Splunk Inc (SPLK) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Splunk fourth-quarter 2017 financial results conference call.

(Operator Instructions)

As a reminder this conference call is being recorded. I would now like to turn the conference over to Ken Tinsley, Corporate Treasurer and Vice President of Investor Relations. Please begin.

Great. Thank you, Latoya, and good afternoon, everyone. With me on the call today are Doug Merritt and Dave Conte. We issued a press release after close of market today, and it is posted on our website. Additionally, this conference call is being broadcast live via webcast. And following the call an audio replay will be available on our website as well.

On today's call, we will be making forward-looking statements. Including financial guidance and expectations including our forecast for our first-quarter and full-year of FY18. Transactions, products, and services and revenue mix. Planned investments and trends in our operating model results in our investments, trends and momentum in our business including international revenue.

These statements reflect our best judgment based on factors currently known to us, and actual events or results may differ materially. Please refer to our 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 to non-GAAP results is provided with the press release and on our website. With that, let me turn it over to Doug.

Thank you, Ken. Hello everyone and welcome to the call. Having just flown in from our annual sales kickoff, I'm excited to be talking to you all about the opportunity in front of us. As a Company, we delivered on FY17 and our enthusiasm heading to FY18 could not be higher.

Our energy comes from a great Q4, where we delivered $306.5 million in total revenue, up 39% over last year. For the full-year, revenue totaled $950 million up 42% year over year. Our growth continues to come from a combination of both new and existing customers expanding their deployments both on [prem] and in the cloud. I am pleased to report that in Q4, we added nearly 700 new customers to the Splunk family. Which is now more than 13,000 strong.

We are well on our way to achieving a goal we shared with all of you at our analyst day in January of having 20,000 customers in three years. I would also like to say thank you to our partners from around the world who joined us at our kickoff. It was inspiring to see our collective teams driving the alignment that is so critical to ensure that we capitalize on our mutual opportunity.

I can speak for every employee and for our partners in saying that we're fired up. And our customers are our number-one source of inspiration. As we discussed during analyst day, we continue to believe that we have a tremendous market opportunity. And that we are still in the early innings. With the move to digital, e-commerce, mobile and social, organizations are now increasingly using machine data to provide critical context to the transactional data stored in ERP and CRM systems, relational databases, and in data warehouses.

Customers are looking for a solution that allows them to harness this data and use it to make real-time decisions. Splunk's platform is the best solution to enable customers to easily and cost-effectively collect, analyze, and get maximum value from this largely unstructured and voluminous data. There is no other solution on the market today that does what we do. And our customers are leveraging orders of magnitude more data daily than ever before.

Our goal has become the standard for machine data in every account. A ubiquitous machine data platform solving our customers' big data challenges and IT operations, application delivery, security compliance and fraud, business analytics, and the Internet of things.

We're focused on these [use] cases and markets because each is going through a shift to an analytics-based approach, where Splunk is uniquely positioned to lead this change and deliver for our customers. You heard from each of the leaders from our market groups about their strategy and execution on analyst day. Haiyan and Rick for our core markets in security and ITOA. And Snehal for emerging markets, business analytics and IoT.

From a go-to-market perspective we continue to be focused on investing and optimizing our demand-generation activities and field segmentation and coverage to accelerate customer acquisition and success. As we have said before, we believe that we're still early on the adoption journey, even within our largest accounts. We want to vigorously pursue those opportunities. I am excited about the changes that our CRO, Susan St. Ledger, is making to the go-to-market model, which she outlined our analyst day, to enable us to fully capitalize on the opportunity ahead.

So, moving on to the execution in Q4, which gives me the opportunity to share a small sampling of our customer successes. We continued to see strong traction in our core use case of IT operations, app delivery, and security.

Enterprise security, or ES, is now well established. And we have been recognized as a leader in Gartner's Magic Quadrant for SIM for four straight years. And while this our first full year on the market with IT Service Intelligence, or ITSI, the products are showing the same upside potential as ES. In fact, IDC has recently declared that Splunk is the global market share leader for the emerging area of IT operations analytics.

Q4 notable wins include insurance giant AFLAC, who further expanded their use of Splunk in Q4. They initially used Splunk in IT operations, then selected ES as their SIM, and added Splunk user behavior analytics, or UBA, to improve threat intelligence. I'm happy to report that we are now shipping Splunk to FedEx.

As you know, all revenue flows through IT. And this is why so many companies are focused on digital transformation. FedEx CIO Rob Carter is a visionary who drives their business strategy to what he calls the four horsemen of dominant design: servers, networks, storage, and software.

Rob and his team are going to use Splunk Enterprise and ITSI to monitor their critical applications, helping to ensure customers always get their packages on time. Thanks to our partners at Dell EMC who played a significant role at FedEx. Longtime customer Escherian expanded their use of ES for security and fraud detection and also bought ITSI to monitor their technology stacks.

Escherian's [CSO] sees Splunk machine learning as critical to hunting threats in their network. I'm proud the Splunk is now deployed across multiple agencies, counties, and programs within the Commonwealth of Virginia. Including the Supreme Court of Virginia, who selected Splunk Cloud and ES. And the Virginia Department of Motor Vehicles who expanded Splunk to drive real-time security and compliance.

Special thanks to our partners at Carahsoft and Slate Consulting, who were instrumental in these opportunities. The University of Minnesota made a multi-terabyte expansion as part of a strategic program to further improve their IT and security systems. The Australia New Zealand [banking] group standardized on Splunk Enterprise and ITSI as a monitoring reporting, business process, and analytics platform for their application support teams. Splunk will enable the teams to build resiliency and automation to create their vision for self-healing and self-sustaining systems.

And our existing customer Penske Truck Leasing expanded their use of Splunk into business analytics by using the platform to gain broader visibility into the systems that manage all truck leasing logistics. Other notable customer wins this quarter include Jiffy Lube, Papa John's, and the City and County of San Francisco.

In Q4, we continue to see multiple customers standardize on Splunk and assign enterprise adoption agreements, or EAAs. Including Stamps.com who signed an EAA to standardize on Splunk across multiple use cases. Including monitoring and analyzing 3 million customer transactions per day. Helping their dev ops teams quickly identify and fix bugs in their platform and allowing the data center ops teams to stay ahead any issues that may impact service.

Other EAA customers in the quarter included Telstra and the UK's National Health Service. We also saw our cloud business continue its growth momentum. A sampling of our cloud wins in the quarter include Randstad, one of the world's largest HR recruiting firms, who bought Splunk Cloud, ES, and ITSI to support a massive cloud migration. Moving 30 global data centers and more than 5,000 servers to AWS. Splunk will be used to monitor the new AWS environment from both an IT and a security perspective.

The University of San Francisco, which expand their Splunk cloud deployment, will continue to leverage hybrid search to enhance their vulnerability detection capabilities. Raymond James, one of the largest financial planning and services companies in the world, selected Splunk Cloud and ES. Thanks to the AWS Solutions Architect team who partnered with us on this one.

Moving on to the ecosystem, where increasingly Splunk is being viewed as a critical component of the IT and security landscape. Let me give you some Q4 examples to illustrate what I mean. A major retailer in the UK, specifically called out Splunk's integration with one of their existing security vendors, who is a partner, as a major reason for buying and deploying Splunk.

Another large US healthcare company chose Splunk in Q4 to be deployed alongside solutions from our partners Proofpoint and ForeScout. Similarly in ITOA, our customers are deploying Splunk alongside tools like Dynatrace, AppDynamics, New Relic and ServiceNow.

Because of our ability to collect all data types and provide correlations across platforms, applications, infrastructure, mobile and wire data, partners have focused on any particular component in the stack end up being just another data source for Splunk. This model allows our customers to leverage the Splunk platform to enhance their visibility to an entire environment on prem and in the cloud.

You also saw us demonstrate at the RSA Conference last week. We had the privilege of meeting with dozens of customers and partners. The one theme that continued to stand out, as it does every year, is that we are clearly moving to a world of analytics-based security. We welcomed five new members to the growing Adaptive Response Initiative, which is designed to help organizations better combat advanced attacks through a unified multi-vendor defense.

It was great to see so many partners, including Symantec, Palo Alto, ForeScout and Proofpoint, integrating their security solutions with Splunk through the adaptive response framework. This leverages Splunk's capabilities as the intelligent security data platform. And is driving Splunk and ES to become the nerve center of our customers' security operation centers.

To cap that week, Splunk was also honored with the 2017 SC Magazine award for best enterprise security solution. Splunk was also named a finalist for the best SIM solution and best behavioral analytics enterprise threat detection solution. Other highlights from our ecosystem include Infoblox, who expanded their OEM, using Splunk as a core of their Infoblox reporting and analytics product.

Embedding Splunk into their outframe allows Infoblox to empower their non-technical users with advanced reporting needed to streamline internal operations and business-critical decision making. And CrowdStrike, a longtime Splunk OEM partner, has expanded their use of Splunk as the core of their Falcon endpoint protection product to create customizable reporting, dashboards, and forensics for end-users.

In summary, it was a solid quarter and finished to our FY17. I'm really proud of the entire Splunk team. We have a tremendous opportunity that is immediately in front of us. Splunk is uniquely positioned to capitalize on this opportunity, and we are pursuing it aggressively. We are early in our journey and are investing for scale and growth.

We are delivering high value to our customers who are expanding their adoption of Splunk as their platform for machine data analytics, both on prem and in the cloud. Again, thanks to all of our customers and partners, and thanks to everyone who works at Splunk. I am enthusiastic about FY18 and beyond. With that, let me turn it over to our CFO, Dave Conte.

Thanks, Doug. Good afternoon, everyone. Thanks for joining the call. I am pleased to report strong Q4 results to cap a solid year for Splunk.

Fourth-quarter revenues were $306.5 million, a 39% increase over Q4 of last year. For the full year, total revenues were $950 million, a 42% increase over last year. Full-year total billings were $1.126 billion, up 38% over last year.

At our analyst meeting last month, we laid out milestone and targets as we transition to a predominantly subscription model. For the full fiscal year just ended, cloud revenues totaled $47.8 million on billings of about $95 million. As pleased as I am with our progress, we remain in the early stages of our addressable market.

As Doug described, we have a unique opportunity to establish Splunk as the standard for our customers and their data analytics. And will continue our focused investments in our product portfolio, our field groups, and the cloud to ensure customer reach and customer success.

In the context, customer adoption is ramping. Historically more than 70% of our quarterly license bookings have come from upsells to existing customers. At our analyst day, we updated this to 80% on a full-year basis, reflecting the increasing adoption of Splunk by our customers.

In Q4 we added almost 700 new customers. The highest in our history. For the full year, we added nearly 2,200 new customers overall. And ended with more than 13,300 customers globally. Tracking well to our target of 20,000 customers in FY20. Our continuing commitments to product innovations around our platform and solutions, as well as our pricing programs, are accelerating Splunk adoption.

In Q4, we recorded 697 six-figure orders. For the full year, we recorded 1,942, so almost 2,000, Ken, six-figure orders in total, 166 seven-figure orders, and 3 eight-figure transactions. Overall our going product suite, complemented by increased awareness and compelling ROI, together are driving this type of large-scale adoption.

At analyst day, we detailed our mission to maintain an unrelenting focus on customer success. This effort continues to drive higher ASPs overall. In FY17, license ASP was about $69,000, higher than our prior levels of $40,000 to $50,000. Remember that increasing ASPs, to the $80,000 level is one of the three key drivers on our road to $2 billion in total revenues in FY20.

All right. Turning to overall ratable mix, which includes term and cloud transactions, we realized 45% of software sales in Q4 and 46 for the full year. Both in line with our expectations. Going forward, and as I laid out in January, our plan is to transition our business model to 75% subscription by FY20. With the long-term nature of this objective and considering the highly variable quarterly mix, we will be updating you annually as it relates to subscription mix targets and performance. Again for next year, or FY18, we expect 50% of the business to be subscription.

Now back to Q4, international operations contributed 24% of total revenues for the quarter. Slightly better performance than prior quarters, as our international teams continued to develop their books of business. Longer term, we expect to see international teams contribute between 30% to 35% of total revenues. Our education and professional services represented 7% of revenues in Q4, consistent with prior periods.

Turning to margins and other results, which are all non-GAAP, Q4 overall gross margin was 85%. Consistent with Q3 and 400 bps lower year over year, reflecting the expansion of our cloud business. As we have discussed in the past, we are in the early stages of our cloud offering and gross margins from cloud is low at these absolute levels. Specifically, in FY17, cloud impacted gross margin by 5%. As we scale that business the impact from cloud margin headwind will diminish over time, as you would expect.

Q4 operating income was $36 million, representing a positive margin of 11.7%. Q4 net income was $34.8 million, or $0.25 per share, using a fully diluted weighted average share count of 139.1 million shares. For the full year, operating margin was 6.2%, slightly above our expectations due to the strength of our overall top-line performance. Net income was about $56 million, or $0.41 per share, based on a fully diluted weighted average share count of 137.4 million shares.

Turning to cash flows. Cash flow from operations in Q4 was $103 million and free cash flow was $84 million. Full-year cash flow from operations was $202 million in total, and we ended the year with about $1.1 billion in cash and investments.

Full-year free cash flow was $156 million for the year, reflecting total CapEx of $45 million. Again, the bulk of which related to our South Bay campus buildout. Full year CapEx was actually lower than anticipated due to efficiencies realized from that project. Absent the South Bay buildout, our CapEx was approximately $19 million, consistent with prior periods and highly correlated to our headcount growth.

We completed the two large Bay Area projects that support this headcount growth, as we continued to deliver for our customers of course. And now that we have optimized these buildings, we do have some legacy space that is still under lease that is no longer being utilized. As a result, on the financials, you will notice a nonrecurring charge related to phase out of this idle space. Looking back over the past few years, our investments are clearly paying off.

At the bookings and revenue scale we expect in FY18 and beyond, we are beginning to see leverage benefit from these investments in our operating model. For the full year 2018, we are targeting non-GAAP operating margin of about 8%, consistent with our plan of 100 to 200 basis points of annual op margin expansion in the near term. As we continue to invest at an aggressive but measured pace on our path to $2 billion in revenue.

We expect full-year revenue of about $1.185 billion. A slight increase from our previous guidance last month and on billings of about $1.4 billion in total. For the full year, we expect cloud to contribute about $85 million of revenue on about $150 million of billings. We anticipate full-year gross margin will be consistent with FY17.

We continue to focus on our investments on delivering the best customer success. We will be disciplined about how we expand our product lines and ensure our coverage model delivers top-line growth at these absolute levels. As we detailed last month, we are driving to 12% to 14% operating margin in FY20, with expansion beyond that to at least 25% as we reach higher scale.

Now looking at the quarterization of FY18, we expect Q1 revenue to range between $231 million and $233 million. As in prior years, quarterly revenue will likely be weighted 42% first half to 58% second half. We expect revenues, billings, and cash flow will closely follow the quarterly patterns we have seen historically for each of those items. With the continued investments I've described and overlaid with our revenue plan, we expect non-GAAP operating margin of between a negative 2% to a negative 4% in Q1, turning slightly positive in Q2, and then ramping in Q3 and Q4. Consistent with the seasonal nature of our model.

For EPS calculations, since we expect to be an operating loss position in Q1, you should use a share count of about 138 million shares. For CapEx, with the two Bay Area projects now complete, I expect we will return to a more normalized level of capital investment of $18 million to $20 million for the full year.

Stepping back, it is important to highlight that our business continues to generate substantial cash flows just as we saw in FY17. In FY18 we expect operating cash flow of about $250 million, similar to prior years in terms of percentage, and sharply higher free cash flow of around $230 million. The cash flow generating capabilities of our business are strong, especially when you think about our growth trajectory on our path to $2 billion over the next three years.

In closing, Q4 results and our full-year performance were solid. Our product investments are driving customer success, and our field expansion is enhancing our execution capability. Our strategy is working well, and we plan to continue to fuel the pace of adoption as we drive to make Splunk a ubiquitous machine data platform. Thank you so much for your time and interest, and with that, we will take your questions.

Thank you.

(Operator Instructions)

Michael Turits, Raymond James.

Hey, guys. One for Dave one for Doug. First for Dave, obviously very strong first numbers this quarter and likely higher guide versus straight on margins for the year. But still margins down year-over-year for the first quarter on that EBIT margin loss. Can you just give us some insight into that?

Hey, Michael. How are you?

Good Dave. Thanks.

So obviously what we communicated last month at A day and today, we're thinking about our trajectory over the next 3 years. Both from a customer acquisition perspective, a revenue and billings perspective, and of course margin expansion. When we then look back at the fiscal year, we think that the expansion of margin around 100 to 200 bips makes sense and is consistent with our historic level of investment as we look to increase our coverage in particular in the field and of course drive for scale on the product in the cloud side.

So then we break that down and we look at the feasible nature of our business, I think it is important to note FY17 we had a strong finish, we're certainly proud of our results. And if you look at our large transactions, those over seven-figure, you see half of our large transactions for the year came in the fourth quarter alone. So when we look forward for FY18, we're modeling in that same type of seasonality.

When you that pair that type of seasonality with our run rate of expenses both from our headcount levels, our cloud operation, and of course we have done our facility expansions in the South Bay. That translates to a seasonal mix of margin and I think that seasonal mix, or that seasonality of margin is pretty consistent if you look back over time.

Thanks, Dave. And then for Doug. I think you alluded to it briefly. But can you talk a bit about investment going on currently for product sales outside of IT? Specifically let's called business analytics or [BI] but what are they doing there and also how does the mix of build versus [used] partners for applications in that area?

Thanks, Michael. Yes. As we talked about at analyst day, we moved Stehal and [Toni] in to a dedicated role focused on the build-out business analytics and IoT's cases on more of a private basis. And we have seen through the years thousands of these new cases being development, but really done by our champions within our current accounts. And my feeling and [Godfrey's] I think before me at some point in time you get enough critical mass and guideposts that you could start find that use case that can be deployed hundreds or ideally thousands of times and start to get a body of those.

Stehal is focusing on a handful of personas and buying centers at first and it is the entire initiative is very tightly focused on partner coupling and interactions and given that we are getting into the far more vertical specific as well as functional specific needs, versus a much more broad-based horizontal occurrence. Of our SIM instances or user behavior analytics or IT operations.

I am excited to see the progress that we will make this year. We have got a lot of early POC traction that has been developed tightly with the customers and partners and we will keep you guys up-to-date on what we are seeing over the course of this year.

Great. Thanks, Doug.

Thank you. Raimo Lenschow, Barclays. Hi please check to see if your line is on mute. Okay. We will take the next question from Ed McGuire, CLSA.

Good afternoon. I was wondering if you could talk about the dynamics behind the eight figure deals that you guys are really focused on and to what extent are you focusing on really expansion of existing customers? As well as investing in products like user behavior analytics as ways to really drive up total value for customer?

Thanks for the question. So the march to big transactions, whether it is seven or eight figure deals tends to typically be as I have said before a expansion of use cases beyond the initial set that was sold into the account. So it is a combination of adoption within that initial use case, where the security analytics platform for the security operations center let's say. Or where the core IT operations backbone or the hundreds of heterogeneous apps that a typical data manager has.

So we get adoption as we get more the data sources in, but then the real interesting attraction that comes to Splunk as we start to hop from department to department because of the reuse capability. The scheme at read capability of that data platform that Splunk provides. And as we get a critical mass of use cases, it becomes more apparent that we're the data platform and it becomes easier ready to justify the return on investment until a cost of ownership assumptions that would drive a seven or eight figure deal. Products like user behavior analytics and ITSI help us on that journey.

The sooner that we can collapse time to value for the customers, the better for them to see the value of the data they have in their Splunk platform. But hand-in-hand with that we have almost 1300 applications up on Splunk base now and the vast majority of those were built by partners and third parties. So whether it is a third-party app, Splunk app, or it is just a packaging and bundling of the core Splunk platform for specific uses, all of those motions help drive the adoption and virility of that platform. Given the customers really by solutions to [pain] and then eventually optimize the fact that they have got something that's more of a platform that they can use across the organization.

Great. And just a follow-up on the competitive landscape. Could you comment on Cisco's acquisition of app dynamics is certainly a validation of a app approach to IT performance challenges. How does that acquisition color or change in any way your conversations with customers? And have there been any notable changes in the competitive environment? Thanks.

Thanks for the question. So no notable changes in the [fed] environment starting at the high level going directly to Cisco and app dynamics both are partners of Splunk and have been partners of Splunk and actually [built] their customers of Splunk as well. At the end, the APM vendors in general saw a really important but more narrow problem than what Splunk solves. They provide that visibility around application performance and any issues or interruptions around applications on a much more deep interrogative basis.

Why they've been partners, all of them, [Aptiv New Relic] Dyna Trace, et cetera, is that they are a great data source for the Splunk platform across the IT operations and app data app management landscape. I do not anticipate any major changes in the partnership with Cisco or Apptiv and we're focused on helping that IT operations leader continue to solve that incredibly complex task of correlating, trying to find, get ahead of a problem and/or investigate existing problems for really quick resolution, when you have got again hundreds of heterogeneous software solutions and hardware solutions that do not have uniformity and the data that they are spitting out. And we are natively built to cooperate despite the fact that your trying to string them together as one module service where customers.

Okay. Thank you.

Thank you. Kash Rangan, Bank of America.

Hey, thank you very much. I would ask a question for Dave. Dave, with Splunk's vital signs looking so good, are the mystic rhythms going to open up the power windows with some big money in the future?

(Laughter) --anybody out there (inaudible) what Kash is saying? (laughter)

Okay. What I wanted to clarify was the stock is down in the after hours, but it's important that you are actually raising your revenue value, you're actually raising the offering margin guidance if this is [AP] versus street expectations and you had a quarter where you beat the revenues licensed [delaying] operating margins. So what seems to be the missing point here is the Q1 seasonality. If you could you just elaborate on the any particular reason why you may be conservative with respect your operating income guidance and revenue guidance as it relates to the street for Q1? That will be great.

And for you, Doug, unfortunately I don't have a rush kind of question for you. But can you elaborate a little bit on the 5000 servers moving to the cloud? And why that customers actually using you as opposed to what people would have normally assumed it to be a layup win for (inaudible) and if you can at the end, comment on sales capacity growth rate? Thank you so much.

And Doug, when we are done with the call, we can go to my rush archives and pull out all the key songs that Kash has referenced.

I have only seen them in concert 10 times Dave versus your 50. So you definitely got a leg up on me. [I rated] number of times I've seen Rush live.

Cash, I think the thing that is important one, as I mentioned to Michael, we are looking at our plans over the next three years. The trajectory of going from effectively a billion-dollar business after 10 plus years since inception to getting to $2 billion in just three years, that's where we are focused on investments all tied back to making sure the customer succeed.

Now big parts of that, and you guys know we had not provided billings as a metric but we thought it was appropriate to do so at this level of scale when you start moving from what has been primarily a perpetual model to now our objective of getting 75% subscription in the out years. A big chunk of that of course is the cloud component and for FY17, the year we just finished, we had almost $50 million of cloud revenue and we all know how cloud revenue and cloud costs are linear. They are not seasonal.

So we layer in our cloud costs, which I have articulated of the last few quarters and specifically again today represents about a 5% hit on the gross margin line. When you layer that in, on a linear basis against a seasonal topline, you get a different margin profile for Q1. You compare that too with the large orders again what we think is an indicating metric on our path to Q billing, you look at those large adoption orders and you see the seasonality of them where 50% of all of our large orders are coming in the fourth quarter and the associated revenue dynamics of that, you get that type of picture from Q1 revenue and margin profile to full year.

To me, this is, it is really about fine-tuning. Then in January we gave our initial outlook for revenue for FY18, we updated that today which you pointed out. And this is about fine-tuning the models in terms of quarterazation.

And the second part Doug on the [other service parts].

One, the applications that we have that help provide visibility for ADBS customers in the ADBS landscape continue to be uniquely positioned and differentiated. It is an incredibly beautiful thoughtful thorough set of applications that help customers and everything from security posture of those apps that they need to be [asked] to optimal usage of the hundreds of ADBS services that they have rolled out and continue to rollout. So that you can get predictably on everything from performance to cost and continue to drive your business.

So I think natively even for an ADBS only account, we see a lot of traction with Splunk as a core platform in the Splunk app for ADBS. And then someone like Rondstad where we have talked about over the past couple of years, this shift from on prem to cloud. They are almost always applications that will remain on prem because the architecture and nature and often the age of those applications demand, can be much more efficient if they continue to exist in the data center and architecture that they are built for.

So most of these organizations, there's a hybrid approach that they will always have to manage or at least manage as they transition the core other apps to the cloud and why we work so effectively with ADBS is that we provide that assurance to our joint customers that as in a single pane of glass with our hybrid cloud non prem approach so that they are assured consistency, security, performance, mean time to resolution for apps, whether they are in transition, have landed one side or the other, or are going to be in transition. (Multiple speakers)

Kash, the way that we are thinking about sales capacity is at a macro P&L level. So, over the last few years sales and marketing expense of course non-GAAP as a percentage of revenue has been probably in the 55% to 60% range for FY17 it was about 52% and when we look for building our capacity and the investment in coverage for FY18, we expect sales and marketing to still be above 50% of revenue for the year. So of course there are all types of components that underlie the moves that Susan is making, all focused on ensuring that we get the right amount of coverage to go capture the [Tam].

Doug pointed out on our last call just in terms of our, what I'll call our lack of coverage in terms of the addressable market, we still did not have physical presence in 18 of the states here in the US. So we have got a lot of work to do just in terms of getting the appropriate coverage levels. So we are going to maintain that investment philosophy again plus 50% of revenue for FY18 in sales and marketing and from that you can ultimately derive the type of capacity that will be deployed for the year.

Thank you. Walter Pritchard, Citi. Walter, please check to see if your line is on mute.

Can you hear me now?

Yes, we can.

Okay. Great. Doug I wondered if you give us some color the security market and growth there relative to the rest of the business. And you have had some competitors I think your largest competitor in that space the assets' trading hands again with a divesture. And I was wondering how you think about that as a potential driver in your FY18?

Thanks, Walter. Yes. The RSA conference just being on the heels of RSA it's a great TF to where we extend security. I love going to that show and for Splunk every one, that show just keep getting bigger because security is such a hot topic and something I think we will be living with for many years to come. And Splunk's presence there just keeps growing every year as it becomes more clear that this need for a security data platform and correlating all the different data streams, they are coming from that needed more narrow or specific hardware or virtualized appliance solutions that are populating any (inaudible) landscape. But that just becomes more and more of a problem for CSOs to tie those data flows and those different devices together so you actually get a fabric instead of insight and a true defense and reaction capability.

It was a really nice momentum show for us. We walked in knowing that we are going to be featured in 12 vendors' booths because of the integrations they had done. And as we walked around the show we saw over 30 different vendors that had built those integrations and were showing Splunk within their booth.

We are honored and completely focused on continuing to drive both the immediate insights for our CSOs and their security teams. But continuing to double and triple down on machine learning and on applications and solutions whether ours or third parties. So our customers then can continue to keep pace and ideally stay ahead of this very turbulent landscape.

Thank you. Melissa Gorham, Morgan Stanley.

Great. Thanks for taking my question. Dave, at the analyst day you talked about FY18 being a year of transition or maybe disruption as you're getting yourselves forced to sell Splunk Cloud. I know that you have guided for FY18 but I guess from a quality perspective, can you maybe talk about what you're hearing from the sales force? And if there is any reason to believe that that view should change in terms of the level of transition in FY18?

Well, again, the benefit of having analyst day a few weeks ago is we get the view of how we finished the year. But our points of view in terms of our outlook are obviously relatively consistent given the short timeframe in between.

We just came back late last night from our sales kickoff that Doug mentioned in his prepared remarks and there are so many adjectives to describe the energy, the excitement, and ultimately the opportunity, I think it's infectious to be with our field organization, particularly when you pull them altogether. And one of the big objectives for us was to try to insert as much simplicity for the field in terms of selling what is a very complicated product that consumable in multiple ways. We want to enable customers to leverage our product wherever the data sits, so whether that is on prem, behind a firewall, on a term basis, on a perpetual basis or cloud.

So what's been the transition part is moving that sales DNA from a exclusively perpetual business to when that now says gee, data lives in the cloud and we need to be able to sell cloud and it has a different transaction composition to it. So I think we have made great progress in that regard. We have worked hard to ensure that there is neutrality across our field organization so that ultimately it's the customers' data requirements and analyzing the data where if it lives that's a key driver and I think that's really resonating well with the field organization.

The other part, in terms of that transition and that continuously moving the organization to address the overall Tam and position ourselves for the right level of scale as we try to effectively doubling size of the Company in 3 years is ensuring the coverage is right. At analyst day Susan talked a bunch about it, Doug mentioned in his prepared remarks.

So, one big area of focus again that we played out at the kickoff was evolving how our resources are deployed to go serve those existing customers, but of course capture new ones as well. So that's all part and parcel of the whole exercise. A long answer Melissa to a question I think we are in great shape in terms of transitioning that selling motion to not only include all the on prem business that we have done historically but importantly add cloud.

Okay. Great. That's helpful. And then just one quick follow-up. Was there any change in duration in the quarter? So we did see a little bit of an uptick in long-term deferred. So I was just wondering there's anything we can attribute to that.

No. The large orders that we talked about, the largest orders again for the year, we had three eight figure adoption transactions were all fourth quarter transactions so overall duration is consistent I would say.

Okay. Great. Thank you.

Thank you. John DiFucci, Jefferies.

Thank you. My question is for Dave. Dave, you guys put up a really strong quarter. So there's obviously there's some confusion in the market after hours. I am just curious, why not give us more to be also model you in more detail?

I know you gave us a lot at the analyst day and I really appreciate that, but can you give us the term license number? Because pretty soon we're going to see it anyway, because if 606 comes out, you're going to have to do a lot of different things.

Because it just seems like every time you guys reports the stock is so volatile afterwards and you usually recover and I know you're not going to guide based on a day's volatility. But could you give us-- you give us the percentage of term bookings, but could you give us the term license revenue number going forward? I think it would allow us to model you and when you give guidance probably understand it better; at least like I think maybe next quarter's guidance is why the stock is down so much after hours.

Hey, John. I certainly won't comment on any particular trading dynamic. We are certainly quite proud of the finish to FY17 and in particular when we talk to our customers and I know you do as well. But our focus is on their satisfaction and that will ultimately lead to our shareholders' satisfaction so we stay focused on the customer that is really what matters.

When we think about guiding, thank you for acknowledging a lot of the info that we shared at A day, but if I step back extremely conscious of what has historically been a complicated model. And I share with all of you the challenge of trying to forecast mix and any particular transaction on any 90 day period can have an impact on geography between balance sheet and income statement which makes it really hard.

So to try to up level the way to think about our execution and performance, we now provided a 3 year outlook for revenue, billings, and margin. And giving billings guide is a new thing for us and consciously intending to give the macro view over not just this fiscal year but the next three fiscal years about how to think about the overall business and then the geography issue becomes a subset of that. Now we are also consciously moving to a more heavily weighted subscription business and we talked about that at A day, there is a lot of reasons to do it, of course 606 is going to affect that.

One thing that you said in your question, John, if 606 comes along. If you know something that I don't about 606 please share it off-line. That would be something that we're going to be mapping over the course of the year.

We want to be in the same ride along with all of you and our peers out there in software that will be adopting that standard and then developing the appropriate metrics that give you the appropriate insight in terms of evaluating our performance and how to build your models in light of 606. Might that include a call out specifically for term license, it may. But today, I think the best way to think about us is at a macro level metric around revenue, which is our primary metric and then billings which cuts through all of the complexity of mix between cloud and term and perpetual. And then we will develop additional metrics along the way that we think are instructed to how you build your model.

Okay, Dave. Well, thanks. And by the way, I just think 606 there are some things on it that do not make a lot of sense to me anyways, so it's been delayed so many times that's why I say if it comes along but thank you.

Thank you. Phillip Winslow, Wells Fargo Securities.

You guys for taking my question and congrats on a good close for the year. I really just have a two questions first one for Doug.

Doug, Dave actually ran off a lot of positive big deal metrics in million dollar deals north of $100,000 so a good acceleration in Q4. But then also I think back to analyst day, even this call you also mentioned new customer wins and the goal of growing that, which you did do this quarter. But when you think about the upsell and also upsell to bigger deals, and while at the same time trying to grow the customer base how are you balancing those two? From just the go to market perspective? And I just have one follow-up for Dave of that.

Thanks, Phil. We have got again it is great coming to this call right after a sales kickoff because so much of what we are doing for this year was bundled up and packaged and delivered to the sales teams and our partner teams were there also. And there is this duality we are driving, which is what can we do to make it easier to land and a lot of what we are doing with those net new land also can make it easier for us to drive expansion where those are buying centers that we have not touched yet within an organization.

And one of the key elements we rolled out at this SKO was a series of sales packages or bundles. To make it easier to both from a [stocking u] to a SKU basis within our systems for partners and ourselves to see. And on a communications and marketing basis to be able to drive Splunk Enterprise backbone with the right data source ingestion and the right structuring of that data and that the views and remediations around that data to specifically go after different buying centers, and percentages within those buying centers to help on both of those fronts. So we have got a really tight tie on our sales segmentation, our partner incentives, and our customer success teams to have a consistent motions around net new and existing accounts so that we can see traction on both those fronts.

Got it. And then Dave, maybe I missed it. But could you give us a headcount but also quote a [caring] headcount for where you exited the year? And then when you think about what Dough was just saying about the mix of call it direct and indirect partners, how to think about the quota carrying? And also overall headcount growing relative to just call it the business maybe as partners become a bigger piece?

Hey, Phil, welcome back, by the way.

Yes. Good to be back

It's good to have you. So the overall headcount for the Company finished the year at just over 2700 in total. Again, from a quota carrying capacity, we would like to graduate away from specific quota carriers, because I don't think it really at this stage of our development and how we are think about our scale going forward, I don't think it really reflects the way we're structuring our go to market and ultimately our capacity.

And I think you rightly point out that from an indirect perspective, as we look to gain leverage and ultimately reach that partner and indirect channel is going to be really important. In fact, it was great at our sales kickoff again we just got back that we had, not just our own direct employee but the best of the best in terms of all of our partners and channel partners specifically, part and parcel of the whole program. So we really look at those folks as a true extension of what we are doing so much so that we include them in all of the activities over the balance of the program.

So when I look out over the next several quarters and years, we have been investing in our channel capabilities. And the associated leverage from that is something we fully expect to realize over the course of FY18 and as we go through 2020.

Quantifying that is something that we are going to have to wait and see how it goes. But it is absolutely important that for us to go capture that Tam, we need to have a strong portfolio of partners that are helping us reach those accounts. So that's fundamental to our investment pieces in terms of coverage for sure.

Got it. Thanks, guys.

Thanks, Phil.

Sarah Hindlian, Macquarie.

All right. Thank you. I had a bunch of questions, Dave, Doug. I will try to limit myself. You saw this really strong quarter and a step [function] in higher and customer adds. And that helps us in understanding, or at least attempted to see the mix of revenues that are coming from new versus existing customers. And Dave, you were good some of that data in January.

I am wondering maybe I am being greedy, but can you give us come color on how the mix was in Q4? And then also a couple of others. Doug, when you were talking about the seasonality you are seeing in Q1 and yes, I do think that's why the stock is a little bit softer in the aftermarket, I am also wondering how much of that you can also attributes in terms of your outlook to these important and necessary territory realignments that Susan outlined a few weeks ago? And I will cap myself there. I do have another if you have a moment.

All right. Thank you, Sarah. Just want to start with the Q1 piece on the territory piece. As again we have said over and over, the coverage is, the markup team is so enormous for Splunk, given that we can play in almost any use case. Every company is a data company and we can play in any use cases that coverage is our biggest issue. And what Susan is doing this year, I think is a really good continued progression.

On refining are predominantly geo-based model which went back to the 18 states with fortune 500 companies, but we did not have the reps covering this companies in those states. For us, our number one orientation has been how do we get people local and close to those accounts? And we have been augmenting with sales specialists and domain expertise around security, IT operations, app dev, and increasing [lots of the same] with BA and IoT so that we can have the right domain expertise to complement those geo-guides.

And right after that we will be vertical. And we have got one big vertical ramp-up sector right now but there is always a triangle with any of our tech accounts of how do you manage the mix of geo function and vertical. And this year, we are seeing in some of the territories, a more aggressive account reassignment to make sure that we have people close to their accounts but also we have got the right ratio accounts to reps.

So we can effectively prosecute the opportunities either in that new accounts if you have less accounts, there will be more aggressive doing hard work of opening up those accounts. And or spending of time at existing accounts. You have to be on less accounts and less distractions, they will do more daily and weekly activities of educating people across multiple departments on the benefits (inaudible) and then you mix in the need to also include cloud and more subscription orientation of sales cycle. That's a fun mix that Susan has at her disposal right now.

It's really interesting that the opportunity that we have we inherently leads to challenges. And what I mean by that is, because of Splunk is so broadly applicable, the need for specialists around our prominent use cases having Rick, Stehal and High-End as our subject matter experts in these core markets. Like our core product is so flexible for our customers in terms of data extraction or value extraction from their data that puts, and I have talked about this for the last five years, that puts a lot of pressure on our field, our direct field folks in terms of having that expertise to direct our selling motions around the prominent use cases to the personas inside the buying centers of our customers. So getting the account assignments right, which Doug mentioned in his big focus for Susan is critical for us to continue to lead port standardization adoption in our core accounts.

Now you ask, thank you for the upsell rates for the year, obviously the fourth quarter again we did half of our seven-figure orders were in the fourth quarter and the majority of those almost all of those transactions were to existing customers. So you can imagine that the upsell rates in fourth quarter was the highest of any of the quarters of the year and that is consistent with prior years as well.

But back to our field and our coverage, new customer acquisition is again, one of the key drivers that we provided on our journey towards $2 billion in revenue. And it matters a bunch we are thrilled with our existing customers and we're thrilled with their adoption behavior and characteristics that drive really solid results for FY17 and of course the outlook going forward. But you might recall that the cohort that we talked about on the customer as well.

So just to give you a couple of stats back again from A day that we looked at a population of customers that have purchased 5 years ago and the behavior of the subsequent 5 years was they would consume over 10 X the amount of data from their initial purchase that translated to over 7 X the amount of dollars back to Splunk.

So you mentioned a word greedy. And I will tell you that we would like nothing more than to continue to have success in the install base but we want all those new customers as well. So the field alignment and the again, the alignment around, and the transition around ensuring we sell cloud at an appropriate pace alongside on prem is critical in terms of how Susan is now organizing in the field.

You guys that makes a ton of sense. I really appreciate that and I certainly understand those realignments. There's just one other thing I wanted to ask you about and it's just really a point of clarity, because the license revenues you put up in Q4 were really tremendous and they were above what I was expecting and the ratable mix was a little bit lower and I just wanted to point of clarity I believe that's the result of a few very large cloud deals. I recall you signing as compared last year is that correct?

That is correct. In that our largest transaction in last year's Q4, which also is an eight figure transaction was 100% ratable. It wasn't necessarily 100% cloud, just to clarify everybody recalls that we have three legs of this model, term, cloud, and perpetual. So that certainly an element of it.

Again, from a revenue yield perspective and a license mix perspective when you do, you have 80 transactions that are over seven figures, a handful of those can significantly impact ratable mix percentages as well as revenue yield and I think that is reflected in the results. I think it is also the reason that I am saying listen, we're giving you a 3 year outlook in terms of percentage of our business that is going to see subscription and what component of that is cloud so that we can model beyond the 90 day fluctuations in mix to the annual and then 36 month horizon in terms of overall composition.

Our thank you guys. Appreciate it and congrats on the quarter

Thanks.

Thank you. Kirk Materne, Evercore ISI.

Thanks very much guys and congrats on a good finish to the year. Dave, I have one point of clarification for you, it follows up on Sara's question. You know it would seem reasonable to me that again some of the tweaks Susan is making to the sales org that you guys discussed at the analyst day which would likely exacerbate some of the seasonality that you're referring to in terms of the 1Q guide and if I was a CFO and you're going through some sales changes you might want to take a little bit more conservative take on pipeline conversion things like that. Is that a fair assumption? I know you have gone through this a bunch of times and you know you feel good about those changes from a long-term perspective, but anytime to go to a sales or change my guess would be that you're going to maybe take a little bit more conservative tact in terms of guidance, especially at the front end of that. Is that fair to assume or is that a reasonable assumption?

Hey, Kirk, I think it is fair to not just assume, but I will declare that we explicitly and deliberately evaluate our pipeline, our pipeline conversion and our expectations for delivery when we build our outlook. I am not going to characterize that as conservative or as aggressive but just factual.

What do we see in terms of opportunity and what's the impact in terms of sales cycle as we begin the new year. So yes, we absolutely contemplate the organizational design and the organizational design changes when we give the outlook.

But to me when I look at the balance of FY18, this is a tweak to the seasonality. I am tuning the model based on how we see the composition of the pipe and how we are deploying the resources over the balance of the year and of course our favorite topic mix and how we think that plays out, measured against the run rate of expenses and headcount and cloud expenses and the like.

So again, I try not to use words like aggressive or conservative. I think it is appropriate the way we have looked at the quarter in the context of the full-year. The seasonal nature of our business as we pressed $1 billion and we start driving towards $2 billion and this is about tweaking and tuning your models to reflect ours.

Got it. That's helpful. And just one quick follow-up for Doug. Doug we have talked about sort of the verticalization of some of the products and obviously as you guys go deeper within enterprise as being to talk the language of industries. I realize it is really early and there is so much opportunity for you horizontally but when you look at vertical markets, are we 12 months, 24 months, even further away from starting to find sales specialist that can talk the language in terms of financial services or healthcare or whatever it might be? I'm just curious where we are on that evolution.

So we do have one massive vertical public sector. Which is fed, state, local, and education. And we actually this year one of our strategic initiatives in both EMEA and APAC was to public generator a public sector vertical carve out in the [right] countries in both those theaters. So I think we would all agree that there is value in vertical focus as you can afford to carve out or dedicate people to it.

And then from a clustering basis, we have had really strong traction as a lot of companies do in their earlier days with financial services, telco, for us, big high-tech and web properties, and we do have cluster expertise that understands the language capabilities around those markets. Both the sales reps that tend to be either 100% focused on those, even though they are not in an industry vertical yet and or has those as a majority, but also the SCs and then we have got a handful of folks in marketing and pro serve that are specifically from those backgrounds as well.

Susan's orientation is over the course of this year and next to continue to get a little bit more pointed and aggressive in those areas. But it really it will be at the right time for density in those sectors in making sure that we have got the geo coverage and the market segments coverage nailed down as well.

Great. Thanks guys. I really appreciate it.

Thank you. Matt Hedberg, RBC Capital Market.

Hey, thanks for taking my questions, guys, and congrats on a strong end of the year. You have talked a lot about cloud mix increasing through time and your billings guidance is extremely helpful, Dave. But thinking about the mix between short and long-term deferred, is this a trend towards more long-term deferred that really should continue and really mirror this shift to ratable through FY20 I want to make sure we understand that mix on short and long-term deferred.

Hi, Matt. What we have experienced historically, is in the fourth quarter we do again our largest transactions which tend to be -- have a bigger impact in terms of long-term short-term mix. So I think that behavior will continue and potentially increase in terms of composition of short and long-term deferred, as we move to more and more subscriptions. What our expectation is that as the subscription grows to 75% of the next three years, that to be duration will stay the same but ultimately that will lead to more long-term deferred.

That's helpful. And then maybe Dave just one point of clarification, thinking out the quarterization of op margins as we move throughout the year it seems like Q1 is a low watermark. Is it fair to assume that the sequential improvements really throughout the year following Q1?

Yes, Matt. I think there's been a lot of questions and it make sense because we're asking everyone to kind of align their models two ours. And I mentioned this in prepared remarks, if you look at the quarterly seasonality of our key metrics like revenue, like cash flow, like billings, and like margin, we are expecting the relationship and I specifically said revenue in the first half of the year has been 42% in the back half has been 58% we think that is going to begin consistent for FY18. And if you look over the last number of years, the contribution first half second half to total cash flow for the first half we think is going to be consistent for the most part, same thing for billings.

The amount that we bill in the first half as a percentage of total billings for FY18 is going to mirror what we have done for the last three years and I think the same could be said for margin with a little tuning to where margin is going to be steeper Q1 to Q4. As our run rate, our exit rate of expenses around headcount and cloud in particular, are increasing as that cloud business grows.

So the slope of margin expansion is going to be a little bit steeper than it has in the past. But those other key metrics in terms of quarterization are going to mirror very closely how the actual results have followed for first half, second half over last three years.

Helpful. Thanks, guys. I appreciate that.

Thank you. Keith Bachman, Bank of Montreal.

Just for clarification a follow-up and a question. Dave on the clarification you have indicated I think that gross margin would be roughly flat for the year compared to the year that you just concluded. Could gross margin be actually be down a little bit Q1 given mix relative to last year?

And then my broader question, is just something that came up at analyst day was on stock-based compensation. You indicated that it likely is going to come down. I wanted to see if, as we look at this year's percent of revenue I wondering if you revisit some of thought there? Obviously there are things that are out of your control like stock price. But as you think about hiring plans I would assume this is going to be source of alleviation of at least the amount of new grants associated with the stock-based comp. But if you just revisit on stock-based comp for FY18 that would be great.

Yes. So thanks for the question. Stock-based comp, we do expect it will continue to decline as a percentage of revenue and it's come down in FY15 it was in the upper 40 percentile range, 2016 it was in the lower 40 percentile range for 2017 is just a sliver just rounded up to 40% of revenue and we think that trend line continues which we showed at the analyst day. Also recall that of our differed stock based compensation expense a large percentage of that came from a single quarter and we expect that's the amortization of those expenses going to fall off in the near-term. What we really look at in terms of -- is what we think is important to look at is the annual dilution rate itself.

Right.

And that has gone from greater than 10% on the year that we went public, and has continuously trended down to where we think and what I said at analyst day is when we think about it in the 4% to 5% range. And some folks me say gee, Dave, that still feels maybe 100 or 200 bips higher than we would like it to be but it really ties back to the headcount growth.

So, if we see overall scale of the business or the growth of the business decline and therefore the headcount growth rates change, then maybe the actual dilution rate may get down to that 3% range but over the next 3 years, we have been again, steadily moving the growth dilution rate down and it will be half of what was in the year that we went public. So that's how I think about the key driver around compensation use of equity is around overall dilution and what follows, without again to your point being able to predict stock price, what follows is [SBC] as a percentage of revenue which is also been coming down and that will continue.

Keith, what was your first question, please.

Just on gross margin, Dave. Could gross margin be lower on a year-to-year basis in Q1?

Yes. Again, if you follow my last comment around looking at margin being steeper seasonally.

Sounds like yes would be the answer.

Gross margin will be steeper as well.

Okay. Thanks for the clarification, Dave.

Okay. Thank you.

Thank you and we have time for one more question from Brian White, Drexel.

I am wondering if you could talk a little bit about the potential implications from the ramp up of 5G networks. Obviously next week is mobile world Congress, 5G is already being tested and there is some small commercial deployments out there. I am just wondering if you thought about the impact this could have on Splunk?

Thanks, Brian. You know, interestingly enough, we had a couple of really nice transactions in the telco world this year and in Q4 in particular and across all three one of these cases that they got excited about was correlating cell fidelity customer interrupts or non interrupts and then the network itself the back haul network.

I have not really thought through how that might apply to 5G other than maybe monitoring the health and success of the roll out of 5G infrastructure. But we definitely within the telco community are seeing more people start to bridge from the IT and or security buying centers into the run the business buying centers which I would classify as IoT-ish type move for Splunk.

I think the implications for IoT will be very significant and I think there will be a lot of machine data. That's why I'm wondering if you have thought about it yet. Just on the deals, it seems like the enterprise customer additions in the fourth quarter here was the biggest sequential uptick we have seen ever, and so I am wondering were you surprised by the number of enterprise customers you added in the January quarter?

So hi, Brian, it's Dave. Obviously Q4 is always our seasonally strongest quarter and with all things the largest orders always happen to come in at that period of time as well. I do want to just clarify -- I have said this many times over the years that and you are not saying this Brian, but just for the benefit of everybody listening, seven-figure transactions is not synonymous with enterprise adoption transactions. And I showed a chart at analyst day that actually showed the historic number of seven-figure orders that we delivered and that inception to date based on our definition through Q3 could actually recorded just under 100 enterprise adoption transactions to date. So there are some folks that want to interchange the word million dollar order and enterprise adoption transaction. I just want to point out that those are not synonymous.

Okay. Got you.

We definitely have been pushing all year on continued focus, on enterprise wide usage when appropriate. And continue to focus on driving into net new accounts. So it was nice to see in Q4 continued traction in those and send some good markers. The drum beat on both those continues very strong into FY18.

Great. Congrats. Thanks.

Thank you. At this time now turn the call back over to Ken Tinsley for closing remarks.

Great. Thank you. And thanks, Latoya for your help today we really appreciate it. And thanks everybody for participating we look forward to updating you next quarter.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.