Splunk Inc (SPLK) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Splunk Inc fourth-quarter FY15 financial results conference call.

( Operator Instructions )

As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Ken Tinsley, Splunk Corporate Treasurer and Vice President of Investor Relations. Please go ahead.

Great. Thank you, Jonathan, and good afternoon, everyone.

With me on the call today are Splunk's CEO, Godfrey Sullivan; CFO, Dave Conte; as well as executives Haiyan Song and Doug Merritt. Our press release was issued after the close of the market today and is posted on our website. This conference call is being broadcast live via webcast and, following the call, an audio replay will be available on our website.

On this call, we will be making forward-looking statements, including financial guidance and expectations for our first quarter and FY16, transaction and product mix, planned product sales and facilities investments, our market opportunities and customer adoption of our products, expected success of our market groups and use-case opportunities. These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially.

Please refer to documents we file with the SEC from time to time, including the 8-K filed with today's press release. Those documents contain risks and uncertainties 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 with non-GAAP results is provided in the press release and our website.

With that, let me turn it over to our esteemed leader, Godfrey Sullivan.

Thank you, Ken, and I have to say that was one of your best disclaimers ever. I mean, that was awesome.

Welcome, everyone. Thanks for joining the call. We had a great finish to the year and I want to thank our customers for their enthusiastic support and also our Splunk employees for their many contributions.

Revenues for Q4 were $147.4 million, up 48% year to year. License revenues, $98.1 million, up 43% year to year. We finished the full year at $450.9 million, up 49% from the prior year.

Notable customers in Q4 include Macy's, Toyota, Lennar Corporation and New York City Transit. We welcomed a record 600 new customers to Splunk in Q4 and had a rocking quarter for Splunk Cloud.

We showed progress in product diversity. One good example is our recent press release regarding Hunk adoption by Yahoo. We also closed new Hunk opportunities with Societe Generale, and CenturyLink.

Our themes for this call are markets and geos. Over the last year, I've been describing Splunk's increasing TAM and how we're organizing in the market groups so that we can deliver best-in-class solutions in our core-use cases.

The market groups enable us to create strategies that are a direct match to our customers' needs and aspirations. These groups own of the vision, product spec, and go-to-market elements, with world-class domain experts leading them.

The security market group is a great example and that business is on fire because of our focus, and great leadership. Today, I've invited Haiyan Song, who runs our security business, to join us and give you a read out on our progress and velocity.

In addition to Haiyan leading security, we also now have Mike Oleson running our Cloud team and Rick Fitz leading our IT markets group. On future calls, we will have Mark and Rick as guests to update you on their progress. For your favorite CEO, that would be me, it gives me the ability to delegate these core markets to a very capable exec team, so that I can focus on spinning up the next area of opportunity.

The market that I want to target next is business analytics. Many of you know that our customers start using Splunk for IT ops or security, but they ultimately discover high-value use cases like customer experience analytics. We have a unique value to deliver here and it's time we formed up a focused team around analytics use cases.

So two themes today, markets and geos. On the geo side, we're investing heavily in our field because we know that more customer touch is great for customers and is great for us. I've invited Doug Merritt, who runs our customer-facing teams to give you a readout on our wins and our field activities.

Before turning it over to Haiyan and Doug, a few comments on products. First, Cloud. From Q3 to Q4, we increased the number of Cloud customers by 90%, including a number of six- and seven-figure orders. Washington Post has been a Splunk customer for several years. In Q4, they chose Splunk Cloud to monitor and analyze their new mobile apps.

TheScore, think of them as ESPN of Canada, is a new customer. They'll use Splunk Cloud to monitor their infrastructure, trace engineering requests, and receive threshold alerts to better anticipate and prevent system problems. Also happy to tell you that Computer Reseller News just named Splunk one of the Coolest Cloud Vendors for 2015.

We also had a strong quarter with Hunk. Societe Generale, the third largest bank in France, expanded their use of Hunk within their big data innovation center. We had a strong quarter at Amazon, and sold tens of thousands of hours of Hunk on the Amazon EMR console.

Just last week, we announced that Yahoo is using Hunk to explore, analyze, and visualize data from their Hadoop environment, which stores more than 600 petabytes of data -- I can't even say petabyte. To quote Yahoo, insights we gain from Hunk helps us save millions of dollars per year in hardware provisioning. The Yahoo production teams are also using Splunk Enterprise to analyze more than 150 terabytes of machine data daily.

So great progress on markets and geos, all to accelerate the velocity of some great products. We just completed our annual Company kickoff event and I can tell you that everyone is fired up about our plans for this year, platform, apps, Cloud, market groups, partners, and developers. And we have significant work underway in each area.

Okay. So Q4 was outrageous and fun. Now, to get to the security story I'm happy to turn the call over to Haiyan.

Thank you, Godfrey.

It was indeed another great quarter for our security market. With increased awareness and concerns around high-profile breaches and insider threats, companies and government agencies are looking to companies like Splunk to provide the next generation security solutions.

Splunk is now the go-to platform for the next generation of security operations center. Some even signified this evolution with a new name, security command center. Or, what I like to say, Splunk is becoming the new nerve center, the security brain for organizations around the world.

In public sector, cyber attacks are on the mind of just about everyone, and Splunk is becoming one of the go-to companies for agencies for better detection and protection from today's cyber threats. The US Department of State, a longtime Splunk customer, expanded their use of Splunk to help protect the networks, domestically and abroad. Security use cases have expanded from a departmental purchase and are now driving enterprise-wide adoption of Splunk. A global banking institution standardized on Splunk for security analytics and did a global replacement of a legacy SIM.

Solution selling continues to be one of the highlights of our security business. Our app for Enterprise security continues to be a driver in opportunities and competitive wins.

Zurich Insurance Group is a new customer that is replacing their legacy SIM with Splunk and we are now their global security intelligence platform. We're also seeing more organizations adopting the new Cloud paradigm and leveraging Splunk Cloud to deploy security solution.

1-800-Flowers.com uses Splunk Cloud to comprehensive -- for comprehensive real-time web performance monitoring across in their e-commerce platform to provide a superior customer experience. They also utilize Splunk security solutions, which include multiple security apps to help manage emerging security threats, alerts, and real-time incidents response.

Splunk Cloud enables customers to respond to security threats faster than ever before. They don't have time to spend up the internal infrastructure. They just need to get the work done. More organizations understand that the data can be secure in the Cloud and they're comfortable and have confidence in our security model in Splunk Cloud.

It has been a great year at Splunk since the formation of the security market group. Our mission has been to lead, focus, and enable. I recently attended the White House Cyber Security Summit with the President and the nation's leading CEOs, and it's clear that cyber security will continue to be a top priority for every business and government agency and Splunk is a key part of that discussion.

Looking ahead to the next year, where we'll invest further in analytics-driven security, with a focus on breach analysis and insider threat use cases to help our customers combat today's event threats. We will also continue to invest in our ecosystem of security partners, with Splunk acting as the nerve center for security operations.

I am proud of the progress we have made and the results we have delivered in our security market. I'm very excited about the opportunities ahead.

Now, I'll turn it over to Splunk's Head of Field Operations, Doug Merritt.

Thank you, Haiyan.

It's such a great time to be at Splunk and I'm excited to share more on our excellent quarter. On this call, I'll talk about markets, geos, partners, and pricing.

You just heard from Haiyan about how our focus in the security market is delivering tremendous success. We are extending the same focus to our other markets as well.

First, IT ops. In Q4, the US Navy expanded their license to help with an ongoing data center consolidation. They're closing more than 200 data centers and moving the work loads to Navy Enterprise data centers. And they're using Splunk to monitor and ensure a successful and smooth transition.

Macy's is a long-time Splunk customer that expanded their license in Q4. Splunk is helping increase uptime and performance of Macys.com and Bloomingdales.com, all leading to a better online customer experience.

Longtime customer Zillow significantly expanded their use of Splunk for IT ops and also purchased the Splunk app for VMware. Splunk's platform now functions like a utility, providing dashboards to all other developers and engineers to improve quality and performance of Zillow's products and services.

Their ops team is even using Splunk to change the color of their office lighting as problems become critical. Now that is an innovative use of Splunk. Other organizations selecting Splunk for IT ops include the City of Boise, Hong Kong University of Science and Technology, and Pentagon Federal Credit Union.

Next, business analytics. We closed an opportunity with Walmart Brazil in Q4. Walmart Brazil is using Splunk Enterprise for business analytics, as well as for app delivery and IT ops. They analyze their e-commerce platform to improve website performance, ensure uptime and discovered new revenue opportunities by improving the customer shopping experience. Other companies choosing Splunk for business analytics in Q4 include Auchan, a large French retailer and CenturyLink.

Now on to the geos. All geos delivered a strong Q4, with international contributing 25% of our revenues and growing bookings greater than 60% over last Q4. As part of our continued focus on customer adoption and success, I'm happy to tell you about several changes in leadership, including two new leaders to the international team.

Adam Bangle joins us as our Head of Sales in EMEA. Adam formerly was with RSA and we're pleased to have him on board. Thanks again to Tom Schodorf for spending Q4 in EMEA to assist with the transition.

At APAC, Emilio Umeoka, who is our Head of Global Partners, will now also lead APAC sales. Emilio has extensive experience in APAC. He was formally President, APAC, in Microsoft and, by the way, Computer Reseller News Magazine just named Emilio a Top Channel Chief of 2015.

In addition to Adam and Emilio, we've put Bill Cull, who's been leading the public sector in the Americas for the past three years, in charge of global public sector, and Anthony Palladino continues to do a fantastic job as our Head of Sales in the Americas. And I'm sure you've heard that Vishal Rao is leading Splunk. I want to thank him for four great years. We've decided to eliminate the position of Head of Direct Sales and now all the geos will report directly to me. I'm very pleased about our strong leadership that's in place to help us prepare for this next phase of growth.

Now on to partners. Investment in partners is absolutely critical to our growth strategy and you'll see us put renewed focus on this in FY16 as we launch the Splunk Partner Plus program, which we will unveil at our upcoming Partner Summits.

ServiceNow is both a strategic partner and a customer. They have signed an enterprise agreement in Q4 to expanded in several use cases, including IT ops, application delivery, and security. We also had a strong partner relationship headlined by our compelling product integrations.

Vox is another important partner. They have purchased a multi-terabyte license to expand their use cases from IT ops to security and business analytics, gaining insights into their end-user activity to feed their queue of new product features and functions. Our joint customers also appreciate the Splunk app for Vox, which enabled business teams to track usage trends, security teams to spot suspicious activity, and finance teams to audit for compliance.

Deloitte -- our partnership with them is expanding. We had a number of joint transactions in public sector alone in FY15, including the state of Georgia Health and Human Services in Q4. I2, our higher ed partner, is also on a tear.

This quarter we received 10 orders totaling more than 1 terabyte with universities including Ball State, the University of Alabama, and Washington State. Washington State is standardized on Splunk our across IT, IT operations, security, and networking.

And the last topic, pricing. Over the past year, you've heard us talk about how we are constantly looking for ways to improve our pricing strategies to accelerate broad adoption and time to value for our customers.

Learning from our experience with customers who have already standardized on Splunk with an EAA, today we rolled out a program to make it easier for customers to deploy Splunk enterprise-wide. The goal is to have a standard enterprise pricing program that provides budget predictability for these customers.

So what's different? Our new unlimited pricing is aligned with the size and scale of the customer and their systems and is not based directly on volume of daily data indexed. This approach will enable customers to ingest more data, from more sources, with the cost determined up front.

So in summary, we had a fantastic quarter. We are investing in markets, in the field, and making enterprise adoption easier and in our partners to deliver a strong FY16.

Now back to you, Godfrey.

Thanks, Doug.

As I mentioned at the start of this call, FY16 is the year of the markets. A year ago we introduced the idea and now we're in full execution mode with Cloud, IT ops, and security. All the breach headlines are driving organizations to make faster and more comprehensive decisions when selecting a security solution, so that business will continue to be very strong for us.

For me, business analytics is the next stop and I'll be spending a lot of time there. In our geos, we're expanding sales and technical headcount and we're ready for the next phase of growth. And as we've heard from Doug, partners are key to our growth strategy and we're excited about the marquee relationships we're building and strengthening this coming year.

With that, I'm delighted to turn the call over to CFO Conte, who will mesmerize you with the numbers. Go, Dave.

Thanks, Godfrey. Maybe I'll hypnotizing you with the numbers instead.

As you can hear from the team's enthusiasm, Q4 with a strong finish to a remarkable year for Splunk. The investments we've made in product development, field expansion, our market groups, and the Cloud drilled performance substantially above our FY15 plan.

Fourth-quarter revenue totaled $147.4 million, a 48% increase over Q4 of last year. License revenue grew 43% over last year, totaling $98.1 million for the quarter. For the full year, revenue grew 49% to more than $450 million in total, of which about $283 million was license revenue, or a 42% increase over last year.

Our product and Cloud investments are all about making the adoption and expansion of Splunk easier for our customers, allowing them to gain valuable insights from their machine data, irrespective of their environment, data sources, or where their data lives. Our market group approach helps us bring solutions tailored to our customers' most important use cases and enhances the value they get from their data.

On the field side, we continue to build our capacity globally. We ended the year with 306 quota carriers. As we've discussed, our go-to-market strategy is evolving from a singularly geo-based approach into a multidimensional field organization.

As a result, we expect our selling capacity in the future will reflect more than our traditional quota carrier model and include global channel leverage, such as partners, market oriented specialists, and resources dedicated to key verticals or even specific use cases. I'll continue to update you later in the year around our capacity overall as this evolution continues. More broadly, we grew our total Company headcount by about 400 in FY15, and ended the year with more than 1,400 total employees.

As pleased as I am with our progress, we're still in the early stages in our markets. We have a unique opportunity to establish Splunk as the standard for our customers and their data analytics, and we will continue our aggressive and focused investments in our product portfolio, the field, our market groups, and the Cloud to ensure customer reach and success.

Splunk continues to deliver incremental value to our customers as they index more data across their enterprise. Once again, more than 70% of our Q4 license bookings came from existing customers, while we also recorded a record 600-plus new customers in the quarter. For the full year, we added over 2,000 new customers overall and ended with over 9,000 customers in total.

Our continuing commitment to enable Splunk adoption via product innovations, as well as more effective pricing strategies such as EAAs, collectively is driving adoption. In Q4, we recorded 429 orders greater than $100,000, compared to 289 in Q4 last year. On a full-year basis, we booked just over 1,100 large orders, compared to 791 last year.

In Q4, we also recorded a record 39 transactions greater than $1 million, compared to 21 last Q4. For the full year, we booked 68 orders greater than $1 million, compared to 41 last year.

Our growing product family, plus increased awareness and adoption of Splunk software, are driving this type of adoption. As a result, we've seen our full-year licensed ASP range increase to $40,000 to $50,000 in FY15, up from $30,000 to $40,000 in prior years.

The growing appeal of our EAA transactions, as well as our subscription product momentum, continued to impact our bookings mix. In Q4, the total of all our ratable transactions accounted for 45% of our licensed bookings. For the full year, our ratable mix was 38%, which was above our previously guided full-year range of 25% to 35%.

Last quarter I said that the pace of adoption of our Cloud offerings and other ratable products would drive ratable mix even higher. With current visibility into customer buying behavior, and incorporating our expanded EAA offerings plus Hunk and Cloud momentum, we now estimate that full-year ratable mix going forward will likely range between 30% and 40%. The mix of ratable transactions will continue to vary substantially quarter to quarter, generally following seasonal trends.

All right. Our education professional services represented 6% of revenue in Q4, consistent with past levels of 5% to 10%. Remember, since we recognize revenue on services only when they are delivered, services bookings typically do not flow through the balance sheet as deferred revenue.

Turning to margins, the detail I give for operating metrics are non-GAAP. Overall Q4 gross margin was 90%, in line with our expectations and prior period levels. Q4 operating income was approximately $11.5 million, representing a positive margin of about 8% and better than our expectations on the strength of our overall top-line performance.

Q4 net income was $11.6 million, or $0.09 per share, based on a fully diluted weighted average share count of 128.6 million shares. For the full year, operating margin was 2.7%.

On a non-GAAP basis, this was our first profitable fiscal year. Full-year non-GAAP net income was about $11 million, or $0.09 per share, based on a fully diluted weighted average share count of 127.1 million shares.

Cash flow from operations in Q4 was $51 million. Free cash flow was $49 million. Full-year cash flow from operations was about $104 million, or 23% of total revenues. Free cash flow was $90 million.

Looking back over the year, investments in our markets, product, field, and Cloud are clearly paying off. Looking forward, we will continue to aggressively invest in these areas as we scale the business for our next phase of growth. This is central to our long-term strategy of delivering Splunk anywhere and everywhere our customers' data resides.

Our plan is to invest proportionately with our top-line growth, so for the full year 2016, we are targeting non-GAAP operating margin of between 2% and 3%, consistent with our FY15 op margin performance. Over the medium term, our operating margin targets include the impact of a gradual 1% to 2% increase in cost of services to reflect the ramping of our Cloud business.

We remain committed to running the business on a positive operating cash flow basis and estimate that full-year operating cash flow will be approximately 20% of total revenues, with the quarterly levels following the trend we've seen over the past several years. FY16 will be a higher CapEx year for us as we expected the bulk of our San Francisco HQ buildout costs will be incurred this year.

We combined with our global facility expansions to accommodate our growing employee base. We are planning for approximately $50 million in total CapEx in FY16, weighted about $20 million in the first half and $30 million in the second. We expect to achieve these operating results on our expected full-year revenue of about $600 million, an increase from our previous guidance of $575 million.

We expect Q1 revenue to range between $116 million and $118 million, with subsequent quarterly revenues following the seasonal patterns we have seen historically. With the continued investments I've described and overlaid with our revenue plan, we expected negative non-GAAP operating margin of between the 2% and 4% in Q1, increasing to about breakeven in Q2, then turning positive in Q3 and Q4, consistent with the seasonal nature of our model.

Because we denominate globally in US dollars, we have no foreign exchange exposure to our revenue line. (Technical difficulty) however, have modest risk below the revenue line from foreign currency fluctuations. In Q4, we benefited from the strong dollar to the tune of about $0.01 a share at the bottom line.

Overall, our Q4 results and our full-year performance were solid. Our product investments are driving customer success and our field expansion and market focus is enhancing our execution capabilities. Our strategy is working well and we plan to continue to invest and fuel the pace of adoption as we aim to make Splunk the standard for machine data analytics.

Thanks much for your time and interest. With that, we'll take your questions.

(Operator Instructions )

Phil Winslow, Credit Suisse.

Hi. Thanks, and congratulations on another just awesome quarter here. Two questions. One just sticking with the theme of markets share and verticals. Your security -- if I rewind back to sort of the IPO time, I think you all talked about security being 20% or less of the mix of your business. I know it's always hard to tell sort of what exactly Splunk capacity is being used for, but what has not gotten up to now? It sort of feels like it's maybe 30%, 35%. Wondering if you could just give us a sense of that.

And then also, when you think about that business going forward, how do you kind of think about the TAM? I mean obviously we've talked about your security information management, but now you've seen sort of security intelligence, sort of a new field starting to show up as well. How do you think of the potential of that? And then sort of second question is on the big data side. Obviously, you mentioned the contract with Yahoo, basically the birthplace of Hadoop for Hunk. Godfrey, just from a very high-level perspective, what you think that means in the sense that the place that Hadoop was born is actually paying for and using Hunk?

Hey, Phil. Well, first, thanks for your comments and happy to take those on.

So, part of the -- I mean, the whole motivation for doing market groups to begin with was that we -- one of the challenges of running Splunk, as you well know, is trying to decide what not to do. That is, customers use the engine for so many use cases that we had to start looking for the place where we would see repeatable use cases and know that we could do a certain solution multiple times as opposed to everything being sort of a one-at-a-time issue. Security is a great example of that.

We started working on the Splunk app years ago, which was a way to put workflow and content and all the partner data into a place where customers could easily use it. I think the security has been the first of our use cases to mature where we can actually fully form up platform, app, best practices, and the like, and I think Haiyan's just that at marvelous job of unifying the team, further driving product strategy and you see it in our results.

I think the direct answer to your question around percentages, it's anywhere the 35% to 40% range on a quarter-to-quarter basis throughout this year and I would expect for to stay in that range going forward, because that business is just on fire. The rest of the business growing nicely, too, but security has been doing great. Now it's our challenge to then move on to each of the other areas where we have repeatable use cases and do something exciting there, so I'm very, very bullish about that.

On the Hunk side, I still see Hadoop primarily used as enterprise data warehouse replacement. It's cheap storage and replacement of very expensive storage. And once that happens, then customers say I need to have a way to get to that data, and the fact that Hunk can analyze that data in place, that is, we sort of index it within the cluster and give you the answer back, even on an iterative basis, is so different than having the to move that date out of Hadoop in order to do analytics on it.

The architecture and the approach of Hunk is exactly what the big Hadoop shops look for when they're trying to analyze that data, especially very large data sets over time. I think that Hadoop -- I should say the Hunk world will continue to make progress more slowly than our other segments of business just because they are not as many Hadoop customers as mature as Yahoo and some of the other bigger Hadoop installations. But we're bullish about that business, too.

Thank you.

Thanks, Phil.

Thanks.

Brent Thill, UBS.

Hey, good afternoon.

Godfrey and Doug, around the EAAs and around the formalization now, can you just maybe give us a sense of what you think this does now with some of the larger enterprises accounts? I know you've been very flexible with your clients on pricing in the past, but what does this mean now with today's announcement and what you think this will do for some of the pipeline, the larger transactions and perhaps some of the multi-solution areas that you're going after?

Thanks, Brett.

You know, you folks have been pretty vocal with us over the last several years, saying: we always hear that your customers love your products, they like the Company, they like everything about Splunk except they worry about the pricing model having an indeterminate cost attached to it because they don't know how big their data could get.

And so kind of looked back -- I like the old Oracle analogy from their early days where, when it was very early game, they said let's go out and offer customers the ability to put as much data as they want into the engine and then go from there. I think that's a good model for us where these are early days, but we have first-mover advantage and we have a very differentiated product and the combination of those two means we should give our customers a way to think about put as much data as you wanted into Splunk, not just high-value data or data that is held back by an indexing rate.

So from a strategy standpoint, it's just a matter of, let's make it as easy as possible for customers to standardize on Splunk. I don't know, Doug, you've been on an airplane a lot over the last nine months. You've gotten plenty of feedback yourself.

Yes.

It's in line with what Godfrey just went through. First of all, being able to offer more structured vehicles, so that our sales force can have direct dialogue with customers that really do want to go larger with Splunk without all the checkbacks that were necessary with a little bit more handcrafted approach, I think is super important with where we are now as a Company, given the desire of many companies to expand.

What wasn't -- may have not been as clear that announcement is, customers want to deploy multiple modalities, classic and perpetual, term and unlimited. The announcement is focused on unlimited, but we are continuing to give choice with the EAA structures, so that we can map to customers buying preferences and make sure that we meet their needs for the use of Splunk.

Great.

And just a quick follow up for Dave, just on the move to the Cloud versus term or perpetual. There's been some concerns, perhaps, that there may be different economics. I'm just curious if you could just walk through the quick view in terms of what you're seeing economically across the different ways that you can go to market.

Sure.

When you look at -- in terms of the top line, Brent, the economics are really specific to the use case. We're seeing that customers, many of our customers are taking advantages of hybrid search, so they'll have certain use cases where their data is behind the firewall and other use cases where their data is in the cloud and ability to leverage Splunk across all the data sources is really valuable.

That translates into, I would, say top-line economics that are appropriate for the particular use case and we see that across the delivery vehicles. Obviously, from a cost perspective, and I mentioned it in my prepared remarks, there is incremental costs for us to deliver that service and we see that again increasing our cost of service and hitting our gross margin by maybe 100, 200 basis points over the course of the year.

Great. Thank you.

Thanks, Brent.

Keith Weiss, Morgan Stanley.

Excellent. Thank you for taking the question and very nice quarter.

Thank you.

I was wondering if you could give us a little bit more color on the sales investments that you're looking to make. It seems like last year was a heavy focus on geographic expansion and security. Is it a similar pace of expansion when you go into BIs and similar type of guide that you're bringing on board? And then if Dave could quantify a target of where you look to end the year in terms of sales capacity, that would be helpful.

Thanks, Keith. Yes.

So consistent with what I walked through, I think it's a combination of geo expansion, there's still a lot of opportunity across the multiple different theaters; the market investments, making sure we got the right specialist capability or the main expert capability to support our general sales force; and continued balance investment across the partner ecosystem, as well. Dave, I'll hand it to you for any specifics on --

Sure. Keith, we've been talking about the composition of the sales team, and I was a little more explicit that it's an evolution in terms of its breadth. Doug just touched on the fact that market specialization, the investment we are making in terms of getting -- ultimately, what we want is a leverage channel relationship with not just pure vars but strategic channel partners. Those are all part of our investment thesis.

In terms of what you can expect for the next year, if you go tops down the expectations around op margin will be a consistent amount of positive operating margin overall for the fiscal year. We'll look to make those investments consistent in terms of the expanse categories, between sales and marketing, R&D, G&A, that you've seen from us in prior years.

As it relates to specific metrics around capacity, as I've mentioned in my prepared remarks, we'll continue to measure those internally and determine what's appropriate to share externally so that you can build your model, which we want to reflect our model. Consistent with what we've done in the past in that regard, we get to about the middle of the year and then I'll give some insight in terms of how we are thinking about year-ending sales capacity overall.

Got it. It sounds like the actual number of sales perhaps might be a little less important because you have so many guys working around them that it might be about the actual productivity of each one of the sales guys is enhanced by partners, by market specialist. Is that the right way to be thinking about it?

Well, we're certainly looking to always address and make our sales folks productive. I mean, that is a never-ending exercise for us and I think we've done a nice job of it. I'm certainly happy with the productivity that we've experienced and the productivity gains that we've experienced.

But in terms -- it's really about, how do we address what looks to us it to be an ever-increasing TAM. We need to have the right experts in the sales teams, partnering with our market groups like Rick and Haiyan's, and also our direct sales guys to go to the customer and say, okay we're going to tell you how to extract all the value from your data. I think that you are thinking about it the right way, but in terms of specifics, again, mid-year I'll come back and I'll give you since the specifics in terms of how to think of it for the end of the fiscal year.

Excellent. Thank you very much.

Thanks, Keith.

Raimo Lenschow, Barclays.

Congratulations from me, as well, and thanks for taking my question.

The question was on the pricing announcement you announced this morning, and I know we have talked about this before. Can you talk a little bit about the implications you see in your conversations with the big customers around the -- I mean, you obviously had EAAs before. What's the different debate you can have now, and what impact are you expecting for next year and going forward?

Thank you.

Thanks, Raimo.

I'm going to turn it over to Doug and I'll sweep up the floor in case it's necessary.

No pressure.

Hey, Raimo. It's Doug. The way that we approach EAAs, it is -- by the time a customer -- you don't lead right away with an EAA, obviously. You build credibility within the customer and actually get there. And I'm really thankful and happy for the thoughtful and thorough processes we have around sales here.

We've got a whole best practices guideline for our EAAs that has pricing as actually the eighth the step of eight key steps. It is certainly important, but there's a lot of understanding the customer, understanding their needs, understanding the environment, building the right champions and coaches, proving value along the way and ensuring that the customer's got the right momentum before we drop into an EAA discussion.

I think the clarity that were adding with a new EAA structures makes it an easier early framework for our customers as they're dealing with us, and makes it a cleaner discussion or landing point for them as they get -- as they understand where their demand set for Splunk will go over time. I think the main focus it was in two aspects, ensure that we help our customers get greater adoption and traction by taking the pricing issue, or by making the pricing issue more clear for them, and ensuring that our reps are more empowered and have the more clarity and tools at their disposal to have those discussions on a broad-based and scaled orientation.

Perfect. Godfrey, are you okay with that? Thank you.

Raimo, as long as you're happy, I'm happy.

Okay. Thank you. Well done.

Ed Maguire, CLSA.

Hey, good afternoon, everybody.

I just had a question about some of the sales changes you are making and how those actually map into the industry groups. It sounds to me, from how you've described it, that you are moving from even more of a specialized approach than even the structure of the market groups. I'd be interested in any color in terms of how that is actually informing not just the go-to-market, but also how that's tying into your development of solution sets.

Ed, I heard a rumor that you're in Tokyo or somewhere. Is that right?

It's not a rumor. I'm there.

So you're asking me that question at four in the morning. I just wanted to make sure all is clear about that.

Yes. It's 14 hours ahead, so it's actually a civilized hour.

All right. Well, thanks for the question, as always and good to hear your voice. So I'd like to ask Haiyan to opine on this a bit, but when you look at the market group formation is more -- field structure is a part of the market group formation, but it's really about forming up competency in our major use cases. Haiyan, maybe it's worth just to talk about what the members of your team, like what are the types of titles that belong to your team and then how does that apply to apps and sort of the solutions stack and then we can come back to field.

Sure. Ed, good to talk to again.

As I mentioned, the mission for the security market group is to lead, to focus, and to enable. So what we have is our Head of Product Management, Head of Development, Head of Solution Marketing, they are fully focused on the security market. Not only that, we have a dedicated CD director who focuses on building our ecosystem and that into the field, what we're doing is we're building a multi-tiered team with subject matter expertise.

They are distributed into the field, into different regions, and there is a global support for them, for more strategic accounts and more advanced prototype needs. Not only that, we also build a dedicated professional services organization just for security customers and so we can provide trusted advisory services to them. With all of those, it's really, the market group provides the vision and the strategy and also the enablement for the execution, if that helps.

Great. And just a quick follow up, a year on, we started talking about Internet of Things last year and I know you have some initiatives. Just quick thoughts on progress? I do realize it's early days, but any color on that from you would be very helpful. Thank you.

Yes, thanks Ed.

The Internet of Things to me still looks like it's shaping up to be an industry conversation more than anything else. I always think, what is the primary lens you look at when you look at a market or set of customers and in the inside of the existing Splunk company, the primary lens we look at is a market or solutions lens. How many people are buying the product to use it for security use cases or IT operations use cases?

When you get to IOT, it looks an awful lot like industry segments and very specific even to that. So within building systems, you'd be in military operations or residential would be two very different market segments. In traffic management, we see trains, we've got a lot of train customers that use Splunk for monitoring trains remotely. At the same time, smart grid would be a completely separate industry, but with very similar types of technology stack supply.

I don't have that one all figured out yet. I'm spending a lot of time this year on the business analytics piece, but we are doing a lot in IOT. We probably have more IOT customers than any other big data company, but it's because the product is so easy to use. I think that the work that will apply to IOT will be industry-specific and therefore, partners will be a big part of that conversation.

Great. Thanks very much.

Thanks, Ed.

Kash Rangan, Merrill Lynch.

Hello. Thank you very much. One question for Doug, with respect to the new pricing model for EAA. I know you eloquently explained how these two deals are be different, so it feel like you've got a pretty good handle on potentially spillover from one bucket to the other. Can you talk a little bit more about how you are pricing it exactly? Is it based on headcount or revenue, whatnot? How do you think that expansion sales of current customers are likely to play out?

I guess a follow-up for Mr. Conte is, have you -- are you really -- the view that since this pricing model was launched today, we really don't have a great feedback, a lot of feedback from the customer to be able to assess how much of your business mix is going to be from the ratable, because it would seem like it's going to take some time for this to be sorted out among your customers and there could be some volatility in that mix. Right? Just wanted to get that.

Thanks.

So to start on the actual structure, for the unlimited EAA, it's based on customer size, with revenue as a component of that but there's other factors that go into that size, as well. Again, the goal there is to take the data volume piece away and instead allow the customer focus on how to use Splunk as a machine data platform across all functions, all use cases, the way that they have given us feedback that they want to drive.

To structure the different vehicles we came out with, we did do a series of interactions over the past six to eight months with key customers that already were beginning to discuss different EAA type formats. So we've got some decent field validation and customer validation on how these things should be structured and I feel pretty good about the thoughtfulness that went into it. Dave's team was key in driving the overall structure and making sure it worked and I'll hand the remainder of the question over to Dave.

Hey, Kash. It's Dave. Your question about mix and volatility in that mix, you are spot on.

As we get into -- just because we've structured the program, as you know, we've been doing EAAs for certainly well over the last year, but each one an individual exercise, not just for the customer but for the field. So this program has some dual benefit in terms of enabling customers to get the predictability that they want in standardizing on Splunk, enabling field to deliver that structure to the customer.

So I expect we will continue to see quarterly volatility. Again, I expect it to be the way -- seasonal, in terms of how we've seen it by quarter, Q1 probably having the least amount of ratable composition and Q4 having the greatest, generally tied to larger transactions.

But as you know, I've been providing an outlook on mix for the last three years that's gone from 10% to 20% of license to 20% to 30% of license to now 30% to 40% of license. So the composition has obviously grown as a percentage of the whole but it certainly volatile on a quarter-to-quarter basis and all the way down to a particular transaction and when it closes.

And then quickly if I could, within that subscription mix, any feel for how the proportion of Hunk deals versus ratable deals versus field, which piece is smaller? Just your --

Well, yes. I mean, it's hard to -- obviously, as we've moved from single product to multi-product, many of those multi-products, and while Cloud is not necessarily a separate product, it's rev rec is treated separately and ratable. But given the overall growth in the Business and our traditional enterprise platform sales, it's really tough to measure exactly, well, how much can I expect these new products and delivery mechanisms are going to increase that ratable contribution, because the rest of the Business isn't standing still.

So again, you're just going to have to stick with me as I give you the visibility that I have and the way we plan for ratability across the balance of the year. We will continue to refine that metric as it becomes refined for us.

Thanks, Kash.

Daniel Ives, FBR Capital Markets.

Yes. Thanks a lot. Godfrey, could you maybe talk over if we compare where we were a year ago and how the conversation with customers have changed in terms of the adoption curve and just more customers are really willing to spend significant dollars with the Splunk platform. Maybe can just compare and contrast where we were a year ago.

Sure. Happy to and thanks for the question.

We show that in the numbers, just if you look at the increase in the number of seven-figure transactions, for example, from one year to the next. It's a pretty impressive percentage, and that is at the mirror image of the fact that customers went from departmental to multi-departmental and now are expanding out to more enterprise adoption. So I think that part of the maturity curve that we will go up is just a continuation of that expansion from multi-departmental to more of an enterprise flavor and the pricing model helps accelerate that.

I -- the difference in conversations, two or three years ago I was out meeting with sys admins and first level IT administrators and I was trying to explain to them what a search engine for a machine data was. More recently, I was out in Europe meeting with a 3C level execs of a large European telecom and they were comment to me was: Splunk is everywhere inside our Company.

We need to come back and spend several days doing technical planning with your development team because we need to embed you as a mission-critical part of our Cloud service. Pretty good example of how the conversations have changed over the years and I couldn't be more excited about it.

Yes. And just as a quick follow up, cyber security and sort of the convergence of what we're seeing with Splunk on the security side, how big of a game changer has that been to your Business and even your -- going forward into FY16. Thanks.

I'm not sure I heard the question. How big is --

-- it in terms of security, in terms of if I think about the security (technical difficulty) in the platform, just you talk about how big of a contributer that is going forward over the next 1 to 2 years and just how that's really been a big change that you've seen in terms of that demand cycle.

Got it. You broke up a little but there but I'm going to turn this over to Haiyan from a standpoint that two years ago, we had a collection a handful of really smart security practitioners, individual practitioners, scattered across the Company and now we have a fully formed marketing -- market team around it. I think, Haiyan, this is probably best for you to answer how that looks.

Sure. I think in my year here at Splunk, I've certainly have seen great momentum building up. The market is embracing our analytics-driven approach and is embracing the solutions. You can see from the results that we have shared and we have been growing really, really healthy and I think multiples of the market growth for the security market. And those wins is not because the market itself expanding only and is also for competitive wins that we have got in this existing market.

In terms of (technical difficulty) couple years, as I mentioned in the call, from just attending the White House Cyber Security Summit and the people and the resources that was made available by the government and by the enterprises, we can continue to see top priority is going to be given to cyber security and defense and we are becoming the go-to platform for a lot of enterprises and organizations. Partly because the role that they are expecting us to play and we have proven being the nerve center in a lot of the security operations is really helping the security operation team evolve into the next gen technology solution for security and solving the more advanced threats.

Very helpful answer. Thanks.

I'm really bullish on the fact that the content that you've assembled, like the app and the dedicated ProServ team and all that's been a real enabler, because we're seeing a very high attach rate now on our enterprise security app; our solution on top of our engine sales. It's a great sign of the marketplace looking to us for a complete solution.

John DiFucci, Jefferies.

Thanks for taking my question.

I have another question on the EAAs and the pricing and then a follow-up for Godfrey. On the pricing, and you say in the press release, it's for customers of any size. And I'm just wondering, do anticipate this for smaller customers? Maybe could you give us -- sort of give us an example of general terms? What is the license price going to be based on, especially those smaller customers. We sort of get it with the larger ones, but just how might this work differently for smaller customers, if at all?

One of the cool things about Splunk is the data of volume is not dependent on size of the organizations. There's a number of smaller -- technically smaller, revenue-wise, mid-size and smaller dot-coms that have huge data volumes, and still would fit in well with an unlimited EAA one of the other structured vehicles we have.

But I also understand your point of when someone is still -- is not completely wall-to-wall with Splunk, how do EAAs help them? That's what we've got that perpetual term and unlimited triumvirate structure and the perpetual -- the other vehicles still maintain a data orientation, just give visibility on what that data pricing is and they go down to smaller levels. They go down to as low as 100 gig or 250 gig. So we're hoping that we cover the full gamut of customers that are interested in Splunk.

Hey, John, it's Dave.

I think the conversation around enterprise adoption, pre-program or pre-announcement this morning, it's really about the customer maturity. And how do we get them in that position where their comfortable standard -- they want more of our product and giving them that predictable ability to deploy broadly our solution -- our platform and solutions on top of it, is really the objective.

So when we talk -- we want to make that the case for all customers, regardless of their size, that are at that level of maturity so that we can move them up from that operational intelligence level one to the ultimate goal of operational intelligence level four, where they're deriving mission critical information from their data. As Doug mentioned, we've created the program with, what I think, enough flexibility to make it attractive for all of our customers, regardless of what their particular needs are, whether it's perpetual, whether it's term, and the sizing of the license will certainly be factored on many things. In this case, not our historic capacity pricing, but rather, size of customer.

Okay. That's helpful, because I think -- and you know this, right? We get asked the questions all the time about your pricing and it's always been a big question and it's actually been somewhat of a concern of investors.

But I think when I talk to investors that I usually say, listen, Splunk management is not stupid. If it makes sense to do things in a different way with a large customer, that's what they do. But it sounds in this case where you might be able to -- at least as far as I know, you hadn't been doing that a lot with smaller customers. And what I mean that they don't have huge businesses yet. And when you talk maturity, Dave, I just want to make sure you're talking about maturity as to how -- not maturity of the company and how big they are, but maturity of their adoption of Splunk.

That's right. You've got it.

Okay, cool.

How far along are they on their data journey with the Splunk?

Okay. Got it. Great. Thanks. And if I could, a follow-up for Godfrey. Godfrey, when you speak about the business analytics opportunity, does this refer to what most people think of when they think of Splunk, like web analytics of retail websites, or are you referring to something even broader than that, like some of the applications that traditional business intelligence address? If you are thinking broader than that, will that require more specialized apps to be written on top of Splunk?

Great question.

I do not think that Splunk has -- should pursue the analytics marketplace as defined by today's BI tools. There are plenty of tools that understand how to search, report, analyze, structured data sets and that's not a place where we would add significant value. The place where we really add value is in data in-flight. So you think about data that's in motion and that's where Splunk's time series engine has a significant advantage over anything else.

Now, if you combine those two sets of data, data that's in motion with data that's at rest, you can do something, oh, like Dominoes does, when they look at real time phones from folks' mobile devices to their web system, and you could understand what pizza right now is being ordered that's most popular in Cleveland, let's put a marketing promotion out there to boost sales in that moment. So the traditional BI market, people just -- they compared this quarter's results to last quarter's results and look for variances in those numbers and time really isn't a dimension.

Our customers, ones that have very high transaction volumes and customer-facing dot-com environments or mobile environments, which is really on the surge, you want to be able to combine the value that's in the data in motion along with some of the data that's at rest, like customer names, account numbers, pricing information, and so forth and we have an enormous opportunity there. We have a lot of customers that do it that with Splunk today.

It's mostly kind of a custom business, where they grow into that over time and I think we can accelerate that if we start to put a model around it. The answer to the last part of your question is yes, it will require some templates or content that help accelerate that level of adoption because it's a fairly complex set of technologies that you're pulling together.

Okay. Great. That's helpful.

And if I could, so it sounds like, you talk about real-time analytics and is the next step there, and is that part of what you were saying, were you sort of implying that you also, by doing this, get into predictive analytics too? Maybe that's too broad a category. I don't know.

Yes. I agree with that.

Okay. Great. Thanks a lot. Nice job.

Appreciate it. Thanks.

Mark Murphy, JPMorgan.

Yes. Thank you. I will add my congratulations.

Godfrey, I believe you said the security group is on fire, and I'm curious, did it grow materially faster than the total revenue growth for the quarter, which came in at 48%? Even if you can comment directionally on that. Do expect that the security group is going to outgrow the rest of the business this fiscal year?

Yes.

I mean, as I mentioned to, I believe it was Phil asked the question, security business is running between 35% and 40% of our revenue on any given quarter basis, so its growing at -- as fast or faster, depending on the geo and all the rest of that, so it's all good. The reason it's on fire is high end, by the way. I just want to be clear about that.

Thank you, Godfrey.

Thank you.

And then as a follow-up, Godfrey, I was a digesting the handful of changes in sales management and of course, I always wonder if you're factoring in any possibility of any minor disruptions that could result in the field this fiscal year or beyond? And then, when you mentioned that the new unlimited pricing, I started wondering if there could be an offset there, just in terms of perhaps some pent-up customer demand?

I'm asking this question from a different angle. I'd have to think you could see a surge of some larger transactions from customers who want to separate the cost from the data growth or maybe a pull-forward of certain transactions. So I'm just curious, what to expect on both fronts? Is the timing of those two events purely coincidental? On the disruption question, I think Q1 is Q1. It's always the place where Doug and his team, they assign new quotas, they split territories, they reassign account teams. Whatever it is. All the changes that occur in enterprise software, they always occur in Q1, which is, I think one of the reasons why you see Q1 seasonally weaker than the rest of the quarters. It's when all the change happens.

So there's nothing particularly different this year about it than prior. It's just all those changes and rollout at the beginning of the year and off you go, so that part of it feels pretty good.

I would just like to reemphasize what Doug said. That is, on the pricing model, we have multiple dimensions to that model. We have a perpetual model for customers who want to spend CapEx and own software, we have term for people who like to buy it that way, and we have unlimited, depending on what you need as a customer. I -- through all these years, the number one thing you can count on is that the customer has an opinion about how they want to do that, and they usually tell us which of those models are most important to them.

So I don't expect a surge of anything as much as I expect -- well, if there is a surge, it would be in conversation, customers saying, come tell me about your program. I think that will be fantastic. But as Doug said, pricing is the eighth step out of an eight-step customer management process that we teach here, and so we don't lead with pricing. It's just a way to have a customer better understand the models. I'm excited about the new programs but it's going to take the normal amount of time for these opportunities for it to show us what the outcome is, which way the customer prefers to buy.

Thank you.

Thanks, Mark.

Greg Dunham, Goldman Sachs.

Hi, thanks for taking my question. A quick on security. It's related to Haiyan's comments that it's not just that the security market is doing well, it's that your outgrowing the market. The question really is, what has been the impact from the security markets group? What have you measured as the benefits to that in the last year?

Could you rank order? Is it volume? Is it less discounting? Is it consistently? How do you measure the success of moving to that model within security now at year end?

Thanks.

Let me give you a couple of things that we set out as goals for our team. I think it's the winning and the momentum comes from us bringing the right solutions to the customer and what they really need is to have a new approach to help with today's advanced threats. Some of the legacy product is not really meeting that need, so I think that's the most important part. In terms of metrics and others is, how many times do we get invited to the table. I think with us being recognized as the leader for the market, we are in all the conversations, because we get automatically included in the RSPs.

The other part is how many times that we can go and message out to the market and the customers why a new approach is needed, why being the new nerve center is an important thing as part of their technology refresh when they look at into security. I think other areas for us is getting our field organization trained and so we can have a productive conversation with customers and with the users and different audiences with the right messaging and the right solutions to them.

I think those are a few. There is probably many other things in terms of attach rates and growth rates. I think those are things I'll defer to Dave.

Yes, Greg. It's Dave.

I think we've been talking a long time about single product and multi-products and we have been investing significantly in terms of content that we can provide on top of our platform and enabling others to provide content, both our customers and third parties to provide content on top of our platform. A shining example of that is our enterprise security app that sits on top.

Haiyan mentioned attach rate. The rate of attach is that we see as our market group that's led by Haiyan is able to engage and articulate the value proposition of our solution around security, has been a differentiator for us in that market and we see it ultimately in our win rate, which is extremely high. When we are engaged in an opportunity, the depth of expertise that our market group focus brings to the field organization, and its influence on the product development organization, creates a solution that customers have to have to protect themselves.

That's helpful. Thanks.

Thanks, Greg.

Karl Keirstead, Deutsche Bank.

Actually, I'm good. I'll ping Ken afterwards. Thank you.

Thanks, Carl. Appreciate that.

Thank you. This does conclude our question-and-answer session for today's program. I'd like to hand of the program back to Management for any further remarks.

Great. Thanks, Jonathan. Appreciate your help today. Thanks, everybody, for joining us.

As a reminder, we will be hosting a Splunk live event in DC on April 8. You can register via the website. Hope everybody has a good evening. Thank you for your time today.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.