Splunk Inc (SPLK) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Splunk's second quarter 2013 financial results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to hand the conference over to Mr. Ken Tinsley, Sir, you may begin.

Great, thank you, Sayed, and good afternoon everyone. With me on the call today are Splunk's CEO Godfrey Sullivan and CFO Dave Conte. As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available on our website following the call. By now you should have received a copy of our press release that was distributed this afternoon. If you have not, is available the investor relations section of our website.

Before we begin, I would like to remind you that during today's call we will be making forward-looking statements regarding future events and financial performance including our guidance for our fiscal third and fourth quarter and full 2013 fiscal year. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, specifically our final prospectus for a follow-on public offering in July 2012 and our periodic reports that we file with the SEC, including the Form 8-K filed today with today's press release. Those documents contain and identify important risks and other factors that may cause our actual results to differ from those contained in our forward-looking statements. Forward-looking statements made during the call today are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain accurate current information. Splunk disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call, but will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum.

Also during the call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the GAAP and non-GAAP results is provided in today's press release and on the investor relations section of our website. The projections regarding our non-GAAP operating margin that we provide today exclude stock based compensation expense, which cannot be determined at this time and therefore, cannot be reconciled in today's press release. With that, let me turn it over to Godfrey.

Thank you, Ken. Welcome, everyone, and thank you for joining us on our Q2 earnings call.

I am pleased to say that the momentum from our fiscal first quarter of 2013 has continued into Q2. Revenues for our fiscal second quarter were $44.5 million, representing 71% growth compared to the second quarter last year.

License revenue for Q2 was $30.2 million, representing 61% growth compared to last year.

Best of all, during the quarter we welcomed nearly 400 new customers to the Splunk family.

Today I'd like to update you on several themes we discussed on our last call. Splunk as an enterprise data platform, Splunk as a platform for apps and developers and our theme of investing for growth. First, Splunk as an enterprise data platform. Splunk enables organizations to easily gain operational intelligence from their machine data. The more data we index, the more value we deliver. Our new customers usually purchase Splunk to solve one use case and then learn more about the value of their machine data and then expand to additional use cases over time.

Monster Worldwide, the global leader in connecting people to job opportunities, is a new Splunk customer. Monster selected us to support their security monitoring and compliance efforts. One of their top objectives is to protect, track and control access to sensitive customer information. They like Splunk's functionality and rapid deployment which was much more attractive than trying to build a custom solution.

As our existing customers gain experience with Splunk, they add more data and get more value. Hughes Network Systems is the global leader in broadband satellite networks and services. Hughes first became a customer in 2009. At that time, they chose Splunk Enterprise for security purposes to identify threat patterns across many data sources. In Q2, they expanded from security to IT operations, assisting the company in the successful launch of the Jupiter satellite.

For Hughes, any issue with their satellite performance has a direct impact on customer revenue and retention. Hughes is a good example of our ability to enter a company relationship for one use case and then expand that relationship to other departments. In this case, from security to satellite operations.

Many of you have attended our Splunk live events and you will recognize this story as consistent with the expansion that many of our customers describe for themselves. That is, Splunk moving from a departmental success to becoming a data platform that brings value across the enterprise.

To support our mission to become an enterprise data platform, I'm also glad to report that we are well into the beta phase for our next core product release, Splunk Enterprise 5.0, which includes faster reporting over very large data sets, improvements for fault tolerance and various UI improvements. We will be providing more detail on 5.0 at our user conference in Vegas next month.

Let's move onto Splunk as a platform for apps. Many of our customer use cases like app monitoring, infrastructure analysis, and security, are accelerating through the use of specific data sources and views that we call apps. In Q2, Splunk and our user community added over 40 apps to SplunkBase.

For example, one customer contributed an app for SQL database extensions that enables customers to integrate structured information from SQL databases with semi-structured information in Splunk. Another customer posted an app called Security Onion for Splunk which provides an integrated UI for Security Onion, which is a popular Linux offering for intrusion detection and network security monitoring. In addition to the apps contributed by our customers, Splunk also shipped GA versions of the Splunk app for VMware, an app for Windows Active Directory and an app for Palo Alto Networks.

The Splunk for VMware app shines a bright light on virtualization. It enables customers to see data from all layers of their virtual infrastructure like host operating systems, applications, as well as the underlying server storage and network devices. For the first time, customers see everything about their virtual environment.

CloudShare was an early beta tester of our app for VMware and has now adopted Splunk companywide to gain deeper insights into every aspect of their business. Their infrastructure performance, their customer trends and realtime business metrics. CloudShare presented their Splunk implementation and VMworld yesterday, and it was an exceptional presentation of Splunk as an enterprise data platform.

An extra mention here, many of our apps are lightweight templates that combine data source interpretations with simple views. The VMware app, on contrast, is pretty beefy. More than 18 months of development effort to get the data from the VMware host and extensive beta testing in large-scale environments. This app is heavy on IP and our customers are very happy about it.

The app for Windows Server Active Directories enables organizations to avoid services outages and perform proactive management and compliance reporting with Active Directory. We all know Active Directory is everywhere and when stuff happens, users are unable to login, access privileges expire, e-mail stops flowing and every executive hears about it. This new app is easy to deploy and uncovers the data needed to restore Active Directory service quickly.

Riverbed Technology was one of our customers who participated in our AD program and our beta program and have deployed the Active Directory app across the company.

Finally, the Splunk app for Palo Alto Networks also went GA in Q2. This app takes in data from Palo Alto Network's firewalls to provide additional visibility, insight and analysis of next generation security threats. Our thanks to Palo Alto Networks for their active support in helping us build this app.

Okay, Splunk as a platform for developers. Developers are a new market for Splunk, and we are investing in tools that make it easy for developers to extend the power of Splunk Enterprise. We now have three SDKs in beta; Python, JavaScript and now Java. All three are fully documented and supported. Momentum is building, and we are now logging more than 1,000 unique visitors per week to our developer website.

Hurricane Labs is an information security firm that uses our Python SDK. Hurricane Labs processes millions of events each day and helps clients develop awareness of what's happening on their networks. They deployed Splunk as a security solution for the clients. Because they are a Python shop, our Python SDK enables them to customize and extend Splunk for their customers within their standard development environment.

As I meet with CIOs, I receive very positive feedback around our SDK efforts. They want to customize and extend Splunk within their corporate environments. Most frequently, this is Java, Python and JavaScript, and our SDKs enable to do this in their standard languages. We'll update our progress as we move forward, and our goal is to drive new use cases within and beyond our core IT markets.

Our newest offering for developers is Splunk Storm. We are pleased to announce earlier this week the general availability of Splunk Storm, our first cloud service. Feedback during the public beta program in Q2 was very encouraging with hundreds of active projects and users. If you are developer building apps in the cloud, you can sign up for Storm, choose your capacity and be live in five minutes.

Offering Splunk as a multi tenant on-demand service gives our customers these benefits. Monthly pay-as-you-go pricing, no installation or maintenance of hardware or software, and the ability to scale capacity as needed using a simple slider.

One Splunk Storm customer is SendHub, a company that enables customers to easily communicate with individuals and groups of any size through SMS messages, voice calls and voicemail. SendHub sends over 0.5 million messages per month to thousands of subscribers. To ensure the success of their business, SendHub uses Storm to monitor the performance of their API end points to ensure high-quality service to both their website and their mobile applications.

Splunk Storm is on its way to becoming the service of choice for application developers in the cloud. Since we launched two days ago, we've seen a noticeable uptick in sign-ins and projects.

In summary, we made great progress during the quarter, driving Splunk as an enterprise data platform both through expanded use cases, 400 new customers and through our upcoming 5.0 product release. We made progress extending Splunk as a platform for apps and developers with new SDKs, new content being contributed by our customers and our new offerings for VMware, Active Directory and Palo Alto Networks.

Finally, we delivered Splunk Storm, our first-ever SaaS offering, to enable developers to build better products faster and also to instrument their apps so that they can build in the operational analytics coming from their machine data when they go into production.

Now, with more on the numbers and our investment plan for growth, I'll pass it over to Dave.

Thanks, Godfrey. Good afternoon, everybody, thanks for joining us. First, I'll provide a recap of our results for Q2, then share our outlook for Q3 and the remainder of the year.

As Godfrey mentioned, revenue in the second quarter totaled $44.5 million, a 71% increase over Q2 of last year. License revenue in the quarter totaled $30.2 million, an increase of 61% over last year while professional services revenue was consistent with prior periods at approximately 6% of total revenue.

We added almost 400 new customers in the quarter while our existing customers continued to buy more Splunk software. Specifically, 71% of the quarter's license bookings came from upsells to our existing customer base, the third consecutive quarter where our existing customers drove more than 70% of the license business.

Upsells come from both expansions and to new departments and use cases as our customers move toward the next phase of operational intelligence and upgrades for additional capacity in an existing Splunk instance.

This quarter about two-thirds of upsells came from expansions and one-third from upgrades. We continue to see deeper adoption of customers in terms of order size. In Q2 we signed 98 orders greater than $100,000, up from 65 and the year ago quarter and 73 in Q1.

Last quarter, I outlined two of our large investment areas, field coverage and product. On the coverage side, we continue to increase our sales capacity by hiring high-quality sales professionals. We ended Q2 with 117 quota carriers, up from 101 last quarter and up from 94 at the beginning of the year. We will continue to invest in field operations of the second half and expect to grow quota carriers to between 140 and 150 by the end of the fiscal year. We will also continue to add the requisite technical sales personnel and management functions to support our quota carrying teams.

Our international sales team continued to make good progress. Similar to Q1, our international customer base grew 70% over the prior year and totaled approximately 1,600 customers as of July 31. Importantly, of the 16 new quota carriers we added in Q2, 10 of them were based outside the US. International operations contributed about 20% of total revenue in the quarter, consistent with prior levels.

As a reminder, we find that our quota carriers take anywhere from 9 to 12 months before reaching full productivity. The variance being driven by the maturity of the markets where we are adding new sales folks. As such, we expect our recent additions to fully contribute to overall capacity towards the second half of next year.

Continued product investment is critical to our growth strategy and is important in terms of increasing the capabilities of the Splunk enterprise platform. Godfrey identified several initiatives that are underway and how these product enhancements will expand our applicability in the marketplace.

A specific example within the products group where we continue to invest is the expansion of our team building SDKs for our developer community. We will also continue to add technical resources to our core enterprise product teams in both the Bay Area and plan to create R&D centers of excellence both domestically and abroad. With the introduction of Splunk Storm, we will be investing aggressively in our cloud offerings capabilities as well as the associated infrastructure to support our cloud-based customers.

Now, turning back to the core, as it relates to maintenance contracts, recall that we calculate our maintenance renewal rate on a rolling 12 month basis. In Q2, our renewal rate was 91%, consistent with our ongoing expectation of 85% to 90% renewal rates. Our installed base of customers continues to grow, and we are completing higher numbers of large transactions and renewals, both of which have an impact on revenue and on the balance sheet.

Specifically, our deferred revenue balance was $67.7 million at the end of Q2, an increase of more than 120% from the same quarter last year. As we have previously said, the mix between term-based and perpetual license sales will fluctuate from quarter to quarter and has historically ranged between 10% to 20% of any quarter's license bookings. In Q2, approximately 17% of total license bookings were from term-based transactions compared to 11% in Q1. We expect to see continued variability in the mix between term and perpetual licenses based on customer buying preferences.

Regarding margins and probability, overall gross margin was 90% and in line with prior quarters. Gross margin on support was 87% and the professional services margin was slightly negative.

As we continue to focus on customer success and expanding their use of Splunk across their organizations, we will continue to increase our services capabilities. As a result, we expect our services business to operate at or near breakeven in the short-term, with margins expanding gradually over time.

I've mentioned previously that we expect our longer-term gross margins to range between 85% and 95% based on the mix between term and perpetual license sales and the adoption levels of our Storm cloud service. We will continue to update you on the margin impact of Storm as we experience actual customer utilization now that we've formally GA'd the offering.

Overall, our non-GAAP operating margin, which excludes non-cash stock-based compensation, was a negative 1.5% in the quarter. Non-GAAP net loss was $700,000, or $0.01 per share. Our favorable operating and net margin performance was due to our overall revenue growth.

It is important to note that the vast majority of our expenses relate to people costs. Our pace of hiring is steady, so our total expense base tends to grow more linearly than revenue and therefore, can cause of operating margin to fluctuate quarter to quarter.

Cash flow from operations in Q2 was $3.8 million, free cash flow was $2.2 million and we ended the quarter with $268 million in cash. As noted last quarter, cash flow was largely dependent on the linearity of in-quarter bookings and the collection timing of our outstanding receivables, which means cash flows can vary quarter to quarter, just as we saw in Q1.

DSOs in Q2 were 70 days, in line with our 60 to 75 day expectation. As I've mentioned, our goal is to continue running the business with positive operating cash flow.

Okay, turning to guidance. For Q3, which ends October 31, we expect total revenue to be between $45 million and $47 million and non-GAAP operating margin of a negative 4% to 5%. With our first half results and expected performance in the second half, we are increasing our full-year revenue expectation to between $183 million and $186 million.

With our continued but measured investment in product and sales capacity expansion, our higher revenue levels will yield improved operating margin for the year. We now expect full-year non-GAAP operating margin of between a negative 2% and negative 3%, better than the negative 4% to 5% we previously guided.

Our weighted average share count was 95.5 million shares at the end of Q2, and we don't expect any meaningful changes this quarter. However, as Q4 is traditionally our most profitable quarter of the year, we are expecting non-GAAP operating margin to be positive in Q4. As such, it is important to remember to use our fully diluted weighted average share count of approximately 116 million shares when calculating EPS in Q4, or any profitable period for that matter.

Overall, we are pleased with our Q2 results, product developments and increased customer base. We are looking forward to continuing to add the best field reps available and expanding our platform breadth and capabilities.

Thanks much for your time and interest, and with that, we'll open it up to questions.

(Operator Instructions) John DiFucci, JPMorgan.

Thank you. I have a question for Godfrey and a follow-up for Dave. Godfrey, questions on the new offerings. I know Splunk for VMware and Splunk Storm are relatively new here. But I guess -- I think most of us have been out at VMworld and it seems like there's quite an ecosystem around virtualization right now. And I just -- this was in beta for quite some -- for a while. And I guess, could you tell us what kind of traction are you seeing?

It sounds like you're -- you have a lot of interest, sounds like you had a lot of interest in the beta versions here for both VMware and Splunk Storm. But if you could maybe talk to us, give us a little more color about what we might expect going forward. And also tell us if there's anything implied in the guidance for any kind of uptick from these products?

Hello, John. So, the app for VMware is free, so don't -- we're not building any guidance or revenue assumptions into that product. But I will tell you that the enthusiasm from the customer base is not just the ability to look at all the layers of a virtualization infrastructure, it's the ability to correlate that across everything else; across your security posture, your transaction environment, your website et cetera.

So, it's one more important layer of the stack, and it's hard to get at because they don't publish their source feed, and it's kind of a dark hole. And so it was hard work to get it all and now that we have it, customers are very happy about it.

It's enterprise software, so it will take some time for us to be able to report back in terms of transaction metrics and all that sort of thing. But very pleased with where we are.

The first version is heavy on data source development and less heavy on graphics, and as we continue to move on, we will continue to improve the presentation layer.

On Storm, we've just -- we've been GA for two days, so really we've been just tracking what is going on with sign-ups, what's going on with customers registering for new projects and all that. And we've seen a noticeable uptick, but I went want to create a trend line out of two days of activity. It has been two to three times our normal activity levels of July and August just in the last two days, but again, you can extrapolate that yet, it's too soon.

And no, we don't have any revenue for Splunk Storm built into our model, but we are certainly pleased with the customer feedback so far. I think it will be a lot better in Q -- probably by Q3 earnings call we'll be in a much better position to report on that.

Okay, great. And if it -- because the app for VMware I think is listed on your website as a premium offering. That's why I thought perhaps it was paid for, but is it also the app for Palo Alto Networks and the app for Active Directory, I would assume those are also free offerings?

Those are also free offerings.

Okay, great, thanks. And Dave, follow-up on the renewal rate up above 90%, which is -- you were in the 80%s for a while and the seat above 90%, that's enterprise -- enterprise class is up near around 90%, but it is nice to see above 90%. Are you doing anything different there or is it just the continued efforts of your team to try to improve around those numbers?

Well, I think we're doing some stuff specifically around focus in the field organization and John, you and I talked specifically about our investments in dedicated folks around the renewal team. So, most recently in APAC, prior to that EMEA and initially in the US. So, I think we're seeing the benefit of that investment, and that has really been the area of focus. We're not doing anything else beyond that besides providing them these -- some of the apps that Godfrey mentioned we introduced this quarter, I think is certainly helping as well.

Okay, great. This is all great to see guys, nice job.

Phil Winslow, Credit Suisse.

Congrats on smoking the Q2 numbers here. Just looking at the customer count growth here is really pretty impressive with the 50% year over year. Godfrey, a question to you as you balance what you guys talked about deepening your penetration to existing customers, but also continue to acquire customers at this rate. How do you balance that from a go to market perspective? Thanks.

Thank you, Phil. I can't tell you that I do balance it, I wish it were that scientific. What we really do is we look at markets, we try to understand markets that are ready where we can put additional resource, and we do that with as much data as we can, plus experience. We drive events all over world as you've come to a few of our Splunk lives, and thanks for that.

And so you've seen what happens when a roomful of customers hears from other customers about expanded use cases. We've -- we're bringing a cloud offering, I mean, we just push it all. And then the numbers are what the numbers are. I can't tell you that I have a magic formula for how much is new versus expanded. You just have to go out and do your work, and then that number sort of falls out of it.

Great, and then just one follow-up on deal size. Obviously, it seems like you had pretty good size in deals north of $100,000. Just what you're seeing there in terms of deal side and what your expectations are? Thanks.

Well, it speaks to the fact that an expanded field organization can have an impact on that. It is time. You have seen our customers, how they move from a single use case to a multi department use case, and on and on.

And I think about, what, about 25 of our 100 new -- or sorry, of our six-figure transactions, I think about 25% of them were actually new customers and about 75% of them were expansion or upgrade customers. And so that just shows that it's a combination of more people, more marketing events, more go to market stuff. All that stuff adds up, and having more people to carry the water close to the customer really matters for us. So, I think it's just all of that.

There's -- there was nothing in the quarter that was unique or some big one-time whatever, it was just a bread and butter quarter of lots of activity all over the world.

Cool, thanks a lot, guys. Congrats.

Kash Rangan, Merrill Lynch (technical difficulty)._Brent Thill, UBS.

Thank you, nice job. Godfrey, on Splunk Storm, is there a specific customer base that you think this is going to appeal to or is this a fairly horizontal solution that you think even the largest enterprise customers can match up and use your other solution, and use this for other areas as well?

Yes, we've -- well, thanks for the question, Brent. We have targeted this offering directly at developers. And so if you go up on Storm and you see the way it wires up. It's really easy to sign up, create an account, and then choose the data sources you want to input into it, and off you go.

You really can go from zero to live with Storm in about 5 minutes, or 10, but it's not -- this is pretty straightforward. It doesn't have the features of Splunk Enterprise. It's very targeted towards developers and being able to help log apps that are in development in the cloud. So, what we learn from it will tell us a lot about what the appeal is to enterprise customers and others who might want a SaaS offering in addition to On-Prem.

The thing that's unique about Splunk and why Splunk Enterprise has been so successful On-Prem is because you want to put Splunk as close to the physical infrastructure as you can. When you've got dozens or hundreds, or in some cases customers have thousands of Splunk forwarders out on their hardware devices, you want to wire that stuff back to a server that's right next to your physical infrastructure. You wouldn't want to send data from thousands of devices up to the cloud just so you can analyze it and bring the answer back. It's not efficient from a wiring harness standpoint.

So, our OnPrem customers will probably more appreciate the On-Prem solution. Our hybrid customers run, even today, folks like Zynga run Splunk both On-Prem and in the cloud against apps they have there. And then customers who are developers who are starting their projects in the cloud, they don't have any physical infrastructure, so for them it makes perfect sense just to turn on logging capabilities while they're there. And we've made that a five minute exercise.

What's most important to me is that those developers build Splunk into their products. Because it's how you teach your app to instrument out -- to output machine data or logs is what enables you to get good operational analytics on your business when you go into production.

I think there's merit for Splunk in a lot of different places, and we just want to make sure we're in all those places.

Okay, and then just a quick financial question, just on the expansion activity. You obviously saw a really nice jump in larger transactions. Is there a simple metric that you're seeing on repeat orders versus initial orders where you could just give us a color of how you're seeing that jump up over the initial deal size?

Brent, it's been pretty consistent as we've looked at customer buying patterns after their first buy. On average, they probably consume about 2.5 times more Splunk in the following two years after that first purchase. So, it's hard to pinpoint a specific trend in there, in particular, given the breadth of the use cases.

So, as we look across all of the verticals that we're in and then the use cases that are driving a lot of the upsells, it's very diverse. I think it's just more and more awareness of how customers are driving value out of that data that they're able to get out of Splunk.

Great, thanks for clarifying.

Adam Holt, Morgan Stanley.

I'll also echo the congratulations on the real good numbers.

My first question was about the term mix. A little bit higher than we've seen in the last couple of quarters. Maybe walk us through if there was anything in particular that jumped out that was a driver there, and how we should be thinking about the term mix as we look into the back half.

Yes, hey, Adam. We give the range of what we expect, which I know is a fairly broad one, 10% to 20%. We've looked at the historic patterns of how customers buy or how the mix of term versus perpetual is realized on a quarterly basis. And we find that, not dissimilar to my answer to Brent, there's no notable identified pattern.

It really gets down to the specific transaction and the appetite of the particular customer. And our objective, as you know, is we want to enable a customer to buy the product, which is why -- it's not that we're necessarily indifferent between perpetual and term, but we want to enable customer acquisition of the product. We give the 10%, 20% range, that's where it's been historically, that's where we think it will continue to result.

If I could just ask a quick follow-up on a geographic area, you had obviously good growth internationally. Could you maybe qualitatively talk about what you saw in the European theater? And I know you've had some changes there internally. Just where you are in terms of your organization and what you saw in that market from a demand perspective. Thanks very much.

Hi, Adam, Godfrey, thanks to you. Yes, Europe was -- the growth rate in Europe was lower in Q2 than the overall business, and we do see the same economic mess that everybody else sees. That said, we need to give our new European leader a chance to get in there and get his arms around the business and build the team, and do all the good stuff that leaders do. And so I'm hoping that we see Europe come back to even higher growth rates than it is now.

But yes, it's -- we see the same thing in Europe that everybody else sees. It's just that the overall growth rates are pretty high, so we're still enjoying success out of it. But yes, I acknowledge that.

Terrific, thank you.

Raimo Lenschow, Barclays.

Yes, congrats on the quarter from me as well. Two things, first on the profitability side. Obviously you kind of delivered much better, and it's more functional with the license growth coming in better than expected. But how do you think as you plan out into the second half of the year into next year in terms of your path towards delivering profitability sustainably? Are we trying to -- do you think you can grow consistently -- be consistently on profit quicker, or would you like to invest more and push out -- and push to grow more?

And then secondly on pricing, a lot of the discussions we have with customers that come into that renewal because they've used up quite a lot of their -- what they initially bought, whereas -- was -- do you price it on a terabyte per day, or do you need to go to some sort of ELA license? And I was just trying to find out what your thinking is here. Thank you.

Yes, Raimo, thanks a bunch. This is Dave.

Listen, as it relates to our investment philosophy, we are absolutely committed to investing for growth, and if you listen to my prepared remarks, I specifically call out our field expansion and our investment in the product. We are also committed to running cash flow positive. So our ability to generate more profit exists and our philosophy is this is early in this product cycle.

We've got an evangelist sale in many of the regions of the world, and we're just scratching the surface. So, I think prudence says we need to in a disciplined way invest aggressively to maintain and expand the lead that we have currently.

Thank you.

You also asked about pricing, and so it's maybe a little early. I don't want to announce anything specifically, but I'll tell you that Tom Schodorf and I have been out meeting with customers and trying to understand, how do we extend the same viral tailwind that we have through the free download that works so well for getting that first user, that first champion in a company before they've ever invested in Splunk? How do we give them the same ability to invest and expand at the enterprise level?

And so we are examining several options for what we call enterprise adoption that would enable our customers to think more broadly about the product as opposed to worrying about data limits. It's a tricky situation because it's how we price the product, but I will tell you that we are aware of our enterprise customers' desire to expand, but also aware that we need to give them some better tools so that they can stand up large projects and not have the data rate speed frightening or whatever. So we are working on it, and we will come back with more specific feedback when we have something specific to announce.

Perfect, thank you.

Brendan Barnicle, Pacific Crest.

I wanted to follow-up on that pricing question if I could, Godfrey. Did you do any ELAs during this quarter or any different types of contract arrangements?

Gosh, we really don't do ELAs in the classical sense, like we don't do any perpetual ELAs. Every now and then we do a term ELA, and I could count those on one hand that we have done life to date.

Most of the times what we do is we create a window, a big [sense] that the customer can run around in by giving them enough capacity so that they can take on the project they have at hand plus some additional projects and not get themselves into trouble. So, not ELAs in the classic sense, but we do have our version of it, and it works pretty well.

We get some pressure around data volumes and all that because it's a unique pricing model, but if we did it by servers, we would be getting pressure on per servers. If we did by users, we would getting pressure on users. We let customers use as many users as they want, as many servers, as many reports as they want, as many apps as they want. We don't charge for any of that, and so there has to be some pressure point. In our case, it's the data volume.

Our job is to try and make it is easy as possible for customers to expand at the enterprise level and still find a way to have it be fair for them and us, and we continue to work on that all the time. But no, there was nothing out of the ordinary during Q2 as it relates to ELAs or anything like that.

Great, and then over on the app side, nice addition of those 40 apps that that you mentioned. What's the total apps number that you're up to now?

I don't remember. To give you the truthful answer, I think it's around 300. I'd have to go look it up.

And do you see --

The reason why I'm saying I don't know is because some of those apps were written for a prior version of Splunk. And as we go through our upgrades, if we obsolete our end of life an old version, I'd have to go back and recount apps.

So, I want to -- so I'm taking that -- I'm going to take the Fifth Amendment on that one. It's in the hundreds, and I'll come back to you with a more specific answer after we rescrub the list for 4.0 and 5.0.

Great, that it would be helpful. And obviously, you added some really important ones this most recent quarter with VMware and Palo Alto and Windows. What does it look like in terms of the pace of apps development? Is there any metric you can give us around that, how that's tracking?

Well, I -- here's the way our -- if you add Guido Schroeder that question, the guy who runs our factory, he would tell you I need more resources in every area of the business. And I need more developers in my apps business. I need more developers in my SDK team up in Seattle, I need more developers in Splunk Enterprise, and I need more technical resources for our exploding cloud business with Storm.

It's one of four main things that we do which is to develop these templates or apps so that we can put a flavor or personality on top of Splunk Enterprise that enables it to continue to broaden its horizons. So, it's an important driver for us, but it's one of four things we are investing in, and every one of them needs more resource.

Great, thanks a lot.

Kirk Materne, Evercore Partners.

Dave, you mentioned you're looking to get up to about 140, 150 quota carrying reps by the end of the year. The 16 you brought on this quarter obviously a little bit heavier, more heavily weighted towards international quota carrying reps. Was that just opportunistic, or are you guys making an effort to make sure that you continue to bulk out the international, perhaps at a little bit faster pace or cadence then you are the US business?

Yes, I wouldn't say it -- it's not that we are specifically trying to accelerate in one region or the other. We look at within the US as well as the EMEA and APAC, when is a particular -- where is a US territory or a unique country in EMEA, where is the market ready for additional resources? And then, how does that pair up with making sure we've got the right candidate flow?

We are constantly going through the exercise of identifying market readiness, candidate flow, A-plus player, put them on the ground. In terms of mix, it's going to ebb and flow based on those dynamics.

And then without asking too much specifics, but in places like Europe are you trying to get a concentrated population in a few geos first? Or you just going where sort of the demand trends lead you or are you trying to sort of build small presences in the bigger more obvious markets over there before you spread out too broadly?

Well, I think we've, probably over the last, I'll call it 18 to 24 months, made those focused investments in important countries like the UK, Germany, France, et cetera, et cetera. So, were going to continue to make sure we've got enough resource to cover all the demand that we see in those regions.

And then as I mentioned, we are evaluating the -- for EMEA specifically or even in APAC, each individual region around that market readiness. We don't want to prematurely invest in a region where the awareness of what we're doing, the brand recognition, the identification of the problem statement and the solution, and start throwing people on the ground there where their opportunity to succeed would be limited. So, it's a constant measurement of market readiness and field capacity, and that's how we do it.

Great, that's it for me. Congrats on the quarter.

Greg McDowell, JMP Securities.

Hello, guys, thanks for taking my questions, nice quarter. I wanted to quickly ask about Splunk Storm. I know it's a self-service provisioning model, but I wanted to ask is there going to be any sort of active outbound sales campaign or dedicated sales resources to Storm to possibly sell to these developers, and prevent them from possibly going to alternative SaaS tools?

Yes, we will do proactive marketing for Storm. We have not yet done much. So most of the metrics that we've had during the beta period were just from word-of-mouth and people finding us. It was kind of hard to even find the Storm button on our website. So, yes, we will up to go to market mechanisms for Storm and try to expand that as quickly as we can.

We will make sure that our existing field organization has access to and motivation to also push this cloud offering. It may sound -- I know there is a sense that traditional field organizations have had difficulty selling both On-Prem and cloud offering. We think we're going to be a little bit of an exception to that rule in that we are already in major corporations in IT. Those are the same exact corporations who have developers who are going to the cloud to start up their development projects.

Our -- we need to further penetrate, that's an expansion opportunity inside of large corporations for us and young corporations. It is an opportunity for us to expand from IT into dev, so it is critical that we use one to complement the other.

So, we expect to both be active in a go to market capacity and also use our existing go-to-market engine to help with the normal web-based activities.

That is helpful, thank you. And one quick follow-up, just the CapEx requirements to run Storm. I know you're on AWS, but I was just wondering as that -- as Storm starts to take off, if we should see incremental CapEx costs? And that's it for me, thanks.

Yes, Greg, as I mentioned, we are going to evaluate the momentum and utilization of the infrastructure we have. And as we make decisions around that, we will certainly let the group know.

Thank you.

Ed McGuire, CLSA.

Good afternoon, I was wondering if you could draw some distinctions between expansions and upgrades which seem to be tracking really well. Is there a way that you can characterize the relative impact of expansion of data within a single-use case where somebody may be adding new forwarders and additional data capacity versus an existing customer expanding uses of Splunk to different applications or different domains?

Hi, Ed, this is Godfrey. It is a great question, and it is a hard one to answer. So, when customers -- when we engage in a customer conversation about an upgrade, what we call an upgrade, that is usually an existing index where they are moving from 50 gigs to 100 gigs of indexing capacity.

But guess what? What drove that expansion of usage of gigs? Additional data sources. It's kind of a rough classification so that we can keep track of where are we going into a new department with the new sale which we call an expansion versus an existing index or -- that's putting -- so you could split hairs on this thing.

It wouldn't be hard to say, well, there's not much difference because in one you are just -- it was more data sources and more use cases that drove the additional data volume. In the other case, it was more data sources in a new use case.

The way we are trying to define that is so when we say expansion you'll know it was a new sales cycle, existing customer, new sales cycle, different department, probably a different economic owner, and that's how you can tell the difference. But there are times when it's a fine line between the two.

Great, and one last question, it's really a follow-up on competition. I know your offering is pretty unique, but as you are growing and you have more potential for displacement of existing point products, are you seeing any patterns or any changes in terms of the alternatives that your customers may be evaluating as they look at different uses of Splunk and any potential competitors on the horizon?

There is plenty of competitors. Every time we go into a customer, especially when it's a point solution conversation, if it's a security use case, they are comparing us against all the normal security suspects, and when we go into some operational use case, it's the same. We are always trying to broaden the conversation so that they are thinking about Splunk as a data platform of which this use case is the first, but not the last use case.

And that's really the place where we differentiate ourselves from all those other -- the systems vendors, the security vendors, the web vendors, because nobody else has that flexible data platform engine that can do -- that can unify all these different data sources and give comprehensive use of everything from systems metrics to business operational metrics to customer trends to product popularity.

It's -- you have to -- we have to educate the customer on why they should think about Splunk as an engine for all their machine data, and oh, by the way, we are winning this one project. As long as we can continue to reposition the conversation so that they understand what we do best, then we stand a good chance of winning. If we just get dragged into a very narrow point solutions conversation, the other guys know how to sell too, but that we're trying to do.

Great, thank you.

James Gilman, Drexel Hamilton.

Thank you, good afternoon, gentlemen, nice results there. I just wanted to follow up a little bit on the competition on a little bit more, and more specifically, maybe with the cloud offering. Do you -- have you encountered some maybe turn there with the competitors that may be offer a cloud and maybe beyond from a development standpoint?

And then the follow-up on that would be around the ecosystem, I don't think I've heard that word today, but you have these apps that you keep rolling out. And is that -- that ecosystem, as it builds these apps, does that make your solution a little bit more sticky to fight off the competition? Thank you.

Sure, it's a little early for me to give a competitive report on the Storm product and the cloud. I can tell you that the customers with whom I have personally spoken who have used Storm are delighted with how easy it is to set up an account and how easy it is to get their data into the system. How easy it is to see the visibility and transparency they are looking at for their dev projects.

I don't yet have conversations with customers who have said, I looked at the other guy's stuff. And the guys who run our Storm system clearly could, but it'll take me another 90 days to get up to speed on that. So, if you don't mind, let me defer that one until next quarter's earnings call and we will have had the service live long enough to probably have some good color for you on that.

On the eco -- but so far so good. On the ecosystem, yes, we have an active ecosystem. Just as an example, our technical support organization not only has their phones and their e-mail system, but they have a system called Splunk Answers that is very tightly linked to our user community. And of all the questions worldwide that come into Splunk Answers every day, about 70% to 75% of those answers are provided by our community before our own technical support people can answer it.

So, we have -- it's not just the apps business. It'll be the cloud, it's the developers, it's the ecosystem, it's the support organization, it's their help with our Splunk lives. We are very actively involved with our customer ecosystem, apps being one good example.

So yes, we intend to use that ecosystem to their advantage and ours and hopefully, that provides additional stickiness.

Thank you.

Peter Goldmacher, Cowen and Company.

I wanted to ask one more question on SplunkBase. It seems like a lot of the new apps that are being written for SplunkBase that you guys are talking about are pretty consistent with use cases you guys are already seeing and your customers are already using. Are you starting to see on the fringe any new apps being added to SplunkBase that are taking the product in a different direction? And if so, can you talk a little bit about those?

So, I'll -- maybe not, Peter, from an apps sense, but let me just give you one quick example.

A couple of weeks ago, a young lady was in here in our offices from Tokyo representing a large Japanese manufacturing conglomerate. And she was here to do a POC with us, a two day POC. And what did she want to do? She wanted to move all of their elevator data from the 4,000 buildings they have in Japan that have their elevators, and they are going to use that data not to understand the health of the elevator, but to understand the economic health of the building.

You say well, how does that work? Well, the way they have come to the conclusion that if you track all the elevator data, you get a better sense of is the person who lease is coming up for renewal on floor 12 more or less likely to renew based on the amount of traffic going to that floor?

And so, I was quite surprised that they had come to the realization that the machine data coming out of their elevators was one of the most important data sources that they could possibly mine in order to have a better forward trajectory against what their economic health will be of any given building. And it was just a fascinating conversation to show how this whole notion where we are educating the world on the value of machine data is starting to take hold, and we're starting to have very interesting conversations. We just had one with a very large American industrial manufacturing conglomerates in here last week and they wanted to talk to us about very similar conversations around building systems, turbine engines, you name it. Because the data that these systems are spewing off is coming in high-volume in variable formats and needs to be combined with data from lots of other sources in the business of that to get intelligence out of that.

So, yes, we're beginning to see some conversations that are very different than our normal IT business. And we are really thrilled about it and spending a lot of time on it, but it hasn't -- I'd say the apps will probably follow that as opposed to lead it. If that make sense.

Yes, that is great. Thanks a lot, Godfrey.

Kash Rangan, Merrill Lynch.

Sorry about the technical difficulty, we have a new phone system.

Godfrey, one question for you. When you look at the positioning of Splunk as an enterprise data platform, you've been in enterprise software for a long time, Hyperion notably before that. Are you starting to see any early emerging signs that Splunk is becoming a broader enterprise platform? In the sense that if you look at the pipeline, the scope of some of these transactions, are you starting to see those multi-million dollar type potential deals that can really land Splunk on the -- in the same league as some of broader enterprise platform companies? I know it's a broad question, but trying to gauge how much more headroom there is to grow the company and some of the early sense.

And one for you, Dave. Last quarter we saw a trend of where there was more license deferral. I think you are trying to make the point that your license billings, if you will, if you were to calculate that would've been growing at a faster pace than the reported license.

As I look at the numbers this quarter, it does appear to be the case that term being higher and perhaps deferral of licenses due to (inaudible) whatnot could've also played a factor. It is fair to make the same observation that license billings have grown faster than reported licenses this quarter? Thank you.

Hi, Kash, so I'm going to give you a two-part answer to your question.

So when Splunk first goes in, when customers often choose us for the initial use case, we often go in as an IT diagnostics and troubleshooting tool. In fact, we're going to come over and troubleshoot your phone system and show you what went wrong with it. And what happens is, after folks get it in for a while and then start to understand the power of what Splunk can do, the number of data sources it can ingest, the rate at which it can do so and the way it is able to visualize these correlated relationships, finally the light bulb goes on. And they go, wow, this thing is as important to me for the semi structured data as my relational database is for the structured data.

And if you had seen the CloudShare presentation at VMworld yesterday, they are basically using Splunk as the data fabric. It is their data hub that gathers data from every other system they have in their business and pipes it out to some of their other operational systems like salesforce and the like.

So, yes, I think our ability to expand into a place in the IT infrastructure dwarfs that of the Hyperion days, dwarfs it.

Hey, Kash, it is Dave. I do think the composition of deferred in the growth metrics is consistent from what we talked about last quarter. Whether it be term transactions or various rev rec items, we are seeing a larger component of deferred be in the license category then we had a year ago.

Great, that's it for me. Thank you very much.

Okay, listen, thanks everyone for participating today. And Sayed, thanks for your help.

As always, we are here at headquarters if you need to reach us, we would be happy to assist you. Have a good evening. Thanks again.

Thank you, ladies and gentlemen, for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.