U.S. Markets closed

Edited Transcript of SPLK earnings conference call or presentation 21-Aug-19 8:30pm GMT

Q2 2020 Splunk Inc Earnings and Acquisition of SignalFX Inc Conference Call

San Francisco Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Splunk Inc earnings conference call or presentation Wednesday, August 21, 2019 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Douglas Merritt

Splunk Inc. - CEO, President & Director

* Jason E. Child

Splunk Inc. - Senior VP & CFO

* Ken Tinsley

Splunk Inc. - Head of IR

================================================================================

Conference Call Participants

================================================================================

* Andrew James Nowinski

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* Brad Alan Zelnick

Crédit Suisse AG, Research Division - MD

* Brad Robert Reback

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Fatima Aslam Boolani

UBS Investment Bank, Research Division - Associate Director and Equity Research Associate Technology-Software

* Gregg Steven Moskowitz

Mizuho Securities USA LLC, Research Division - MD of Americas Research

* John Stephen DiFucci

Jefferies LLC, Research Division - Equity Analyst

* Kasthuri Gopalan Rangan

BofA Merrill Lynch, Research Division - MD and Head of Software

* Keith Weiss

Morgan Stanley, Research Division - Equity Analyst

* Keith Frances Bachman

BMO Capital Markets Equity Research - MD & Senior Research Analyst

* Matthew John Swanson

RBC Capital Markets, LLC, Research Division - Senior Associate

* Michael Turits

Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst

* Raimo Lenschow

Barclays Bank PLC, Research Division - MD & Analyst

* Walter H Pritchard

Citigroup Inc, Research Division - MD and U.S. Software Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Splunk Inc. Second Quarter 2020 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Ken Tinsley, Corporate Treasurer and Vice President of Investor Relations. Mr. Tinsley, you may begin.

--------------------------------------------------------------------------------

Ken Tinsley, Splunk Inc. - Head of IR [2]

--------------------------------------------------------------------------------

Great. Thank you, Josh, and good afternoon. With me on the call today are Doug Merritt and Jason Child. After market closed today, we issued a press release, which is also posted on our website. This conference call is being webcast live via webcast and following the call, an audio replay will be available on the website.

We also note that supplemental materials have been posted on our Investor Relations page. On today's call, we will be making forward-looking statements, including financial guidance and expectations, including our forecast for our third quarter and full year of fiscal 2020; trends and expectations regarding revenue mix, operating cash flow, operating efficiencies and margin improvements; statements and benefits regarding our recently announced acquisition of SignalFx, which we expect to close in the second half of fiscal 2020 subject to customary closing conditions and regulatory approval; and our expectations regarding our products, technologies, strategy, customers, market and industry.

These statements reflect our best judgment based on facts 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 filed 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, this information presented during the call may not be current or accurate.

We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of historical GAAP and non-GAAP results is provided in the press release and on our website.

So with that, let me turn it over to Doug.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Thank you, Ken. Hello, everyone, and welcome. We are extremely proud of our Q2 results and our continued hypergrowth at scale, particularly our 46% software revenue growth, 33% overall revenue growth and 80% cloud growth. In fact, 25% of our business was cloud this quarter, and we expect it will grow to 50% over the next few years.

I'm also eager to tell you about the acquisition of SignalFx that we announced today. As you know, there are 2 kinds of M&A transactions: consolidation deals in troubled market categories and acceleration deals in growth categories. Make no mistake, we are proactively positioning Splunk for growth and long-term value creation. Splunk is on a mission to become nothing short of the strategic technology partner to the world's most data-savvy enterprises.

Before we get to the details of the acquisition, I'd like to give you a sense of where we are now and where we're going. I want to be emphatically clear. Our business is firing on all cylinders and executing at the highest levels.

For a little data-driven context, only a handful of enterprise software companies in history have hit $2 billion in revenue while obtaining greater than 25% revenue growth, the likes of Microsoft, Oracle, Salesforce, ServiceNow, VMware and Workday. Splunk is on track to join this shortlist by the end of this fiscal year. Not only is Splunk on the cusp of joining these elite companies, we've done it concurrently while making massive investments in new cloud technology and executing on a full business model change.

As you know, customers today want to consume Software-as-a-Service. Our newer business model makes us easier to do business with. And in fact, customers have adopted Term and Cloud faster-than-expected, increasing our mix from renewable by more than 10 percentage points in just one quarter to a stunning 95%.

We've also evolved our pricing approach to make it easier for customers to Splunk much more their data. Our contracting and pricing changes are making a big difference to enterprise customers. And our new pricing meaningfully expands the opportunity for Splunkable data worldwide.

For example, DoorDash is able to provide an enhanced experience to all of its users, from consumers to merchants to dashers, through a Splunk Cloud expansion. DoorDash partners with Splunk across teams such as DevOps, ITOps and business analytics to connect consumers to their favorite restaurants, empower dashers to earn more money faster and help merchants grow their business.

ABB Group, a global technology leader who is driving the digital transformation of industries, selected Splunk for security through a new predictable pricing program. ABB will have Splunk and Splunk ES at the heart of their global security operations center. A large multibillion-dollar software company significantly expanded on Splunk Cloud to take action on data across the entire business, with ITOps, security, DevSecOps and emerging business use cases. I'm also very pleased that this customer is able to utilize a new pricing program that gives them predictable pricing with no data limits. Stay tuned for much more about pricing from Splunk throughout Q3.

Also, our ecosystem continues to flourish. We recently expanded our strategic relationship with Cisco, which is capitalizing on integrations with the Splunk platform to rapidly bring to market new differentiated solutions that will be sold on Cisco's Global Price List. A newly available security solution generated from this relationship, Cisco endpoint security analytics built on Splunk, is now orderable and will be featured at Cisco's internal global sales kickoff next week. We also just jointly announced an expansion of our strategic relationship with Deloitte Risk & Financial Advisory. Deloitte's Fusion Managed Services offerings now incorporate Phantom, which provides automated security monitoring and response capabilities to help clients address evolving cyber threats.

According to IDC, by 2025, the average person will interact with a connected device nearly 5,000x per day. Further, there will be 175 zettabytes of data, 5x more than today, and 90% of this data will require some level of security but less than half will actually be secure. The future is clear. Data represents the biggest opportunity and the biggest threat to businesses, governments and frankly, to humanity.

Splunk's strategy is simple and powerful, to bring data to everything. By bringing data to every question, every decision and most importantly, every action, we are committed to delivering the technology platform required to instantly connect all forms of data from any source in any format, instantly enabling the new approaches required to produce data outcomes and stop security threats, all at ferocious speed and massive scale.

As part of our ambitious growth agenda, today, we announced our intent to acquire SignalFx, a SaaS leader in real-time monitoring and metrics for cloud infrastructure, microservices and applications. SignalFx is a cloud-centric business that gives us best-in-class, massively scalable cloud monitoring, and we believe makes us a leader in observability and application performance monitoring for organizations at every stage of their cloud journey. The combination of Splunk and SignalFx will give application developers and IT departments a unified data platform that allows them to monitor and observe data in real-time no matter the infrastructure or scale in order to cut costs, boost revenue and improve the customer experience.

This fit is not just from a product lens, though. I'm incredibly impressed with Karthik Rau, their Founder and CEO, and the SignalFx team. We share a passion for customer success and our company cultures are a strong match. We look forward to having them as part of the Splunk team accelerating our cloud growth strategy.

In conclusion, we are very proud of our Q2. We are executing in the cloud. We are executing on SaaS. We are executing on our product and technology agenda. Most importantly, we are delivering real, measurable economic value for our over 18,000 global customers. Splunk is a company delivering the new approaches to make the right things happen at the right time to produce the right outcomes all with data.

As a result, we're on track to become one of just a handful of enterprise software companies that hit $2 billion in revenue while growing in excess of 25% by the end of our fiscal year. I want to personally thank our customers, our partners, our investors and most importantly, our people, for working hard to turn the promise of the data future into a reality. Thank you all for your time and attention and partnership. We look forward to seeing you at .conf19 in Las Vegas. And now I'll turn it over to Jason to take you through the quarter.

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [4]

--------------------------------------------------------------------------------

Thanks, Doug, and good afternoon, everyone. Appreciate you joining us today. Our Q2 execution was strong, highlighted by a faster transition to renewable than anticipated. Rather than provide a detailed line-by-line readout of the financials, I thought it would be best to point out a few key highlights, especially those that are the best growth indicators for the business, which you can reference on a new slide deck that we published on our IR site.

For today's report, it's important to note that all Q2 results reflect virtually constant duration of about 33 months on a TCV basis compared to Q2 last year. Second quarter revenues were $517 million, up 33% year-over-year. Cloud revenue was $70 million, up 80% over last year. And Q2 software revenues, which is the total of license and cloud, were up $350 million, up 46% year-over-year.

As Doug discussed, customers are adopting Term and Cloud faster than anticipated, and our transition to renewable is tracking faster than planned. In Q2, 95% of software bookings were either term or cloud. We expect the elimination of perpetual license sales will accelerate renewable mix to 99% in Q4 and high 90s for the full year.

As we previewed last quarter, the accelerated shift to renewable has a timing impact on cash collections. As expected, Q2 operating cash flow was negative given the more rapid growth of multiyear Term and Cloud contracts. This translates to a greater cash flow drag this year as more of our contracts are paid ratably. We are now expecting negative operating cash flow for the balance of the current year and expect fiscal '20 with $300 million net negative operating cash flow.

To be clear, there are 2 new drivers behind this reduction. First, that our renewable transformation is essentially complete with the mix at 95% in Q2 and expected to go to 99% by Q4. And second, we are significantly reducing our upfront cash invoicing for Term and Cloud deals, from 58% paid up front in the first half of '20 -- FY '20 to an estimated 33% paid up front in the second half of FY '20. Again, this is all about timing. While we expect long-term cash yield to return to the mid-20% levels, the timing to get there is dependent on our Term/Cloud mix over the next few years.

Underlying the constant increase in mix has been the substantial uptake of our cloud service. Since introducing it just 5 years ago, ARR for cloud has grown from 0 to over $300 million currently. Customer adoption of cloud is increasing rapidly, and we expect momentum will accelerate from here, so much so that cloud will likely represent half of our overall business within the next few years.

We ended the quarter with total RPO of $1.235 billion, up 47% over Q2 of last year. The portion of RPO which we expect to recognize as revenue over the next 12 months was $751 million at quarter end, up 32% year-over-year. This is a new disclosure intended to provide greater granularity of RPO and its conversion to revenue over the next 4 quarters. RPO bookings was $554 million, up 19% from Q2 last year. Just to note, this growth rate was understated by about 4 percentage points due to 606-related adjustments to RPO bookings last year.

In Q2, we recorded 93 orders greater than $1 million and added 500 new customers. On margins, which are non-GAAP, Q2 overall gross margin was 84%, up 2 points on a year-over-year basis. With such rapid growth in the cloud, we are realizing anticipated efficiencies and scale in that business. In Q2, cloud delivered over 50% gross margin, which is an important milestone on the way to our long-term target of 70% or more. Q2 operating margin was 9%, notably better than our plan, driven by our solid top line performance and some investment optimizations.

Turning to guidance. We expect our high growth trajectory to continue. Q3 revenue should reach approximately $600 million with a non-GAAP operating margin of 16%. For the full year, we are now expecting total revenues of $2.3 billion, up from $2.25 billion. And we maintain our non-GAAP operating margin target of 14%, which, to confirm, will include the acquired operating expense run rate of SignalFx.

In closing, it was an excellent first half, and we're set up for a strong finish to the year. My first full quarter here has been a complete adrenaline rush, grinding myself in the model and understanding that dynamics in the business have been top priority. With this, I'm even more energized about the massive market opportunity we have in front of us, and our unique position to penetrate it enhanced with the addition of SignalFx. I'm enthusiastic about the completion of our renewable transition and the outlook from here is excellent.

With that, let's open it up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Brad Zelnick with Crédit Suisse.

--------------------------------------------------------------------------------

Brad Alan Zelnick, Crédit Suisse AG, Research Division - MD [2]

--------------------------------------------------------------------------------

Congrats on a great quarter. Jason, just so I make sure I heard it correctly, can you just go back over your cash flow guidance for the full year and perhaps double-click a little bit deeper into it and bridge us back from the prior cash flow guidance that the company has given?

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [3]

--------------------------------------------------------------------------------

Sure. So we actually previously have guided to positive $250 million cash flow for the full year. The new guidance is minus $300 million. And so -- and the reason for that reduction -- well, we included that on the website slides kind of just a helpful overview of why this is happening. But what's happening is, one, the perpetual business, which was previously anticipated to be about 15% of the total business, we said renewable at 85%, that was our previous guidance, we're now saying renewable is going to go to 1% by end of year.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [4]

--------------------------------------------------------------------------------

Perpetual.

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [5]

--------------------------------------------------------------------------------

I'm sorry, perpetual will be 1% by end of the year. So that is in perpetual, as you may know, the cash is paid up front. So if you take that reduction and apply that to the second half year of TCV, which is just shy of $2 billion, you're going to lose a couple hundred million just on that change.

Second, we are changing the invoicing duration or percentage of TCV that's invoiced upfront for customers such that we're now effectively invoicing on a ratable basis, so invoicing annually. So typically, our deals are 3 years. Our average duration now is about 33.5 months, so we're billing 1/3, 1/3, 1/3. 1/3 up front, 1/3 after year 1, 1/3 after year 2. And so we previously -- in the first half of this year, we had higher collection closer to -- on a combined basis, it was about 58%.

The second half, we think, on a combined -- or we project on a combined basis is going to be closer to 33%. So if you kind of add all that up, it's about a 25% reduction in cash paid up front on roughly $2 billion of TCV in the second half of the year. That's roughly $500 million reduction. And again, it's all timing. We will be invoicing that cash now really on an annual basis instead of up front or less of it upfront. So we will get that cash back next year, but there will be headwinds for the balance of this year.

--------------------------------------------------------------------------------

Brad Alan Zelnick, Crédit Suisse AG, Research Division - MD [6]

--------------------------------------------------------------------------------

And Doug, if I could just follow up. Congrats on SignalFx. It's a really high-quality company from what we know. But just to ask, why now? What other alternatives might you have explored? And what can you do by bringing the company into the fold versus the partnership that you already had with SignalFx?

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [7]

--------------------------------------------------------------------------------

Thanks, Brad. Good question. And yes, you're right. There are a number of customers we have. They're joint customers. We -- as you expect, we've been in this IT and dev segment really since the founding of the business. We spent a lot of time producing all the different alternatives in this segment. And I can't think of a company in this -- in the overall next-gen, dev and APM segment that we haven't personally met with and/or investigated deeply.

As you suggested, we view SignalFx as the top-tier asset to the things that matter to our customers, which is incredible scale, high, high accuracy around metrics and observability in this very ephemeral next-gen cloud architecture that everybody is leaning into to try and get application velocity across AWS, GCP and Azure as well as OpenShift.

The complement that we see between the 2 -- and this has proven out in a number of these big companies that use our best-in-class, best scale, log aggregation and metrics extraction with the more real-time streaming metrics capability that SignalFx have -- is a world-class flight instrument deck as you're flying a super high-speed plane, which is SignalFx, to make sure that you're going the right direction combined with a world-class investigative capability.

So that when that instrument deck signals something, the high accuracy that SignalFx is able to, you're able to actually very quickly dive in, understand what the root cause is, whether you should be paying attention to it or not and then remediate it accurately. And so it really helps us -- if you think about this whole generation of IT systems, which are generating the data that's so critical to companies, at the backbone having logs, metrics and tracing as the 3 core elements that all need to be done with high, high accuracy, incredible scale and enterprise-grade features across that suite, we feel this is a highly strategic and important addition to the portfolio.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Our next question comes from Raimo Lenschow with Barclays.

--------------------------------------------------------------------------------

Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [9]

--------------------------------------------------------------------------------

Congrats from me as well on SignalFx. And if I can stay on it, like how do you -- Doug, how do you think about the product integration? How else do you think about this? Like are you having to bring the products together? Are they just going to work side-by-side? Like how does this kind of come together? And then I have a follow-up.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [10]

--------------------------------------------------------------------------------

Raimo, thanks for the question. So again, we got a handful of these customers that we spend time with. As we say over and over, we're customer success first and very customer-centric. So in addition to all the great investigations we've been doing and meetings we've been having, listening to our customers helps a lot.

And when you're dealing -- I'll give you an example. There's a Fortune 50 world-class consumer retailer that uses Splunk as a backbone for everything they're doing across their expansive online portfolio and uses SignalFx as well. And they're working very effectively side-by-side right now.

SignalFx, when you think about any big consumer introduction online, you wind up getting get quenched with both human activity and bot activity. SignalFx does a really nice job of providing that instrumentation so that they know whether they need to pay attention to anything and can optimize the revenue that they're trying to drive with one of these great introductions.

And then Splunk is right there by its side, as anything is being signaled, to dive in and help them understand what the reality of that situation is and what they should do, if anything, to make sure that they keep their revenue customer experience going the right direction. I do believe that there is -- and obviously, we believe, as part of this acquisition, that there are going to be some significant benefits to tighter integration between those 2.

The constant transposition and learning that happens between logs, metrics and traces goes back to the framework we've been talking about with you guys on the pillars of this next-generation data landscape. We've got to have an effective investigative pillar, monitoring, analytics and action set of capabilities. And those 4 working in concert provide the ability through organizations to have their real-time sense-and-respond approach.

So as we get full approval for the acquisition and the teams can actually start working together at the detailed level I'd like to, I fully anticipate, and Tim Tully, our CTO and Head of Development, anticipates that we'll see some very interesting and rapid integrations being developed and delivered to market between the 2 products.

--------------------------------------------------------------------------------

Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [11]

--------------------------------------------------------------------------------

Perfect. And then just a clarification. So Jason, thanks for all the extra disclosure. The one thing I wanted to dive -- double-click on, so you said the current RPO, 12 months, which is different from the 24 current definition that you had before. I just want to make sure that you moved to 12 months because that's kind of a very good step in the right direction.

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [12]

--------------------------------------------------------------------------------

That's right.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [13]

--------------------------------------------------------------------------------

Raimo, you are keen on that guidance, so thank you for giving us that feedback early in the year as well.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

And our next question comes from John DiFucci with Jefferies.

--------------------------------------------------------------------------------

John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [15]

--------------------------------------------------------------------------------

So Doug -- and thanks, Jason, for going through the cash flow details there because that's really important. But Doug, you made a comment in your opening remarks, you said that the new pricing expense is a Splunkable data. Can you expand on that a little bit? Is there some new pricing out there that, I don't know, just recently new? Because as you know, in the leasing and investment community, this is always one of the things that's talked about with Splunk, and probably more so than even the customer community. But if you could expand on that a little bit, that'd be great.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [16]

--------------------------------------------------------------------------------

Yes. Absolutely, John. So we did release pricing internally to our teams that we're going to be broadcasting much more loudly over the course of this quarter so that everybody understands what -- how we've shifted.

There's 2 dimensions to the pricing. And when I went through my examples, ABB was one and the large multibillion-dollar software company was the other. One is for people that have digested the data volume piece, we've got contracts there, they -- whether they like it or not, they understand it and they're comfortable with it. We've crafted a predictive pricing framework that very clearly illustrates to organization of any size what their unlimited footprint looks like and move people to much more coarse-grained terabyte-sized bands, and we get them to unlimited much more quickly.

So what we're trying to show them is that there is a terminal value for the core Splunk Enterprise box. And by terminal value, I mean, there's a logical point after being in business for so many years. We're at -- with today's offering and features and functions, where we know that we're only X percent of a software budget, and we want them to understand that we know that, they know that, and that data does not mitigate for them so they can stop worrying about filtering data.

Alternatively, we've also been rolling out a infrastructure-based metric, kind of a virtual CPU, Splunk virtual core-type thing that has no data to it at all. And that just allows the customer to use infrastructure they want to. They can add or delete as much compute and then pay for storage separately as they want and, therefore, they can process unlimited amounts of data. The only difference is the speed of response, so the overall interface that people have with the system. You add more infrastructure, you get faster response. You add less, you get a little bit less response.

But we've heard loud and clear through the years that pricing -- we need to be more thoughtful on pricing. We've been iterating and iterating through the 3.5 years I've been in the seat. And a piece of that -- of those iterations, we're learning what customers -- what will really work for customers. No pricing is perfect.

The other piece of that is continue to expand the portfolio beyond the index. If you really look at our portfolio, and I said this during a lot of the meetings that we've had with you and your peers for that past couple of quarters, the only product -- the only 3 products that are priced on any version of the index or index-based: Enterprise Security, ITSI and Splunk Enterprise. Everything else in the portfolio is now priced on a different metric. And we've just came out with the alternative metric to data volume with the infrastructure-based metric for the core Enterprise stack as well. So very important move, I think, for our customers.

And as we rolled it out internally in Q2, we saw some very positive response from our customers. I'm predicting we'll see the same, even probably more, positive response in Q3 as it becomes more well-known, and the reps are a little bit more conversant with it. And we go external with it as well so that customers are leaning in at the same time their reps are helping them with that.

--------------------------------------------------------------------------------

John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [17]

--------------------------------------------------------------------------------

That's great. That is -- that's really interesting. Thank you for that detail, Doug. And I guess, listen, and just a quick follow-up. The numbers look really good, right? And I'd like to follow up on another product question. I'm going to use simply SignalFx as you had a couple of those. But you mentioned Phantom, too. And in the world of security and orchestration, Phantom -- as you know, customers are just, I think, overwhelmed by all the security products they needed to use to protect the enterprise. And you have companies like Palo Alto and Check Point that are trying to put everything under one roof. And Phantom's currently -- this is like neutral thing that brings everything together and still like choose the best-of-breed. Those companies would say they have best-of-breed within their own roof. But is that -- I've always thought of that as kind of a nirvana that you should be working towards. And I guess my question is how close are you to that sort of nirvana? Like how broadly is Phantom being used in an enterprise in some of your, like, I guess even the ones that use it the most across your entire security product portfolio.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [18]

--------------------------------------------------------------------------------

Great. Great question, John. So one, you're leaning right into TAM and entering org approach to Phantom, which is the OAR part is as important, maybe even more important, than the SOAR, part of the S and the R. The orchestration and automation are critical, whether you're an -- from an IT department, the security department to manufacturing department, sales or marketing. And part of what we love about Phantom is the elegance of the architecture to be able to extend the orchestration and automation as part of the overall platform, no matter what the use cases are.

The other part that we really love about it is all the security content that makes the security orchestration, automation, response framework. And I agree with you completely that we can't see a landscape in security and really, I think, in IT also, but in the security use case where you're not going to have a lot of volatility. There is so much changing so quickly that new products will come in and old products would go out on a continuous basis.

And whether it's Splunk or Phantom, the Splunk index or Phantom, are now increasingly next-generation metrics in tracing stores. Our job across that layer is to try and be the abstraction framework that allows all those critical transactional elements that are both preventing and detecting and trying to manage that security landscape to be at the control of the customer. They can swap in and swap those out whenever they want, and we will continue to work to make sure that there is an automation or orchestration routine that ties in the existing stuff and the new stuff, and that there is an effective correlation and a decision framework, a brain to tell that nerve system what to do.

But we -- the core Splunk products is the brain, Phantom is the nerve center. I know you still need the muscles, which are all those different products from firewall to virus and endpoint protection, et cetera, that need to actually do a ton of the work. And I think part of the acceleration of the entire security portfolio is it really helps that security leader feel like they're in control of the landscape and the landscape isn't in control of them.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Our next question comes from Keith Weiss with Morgan Stanley.

--------------------------------------------------------------------------------

Keith Weiss, Morgan Stanley, Research Division - Equity Analyst [20]

--------------------------------------------------------------------------------

Excellent quarter and really nice acquisition you did. And it makes a lot of sense in the portfolio. It seems to me, with this acquisition, you guys are sort of weighing in on the debate on whether monitoring APM, infrastructure monitoring, a lot of monitoring is going to be consolidating into one platform with this acquisition of SignalFx. If that's the case, is there any other pieces of the puzzle that you need to put into place to get that complete monitoring view in that consolidating environment?

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [21]

--------------------------------------------------------------------------------

Good question, Keith. Yes, on the 4 pillars we talked about, 3 of them are very data-centric and one is fed by the data: investigate, monitor, analyze and act. I think that the one platform thing is interesting because if I go and make the covers, the way that an investigative framework is built, the Splunk index is an example, it's purpose-built. But why we're so effective is purpose-built to be truly world-class and in the category of 1, or that schema-less, high-speed, high-cardinality investigative suite that you need to drive.

That is a different architecture than what you need for that same scale of monitoring where you got, instead of a flattened set of kind of random logs, you got very well-defined but many, many, many points of data in a metric flow. And that's different again than much -- than a more rich multidimensional OLAP framework. So you wind up with different technologies across the pillars if you really want to be best-in-class. And that was part of the real excitement of SignalFx.

Now these guys learned the hard way inside Facebook, and one of the highest-scaled organizations in the world, what it takes to monitor these ephemeral environments back before that was a common buzzword, and observability is being talked about outside the walls of the Facebooks and the Googles and Twitters. So they've had a lot of experience. They've built a truly world-class framework. I think tracing is a really good important expansion area there as well. That's a little bit different architecture than what's happening with metrics. And then I still -- we're still really are excited about that whole OLAP journey. I mean when you look at things like data fabric search, the point of data fabric search is to make sure that, whether you choose our core technologies and those pillars or a third party, we can still be the interface for the end user to take advantage of that data wherever it lives. Because for us to compete in that data -- next-generation data warehousing area, that's tough. That's a really specialty set of skills.

So let's make sure that whether we think we've got the best-in-class solution, like SignalFx now and Splunk, or whether that best-in-class solution is in some other platforms, some other company, we can still help our customers extract value.

--------------------------------------------------------------------------------

Keith Weiss, Morgan Stanley, Research Division - Equity Analyst [22]

--------------------------------------------------------------------------------

Got it. That makes up so much sense. And then one follow-up on new customer adds. That's 1 KPI that hasn't been hitting kind of the targets that you guys had laid out previously. Can you talk to us about the efforts in place to ramp up sort of new customers coming into the door, if you will?

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [23]

--------------------------------------------------------------------------------

Yes. Absolutely. We had 500 new customers this quarter. We think that we're on track to exceed 2,000 this year, which gets us to that 20,000 mark that we had forecasted for you guys 1.5 years ago at the Analyst Day. We continue to lean in a bunch of different activities to make sure that our products are viral at the low end so that we can get that rapid median footprint. In fact, the strength of Splunk and the decision that most companies have to make on their journey is the virality of ASM. But at some point in time, if you've done it properly, it becomes a critical set of infrastructure. That critical set of infrastructure usually now spans the entire organization, it usually carries a higher price tag. And so there is our constant yin and yang of touchless, which we still have happening with cloud trials and downloads across the entire Splunk portfolio. And the important element is convert those lightweight touches to pervasive enterprise-wide deals, which is why that 2,000-plus mark per year is always going to be important for us. The conversion of those 2,000, and making sure effective wallet share and that the overall ASP is within our existing accounts continue to go up, is probably going to be the more important motion from revenue and overall growth perspective.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Our next question comes from Fatima Boolani with UBS.

--------------------------------------------------------------------------------

Fatima Aslam Boolani, UBS Investment Bank, Research Division - Associate Director and Equity Research Associate Technology-Software [25]

--------------------------------------------------------------------------------

Doug, maybe to start with you. As we kind of think about bigger picture trends around enterprise IT procurement, we started to see a lot of the center of gravity on procurement shift to developers. So as it relates to the SignalFx acquisition, how do you feel this could open up a buying audience that you weren't maybe necessarily tapping into it as optimally? And then I have a follow-up as well.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [26]

--------------------------------------------------------------------------------

Yes. I think that, that's one of the many exciting parts about the SignalFx addition to the fold. We did buy VictorOps roughly a year ago, and that certainly has helped. And going back to net news and Keith's question, we still are trying to be -- maintain consistency on net news around the core Splunk products. And VictorOps is much more that viral, low-touch, true developer-centric footprint. And that's the main attraction for us.

But I think, that combined with SignalFx, now gives us a much more interesting footprint for direct developer approach. But then ultimately, the development team is tied back to the ITOps team. Someone's got to -- whether it's a true next-generation SRE and CI/CD, or there's a divide in the classic ITOps and DevOps world, those 2 activities still have to work together. So ITSI and core Splunk, combined with SignalFx and VictorOps, I think is just a really interesting end-to-end coverage, whether we're leading with a individual developer or a manager of development team all the way back up to the Head of Engineering or the Head of ITOps, across a complex infrastructure landscape.

--------------------------------------------------------------------------------

Fatima Aslam Boolani, UBS Investment Bank, Research Division - Associate Director and Equity Research Associate Technology-Software [27]

--------------------------------------------------------------------------------

That makes sense. And maybe just dovetailing that into some of your very specific comment around pricing and being more flexible with the customer based on the pricing front, with the 2Q data points that you have, how should we and investors think about maybe the pricing delta versus the traditional data indexing model? Because I think maybe the perception is that your pricing power is maybe coming down as you change some of the metrics and some of the underlying infrastructure I think that you anchor to. So if you can just comment on pricing and how in a capacity-based data-adjusting world that compares to some of the newer things that you're trying out from an infrastructure-based perspective, and that would be super helpful.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [28]

--------------------------------------------------------------------------------

Sure. That's a good question, Fatima. When I look -- I matched about 2,000 to 3,000 customer actions now over the past 5 years since I've -- by almost 6 years I've been here, and I have never once heard 1 customer at any account say, "I have no more data that I even know exist that I could take advantage of." We've got the opposite problem, which is, "I am trying to be super thoughtful and judicious on what data I put into Splunk only because you've told me that I should pay attention to that metric because it's a data volume-based pricing metric."

So what we're trying to do, why we've seen and we believe and why this predictive pricing with clear guidelines to unlimited for people that are still -- that wrap their heads around the data volume piece is so important, is we think that we are 3% to 15% penetrated with the data that people would like to put through Splunk within organizations. And if we relax that data volume piece, then we can really serve customers and going back to customer success being our #1 focus area as a company.

So I think that -- and what we see -- what we saw in Q2 is, we really rolled this out internally, that we will see people take on the appropriate amount of data because the data volume piece is among the scary element, and we'll see volumes go up dramatically through the Splunk backbone.

Just as a quick update, our largest customer is ingesting over 12 petabytes of data per day, real-time streaming data per day, up from less than 4 petabytes at the beginning of the year. So we view an almost infinite possibility of data. Now you combine that with a nondata-based, nondata-amount pricing from SignalFx, from DSP, from our -- the Data Stream Processor, from Data Fabric Search, from Phantom, from VictorOps, yet all those either deal with data or take advantage of data flowing through the pipes or landing in different storage elements, the value only goes up with those products.

So the whole move was to just finally come clean with everybody. Hey, put as much data as you want in Splunk and either govern that through applying infrastructure with it or we'll give you a framework where we just stop charging you for data and don't -- yes, again, you'll solve the infrastructure cost but you manage that infrastructure so you can get to the right amount of data and not worrying about the cost of the data.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

And our next question comes from Kash Rangan with Merrill Lynch.

--------------------------------------------------------------------------------

Kasthuri Gopalan Rangan, BofA Merrill Lynch, Research Division - MD and Head of Software [30]

--------------------------------------------------------------------------------

I'm just curious if you have included the -- how much is going to be the revenue impact of SignalFx in your guidance for the second half of the year? And also congrats to Karthik, he is on the call here, on the acquisition.

And secondly, from a fresh perspective, it looks like their shift is mostly done. So Jason, you talked about a mid-20s cash flow yield. What kind of time frame are we talking about with respect to that kind of mid-20s cash flow yield? Could it be, worst case, calendar '21, or somewhere between calendar '20, '21? Because we've gone through the shift and we've endured the cash flow drop. So I would expect that as sharp as the cash flow revision has been on the downside, its upswing should also be equally sharp on the positive side, right?

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [31]

--------------------------------------------------------------------------------

Let me start off by saying, it's okay to still lead with the "rush", if you want, Kash.

--------------------------------------------------------------------------------

Kasthuri Gopalan Rangan, BofA Merrill Lynch, Research Division - MD and Head of Software [32]

--------------------------------------------------------------------------------

I'm not in a rush.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [33]

--------------------------------------------------------------------------------

We're not as hardcore as Karthik but we still like rushing.

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [34]

--------------------------------------------------------------------------------

I did say I got an adrenaline rush in this job so...

--------------------------------------------------------------------------------

Kasthuri Gopalan Rangan, BofA Merrill Lynch, Research Division - MD and Head of Software [35]

--------------------------------------------------------------------------------

Exactly. That's the rush part, right? We've got the signal.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [36]

--------------------------------------------------------------------------------

There you go. Exactly. Back to you.

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [37]

--------------------------------------------------------------------------------

I'm in a rush. Okay. So first, on the question about SignalFx revenue embedded in guidance, we effectively didn't include the revenue in guidance. And so, it just -- we did include cost because we know what cost we're going to be incurring. In terms of revenue, we'll update that when the completion -- or when we complete the acquisition.

In terms of the second question on the -- the tougher one on cash, kind of the snapback on cash. So here's kind of the issue, the issue is for the term -- so perpetual now gone, which is hard on cash but much better on, I think, the long-term durability of the business. The downside on term, we do recognize 3 years -- if you could take the average term deal, for every $3 in revenue recognized in revenue, you get $1 in cash since we're billing it annually but receiving most of the revenue up front. So it has a relatively low cash yield as you're booking it. Of course, you get the benefit in the later years as that comps.

Now the -- so the problem is because we were booking a higher percentage of those 3-year term deals or receiving a higher percentage of that cash, almost 2/3 of the cash up front up until very recently, you're now going to have that headwind through the balance of this year and really through -- you definitely will feel the effect next year as well.

The second aspect is, as you move to cloud, you'll -- there you have a ratable business, where for every $1 of revenue, you have $1 cash, so that's a high-cash-yield business. So the reality is we have to project that mix. And that mix, it's been moving quicker than we had expected, and so committing to that time frame is hard. So at this point, I think it's likely that you will not see the mid-20s until after '21. But that's obviously something that we'll monitor as we see the impact of mix between those 2 businesses over the next coming quarters.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [38]

--------------------------------------------------------------------------------

Does that answer your question?

--------------------------------------------------------------------------------

Kasthuri Gopalan Rangan, BofA Merrill Lynch, Research Division - MD and Head of Software [39]

--------------------------------------------------------------------------------

Yes, it does. I mean the perpetual is the worst part. I mean that's the biggest detractor to your cash flow, and that is down to 1. So it should be more manageable, I would imagine, right, between Term and Cloud, which is I'm surprised that you don't have some kind of a range for cash flow next year, granted that you're not going to be mid-20s, that's going to be after '21. But I would implore that we give a little bit more thought to having some range, albeit as broad as it can be because you have more definitiveness today than you had, say, 3 months back. That's -- is that the way...

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [40]

--------------------------------------------------------------------------------

Yes. I would say, as we give full year guidance, which will happen in Q4, then we'll probably be ready to talk about it then.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [41]

--------------------------------------------------------------------------------

And Kash, as you saw with what Jason and Ken included with the visuals, where we're trying to get much more aggressive at transparency and visibilities that everyone can't see [without]. So as we get a little bit closer to next year and we really understand the effects of everything that we're putting in most right now, I feel pretty confident that no matter what the answer is, you will have clarity on why the answer is the answer with less opaqueness.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Our next question comes from Walter Pritchard with Citi.

--------------------------------------------------------------------------------

Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [43]

--------------------------------------------------------------------------------

A question for Jason. On CRPO, you gave an RPO bookings number I think of 19%. I don't think we have the information to be able to calculate the CRPO bookings number. Is that something you could give us? If you like, that's a little bit more of a standard duration constant and all that measure of growth.

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [44]

--------------------------------------------------------------------------------

So the -- I'm sorry, you're asking for current RPO? The historical measure...

--------------------------------------------------------------------------------

Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [45]

--------------------------------------------------------------------------------

RPO bookings.

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [46]

--------------------------------------------------------------------------------

Or...

--------------------------------------------------------------------------------

Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [47]

--------------------------------------------------------------------------------

No. No. Do you have the Q1 or something to calculate the bookings because I don't think we could calculate that this quarter given we don't have Q1?

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [48]

--------------------------------------------------------------------------------

If you -- the website slides, we provided the links on the site, actually shows current RPO going back 5 quarters.

--------------------------------------------------------------------------------

Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [49]

--------------------------------------------------------------------------------

Okay, got it. Perfect, perfect. And then, Doug, I'm wondering on the transition, it seems like it happened pretty quickly in the quarter to renewable. Was there something -- I know the pricing seems like it's been sort of unofficially rolled out so that probably didn't drive it. Is there something you attribute the -- what's driving that significant shift in such a short amount of time with -- in terms of renewable?

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [50]

--------------------------------------------------------------------------------

Yes. You know I don't think the pricing had anything to do with it. I think we -- for 1.5 years now, we've been leaning on Term and Cloud. We put incentives in place starting a year, 1.5 years ago to make both more attractive and perpetual. So I think, for the first time 1.5 years ago, our reps were leading with Term and Cloud. And whether we like it or not, sales teams tend to focus on their commission plan. So when perp paid more, they we're leading with perp. And now we made it more attractive for Term and Cloud, and now they're leading with it, so I think it helps. Faced with bigger secular trend that we're all dealing with, you guys report on a million times a day, is the continued shift to cloud. And as people are wrapping their heads around both their SaaS applications and other SaaS infrastructure and Platform-as-a-Service capability, so much of their IT spend is going to OpEx anyway that -- I think that except for a handful of companies and some limited industries, everyone is actually asking for the opposite, which is, "Can I -- I need my budgeting made to be simple. No matter how the heck you are giving me this stuff, can you please just fit it into the OpEx category because my entire spend rate has shifted that way?" So I think that there is a bigger trend that again is just carrying us along because it really was primarily customers saying, "You know, you guys even having perpetual is making my job harder because now I'm now going back to the CFO and, right, debating one versus the other and just -- if you just took it away, just make it easier." And of course, with Term and Cloud, we can offer a lot of these different pricing constructs and other pieces that make it look more friendly to do business with us.

--------------------------------------------------------------------------------

Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [51]

--------------------------------------------------------------------------------

Great. And then, Jason, just on the CRPO, I think we just don't have the 1Q of last year is the issue. So I don't know if that's something you could provide, that would be great. I think the 5 quarters stopped at 2Q of last year.

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [52]

--------------------------------------------------------------------------------

Yes. Well, there's 47% growth this year then you can infer it.

--------------------------------------------------------------------------------

Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [53]

--------------------------------------------------------------------------------

And you've got the Q2?

--------------------------------------------------------------------------------

Ken Tinsley, Splunk Inc. - Head of IR [54]

--------------------------------------------------------------------------------

Yes. With the growth rate from Q1 '20, you can get to each element of RPO.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

Our next question comes from Keith Bachman with BMO.

--------------------------------------------------------------------------------

Keith Frances Bachman, BMO Capital Markets Equity Research - MD & Senior Research Analyst [56]

--------------------------------------------------------------------------------

I wanted to ask 2 questions. The first one is back on cash flow for a second. Next year, at a minimum, if your perpetual has gone from 10 to 1, just to make it 0, isn't that as a starting point, a $200 million benefit to your cash flow for next year versus the headwind that you're facing this year?

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [57]

--------------------------------------------------------------------------------

No. Because perpetual is booked -- is collected. The cash collected is 100% up front. And when you flip that to Term and Cloud, you're going to be booking 1/3 of it. If it all went...

Yes, so it's -- you have to assume that you're doing that much perpetual. It's just a one-time occurrence, not a repeat occurrence at perpetual.

--------------------------------------------------------------------------------

Keith Frances Bachman, BMO Capital Markets Equity Research - MD & Senior Research Analyst [58]

--------------------------------------------------------------------------------

I mean, philosophically, if you have a headwind this year and you remove it next year, right, I mean it's a $200 million...

Anyway, I agree with Kash's previous comment. I think it would be helpful to get some guidance and comments around cash flow for next year just, again, on the elimination of perpetual headwind, it should be more beneficial.

I'll transition to the RPO bookings, so I'm going to speak from the slide. I just wanted to get a little bit help on what the narrative is. All the metrics look good. Your RPO bookings were down a little bit in terms of your going from 48% growth in Q2 '19 to Q2 '20 was 19% growth. So it is -- has slowed a bit. Is there anything that you want to comment as it relates to the RPO bookings in particular and why that might be slowing? Or is it just lumpy?

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [59]

--------------------------------------------------------------------------------

So well, there is certainly some lumpiness to it, but the first thing I'd say -- so the 19% should really be -- if you take out the -- when we implemented 606, there was an adjustment that related to prior year. If you normalize that, it's 400 basis points. The year-on-year growth, absent that adjustment, is 23%. So you should think of it as really being 23% on a comparable basis. Now I would say -- and that's...

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [60]

--------------------------------------------------------------------------------

Which is still not a sterling number.

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [61]

--------------------------------------------------------------------------------

Which is still not a sterling number. So if you then look at early growth metrics, so you probably see billings is 29%; RPO bookings adjusted is 23%; revenue is 33%; software revenue, 46%; cloud, 8%. So there's a potpourri of growth metrics. So I've been here roughly 90 days, and I've been looking at those trying to figure out like what really is the right growth metric to focus on. And I know in the past, we've talked about software revenue. And as I looked at it, I said, "Well, other than it's a high number at 46%, why is that the right number?"

Well, when I looked at it and kind of unpacked it, I see that, one, the maintenance and services growth is slowing. And the reason it's slowing is for 2 reasons. One, as we move to cloud, the maintenance services are limited because those are embedded in the cloud. So it's all recorded as cloud revenue. Second, we're relying more and more on partners to provide those professional services for us. It's not a high-margin business, so it's better for them to do. So if you want to think about what is really the right growth rate to focus on to say what's the core underlying growth, it is really software revenue.

So I think you will see the lumpiness in RPO bookings. There are impacts. I think you should look at software revenue and you will see a move in RPO bookings, but I think it was probably a little bit low this quarter. Again, the adjustment is a key driver but you will probably be a little bit lumpy because of the fact that we have large TCV numbers and timing of when the deal hits and all that kind of stuff can make that move around a bit.

--------------------------------------------------------------------------------

Keith Frances Bachman, BMO Capital Markets Equity Research - MD & Senior Research Analyst [62]

--------------------------------------------------------------------------------

Okay. Great. Well, I think the deal makes perfect sense. Congratulations on that. And thanks very much for the slide deck. Much appreciated.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

Our next question comes from Matt Hedberg with RBC Capital Markets.

--------------------------------------------------------------------------------

Matthew John Swanson, RBC Capital Markets, LLC, Research Division - Senior Associate [64]

--------------------------------------------------------------------------------

This is actually Matt Swanson on for Matt. Following up from some comments we did last quarter, talking about the vertical solution field teams, could you just give us an update on kind of how the implementations of those have gone? I know it's probably pretty early still.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [65]

--------------------------------------------------------------------------------

Yes. Great question, Matt. So the -- just for people to remember what went on in the last quarter as we -- Susan St. Ledger, our President, hired a Head of Verticals. That verticals team now has 7 to 12 people that play in the vertical that are focused on flushing out specific use cases to the vertical in financial services, retail, manufacturing, health care, public sector, telecommunications, so a handful of verticals. They're really not sales teams, they're more technical evangelist teams that can certainly help on the sales side.

But it's different than a security sales specialist or an IT dev sales specialist who's focused on making sure that we actually secure an independent deal within those accounts, working with the account generalist, account RSM. They have been doing some really good work. I told her really last quarter, we've got an e-book published by the financial services vertical that highlights, I think, 31 different use cases that those guys found that are -- they're mostly nonsecurity and IT-based, probably 80% nonsecurity and IT-based. And you'll see more of those being published as the guidebooks and recipes and direction setters when you move beyond security and IT.

Ultimately, what we're hoping for is that somebody, us or a partner, gets enough understanding of those use cases and see the market potential that they actually craft an application around it. So that's where we are going to see the market for a nonsecurity, non-IT, nondev-based use cases that eventually we'll turn into applications.

It's been really helpful, I think, for our customers in those verticals and for us to continue to visualize the multitude of different use cases with Splunk that we tell every earnings call. And people talk about the Splunk life as kind of anecdotal and not written down, unless they attempt to make sure that there is a whole cookbook, recipe guidebook to make them less anecdotal.

--------------------------------------------------------------------------------

Matthew John Swanson, RBC Capital Markets, LLC, Research Division - Senior Associate [66]

--------------------------------------------------------------------------------

That's really helpful. And then it seems like -- if I can get one more on SignalFx. It's really well-suited for a containerized environment. Could you just talk about how pervasive that technology is to your install base?

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [67]

--------------------------------------------------------------------------------

I think there is -- there are very few customers I've met with that do not have active development activities in the cloud. And as they are up in the cloud, they're obviously using the native services through microservices containers, Kubernetes, et cetera. So I think it is incredibly -- it is an undeniable wave that's happening. When you go back and look at the workloads that are being driven, it still is a small percentage of the total workload. A lot of the applications still wind up signaling or integrating with core applications back on mainframe Linux boxes or Windows servers. They are back in the data center. But we expect that wave to continue, as does Amazon and Google and Microsoft and everybody else that's participating. And I think providing that visibility around those environments, coupled with the rest of our landscape, is something that the team has been very clear on -- our customer team has been very clear on and has been important to them.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

Our next question comes from Michael Turits with Raymond James.

--------------------------------------------------------------------------------

Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [69]

--------------------------------------------------------------------------------

Really great deal. Wonderful to see you branching and broadening out this way. So a couple of financial questions. First, and this is just a clarification. Just to confirm, Jason, are we -- are you at 100% annual invoicing or annual billings? Is that now the rule, all deals are annually invoiced?

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [70]

--------------------------------------------------------------------------------

Yes. We were very, very close to 100%, which is -- I mean we have a 33.5-month average duration, so call it basically a 3-year annual term. And we are basically saying -- if you look at Slide 13 of the website slides, I tried to help folks understand how this works. And it basically shows that at 33% invoicing, which is basically annual billing, so very few exceptions. But on average, the annual billing is correct.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [71]

--------------------------------------------------------------------------------

And if someone wants to give us the money, we will not ship it back. We don't want to pay them to give that money.

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [72]

--------------------------------------------------------------------------------

Yes. I mean, look, I'm a CFO. We used to buy all the services from Splunk and every one of the SaaS providers. I've bought from all of them. And yes, no one is going to write a big check up front unless they get a massive discount. And so that's why -- or it just slows down negotiation and takes much longer. This is where the market has been going and that's why this makes sense.

--------------------------------------------------------------------------------

Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [73]

--------------------------------------------------------------------------------

Okay. Another one. Are you able to cut through the noise regarding adjustment on RPO for 606? And backing into the year ago, just tell us what the current RPO bookings was on a year-over-year basis. So I think Walter was asking for this.

--------------------------------------------------------------------------------

Ken Tinsley, Splunk Inc. - Head of IR [74]

--------------------------------------------------------------------------------

Yes. Michael, this is Ken. Let me clarify that. So you can get the total RPO growth rate from Slide 5 in the deck. But he's right. The current is not broken down. So here it is. So we've already disclosed $765 million as our total RPO in Q1 of '19. Of that, $238 million was current -- sorry, $238 million was long term, $526 million was current. $765 million total. $238 million long term. $526 million short term. And for the RPO adjustment, Jason can answer that.

--------------------------------------------------------------------------------

Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [75]

--------------------------------------------------------------------------------

Right. Okay. I mean we're not going back and forth too many times. I don't know if you have it, if you could. So I just want to know the pricing and get the current bookings adjusted for RPO. So if you've got that growth rate, it would be great. Otherwise, maybe we could do it offline.

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [76]

--------------------------------------------------------------------------------

Yes. So If you were to adjust RPO bookings -- if you were to go -- same, Slide 5, you would basically see Q4 '19 would go down by 400 basis points. So call it 37% instead of 41%. And Q2 would go up to -- from 19% to 23%.

--------------------------------------------------------------------------------

Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [77]

--------------------------------------------------------------------------------

Okay. All right, we'll do more offline. And I'm just going to try and sneak one more in. I'm just going to try and take another shot at the cash flow outlook. And I know we couldn't get a range for next year. I think you said after calendar '21 is when you get back to target. But are we, for fiscal '21, at least cash flow from ops positive?

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [78]

--------------------------------------------------------------------------------

I'm sorry, I'd say -- yes, fiscal '21. You're right, after fiscal '21. Now it's -- again, it depends on the mix shift. And so I just want to make sure it's very clear because this is tricky. So I think before, I think it was Keith or someone asked about headwind and how there wouldn't be a headwind on perpetual. Again, I want to make sure it's very clear. But with the perpetual, you're basically collecting 3 years of cash up front. So when I switch that to term the following year, I'm collecting 1/3 of cash up front, so it is a headwind of 2/3 when that happens. So there is -- that's the headwind that you see, just on lapping perpetual. And then on term, we were collecting about 50% on average for the first half of this year. That's going to go to roughly 33% for next year. And then in the meantime, you have -- if you want to look at yield, it'll get more confusing because then those are both -- both perpetual and term are recognizing 3 years of revenue effectively up front, at least on the license portion. When you get to cloud, it's 1 for 1; $1 of revenue, $1 of cash. So you have to look at all 3 dimensions to -- or all 3 dependent variables, not just one.

--------------------------------------------------------------------------------

Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [79]

--------------------------------------------------------------------------------

Understood. My question was just in terms of looking forward, can we at least say that at fiscal '21, you guys will be cash flow from ops positive?

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [80]

--------------------------------------------------------------------------------

I'm not ready to say that now because, again, there -- it depends. I mean we will be cash flow positive in some quarters, but to say what full year is going to be after '21, I'm just -- there's too -- I have to forecast both variables. I'm just not ready to do that yet. I'll do it by the end of this year, but not ready to do it yet.

--------------------------------------------------------------------------------

Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [81]

--------------------------------------------------------------------------------

Congrats on the acquisition.

--------------------------------------------------------------------------------

Operator [82]

--------------------------------------------------------------------------------

Our next question comes from Brad Reback with Stifel.

--------------------------------------------------------------------------------

Brad Robert Reback, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [83]

--------------------------------------------------------------------------------

Doug, back on the pricing change, are you fairly confident that upon renewal, people will be paying you more on a like-for-like basis?

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [84]

--------------------------------------------------------------------------------

What do you mean on a like-for-like basis?

--------------------------------------------------------------------------------

Brad Robert Reback, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [85]

--------------------------------------------------------------------------------

So can an existing customer renew to this new pricing model? Or is that only sort of this idea of unlimited so they have to get bigger?

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [86]

--------------------------------------------------------------------------------

So right now, we only have very few unlimited contracts. So for people to move to unlimited from their current payment stream will be an uplift for all but those unlimited customers. And even with those unlimiteds, they're current unlimiteds, there's usually some type of framework that has CPI and other adjustments that there is a moderate expansion. But the big expansion for existing Splunk Enterprise unlimiteds, and hopefully we'll be adding more of those over time, is we've got a greater portfolio. Now we've got to add SignalFx and Phantom and DSP and DFS and come back in and say, "Awesome, you've got unlimited for Splunk Enterprise. Let's roll that forward and increase it because of these new products."

When I look at our install base, there is so much upward pressure from every single account I've ever met with in my entire career at Splunk. I'm saying like 2 years in, which is the more you buy, the more you want to buy. And I just -- that this part of why I think people are frustrated with our pricing model is everyone knows data is exploding, and you're going to hold me ransom. And we've been working with a multitude of different formats, including the CAA structure that we I think just got much more aggressive on, to say we really, really, really will not hold you ransom. That's not who we are. We're not Oracle. We're a company that is focusing on making sure that we make you guys productive and happy. And we know there's a fair value exchange here between what we are providing and what you want to give us. So I'd expect upward pressure within our accounts as they expand, and we've got to make sure that our portfolio expansion continues to be attractive to them as well, irrespective of what the expansion looks like within the Splunk Enterprise index.

--------------------------------------------------------------------------------

Brad Robert Reback, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [87]

--------------------------------------------------------------------------------

Great. And then, Jason, one quick follow-up. Can you give us what the contracted but unbilled was or the impact? I know last quarter it was about $80 million.

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [88]

--------------------------------------------------------------------------------

Contract but unbilled. $200 million? Sorry. $200 million.

--------------------------------------------------------------------------------

Operator [89]

--------------------------------------------------------------------------------

Our next question comes from Gregg Moskowitz with Mizuho.

--------------------------------------------------------------------------------

Gregg Steven Moskowitz, Mizuho Securities USA LLC, Research Division - MD of Americas Research [90]

--------------------------------------------------------------------------------

Sorry, I was on mute. I just want to commend Jason, along with a couple of the others, for any additional disclosures. So first, a clarification, if I may. So previously, you had guided to $250 million in cash flow from ops this year, and now it's minus $320 million, so a $570 million swing. And you talked about the 2 dynamics that, in total, appear to represent a $700 million delta. So does that mean that if we were to hold invoicing duration and the renewables mix constant with what you had expected 90 days ago, that your fiscal '20 cash flow from ops would have been about $100 million or so higher than your prior guidance? Or is that not the case?

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [91]

--------------------------------------------------------------------------------

Okay. First, let me clean up some of the statements. So we guided to minus $300 million, not $320 million. So that's a reduction of $550 million from the $250 million guidance that we had previously. I'd also said that the -- if you look at Slide 13 and the attached website slide, it shows that we went from collecting 58% adjusted -- mix adjusted up front to now collecting 33%. So it's a 25% reduction. 25% times the second half TCV, which is roughly about $2 billion, that's the $500 million-ish headwind. There's a little more because of the SignalFx acquisition, a couple little things, so that's how you get to the $550 million.

Now, I'm sorry, can you ask me again what the second part of your question was?

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [92]

--------------------------------------------------------------------------------

Would we've been higher if we hadn't seen perpetual move and if we hadn't shortened the duration with...

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [93]

--------------------------------------------------------------------------------

Yes. So Slide 13 shows what the impact from perpetual is. It went from a mix adjusted 10 to 1., so you could say 9% times that $200 million. And then you could do the same thing for the other 2 buckets of Term and Cloud.

--------------------------------------------------------------------------------

Gregg Steven Moskowitz, Mizuho Securities USA LLC, Research Division - MD of Americas Research [94]

--------------------------------------------------------------------------------

Okay. Correct. And at least, again, based on my math, it does appear that, apples-to-apples, that would have gone up if not for, again, invoicing duration and a higher renewables mix.

--------------------------------------------------------------------------------

Jason E. Child, Splunk Inc. - Senior VP & CFO [95]

--------------------------------------------------------------------------------

Yes, absolutely. Definitely.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [96]

--------------------------------------------------------------------------------

Yes, for sure.

--------------------------------------------------------------------------------

Gregg Steven Moskowitz, Mizuho Securities USA LLC, Research Division - MD of Americas Research [97]

--------------------------------------------------------------------------------

Okay. Just wanted to confirm that. And then secondly, so a follow-up on pricing. So the correlation, guys, obviously is not plus 1. But historically, you've spoken about how increases in data volumes also drive clear increases in revenue each and every year. And I wanted to ask if that will still hold true under the predictive pricing as well.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [98]

--------------------------------------------------------------------------------

Yes. It should have been -- the predictive pricing doesn't grant every existing customer unlimited license. It provides a path where they can see that, "Okay, I'm sitting at X and there's N bands and those bands are much more coarse-grained now before I get to unlimited." So that at least they feel high visibility and much more in control of the data they currently have and what the price point will be for data that they will potentially have in the future.

So we'd still expect, much like our cohort showed in the past, that very few people are going to come, jump in right into their unlimited. They're going to start with 100 gigs or 1 terabyte or 5 terabytes, and then prove out the value of the platform and eventually realize, "Holy cow, I want as much as I can consume when we get to that upper band."

And then you couple that with the many products that have come out over the past 1.5 years, including products that we've added inorganically, like Phantom and S.o. S and VictorOps that complement that whole cohort discussion on the core Splunk Enterprise piece. So there's been 2 levers we've been pushing: make sure that we're clear on what Splunk Enterprise does well; and to complement Splunk Enterprise, craft new technologies to the side or on top of it that bring it even more to life and then make it is easier for people to consume Splunk Enterprise.

--------------------------------------------------------------------------------

Operator [99]

--------------------------------------------------------------------------------

Our next question comes from Andrew Nowinski with Piper Jaffray.

--------------------------------------------------------------------------------

Andrew James Nowinski, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [100]

--------------------------------------------------------------------------------

I would like to start with a clarification on the impacts from the end of the perpetual licenses. So I understand the casual impact, but are you factoring in any potential customer churn or any revenue impact from that decision that we should consider?

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [101]

--------------------------------------------------------------------------------

Yes. In our overall forecast that we just drove, we raised guidance to $2.3 billion. A chunk of that forecast was the pipeline that we're working with, the chunk that is really understanding from the early indicators front of the pricing, what is going to happen on both the puts and the takes. There will be some people that decide, "If you're not going offer me perpetual, I don't want to do business anymore." I don't -- I've not done that yet. We have not had any of those occurrences yet, but it is not as broadly known, and we're not retiring new sales perpetual until November 1. So we've sent out an internal memo to our sales force and the partners, and it made its way through some investor checks and the partner channel world over to you, guys. So there's still -- it's not an immediate thing, but it will be happening starting in Q4.

We think -- we feel confidence in the guidance that we're driving and believe that, in general, it's a very positive element, both for us and for the customers. It gives them what they want and enables us to serve them the way that we want to, which is more data-driven insights, more data-driven actions, more data-driven outcomes that they've been asking for from Splunk Enterprise.

--------------------------------------------------------------------------------

Andrew James Nowinski, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [102]

--------------------------------------------------------------------------------

And then I was just wondering if you could comment on the competitive landscape, specifically against Elastic, and perhaps how your new pricing models have impacted your win rates.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [103]

--------------------------------------------------------------------------------

Yes. I think we've been pretty consistent in reporting what our win rates look like against Elastic, and they remain very high. I've said over and over that one of the things that makes me excited but also gives me a pause for concern is when your average win rates against competitors are north of 80%. That means you're just not being exposed to all the opportunities that are out there. I think one of the things that's been holding us back is people who are really afraid about the price of Splunk. It's not so much about the price. They're worried about this data-driven metric because, again, I've yet to meet with a customer that says, "I'm not getting a fair exchange of value for the dollars I'm shipping you or euros or whatever the heck the quantity is." They're saying, "I don't like the fact that I feel out of control because we all know that data volumes are going to go up." So I would anticipate and hope that this will continue to substantiate or accelerate these win rates.

The win rates that I see is super consistent. As I've been playing around with much of different things and I realize how important this is, and data is absolutely critical to my future or my next-gen infrastructure is critical to my future but the cyber resiliency of my corporation is critical to my future, I need something with enterprise scale with high resiliency, with the right features and functions that will allow me to deal with a very large population internally and externally, then that's turned it. Now I need Splunk.

The more that we can make that a Splunk journey from the very first try all the way through Enterprise license, the better. But ultimately, our bread-and-butter is, and it has been for so many years, we really understand these very complex landscapes, and we're able to quote companies that are doing 5 petabytes, 10 petabytes, 15 tera -- petabytes of data per day, which are those few that really understand the power of data.

--------------------------------------------------------------------------------

Operator [104]

--------------------------------------------------------------------------------

I would now like to turn the call back over to Doug for any further remarks.

--------------------------------------------------------------------------------

Douglas Merritt, Splunk Inc. - CEO, President & Director [105]

--------------------------------------------------------------------------------

I really appreciate the great questions on the call. We are, as I said, very proud of our Q2. And I just want to reach out to the SignalFx team that may or may not be listening to the call, but [certainly quick] on a recorded basis. We are incredibly excited to have you join the overall Splunk team. I think the combination of the 2 of us will be extremely powerful for our customers. I appreciate so much the consumer-centricity that you guys have, that we live every single day. And you're joining a really motivated group of folks, people that natively wound up at Splunk and other organizations like you that found their way through an acquisition. And to all of our customers out there, thank you for the constant support. We're excited to see everybody at .conf19 coming up at the end of October. It's going to be a fantastic show, a lot of new use cases and customer stories to share. So please find a way to get there, and have a great day. Thank you.

--------------------------------------------------------------------------------

Operator [106]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.