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Edited Transcript of SPLK earnings conference call or presentation 23-May-19 8:30pm GMT

Q1 2020 Splunk Inc Earnings Call

San Francisco Jun 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Splunk Inc earnings conference call or presentation Thursday, May 23, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David F. Conte

Splunk Inc. - SVP of Finance

* Douglas Merritt

Splunk Inc. - CEO, President & Director

* Jason E. Child

Splunk Inc. - Senior VP & CFO

* Ken Tinsley

Splunk Inc. - Head of IR

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Conference Call Participants

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* Aleksandr J. Zukin

Piper Jaffray Companies, Research Division - MD and Senior 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

* Karl Emil Keirstead

Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst

* Kasthuri Gopalan Rangan

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

* Matthew George Hedberg

RBC Capital Markets, LLC, Research Division - Analyst

* Melissa A. Franchi

Morgan Stanley, Research Division - VP and Research Analyst

* Michael Turits

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

* Philip Alan Winslow

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Steven Richard Koenig

Wedbush Securities Inc., Research Division - MD

* Stewart Kirk Materne

Evercore ISI Institutional Equities, Research Division - Senior MD

* Walter H Pritchard

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

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Splunk Inc. First Quarter 2020 Financial Results 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. Sir, you may begin.

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

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Great. Thank you, Jimmy, and good afternoon, everyone. With me on the call today are Doug Merritt, Jason Child and Dave Conte.

We issued a press release after close of market today, and it's posted on our website. This conference call is being broadcast live via webcast, and following the call, an audio replay will be available on the website.

On today's call, we will be making forward-looking statements, including financial guidance and expectations, including our forecast for our second quarter and full year of fiscal 2020; trends and expectations regarding revenue mix and operating cash flow; and our expectations regarding our products, technology, strategy, customers, markets and industry. These statements reflect our best judgment based on factors currently known to us, and actual events or results may differ materially. Please refer to documents we file with the SEC, including the Form 8-K 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, the information presented during this call may not contain current or accurate information.

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

With that, let me turn it over to Doug.

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

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Thank you, Ken. Hello, everyone, and welcome to the call. Q1 was a strong start to the year both for product innovation and field execution. We delivered $265 million in software revenue, up 54% over last year. We also announced a series of product developments that expand the capabilities of our portfolio and the possibilities for our customers.

Our growth continues to come from a combination of new and existing customers, extending their deployments both on-prem and in the cloud, letting them consume Splunk in the way that best enables their success.

For the past few years, you heard me continuously cite our focus on becoming the trusted data partner for our customers. We've been describing these capabilities as comprising 4 key pillars: investigate, monitor, analyze and act. We've arrived at this understanding by listening very closely to our customers. The use cases they're delivering with Splunk are crafted by leveraging the integrated functionality across these 4 pillars.

Let me take a step back for a moment and spend a little bit more time on these 4 pillars. First, investigate. Our unique, investigative approach solves data problems without requiring our customers to ever structure their data.

Turning to the next 2 pillars, monitor and analyze. This is where our customers are able to reap the rewards of investigations by monitoring for certain conditions or thresholds and creating predictive analytics.

And the fourth pillar, act. This is where our acquisitions of VictorOps and Phantom come in with orchestration, automation and learning and collaboration to help our customers remediate any issues discovered in the investigation, monitoring and analysis phases.

It's through this lens of capabilities that we look at our product innovations and roadmap, and it was a busy Q1 for Tim and the product teams as they drove continued innovation and delivery across these pillars.

We just released a new version of Splunk Enterprise, 7.3, that continues to define unprecedented scale, ease-of-use and lower total cost of ownership.

Our data stream processor and data fabric search products complement Splunk Enterprise to deliver the next-generation Splunk platform that works against a vastly expanded data landscape. Data Stream Processor accesses, analyzes and transforms vast amounts of data in motion, in real time and routes it to multiple destinations. A great example of a DSP use case is analyzing transactional events such as call detail records in real time, monitoring for anomalies on the stream, routing service quality issues to one set of Splunk indices, initiating an orchestrated and automated response while directing the full historical data set to separate indices for long-term historical retention.

Data Fabric Search enables customers to perform complex analytics against enormous data sets stored in Splunk Enterprise and elsewhere. [You see it by] the example, DFS would identify the patterns of service quality incidents in those call detail records, searching billions of events, spanning multiple weeks, months or even years and analyzing them at the level of individual user accounts or device IDs to determine both the root cause of the issue and the full scope of its impact.

Moving across all 4 pillars, our platform services like AI and machine learning, our Splunkbase ecosystem and emerging products like our newly released Connected Experiences and Splunk Business Flow. Connected Experiences delivers insights on the go through augmented reality on devices like the iPhone, iPad, Apple Watch and AppleTV and through mobile applications that provide users with the ability to investigate, monitor, analyze and act on their data anywhere, anytime.

Business Flow automatically interrogates the machine data gathered by Splunk and dynamically connects steps and events from disparate systems to generate an immediate view of operational processes. In other words, it visualizes processes for our users so that businesses can identify bottlenecks and issues through data to help improve business operations.

[AutoGroup], one of the world's largest e-commerce companies, reported a notable increase in customer conversion rates after using Business Flow.

And finally, our applications. These are packaged solutions that bring the value and capabilities of Splunk to life in a turnkey fashion. Here you see our continued investment in apps like Enterprise Security, or ES; IT Service Intelligence, or ITSI; and User Behavior Analytics, or UBA, which all saw Q1 updates.

While we've been primarily focused on go-to-market and security and IT, we recently formed a Vertical Solutions field team, which is focusing on financial services, telecom and media, health care and IoT. This team is leveraging our existing product portfolio to expand into other parts of the business, increasing our access to additional buyers.

Each quarter, our customers continue to validate that Splunk's data platform is unique and the best solution to help them unlock trapped value by bringing data to every question, every decision and every action.

Now turning to Q1. We saw continued customer momentum both with our platform and aligned with our core markets.

Starting with IT ops and app delivery. Wins in the quarter include Chipotle, who is moving to Splunk Cloud with this major expansion. Chipotle uses us to increase sales by gaining insights from their mobile application orders and rewards program. They increased digital sales more than 100% in their latest quarter, the company's biggest driver of sales and traffic growth.

Madrid-based El Corte Inglés, one of the largest department stores in the world, has expanded their use of Splunk Enterprise. El Corte Inglés uses us for IT monitoring, including new lines of business like Click and Express, its rapid delivery service.

LATAM Airlines Group expand their use of Splunk Cloud so they can better monitor their website and customer applications to quickly resolve customer issues, improve the ticketing process and increase revenue. LATAM selected us because they needed a data platform that could drive outcomes across the entire business and not just in one silo.

Thanks to partner, [Codell], for collaborating on this opportunity.

Moving to security, where we continue to help our customers migrate from a structured legacy SIM to an analytics-based approach. Notable wins include Slack, who's a new customer, that chose Splunk Cloud to enhance their enterprise security program. Slack chose us over the competition because they want security analytics that meet the needs of their very demanding environment.

Brink’s, the world's largest cash management company, expanded their use of Splunk Enterprise, ES and UBA for their global stock. Brink’s selected us due to the platform's ease of use and flexibility, which helps the Brink's team innovate, as well as our ability to handle a complex data architecture that spans more than 40 countries.

PCL Construction, one of the largest general construction contracting organizations in North America, is a new customer, purchasing Splunk Cloud to monitor 700-plus construction projects and their corporate enterprise. PCL Construction will have a comprehensive view into data from their office towers, retail outlets and sports facilities as they're under construction, providing actionable intelligence across the organization.

A long-time customer in Global Aerospace Corporation signed a 7-figure deal for Phantom this quarter so they can better automate, orchestrate and respond across their security data. The customer also uses the Splunk platform for a wide range of use cases across the business, including application performance analytics, DevOps and security investigation.

Highlighting a few customers who have standardized on Splunk as their data platform. Two large government agencies each made a significant expansion of the Splunk platform in Q1. One agency is a long-time customer who will expand from security into IT ops and APM use cases, making us the data platform across both their SOC and their NOC.

The other is expanding their platform to an entirely new division within a large civilian agency, which uses us across IT and security use cases.

And a global entertainment conglomerate purchased an 8-figure Splunk Cloud deal to expanded their use of the platform across the business. This customer already uses us for both operations and security. With the expansion, they will focus internally on creating more use cases to drive business outcomes and adoption within the organization.

And in IoT, last year, I attended a cycling event in Paris and was fascinated by how the cycling world can better use data to improve team and bike performance.

And now Trek, a leading bicycle manufacturer, is a new customer. They'll use Splunk Cloud for race team analytics such as tracking riders' nutrition needs to optimize athletic performance. They'll also use Splunk to support the company's security and IT operations.

Moving on to the ecosystem. Over the last 3 years, our relationship with Accenture has continued to flourish. I was honored to take the stage at Accenture's Industry Analyst Conference alongside their Chief Analytics Officer. We spoke about the future of data and analytics, how we are increasing our focus on business analytics and IoT and the value Accenture is delivering to their customers with Splunk today.

We're grateful to our partners for the layer of strategic, technical, and market expertise they each bring to our community, and this helps us continue to evolve the ways we deliver impactful solutions to our customers.

As you know, customer success is our #1 company priority, and that focus has helped us build a great team and culture. I am proud that Splunk was named one of the Best Places to Work in the Bay Area for the 12th consecutive year. We received similar recognition around the U.S. and in Asia. This is a testament to our people and their dedication to our customers and our partners.

In summary, it was a solid quarter and start to our fiscal '20. We are early in a large and growing market. The velocity of digital transformation continues to gain momentum, granting market leaders like Splunk the ability to bring data to every question, every decision and every outcome for any organization.

Again, thanks to all of our customers and partners, and thanks to all of our talented Splunkers.

Before I hand the call over to Dave, I'd like to welcome our new CFO, Jason Child, to the Splunk team and invite him to share some thoughts.

Dave, we've all benefited from your leadership over the years, your passion for your Rush, your allegiance to the Las Vegas Raiders. And I can't thank you enough for your commitment to Splunk and to our shareholders. Jason?

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

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Thanks, Doug. I'm thrilled to be here and looking forward to dive into the role. In my first 2 weeks in the office, I focused on meeting senior leaders on all teams throughout the business. [I'm inspired] by the passion that everyone here shares with customer success as a unified mission. My priorities over the next few months are to: first, get up to speed on our primary growth initiatives, specifically as it relates to our current product road map; second, identify the leverage points on our model to understand the areas where we can fund future growth; and third, I'm excited to meet or get reacquainted with our covering analysts as well as our investors.

I look forward to working with you all.

Now over to Dave for a read-out on the quarter.

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David F. Conte, Splunk Inc. - SVP of Finance [5]

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All right. Thanks. Thanks, everyone. Good afternoon. Thanks for joining the call. And it's still one more year as the Oakland Raiders, and I'm happy to report that they're tied for first in the division. So always optimistic.

Hey, it's been -- it's a pleasure to take the mic today and then hand it over to Jason going forward. And it's great to be reporting a strong first quarter and, of course, an excellent start to the year.

First quarter revenues were $425 million, a 36% increase over Q1 of last year. Cloud revenue was $62 million, up 85% over last year. And Q1 software revenues, which is the total of license and cloud, were $265 million, up 54% year-over-year.

We ended the quarter with total RPO of $1.2 billion, up 57% over Q1 of last year. In Q1, we recorded 46 7-figure orders and added over 400 new customers, ending with over 18,000 customers overall. International operations contributed 26% of total Q1 revenues, and education and professional services represented 10% of revenues, consistent with the seasonality we've seen in prior periods.

On margins and other results, which are all non-GAAP. Q1 overall gross margin was 82%, up about 2 points on a year-over-year basis, reflecting improving efficiencies and scale in our cloud business, specifically.

Operating loss was $7.8 million, representing a margin of a minus 1.8%, notably better than our plan driven by our solid top line performance. Net income was $3.2 million or a positive $0.02 per share using a fully diluted weighted average share count of 155.4 million shares. Operating cash flow for Q1 was $35 million, and free cash flow was about $20 million. And we ended the period with $2.8 billion in cash and investments.

Now turning to guidance. We expect Q2 revenues of approximately $485 million and non-GAAP operating margin of a positive 3%. For the full year, we're now expecting total revenues of approximately $2.25 billion, up from $2.2 billion. And we maintain our non-GAAP op margin target of 14%.

As in Q1, we expect to be non-GAAP profitable for the remaining quarters this year, so remember to use your fully diluted weighted average share count in your EPS calcs.

With respect to cash flow. I've mentioned before that the shift to renewable bookings impacts the timing of our invoicing and therefore the timing of our cash collections. We reached a renewable mix of 77% last year, which was 12 percentage points higher than planned, and it's expected to be at least 85% this year. This overachievement is driving acceleration of both unbilled contract value as well -- which is well ahead of our plan. In fact, last call, I detailed that our total uninvoiced contract value increased by $0.5 billion last fiscal year to almost $600 million in total. This trend continued in Q1 with total net uninvoiced contract value increasing by another $80 million even though our normal seasonal pattern had total contract value decreasing by several hundred million dollars sequentially. With this faster shift and its impact on collection timing, we now expect full year operating cash flow of about $250 million.

Seasonality of cash flow will be impacted as well, and we're modeling negative operating cash flow of about $125 million in Q2 flipping to about $125 million positive in Q3. Importantly, we expect that the timing of cash collections will normalize once the renewable mix reaches a steady state.

In closing, we're off to an excellent start to the year. Our product investments continue to drive customer success, and our field expansion is enhancing our overall execution capacity. Our strategy is working well, and we continue to fuel the pace of adoption as we drive to make Splunk the ubiquitous data analytics platform.

Now on a personal note, I'd like to say how humbling it's been to have played a role over the last 8 years of Splunk's journey. I've said to many that going public is easy but being public is hard. And the collective Splunk teams have handled this journey with style and integrity. Of course, I want to send a special shout out to the finance team whose grace under pressure has carried the day through high growth, a complex business, all amplified by our favorite topic, 606.

When I joined the company in 2011, we were less than 400 employees in 9 countries and posted $121 million in total annual revenue. Today, we're nearly 5,000 employees in 26 countries and tracking to total revenues of more than $2.2 billion this year and growing.

Living on the lighted stage has approach the unreal and the adrenaline surge one gets from the Splunk experience is like nothing else. I pass the baton to Jason with high confidence that our engine is running well and primed for the next phase of the journey.

Thanks, Doug, and thanks to all the Splunkers out there, past and present. With that, we'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Michael Turits with Raymond James.

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Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [2]

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So Jason, welcome. Dave, congrats and thanks. And Doug, I'll start with you and then a question for Dave.

So Doug, first, just maybe you could comment on the security environment, obviously, it's a good revenue quarter. It was a weak quarter for a lot of -- weaker than expected for a lot of security companies. How did it look for you in security? And then any comment on the competitive landscape around SIM, which seems to be heating up? And then, Dave, I've got a couple.

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

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Thanks, Michael. So I would characterize the security business as very consistent in its contribution within Splunk as it has been for the past 5, 6, 7 quarters. We saw continued strength in security overall, including sales of Enterprise Security, our SIM. As you know, and as the world sees, the market for cybersecurity ultimately comes down to a data inspection and data reaction play. We were very early by not falling into the narrow orientation of SIM and continued to define the opportunity as a security data opportunity and a security analytics opportunity. And I think, because of that, we've seen that momentum within the security realm. And again, it's not -- SIM tends to be the instant event monitoring piece that a security operations center uses. There's a whole host of correlated use cases around that, that deal with fraud, compliance, risk. There's a growing trend of operational technology and their need for the same security wrapper.

So I think the security data market keeps redefining itself. The SIM market is redefining itself. And I think we've been very nimble and pretty foresightful in both many of the developments that we have pushed out organically and some of the inorganic additions we've had that enables our portfolio to be competitive.

And of course, we're seeing more entrants come into the market both from brand-new start-ups as well as some bigger, established players. Our focus -- that hasn't had an impact in our success rate that we can determine. And our focus is to maintain really, really tight intensity on our customers. Customer success is our #1 corporate priority plastered everywhere and make sure that we keep the innovation and ROI and adoption engine running strong so that our CSOs get that strong benefit they expect out of us. But they also get to evangelize the use of the data they've collected across a whole host of nonsecurity use cases to bring quick value and efficiencies across the corporation.

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Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [4]

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And Dave, 2 sides to the duration question. One was, was there any -- you've been guiding to flat duration into this year and last year of 32 months. So is that where we were because we had really good software revenue growth, and I just wanted to see if there's any extra boost from contract duration there. And then conversely, billings were only up 20%-ish. So was there any shortening to contract -- that should be to invoice duration that would have affected billings.

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David F. Conte, Splunk Inc. - SVP of Finance [5]

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Yes. Michael, duration was consistent in that 32-, 33-month range that we expected, the way we've been modeling it and what we saw through most of last year. From an invoicing perspective, as I mentioned in prepared remarks, what I didn't expect was the $80 million increase in uninvoiced contract value, and that's all part of the timing in terms of when we're sending the invoice relative to the amount of renewable contracts that we're doing now. So I'm really pleased with the progress that the company and the field is demonstrating in terms of this accelerated shift to a renewable model and the timing of the cash collections, as I had mentioned on prior calls, is going to be most acute in this year and then stabilize after that.

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Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [6]

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And so that primarily hit deferred on an invoice as opposed to revenue.

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David F. Conte, Splunk Inc. - SVP of Finance [7]

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Yes. Yes. So you guys know I've been beating the drum for quite a while about RPO being a more comprehensive metric than billings. And for a model like ours, in particular, much of our contract value doesn't flow through deferred. So the billings calculation, the historic billings calculation is not as comprehensive as RPO, and you can see that in terms of the dynamic. Now from an -- even though I don't think it's the right metric going forward, of course, we look at it. The billings growth rate was consistent Q1 to Q1. But again, it really doesn't capture the full breadth of -- in terms of the scale of the business as does the RPO calculation.

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Operator [8]

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And our next question comes from Phil Winslow with Wells Fargo.

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Philip Alan Winslow, Wells Fargo Securities, LLC, Research Division - Senior Analyst [9]

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Congrats on a great start to the year. I just wanted to focus on 2 items here. First is just the new customer adds this quarter at 400. So starting up the year with a good metric. Just wondering what you're thinking about balancing this year between sort of new customers and upsell, how are you feeling about where you started? And sort of how you think about the full year kind of in the context of, obviously, you also had a strong $1 million-plus deal count of this quarter, up again year-over-year. So I guess let's call it expansion versus lands, more color there would be great.

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

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Good question, Phil. So we continue to task our people with having this dual focus of extending within accounts and making sure that we are seating future big expansion accounts within the net news. I would say that it was an acceptable quarter on net news but certainly not what our long-term ambitions have. We said it on so many different calls, there's hundreds of thousands of sizable corporations around the globe, and I don't know any of them that don't have a SOC or NOC or don't need to make better decisions through effective data in said interfaces. So all those customers, at some point in time, should be Splunk customers, and there's work that we're doing on the product side as well as work we're doing across the marketing and sales work to make sure that we both fulfill the 20,000 target that we had set 3 years ago but I think, more importantly, to create a bigger aperture for that.

I think this quarter, as Q1, we did -- we saw really healthy expansion within our account base. And there's 24 hours in a day, and when you've got a big, huge expansion opportunity as a rep, you wind up spending a lot of time on that, which is good news because we'd love to see that cohort and the adoption continue to go up and to the right.

So we are not resting or satisfied with net new, but we also are not resting or satisfied with the adoption quotient within our companies -- our customers, rather.

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David F. Conte, Splunk Inc. - SVP of Finance [11]

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Yes. Phil, it's Dave. Just to give some anecdotes. We talk now about 7-figure orders and something we talk about every quarter. And there was a time where that was a really significant event and something that we really anchored around in terms of evidence of adoption and how strategic we can be. And when I got started here, the idea of a 7-figure order was quite exciting. And not that they're not very difficult, but it's with quite impressive performance by the field and the pride that we feel and that execution that we see, this many of our customers gaining this kind of value from what we deliver that they're making us a strategic partner.

So when you think, then, about, hey, a good start to the year, 400 customers, yes, we like that number. We -- obviously, we'd like more. But the success inside of our existing customers, i.e., expand in your vernacular, it's really impressive. And it certainly the village of the entire company that's leading to that kind of success with product, the customer success team, the field, post-customer sales, all that stuff. But just in terms of the scale of what we do with customers now versus what we did, say, 2 years ago, 4 years ago, 6 years ago, is really impressive.

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Operator [12]

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

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Matthew George Hedberg, RBC Capital Markets, LLC, Research Division - Analyst [13]

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Well done, and I'll offer my congrats to Dave as well. I'm sure we'll cross paths sometime in the future.

RPO growth was 57%, I mean, it was really strong especially relative to last year and even looking at the growth in Q4. And I think, on the call, you talked about a lot of the reasons for the success there and then really good indicator of the true health of the business. I guess I'm wondering -- and the comp certainly improved over the year as well. How should we think about RPO growth? Is there -- I know you don't guide to it, but just is there a way that we should kind of think about the progression of that and sort of the underlying sort of strength of the business?

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David F. Conte, Splunk Inc. - SVP of Finance [14]

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Yes. Matt, thank you. It's an interesting question and one that we've been kicking around here for sure in terms of, well, what trajectory would we expect that to take. When you're talking about upper 30 percentile for revenue at 2-plus or at $425 million for the quarter and then you look at RPO at $1.2 billion, knowing that our duration has been pretty steady and say, wow, well, how sustainable is that? Now you guys don't know, I hate the percentage game because the bigger the numbers, the harder the percentages. But I think if you -- you got to step back and say, how penetrated are we in our existing customers? And we believe, lightly penetrated as evidenced by these large orders, by these large expands. And then how penetrated are we in the TAM? We think it's very early in that context, and in particular, because the TAM has effectively doubled since we took the company public.

So what's the opportunity for continued growth in RPO? I expect continued growth in RPO. I expect continued growth on the P&L because there's just so much opportunity to go add value to the customer. Now what you're not going to hear me say is, oh, I expect the percentage to be consistent. Yes, 57% is sustainable. Like we're not guiding to RPO, but it certainly should continue up and to the right.

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Matthew George Hedberg, RBC Capital Markets, LLC, Research Division - Analyst [15]

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That's great. No, I think it really is indicative of sort of how early you are in the sort of the customer journey here. And I guess maybe as a follow-up to that, I'm curious, we've talked about EAAs over the years. And I'm sort of curious where are we there in terms of like getting a more structured program to drive sort of wall-to-wall Splunk adoption? Is that becoming more of a focus for you guys to sort of convert more of your customers to sort of all in on Splunk?

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

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Yes. For sure. There's 2 buckets of initiatives we've been focused on, adoption and net new on the go-to-market side. And as [Viga] talked about a couple of years ago, we formed up the whole Customer Success group much like many other SaaS companies probably 3.5, 4 years ago. We've built that up from a relatively small initial founding to, I think, a very sizable function that's gained a lot of maturity and won a ton of awards across the industry for some of the innovative products and approaches that they're driving.

And I think that investment in the team but then a lot of work they're doing on -- we released a -- 2 years ago, 2.5 years ago, the capability for Splunk to phone home for customers and allowed that to happen with our cloud offering we've instrumented. Everything has deep telemetry and a combination of the growing body of customers that are phoning home plus the cloud telemetry has enabled the Customer Success group to build a whole host of different interfaces to help give guidance to customers, both delivered on-site to the customers and delivered through the Customer Success team on how to be -- how successful they are being with Splunk, where they could be more successful, how they could save additional costs. But it is definitely something that a big chunk of our organization wakes up and focuses on every day in addition to the #1 customer success overall company priority that everybody shares.

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Operator [17]

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And our next question comes from Kash Rangan with Bank of America.

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Kasthuri Gopalan Rangan, BofA Merrill Lynch, Research Division - MD and Head of Software [18]

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Hey, Dave. "Signals transmitted, message received. Reaction making impact, invisibly." All this makes for a very moving picture. That was the first song that I heard of Rush. Two questions, one for you, Dave. With respect to your comments on the uninvoiced value going up by $80 million, although you said on a seasonal pattern, the total contract value decreased by several hundred million dollars. Can you just explain for us what exactly the mechanics are behind that? And as you have this uninvoiced contract value continue to grow, what are the implications for cash flow looking at next year?

And I guess, one for you, Doug, at a very high level. Congratulations, Jason, by the way. Welcome to Splunk. Look forward to working with you. Doug, question for you. The cohort analysis that you shared with us at the Analyst Day a couple of years back where you had data volume grow by, I think, 8x over 4 years or 8x over 5 years and bookings value expanding 4x or 5x over 4 to 5 years, can you give us a quick update on how that trend is sustaining or not?

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David F. Conte, Splunk Inc. - SVP of Finance [19]

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Okay. Kash, it's Dave. And in your honor, I did actually craft in prepared remarks some direct references to Splunk...

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Kasthuri Gopalan Rangan, BofA Merrill Lynch, Research Division - MD and Head of Software [20]

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Loved it, loved it.

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David F. Conte, Splunk Inc. - SVP of Finance [21]

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Yes. So I'll let you guys go on the word hunt there. Look, the dynamic on -- you're right. The absolute increase in uninvoiced contract value was material, $80 million incrementally, even though, seasonally, the pool of contract value is hundreds of millions of dollars lower than Q4.

So what does that imply going forward? As I've mentioned before and tried to refer to in today's prepared remarks, as our shift, which again has accelerated a year early, is, I'll call it, I'm using air quotes here, completed, when we're done and a vast majority, north of 90%, of our contracts are renewable, then you're going to see normalization of cash yield as a result. So this is all just timing as we move on an accelerated basis to this renewable model. I think -- how long is that? I would obviously -- we went from 50% to 77%. Now we're saying, look, at least 85%. We had a really strong quarter in terms of renewable composition. So I think this is kind of the end of that transitional cash flow thing timing-wise, and we'll start to see it normalize next year.

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Douglas Merritt, Splunk Inc. - CEO, President & Director [22]

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And on the cohort. Last cohort we did was 2 years ago, officially -- a year ago?

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David F. Conte, Splunk Inc. - SVP of Finance [23]

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It was last year.

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Douglas Merritt, Splunk Inc. - CEO, President & Director [24]

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I would say last year. What were the figures in that one? Similar? I think it was a little bit higher, wasn't it?

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David F. Conte, Splunk Inc. - SVP of Finance [25]

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Yes, yes, it's...

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

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10x data.

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David F. Conte, Splunk Inc. - SVP of Finance [27]

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10x the data after 7 years.

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

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With a similar...

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David F. Conte, Splunk Inc. - SVP of Finance [29]

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I'm sorry, it was 5 years. It was 10x the data, 7x the economics.

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Douglas Merritt, Splunk Inc. - CEO, President & Director [30]

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So it went from 8x the data with 5x the economics to 10 and 7. But -- so -- but we haven't done a refresh since then, Kash, but what I'm seeing and looking at the adoption programs that we've driven, the customer success metrics that I'm seeing based on the comments I made in the prior question is continued -- as long as we can spend time with the customer and help them with the use case proliferation, we see that cohort continue to drive in the right direction.

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Kasthuri Gopalan Rangan, BofA Merrill Lynch, Research Division - MD and Head of Software [31]

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Congrats, I mean, the cohorts are getting stronger. That's great to see.

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David F. Conte, Splunk Inc. - SVP of Finance [32]

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Yes, yes.

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Operator [33]

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And our next question comes from John DiFucci with Jefferies.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [34]

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My first question is for Doug. Doug, I want to ask a question about the last pillar act in Phantom. Orchestration has always made sense. I mean, it has, but it's just really been too hard to do. Just curious, I mean, I think you mentioned there was a 7-figure Phantom deal this quarter. Like why can't it work now? And how much -- like is this still a -- is this an evangelist-type sale? Do you have people out there having to convince people that they should be buying it? It's not really a new concept, but it really -- it sort is a new market. I'm just curious how this is -- what's happening today and how do you think it evolves?

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Douglas Merritt, Splunk Inc. - CEO, President & Director [35]

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Yes. I think -- I mean, the idea that orchestration has been around for 30, 40 years. The whole BPM category was focused on that back in the '90s and 2000s. I think the difference was something like Phantom. And the difference that, I think, generally, drives an effective platform is, one, it's highly -- we had a very complementary partnership before we bought them because they're highly dependent upon the intelligence of the Splunk engine to direct the high-level orchestration automation that Phantom then does. Two, they're really thoughtful. And being really the orchestration integration layer, it doesn't do all the work. It ensures that the heterogeneous landscape actually completes the work. So the way that, that we've crafted the both ability to drive playbooks or the actual orchestration automation pieces and the way that the integrations happen to ensure that the firewalls close the loop the way they're supposed to or the endpoints react the way they're supposed to, I think, makes it more practical within customers' landscapes. It weaves into what they've already invested in. But then, three, they've started with a very tight focus on security. And we know the cybersecurity industry has got a skills shortage that they're wrestling with. And luckily, for Splunk, they're one of the first functions within companies that realized security is a big data play. And they actually have the data and the volumes of data to help drive a lot of these insights that, through some time, especially with Splunk, they've gotten more comfortable with the results and saying, yes, close the loop automatically for these types of activities.

What we've been working on with the underlying Phantom platform. There's 2 aspects: one, continue to increase the participation by the ecosystem and by any of our own people on the depth of security according to playbooks; but two, incorporate Phantom into the overall platforms that IT and non-security and IT users also can get the advantage of the orchestration automation capabilities of Phantom. And increasingly, they're learning, in collaboration, capabilities with VictorOps, which, together, really make up that act pillar.

So right now, we're seeing more of a -- I'd say, more of a pull from the market and especially in security. There's a sore category as something that I think has a -- is landing well with security buyers and they feel like they only way they're going to get the ability to deploy more people to Tier 2, 3 level is to automate more of the Tier 1 level. And something like Phantom is perfect for that.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [36]

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That's great. But it's -- and thanks for that explanation, that was really detailed and helpful. But it sounds like you're getting more of a pull. It's not like you have to convince people that, hey -- it's not hard to convince them it's a good idea but that you can actually accomplish it. It's -- that's okay, I think.

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Douglas Merritt, Splunk Inc. - CEO, President & Director [37]

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I think platforms work well in their specific use cases and security has a pull. I'd say we're probably still a little bit more evangelical sale with IT. But those guys are pretty tight with each other, so they influence each other. And I'd say that nonsecurity, non-IT is still -- they're still trying to wrestle -- they're still trying to digitize their landscape. So having an orchestration automation platform that requires big data and digitization is something that's probably in the future for them.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [38]

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Great. And if I might just -- I have a question for Jason. And it's actually, Jason, Dave's leaving you with ASC 606, and he's told everybody to go out and look at things. And he's a bright guy and he's -- I love talking to him about it. But if I didn't really want to take a look at RPO and I didn't believe -- I believe Dave knows what he's talking about, but I didn't believe that was a great way to look at it.

And as you know, Jason, when you do due diligence here, there's a lot of questions around it with Splunk because you have this sort of hybrid model and people are like, well, now you're seeing the license benefit. But if I wanted to just take a look at the momentum of the business, which feels like it's doing really well, and I want to just look at the subscription revenue plus the change in short-term deferred revenue, and I know that's getting to its billings and Dave doesn't want -- Dave, it's not -- you're not supposed to talk, Jason is. Is that going to give me a good sense of what the momentum of the business is? Again -- and I say subscription. I mean, maintenance plus cloud, so the ratable part of the revenue. And maybe I try to adjust it a little bit -- you're not going to tell us on a quarterly basis what the renewal mix is, but if I can adjust it a little bit because, if something is on a ratable basis, it's -- there's more of it that's ratable than if it was maintenance in -- of a term license versus perpetual. Does that make sense to you? Because I'm trying to make sense of it, and RPO for me just doesn't do it.

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Jason E. Child, Splunk Inc. - Senior VP & CFO [39]

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Thanks for the question on day 15. Actually, day 14, no 13. So it's a great question. We are in -- you guys have been talking about the transformation now for a year plus. And so I understand trying to find what is the right metric that correlates long-term with true growth and true value is what we're all trying to figure out. I think, theoretically, RPO makes a lot of sense. But if I were to kind of step back and say, "What do I think the value is going to be going forward? And where do we see the value right now?" I think overall software growth at 54% year-on-year. Like that's the number that is probably the one that I think is the one I think is going to be most indicative of the growth that we're creating. And when I look at cloud revenue growth at 85% up year-on-year and the ARR of -- ARR just of cloud growth, up 85% year-on-year, that -- for a company that is at our size and been around for as long as we have, those are pretty incredible numbers. And so -- I don't know, that's how I think about it. I'm going to get much more refined on my thoughts over the next 12 days or more. But I don't know if that helps, but that's how I think about it.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [40]

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Yes. No. Listen, that does help. It does. And long term, that's great. We look at it, too, that way. However, every time you guys report a quarter, there's all this new information, and we want to gauge what the momentum of the business was in the quarter. It feels like it was really strong this quarter. But at the same time, like, some of the metrics some people look at, maybe it doesn't look as strong. But I think -- and Dave, if you could just weigh in on that, that would be awesome, maybe, and then I'll just stop talking.

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David F. Conte, Splunk Inc. - SVP of Finance [41]

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Hey, John, yes. Look, you know this about us. We're really thoughtful about the words we use when we characterize the quarter. And it was a strong quarter and it was a great start to the year. And you can't -- as Jason pointed out, I think, even in our press release. And we've been pounding the table for a long time about software growth rate, 50-plus percent software growth rate in a Q1 at our scale is...

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Douglas Merritt, Splunk Inc. - CEO, President & Director [42]

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Off a tough compare because last Q1 was a good quarter.

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David F. Conte, Splunk Inc. - SVP of Finance [43]

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Yes. So we are proud of the quarter. We're not satisfied nor will we ever be, but I think it's a great start.

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Operator [44]

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And our next question comes from Alex Zukin with Piper Jaffray.

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Aleksandr J. Zukin, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [45]

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So maybe just at the risk of diving more into RPO metrics. If I look at the change in RPO, and I'd actually be curious if we could get the exact number for RPO or if that $1.2 billion is rounded. If I take the change in RPO and add the revenue, I look at a RPO bookings growth rate of about 33%. So I guess, maybe the first question, is that a better metric to look at the overall kind of momentum or the growth of the business than RPO stand-alone or billings. And then, just a follow-up quickly on the federal space.

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David F. Conte, Splunk Inc. - SVP of Finance [46]

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Yes. Hey, it's Dave. The $1.2 billion, it's not in the disclosure. It's not going to be 1-2-0-0-0-0-0, but it's -- so gosh darn diggity close that you would never notice the difference. And the calculation that you're doing is revenue plus change in RPO is -- I think, it's the new era billings calculation of revenue plus change in deferred. So 30-plus percent growth in that metric, I think, is a good proxy.

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Aleksandr J. Zukin, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [47]

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Perfect. And I guess, just a follow-up on the federal verticals (inaudible)some really (inaudible) activity there. I wonder if it will impact (inaudible).

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

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We got nothing on that.

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Douglas Merritt, Splunk Inc. - CEO, President & Director [49]

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Alex, sorry, you were breaking up through most of that.

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Aleksandr J. Zukin, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [50]

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I was just asking about the federal vertical and if you have any commentary on if it was impacted by the government shutdown, what the pipeline looks like for the rest of the year and just a broader macro question about your pipelines generally.

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Jason E. Child, Splunk Inc. - Senior VP & CFO [51]

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Got it.

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Douglas Merritt, Splunk Inc. - CEO, President & Director [52]

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Got it. Yes, we were really satisfied with the performance of the public sector team and the federal team within public sector in Q1. Yes, it's been a bumpy ride for the past 18 months for that group. And I really am deeply appreciative of all the federal employees that find a way to keep their head down and keep doing the right thing for our citizens and for their organizations and persevere through the ups and downs. I think we had -- getting to a final resolution on the budget and having a little bit of a clean slate up until September, I think, is probably helping any of us that -- helping our buyers and then helping all of us that are -- have been tightly aligned to those buyers. So I'm excited about the run up to the end of the year. And hopefully, we'll have a good landscape to work with, with the Fed group post-September as well.

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Operator [53]

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Next question comes from Keith Weiss with Morgan Stanley.

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Melissa A. Franchi, Morgan Stanley, Research Division - VP and Research Analyst [54]

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This is Melissa Franchi, calling in for Keith. Doug, I just wanted to follow up with you on the security business. I mean, so it's been relatively consistent, but it's been consistently good for you guys. And so you're benefiting from both expanding within your customer base, but also displacing the legacy SIM vendors. And so on the latter driver, I'm just wondering, if we're looking forward, how much more is left to displace the legacy technology? And are you seeing any change in the pace of displacement?

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Douglas Merritt, Splunk Inc. - CEO, President & Director [55]

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No. It's been a really consistent drumbeat for probably 1.5 years now as far as the pace. And there's still quite a ways to go. That was a - quite a broad landscape of folks that have tried a myriad of different SIM vendors out there. There's a lot of focus on ArcSight and QRadar, but there were many, many other implementations beside those.

And I think the other piece is the definition of the SIM market keeps changing as well. It's gone from just strict incident event management to the augmentation, now, of behavioral analytics and a much more broad-based security analytics play. And now with the security orchestration automation category, that's trying to blend in as well. So while we are replacing the last-generation SIMs, even for the customers that have already done that, we're still coming in with additional functionality and new product offerings that continue to extend that SIM landscape and offering.

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Melissa A. Franchi, Morgan Stanley, Research Division - VP and Research Analyst [56]

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Okay. That's helpful. And then just one follow-up for Dave. In terms of the guidance for cash flow, sorry to follow up on that again, but you're still looking for 85% renewable mix for the full year. And so I understand how an increase in uninvoiced contract value could drive a headwind to cash flow. But I guess relative to when you guided a quarter ago, can you maybe just put a finer point on what's changed and what's driving that increase in the uninvoiced?

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David F. Conte, Splunk Inc. - SVP of Finance [57]

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Yes. Specifically, the composition in the first quarter in terms of renewable mix and, in particular, the billing -- the invoicing characteristics far exceeded our estimates in our model. And that changed the slope relative to timing.

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Operator [58]

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And our next question comes from Fatima Boolani with UBS.

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Fatima Aslam Boolani, UBS Investment Bank, Research Division - Associate Director and Equity Research Associate Technology-Software [59]

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I have one for Doug and one for Dave. Doug, in your prepared remarks, you were pretty deliberate about some of the initiatives you're putting in place from a vertical solution go-to-market perspective. And I'm getting the sense this is certainly more of a deliberate stance versus your approach in the past. So I wanted to understand what the catalyst behind that was.

And then maybe as an extension to the question to Dave is how should I think about the incremental investment into the business this year given the full year operating margin guidance is unchanged, and if that might have anything to do with this new initiative around vertical solutions.

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David F. Conte, Splunk Inc. - SVP of Finance [60]

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Yes. Hey, Fatima, it's Dave. I'll just talk about the margin for a second. The vertical initiative was his part of our plan that we set out at the beginning of the year. And when we look at Q1 results, which, obviously, we had a really strong top line and that flowed to the bottom line, we also looked at the weighting of margin contribution Q1 relative to margin contribution for the full year. And that was the basis for maintaining our 14% op margin. So that's the reason it's unchanged. There wasn't a specific new initiative. Everything is moving in terms of inside of the context of the plan that we started the year with in terms of the investment portfolio.

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Douglas Merritt, Splunk Inc. - CEO, President & Director [61]

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And to call out verticals, I was really trying to be comprehensive in where we're making our investments overall. And a portion of those investments are against the -- both the existing Splunk Enterprise footprint but then the complementary aspects around the monitor, alert, analyze and act. We've been contributing a significant portion of the R&D budget for the past 3 years on the net new innovation and new product deliveries to complement what has always been a strength of Splunk.

And vertical -- the way that we have gone after new segments in the past, including how we got into security, was to start to peel off -- hire people and put people into a group that have deep expertise in that area and allow them, working with customers, to find the patterns that could be repeated patterns that, then, either we or our partners get to craft a more specific delivery around. And we've been talking about the opportunity outside of security and IT for many years. We launched a whole set of recipes or cookbooks we call Splunk Essentials in the IoT segment last year. And because of that, we've seen some strength in manufacturing uptake. We published a whole e-book in the financial services arena in the past 60 days that starts to detail out the Splunk Essentials in nonsecurity IT areas, as well as some additional in security and IT that are specific to financial services. And all those are the future monetization and further expansion opportunities for a data fabric like Splunk within those orbs.

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Operator [62]

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And our next question comes from Gregg Moscowitz with Mizuho.

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Gregg Steven Moskowitz, Mizuho Securities USA LLC, Research Division - MD of Americas Research [63]

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Dave, you may be exiting this particular limelight, but it's been an incredible journey. So I'll add my congrats, and welcome Jason.

A question for you, Doug. So over the past 6 to 12 months, you've announced a lot of enhancements to the platform: DSP, DFS, SmartStore, Insights for Infrastructure, Natural Language and now Business Flow and Connected Experiences. It sounds like you might be most excited about DSP and DFS. What I'm wondering is can these collectively move the needle on growth in fiscal '20? Or do you think they'll take longer for this to translate into greater sales velocity?

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Douglas Merritt, Splunk Inc. - CEO, President & Director [64]

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I think that, like any 1.0 product introduction, there will be contributions from them over the course of this year. But when you are $1.8 billion with a forecast to grow to $2.25 billion, you need material that results in how do I find $100 million revenue generation sources. And it will take some time to have those products get to the same level of contribution. But the usage, the feedback that we're getting as they have gone into limited general availability across some of our most complex and thorniest customers is incredibly positive. And the other -- there's a line out the door to put this -- for usage on a limited availability basis. So I'm really excited to continue to push those products, make sure that we understand all the use cases and that they are truly ready for life in the wild with no guard rails. And I think we'll have a lot more to share with the community on how they're being used, what use cases they power and how they power them differently than what you've always seen from Splunk and how to get quick value from them at our upcoming user conference in fall, .conf2019.

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Gregg Steven Moskowitz, Mizuho Securities USA LLC, Research Division - MD of Americas Research [65]

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Okay. That's great. And then just a quick follow-up on the net new logos because maybe this is a function of rounding, but on the surface anyway, it would appear that this quarter was the lowest level that we have seen in a few Q1s or a few years for that matter. Are you still -- are you guys still fairly confident that you can eclipse 20,000 total customers by year-end?

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Douglas Merritt, Splunk Inc. - CEO, President & Director [66]

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Yes. Still remain confident on that number. And we did round down on the numbers. So -- but again, it's -- the quarterly reporting on this metric is kind of a pain in the butt given the constant tug and pull between what are we doing on the adoption side versus what are customers doing on the net new side. And the real focus that we've had is what are we doing across all aspects of the company, including product releases and our overall cloud footprint to make it -- to make that number easier and easier to achieve. Right now, there still is a lot of sales involvement. And I'll be really satisfied when there is less human dependency on getting early adopters successful and procuring those products from Splunk.

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Operator [67]

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And our next question comes from Karl Keirstead with Deutsche Bank.

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Karl Emil Keirstead, Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst [68]

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Maybe one for Doug, one for Dave. Doug, the 46% license growth, super strong, the highest in a while. Was there 1 or 2 areas that contributed to that? Or did any element of the business in the quarter feel a little bit onetime-ish that is worth calling out to us?

And then, Dave, I'll ask the second question now. I think everybody could get a little bit more comfortable with your lower operating cash flow guide if it was apparent that the ratable mix really did accelerate beyond the, say, 77% you did in fiscal '19. I know you don't want to get into the habit of disclosing that metric each quarter, but just maybe, just given the cash flow guide might be creating some angst, can you give any color about where that metric landed in Q1?

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David F. Conte, Splunk Inc. - SVP of Finance [69]

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Karl, it was pretty close to our full year objective, which is not typical for a Q1.

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Karl Emil Keirstead, Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst [70]

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Okay, that's helpful. And Doug, I'd love to hear a little color.

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David F. Conte, Splunk Inc. - SVP of Finance [71]

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And Karl, thank you for not asking for quarterly mix. It took us 18 months to get off of that. But yes, we materially exceeded our expectations in terms of renewable, and that's reflected in the $80 million increase in uninvoiced contract value against a, sequentially Q4 to Q1, much, much smaller pool of dollars to draw from. So it was really great performance by the field.

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Karl Emil Keirstead, Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst [72]

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Got it.

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Douglas Merritt, Splunk Inc. - CEO, President & Director [73]

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And then on the performance of the -- over the quarter, it was, I think, a relatively balanced performance. We had a handful of accounts in that 7-figure-and-up arena that really, really leaned in, which always helps. And that's really the marks that we are focused on to take the few number of the EAA and ELA customers to much bigger number of EAA, ELAs, I think, is a really important motion for us as a company. The Americas is the most mature, so they tend to be most mature with that activity, but we saw some healthy endorsements from customers outside of America as well. And as Dave said, it was a strong quarter. We're really pleased with the performance of the teams, and we're excited about how it sets us up for the rest of the year.

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Operator [74]

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And our next question comes from Steve Koenig with Wedbush Securities.

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Steven Richard Koenig, Wedbush Securities Inc., Research Division - MD [75]

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One for Dave and one for Doug. And thanks, Dave, for all the help over the years. Definitely appreciate it. So for you Dave, just -- for building on Alex's question. So yes, the bookings metric kind of low to mid-30s year-on-year. The software metric, kind of 54%. I don't expect every metric to match exactly every quarter, but maybe could you help reconcile those two a little bit? And then I've got a follow-up on -- for Doug.

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David F. Conte, Splunk Inc. - SVP of Finance [76]

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We've been conscious of moving away from perpetual and having a greater component of the business be cloud, specifically. You can talk about term in a second. But cloud doesn't come with maintenance. So it's in the services line for sure, but when we report software, we're saying our cloud number plus our on-prem number, i.e., license, that's 54% software growth, and we've been doing that for over a year now.

So when you look at the composition of the calculated RPO bookings number like the software component is actually -- is quite strong. And you're asking me how do we reconcile the delta. The biggest Delta is in the nonsoftware components.

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Steven Richard Koenig, Wedbush Securities Inc., Research Division - MD [77]

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Got it. Okay. I will work on that. And then the one for Doug. So Doug, when I look at some of the kind of the next-generation kind of new age vendors that want to do -- innovate in both security and in IT ops, it seems like there've been some interesting value-adds, the innovations some of these companies are doing. And then some of them in both spaces are going back and trying to do log management. And I'm just wondering what's your sense of the competitive dynamic out there with regards to the newer players and how Splunk plans to stay ahead.

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Douglas Merritt, Splunk Inc. - CEO, President & Director [78]

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Sure. So let me start with the log management piece. The core uniqueness that Splunk has that people still can't emulate and have a tough time wrapping their arms around is that we don't manage logs. Logs are unmanageable by definition. Every log is a snowflake. And any attempt to create structure and mandates with logs is a Sisyphean task. It's never ever going to come to fruition. That's not the nature of logs. Why Splunk was created is, if you've got a data source that by nature is chaotic and never systematizable and yet you've got to make sense of the data, then you need to create a data structure that actually is able to be completely non-schematized so that you can take what people would assume is random garbage and put it into this data -- investigative data lake and still make sense of it. That is -- that's completely unique. There's no other data structure out there that can do that yet. It's not worthwhile for us to rely on that. Eventually, someone will figure that out, but nobody else can do that, which is why on a forensic investigation basis, whether it's security forensics, IT forensics or outside those 2 departments, we're in a pretty -- we're in a category of 1.

As these vendors are coming in with a very IT or security-focused lens, it's not a bad way to go to actually start a platform. But the dilemma with that is the data that you're gathering for -- to serve an IT user or a DevOps user or a security ops user, the overlap between those different constituencies is very high on the data. And then it winds up being very similar data that you'd want to use outside of those 2 departments as well. If you structure all data, there's not much reuse you can get because now it's tailored for that specific audience. But the dilemma that we all have, and I think part of why Splunk is in the leadership position, is how do you create a very robust framework? Starting with a data repository that never structures the data allows you infinite variety on how you cast that data and make use of it across these different departments. And that's -- I guess, I'm trying to say, to solve the problems for these users and then to extend beyond that finite set of users to a broad set of organizations across a company means you've got to build a very complex and robust data platform capability set. And I feel like the investments we've been making over the past 3 or 4 years, and products like DSP and DFS are just examples of that, there's over 10 products we've announced in the past 1.5 years, I think, gives us the ability to continue to deliver unique value to our customers across multiple use cases, including security and IT.

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Operator [79]

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And our next question comes from Kirk Materne with Evercore.

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Stewart Kirk Materne, Evercore ISI Institutional Equities, Research Division - Senior MD [80]

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Dave, best of luck going forward. I guess, my question is for Doug. Doug, one of the things I've been sort of wondering about over time is just the flywheel effect for partners for you all. Only 17,000 customers for a product like yours seems so low relative to the potential. And I'm just wondering what's sort of taking a while for partners to kind of jump on and create really another distribution model for you all because you've been sort of slugging this out, I think, with more of a direct sales approach. And that's sort of been the way you had to do it at the start, but at a $2 billion run rate, I'm just wondering what's it going to take to get the bigger SIs, to get some of the bars really jumping in, in a bigger way with you all so you can create a little bit more leverage from a go-to-market perspective over the next couple of years.

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Douglas Merritt, Splunk Inc. - CEO, President & Director [81]

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Sure, Kirk. I've obviously been very consistent on the need for a robust partner ecosystem. And I think that the improvements we made over the past 5 years have been pretty notable and remarkable. There's still a long way to go. You're never done, we're proud but not satisfied. We just had our Global Partner Summit this quarter and rolled out a bunch of new enhancements to our partner programs as well as our partner portal and tech infrastructure to help make their lives easier and better.

I think the amount of partner involvement has gone up and up and up over the past 5 years. It's well over 50% across our -- all of our theaters right now as a company. The dilemma is that partner involvement is usually co-sell with us, not independent sell.

I think, a lot of what we are continuing to work on, which goes back to the underlying platform and the platform capabilities, is making it easier and easier to build solutions and other contributions on top of the Splunk platform so that partners -- actually, the thing that they are talking to a customer about is their thing on top of Splunk rather than Splunk or Splunk's thing. And I think, we've made traction. We keep seeing Splunk base -- the volume of items on Splunk base go up, and -- but there's still more work for us to do.

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Stewart Kirk Materne, Evercore ISI Institutional Equities, Research Division - Senior MD [82]

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Okay. I guess, just to try to maybe put a timeline on it. Is this something you could see moving the needle next year? I'm just kind of curious. I know it's an iterative process, but I'm just kind of curious. It seems like you see a lot of data points heading in the right direction on this. Is there any sort of inflection you see coming? Or is it just -- it's going to be sort of pushing the boulder up the hill to a certain degree?

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Douglas Merritt, Splunk Inc. - CEO, President & Director [83]

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I think the -- what we are seeing is we have prioritized different partners and accounts. Accenture is one of those examples. We've had some interesting announcements with Cisco and Symantec where they're OEM-ing Splunk for different use cases. So pick fewer partners that we go deep with and really do co-development and make sure that there is -- going back to the it's a partner thing that they're leading with, that they have what they need for a whole series of use cases or different buying centers to be successful on their own with that sales initiative. And I think within those customers, and Accenture's probably the one we've been most consistent with for 3 solid years, we're seeing that productivity from those accounts.

And then in addition to that, what I was referencing around the overall partner program and the technology enablement that we're doing and the partner enablement is how do you continue to increase the capacity and capability of those that are not getting that really, really discrete focus as well. But I think we're seeing a tipping point in some of our top-tier accounts, which, hopefully, we'll see the -- we all see the benefits out in the marketplace.

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Operator [84]

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And we have time for one final question. Our last question comes from Walter Pritchard with Citi.

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Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [85]

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I guess, Dave, a question for you. I guess, a final question on the final call on maintenance. There was a question...

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David F. Conte, Splunk Inc. - SVP of Finance [86]

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Walter, I saved the best for last.

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Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [87]

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Certainly. So on maintenance, I guess, looking forward on that number and maybe, I guess, it's you, now, Jason, but should we think about that staying positive? Or it's -- the growth rates come down quite a bit. I'm wondering how should we think about that from a trajectory perspective. And then I had a question for Doug.

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David F. Conte, Splunk Inc. - SVP of Finance [88]

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Meaning the maintenance growth rates?

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Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [89]

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Yes, the growth rate. Yes, I think it was 30s. It was 30s maybe an year ago and it's kind of into the 10% range right now. Is that -- is this a level you think it stays? Or do you think it comes down further in terms of growth?

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David F. Conte, Splunk Inc. - SVP of Finance [90]

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It probably is going to continue to decline a little, but it's -- really, the offset is, well, how fast does cloud grow as a percentage of the total. Obviously, term gets -- a chunk of term gets put into maintenance. It's a different math equation than when it's perpetual. But the big swing is cloud is a bigger percentage versus perpetual. That's the biggest thing in maintenance.

The other piece, professional services more times than not don't flow through RPO at all. You do get them into deferred on occasion based on timing of delivery and payment and all that. But when I talk about the other components when we think about gross book of business that the field is generating, we put all the software components, all the maintenance components and all the services components in that pool. But the biggest -- again, the biggest recomp from that earlier question relates to maintenance.

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Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [91]

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Okay. Got it. And then Doug, on the sort of higher-velocity model that you're looking to drive, could you update on -- update us on where that -- where things stand there? Is that starting to contribute a material number of new customers? And are there milestones this year that you're looking at to feel like that initiative will be where it needs to be?

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

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So for better or worse, as I've talked about in past calls, that net new customer account is really a Splunk enterprise account. And for month-to-month contracts in our cloud arena for the VictorOps contracts, which are true ARR and many of them are monthly, we don't include those in the number. So we've maintained consistency over the many years we have been reporting out on how we're defining that number. So a lot of that velocity is not trapped in that number. And as we get more and more traction with the Splunk Cloud platform and a lot of the elements that are offered there, we're going to have to face the decision point of how do we want to update you guys on the total customers, not just the Splunk Enterprise customers, and what that trajectory looks like because that's becoming a more and more sizable portion of our R&D investment as well as everything around the company and systems to support that lower-touch, higher-volume model, marketing programs, sales teams, et cetera, et cetera.

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Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [93]

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Okay. And milestones this year, is there anything we should be focused on? Or is it a sort of incremental just (inaudible)?

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Douglas Merritt, Splunk Inc. - CEO, President & Director [94]

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It is. It's something that you -- that we're not -- we have not -- we're not making visible to you guys. So, no. There's internal milestones that we have, but there's nothing that we are breaking out and reporting externally right now.

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Operator [95]

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Thank you. And at this time, I'll be turning the call back to Ken Tinsley for any closing remarks.

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Ken Tinsley, Splunk Inc. - Head of IR [96]

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Great. Thank you, Jimmy. I appreciate your help today. Jason, welcome. And Dave, thank you. It's been a pleasure and an honor. Hope everybody has a good night.

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Operator [97]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program and you may all disconnect. Everyone, have a great day.