seen too much of that yet, but when Coca-Cola presented a comp Michael Karner talked about that and said all of future Coca-Cola apps for the consumer division are being built in the Cloud. And he’s built a consistent architecture including Splunk as that reference monitoring engine on Amazon. And he can turn on effectively a new grid for an application in 10 minutes. So the whole point being why would I do that all, in an old way if I can do it in 10 minutes the new way and skip all that stuff. So this is a movement and that why I believe that in a few years it’ll be 25% of our business that could be more. But now to your specific question about how do we handle that? How does the -- that’s probably a little too much to handle on the call, but maybe as we get a few more of them under our belt we can come back and give you some color on how we manage all that stuff? And the difference between what somebody was paying us for a license there versus Cloud and compensation that’s a big -- that's a long topic. So if you don’t mind I’ll defer answering that one till may be a future time when I have a little bit more context for it. Derrick Wood Right. Its sounds that it’s too early for that. Okay, if I could squeeze one more in. I mean you guys have obviously done very well with the segmentation and security. It sounded like you're starting to do some segmentation in ITOA? Godfrey Sullivan Yes. Derrick Wood Is that correct assessment, can you shed some more light on that? Godfrey Sullivan Well it’s -- yes, of course, it’s been our core market. Its kind of how Splunk started as a company was to be able to do IT operations ,troubleshooting and monitoring and alerting and all that sort of thing, and it kind of expanded from the guys who run the servers to the adjacent apartment of, the app build and desktops and networks and everywhere else its kind of spread but our base was from the very beginnings was sort of IT operations and that ended up itself. The apps and ops used cases are very specific and have a very different dynamic, different set of partners, different value metrics, different ROI then say a security used case or business analytics used case. So to have a leader in this case Rick Fitz joining to help us define that marketplace strategy partners, ecosystem apps, solutions, all the marketing messaging, field readiness, if you just think about that soup to nuts as a marketplace and what the customers needs are, it really helps to have a senior leaders who has been in that part of the world for a long time. And so this was -- if security was our first one, ITOA would be the natural second one to go after because it’s our core business. And then business analytics Cloud and then business analytics would be the one after that. So yes, I think it's important for us to do and it’s the only way that we can begin to capture the market opportunity. When the market opportunity is that broad, you have to put some focus on it. Derrick Wood Great, thanks again. Godfrey Sullivan Thanks, Derrick.

[Operator:]

We have time for one final question from Aaron Schwartz of Macquarie. Please go ahead. Aaron Schwartz Good afternoon. Thank you very much. Godfrey, you mentioned a couple times the value and the solutions and presumably when you start to have those conversations and installations that makes the customer or your technology that much more sticky to the customer. You also mentioned a lot of the partners involved there. And I'm just wondering how you view the line in the sand for what you need to own on that side, what your partners own and really how you make sure you monetized that properly? Godfrey Sullivan Gosh, that’s a good question. I am not sure I thought about that much today in terms of where to draw the line in the sand. I would say that, we would welcome as many partners as want to make a significant investment in the business with us. Maybe the difference between where we were 3 or 4, 5 years ago and today is that as we move from sort of just what we used to be simple troubleshooting, alerting, sort of re-logging if you will now to a much more sophisticated set of used cases that have often times. It where a mission-critical part of an app dub scenario or we are monitoring a large-scale data center, or we are involved in a huge security project, you have to have some expertise to meet the customer requirement at that stage. So our definition of what makes a good partner is more mapped to our used cases now then to just core logging. And as we define our partner map and how many of them, and at what countries, and what value do we bring to each other. A fewer partners that are deeper in terms of their Splunk investment is probably how you’ll see that evolve. Aaron Schwartz And just in terms of articles obviously you talked a lot about security, I mean do you think you need to own I guess some on vertical expertise in other areas? Or is that more of the role of the partners? Godfrey Sullivan Both. So for example as we perform up a more complete security market group, they will have partners that are security market practitioners that become very, very important to our business. So I think you’ll just see alignment between the market and those used cases and the partners that map to that. There is a very strong partner network around the world, that’s focused on security because so many of the other security vendors like [indiscernible] and so forth sell appliances, which are delivered to those geographies through partners. So there is a natural partner group out there called security focus partners and we want to have very strong relationships with the best of them, because we are part of that security solution and partners are really great at bringing that sort of multi vendor stack to the customer. So I just think it’s more about alignment than anything else. Aaron Schwartz Perfect. Thank you. Godfrey Sullivan Thanks Aaron.

[Operator:]

That concludes our Q&A session. I’d like to turn it back to Ken Tinsley for closing remarks.

[Ken Tinsley:]

Great thanks, Eric. Appreciate your help today, and thank every body for joining us. Hope you have a great night, and a good thanks giving.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. Thank you for your attendance, you may now disconnect. Everyone have a great day.