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Executives

Ken Tinsley - Former Treasurer and Director of Investor Relations

Godfrey R. Sullivan - Chairman, Chief Executive Officer and President

David F. Conte - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Adam H. Holt - Morgan Stanley, Research Division

Kash G. Rangan - BofA Merrill Lynch, Research Division

Philip Winslow - Crédit Suisse AG, Research Division

Brent Thill - UBS Investment Bank, Research Division

John S. DiFucci - JP Morgan Chase & Co, Research Division

Raimo Lenschow - Barclays Capital, Research Division

Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Peter L. Goldmacher - Cowen and Company, LLC, Research Division

Shebly Seyrafi - FBN Securities, Inc., Research Division

Splunk (SPLK) Q3 2013 Earnings Call November 29, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to Splunk Third Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Mr. Ken Tinsley, Corporate Treasurer and Vice President of Investor Relations. Sir, you may begin.

Ken Tinsley

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

Before we begin, I'd like to remind you that during today's call, we will make forward-looking statements, including our guidance for our fiscal fourth quarter and our 2013 full fiscal year, expanded use of our software by existing customers, our investment in our sales capacity and field operations and our product enhancements. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, including the Form 8-K filed with today's press release. Those documents contain important risks and other factors that may cause our actual results to differ from those contained in our forward-looking statements. Forward-looking statements made during the call today are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Splunk disclaims any obligation to update or revise any forward-looking statements to reflect events that occur or circumstances that exist after today. We will provide guidance on today's call but will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. During the call, we will also discuss non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the GAAP and non-GAAP results is provided in today's press release and on the Investor Relations section of our website. The projections regarding our non-GAAP operating margin that we provide today excludes stock-based compensation expense, which cannot be determined at the time and therefore not reconciled in today's press release.

With that, let me turn it over to Godfrey.

Godfrey R. Sullivan

Thank you, Ken. Hello, everyone. Thank you for joining our Q3 earnings call. I have to tell you that my exec team accuses me of being an obsessive perfectionist, that I can usually find imperfection even in good results. But this time I just have to admit it, the Splunk team delivered really impressive results across the board, every product, every geography, every function. I'm very proud of our team.

Before addressing the business results, I'd like to welcome our newest board member, Steve Newberry. Steve has an impressive track record as the Chairman and formerly a CEO of Lam Research. I know that Steve is well known to many of you, and I look forward to working with him on our board. I also want to take this opportunity to thank Erik Swan for 9 years of leadership on our board, and I look forward to his continued energy and vision as our CTO.

Now onto the quarter. Revenue was $52 million, up 67% compared to Q3 of last year. License revenue, $34.6 million, up 56% compared to the same quarter last year. We added more than 350 new customers including China Mobile, Daimler AG, Kohl's Department Stores, the U.S. Department of Education, South Australia Police, and my personal favorite, Churchill Downs.

As we've done in our past calls, I'd like to report on 3 core initiatives: Splunk as an enterprise data engine; Splunk as a platform for apps and developers; and investing for growth, which Dave Conte will cover.

Let's start with Splunk as an enterprise data engine. We recently launched the latest version of our flagship product, Splunk Enterprise 5.0. Customers are pleased with the quality, as well as the new functionality in 5.0, and they're upgrading quickly. In the first week, there were more than 11,000 downloads and more than 650 of our 4,800 customers upgraded to 5.0 in the first week. New innovations in Version 5 include report acceleration that delivers reports up to 1,000x faster. Splunk 5 also offers enterprise, class, scale and resilience with our new index replication technology, and we'll soon release the SDKs for developing additional enterprise applications.

Splunk Enterprise 5.0 is driving new customer adoption as well as existing customers who are expanding to enterprise deployments. Getty Images is a new customer in Q3. Getty is well known, as a pioneer in digital media, as one of the first companies to license images online. Splunk will now help Getty track the performance of their customer-facing applications to improve their customer experience and enable real-time product analytics.

Kohl's Department Stores, another new customer in Q3. Kohl's operates more than 1,100 stores worldwide and purchased Splunk for application management. We help Kohl's fix application problems faster, reduce downtime, improve application performance, gain end-to-end operational visibility and deliver new insights through customer and product analytics.

Interactive Data is a leading global provider of financial market data and analytics and is a current Splunk customer. Interactive Data upgraded to 5.0 following their participation in the beta program. They're currently using us for IT monitoring and are now expanding their data sources to enable analytics of all their web-based offerings.

Adobe is another existing customer who is expanding their use of Splunk across the company. Among the dozens of projects at Adobe, one of their most strategic investments is their Creative Cloud initiative and Adobe has selected Splunk to manage, monitor and develop operational analytics for their Creative Cloud service. We're really proud to be a part of this project.

In Q3, we also announced the general availability of Splunk Storm, our first SaaS offering. We're very pleased with where we are in our first few months. There are thousands of new projects and about 100 paid customers using our service. Most of Storm's customers are new to Splunk, giving us some early evidence that we're reaching a new market with this service. Just to be clear, our 100-ish new Storm customers are not included in the 350 number that I gave you earlier. Those are Splunk Enterprise customers. We will start reporting Storm customers when we have a few more quarters under our belt.

Storm is already attracting an ecosystem of cloud partners. DataSift, a leading platform provider for social media and new source insights, has integrated its cloud-based platform with Storm. In just a few minutes, users can add data from Twitter, Bitly and many other social media sources in Storm available for analysis.

In addition to our new Storm customers, we also have cases where existing Splunk Enterprise customers are now also using Storm. Electronic Arts is a leading distributor of video games and expanded their Splunk Enterprise license in Q3 and now use both Enterprise and Storm. EA relies on Splunk Enterprise to identify fraudulent activity, code of conduct violations and monitoring game transactions through their commerce system. With Storm, we're supporting some of the EA developers who are building cloud-based games.

It's worth reporting that we had a few 6-figure wins in Q3, where customers chose Splunk because of our ability to offer a combination of on-prem and cloud solutions. And our early learnings here help us better understand how to market Storm and Enterprise in an integrated fashion.

Switching now to the developer community. In Q3, we had 45 new apps and plug-ins posted to Splunkbase. For example, NetFlow Logic has built an app that allows users to easily correlate NetFlow data with other sources to quickly and easily identify new insights from their networking infrastructure. We're excited to see more developers embracing Splunk as a platform. The ecosystem is growing most visibly at our SplunkLive! events. Companies like Amazon Web Services, AppDynamics, Boundary Software, Centrify, ExtraHop, FireEye and Palo Alto Networks have all sponsored various Splunk events this year.

In Q3, we purchased a plug-in that was developed by one of our partners in Europe. The plug-in, which is now on Splunkbase, is called Splunk App for dbx. It's a SQL database extension for Splunk that enables customers to easily integrate information from a relational database into Splunk queries and reports. Our customers are frequently connecting machine events like clickstream product activity with structured data like customer account records. The app for dbx makes it easier to connect structured and unstructured data to deliver real-time customer, revenue and product analytics. Pretty cool.

This past quarter, we also announced the GA versions of the Splunk App for HadoopOps and Splunk Hadoop Connect. Hadoop Connect provides bi-directional integration to easily move data between Splunk Enterprise and Hadoop. There are lots of well-known challenges about getting data and value out of Hadoop. I hear it everywhere I go. With Connect, we'll help our customers be more successful with large-scale data storage and analytic projects. The App for HadoopOps provides real-time monitoring and analysis of the health and performance of the end-to-end Hadoop environment. These large-scale storage projects have problems just like every other IT stack, and it's another opportunity for Splunk to drive customer value and success.

In Q3, we released the 2.0 version of the Splunk App for PCI. Collecting and retaining data for compliance audits is really difficult, particularly since most PCI solutions require data normalization to deal with the wide variety of operational and security data formats. Our PCI app fundamentally changes the pain of compliance reporting from static periodic reporting to a live interactive search environment. Managers and auditors can now ask any question of their data and get the answer right now.

In Q3, Major League Baseball expanded its use of Splunk by purchasing our apps for PCI and Enterprise Security. They didn't have a sem in place and their Chief Security Officer was aware of our success in their IT operations group. Now Major League Baseball uses the same Splunk platform to manage both their IT operations and their security departments, a trend we're seeing with many of our customers. Splunk is tearing down departmental silos by providing an enterprise view of the data and creating new levels of collaboration.

And while we don't break out our Apps revenues, I'd like to give you some color on this. In Q3, our 2.0 versions of the PCI and Enterprise Security had their best quarter ever in terms of bookings and customers, demonstrating the long-term value of our data platform and the potential of our Apps business to drive success in multiple segments.

Another customer, UniCredit Business Integrated Solutions, better known as UBIS in Italy, significantly expanded their Splunk license in Q3. Like many of our customers, UBIS' first success was in IT operations. Thanks to their initial success, they decided to extend their use of Splunk across the enterprise. They have now expanded the scope to monitor additional critical application systems including WebSphere, Tuxedo and Apache, as well as troubleshooting their TIBCO infrastructure.

On another note, we want to thank all of you who attended our Annual Worldwide Users' Conference in Las Vegas in September. It was a blast to celebrate with more than 1,000 customers, and I appreciate the time that many of you spent with our customers learning more about our business. One of the presentations I enjoyed the most was from a customer from Harris Corporation. They were indexing data from the radar tower at JFK. Our customer showed a Google map of all the flights on the ground, how long they were on the runway, the most efficient route they had traveled, if they were delayed and for how long and more. It was pretty amazing. I interrupted his presentation and asked him, "Do the airlines know that you're doing this?" And from across the room, another customer jumps up and says, "Well, we do now. I'm with a major airline, and I want Splunk." Another customer presentation posed the question, "Does the dimmer switch on a light really save electricity or does it just dim the lights?" The audience was split down the middle on this one. Then he proceeded to prove the answer using real-time data from his circuit breaker panel at home, driving real-time graphics in Splunk. These are pretty fun times because our customers are so creative.

In closing, I just want to extend my compliments to our employees and partners who have delivered our Q3 results. I also want to thank our more than 4,800 customers around the world who have helped us in so many ways. Whether they're speaking in our conferences, participating in our beta programs, contributing to Splunk Answers or creating new apps on Splunkbase, we have some amazing customers.

Now for more on how we're investing for growth, I'll turn it over to Dave.

David F. Conte

Thanks, Godfrey. Good afternoon, everyone. Thanks for joining us. Despite the challenging environment for the software sector recently, Q3 was another strong quarter for Splunk. Our third quarter results exceeded our plans, and we reached several significant milestones. Third quarter revenue was our highest to date and totaled $52 million, a 67% increase over Q3 of last year. License revenue was also the highest we've recorded in a quarter and totaled $34.6 million, an increase of 56% over last year.

As Godfrey mentioned, our customer base grew to over 4,800 in total and our existing customers continue to buy more. As I've detailed before, our existing customers will buy more software for both expansions into new departments or use cases and for upgrades of additional capacity in an existing Splunk instance. Q3 was our fourth consecutive quarter where our existing customers represented more than 70% of the quarter's license bookings, even while we added more than 350 new customers in each of those quarters.

In the past, upsells have been split about evenly between expansions and upgrades. However, as more of our customers move towards the next phase of operational intelligence, we're experiencing a shift in the upsell mix with 2/3 coming from expansions and about 1/3 coming from upgrades. Large orders, which we define as those greater than $100,000, totaled 125 in Q3, up from 77 in the year-ago quarter and 98 in Q2. This is the first quarter where we've recorded more than 100 large orders.

From a geographic perspective, we're pleased with the results from our continued investments in the expansion of field coverage and capacity. Consistent with prior periods, international operations represented approximately 20% of total revenue. In Q3, all 3 of our major geos, the Americas, EMEA and APAC, each grew 60% or more on a year-over-year basis. We continued our capacity investment by adding 27 quota carriers in Q3 ending with 144 in total. Given our ability to successfully attract high-quality sales teams, we now expect to end the year with approximately 160 total quota carriers, an increase from the 140 to 150 estimate we've provided on our last call.

Our other major area of investment focus relates to products. Consistent with our mission of enabling and supporting the Splunk platform, we continue to invest in our development organization's abilities to expand our enterprise product, our apps and content, our SDKs and developer environments, and importantly, our cloud-based offering via Splunk Storm. As Godfrey discussed, we're pleased with the early momentum we've realized since GA of Storm, and we'll continue to build capacity and infrastructure to deliver this offering at high scale.

The consistent acquisition of new customers and the continue upsell success in the installed base is evident both on our revenue lines and on the balance sheet. Specifically, our deferred revenue balance continues to grow and totaled $74 million as of the end of Q3, more than double the balance from the same quarter last year. Our maintenance renewal rate was 91% consistent with Q2 and in line with our ongoing expectation of between 85% and 90%. As a reminder, we calculate our maintenance renewal rate on a rolling 12-month basis.

As I previously described, the mix between term-based and perpetual license sales will fluctuate from quarter-to-quarter. Term-based license sales have historically ranged between 10% and 20% of any quarter's license bookings. In Q3, the mix was slightly lower at approximately 7% of license being term. This compares to 17% in Q2 and 11% in Q1. As is often the case with larger software transactions, there are certain revenue recognition rules which caused some of our Q3 perpetual contracts to be deferred and reflected on the balance sheet. We expect to see continued variability in the mix between term and perpetual licenses based on customer buying preferences and expect some perpetual transactions in the future to be deferred as well.

Regarding margins and profitability, overall gross margin was 89%, in line with prior quarters. Gross margin on support was 88% and Professional Services margin was slightly positive. We recorded seasonally high levels of Professional Services and educational revenues in Q3 in connection with our users' conference. Service revenue represented 9% of total revenue for the quarter versus 6% last quarter.

Overall, our non-GAAP operating margin, which excludes noncash stock-based compensation, was a negative 1.3% in the quarter, better than the negative 4% to 5% we previously guided. Non-GAAP net loss was $800,000 or $0.01 per share. Our favorable operating net margin performance in the quarter was due to our higher revenue growth offset some by our headcount growth, where we ended the quarter with just over 650 total employees, an increase of almost 200 from the start of the year.

Cash flow from operations in Q3 was $6.5 million. Free cash flow was $4.2 million, and we ended the quarter with about $273 million in total cash. Cash flows will continue to vary from quarter-to-quarter based on the linearity of in-quarter bookings and collection timing of receivables. DSOs in Q3 were 71 days versus 70 days last quarter and in line with our 60- to 75-day expectations. We expect to continue to run the business with positive operating cash flow with Q4 historically being our strongest cash flow quarter of the year.

Turning to guidance. For Q4, we expect total revenue to be between $58 million and $60 million, split approximately 2/3 from license and 1/3 from services. When combined with our Q1 through Q3 actual results, this translates to expected full year revenue of approximately $192 million to $194 million, an increase over our previous guidance of $183 million to $186 million. These higher revenue estimates paired with our continued investment and scaling the overall business translates into some improvement in operating margins. Specifically, we expect our Q4 non-GAAP operating margin to be a positive 3% to 4%.

For the full year, we now expect non-GAAP operating margin of between a negative 1% and a negative 2% versus the negative 2% to negative 3% previously provided. Our weighted average share count was 96.7 million shares at the end of Q3. Because we expect positive non-GAAP operating and non-GAAP net income in Q4, remember to use our estimated fully diluted weighted average share count of approximately 116 million shares when calculating Q4 EPS. For the full year, also remember to calculate our share count as if we completed the IPO on February 1, about 97 million shares on a pro forma basis. Overall, we're very pleased with our Q3 results and our progress around the expansion of our product and field capabilities.

Thanks much for your time and interest. With that, let's open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Adam Holt for Morgan Stanley.

Adam H. Holt - Morgan Stanley, Research Division

It looks like a terrific quarter. So the first question, obviously -- well, it sounds like it might be a little silly in the context of that, but we've heard from a lot of companies that things got difficult at the end of the quarter and obviously the macro has been tight. Did you see any change in buying behavior at the end of your quarter? And what kind of assumptions do you have in terms of close rates and coverage as you look into the next quarter where the guide implies a little bit of a slowdown in license revenue?

Godfrey R. Sullivan

What was kind of interesting about the close of our quarter given the October 31 date was it just happened to coincide with Sandy coming ashore. So compared to customers who have -- compared to companies that have a normal quarterly closing period, that we were a bit unique in terms of being in the handful of companies who are closing right at the same time that the entire East Coast was kind of closed. So I think that it speaks a lot to our linearity and the fact that we weren't dependent on the last 24 hours of revenue in order to post the results. So no, we didn't really see a big change in terms of our linearity during Q3. It was actually pretty good. So that's probably it. It was just a very healthy quarter all around. Q4, we always look to Q4 and know that if there's a quarter in the year where we will have large transactions and unknown ratability or term or all the distinctions between perpetual and term and all that, this is the quarter, so our guidance sort of reflects that.

Adam H. Holt - Morgan Stanley, Research Division

If I could just ask a quick follow-up on the apps, it sounds like you're getting great traction with the applications. Do you have a sense for what percentage of your deals are driven by applications or touch applications? And as you look at that business, how do you think about monetization on a going forward basis?

Godfrey R. Sullivan

Well, the apps help a lot because almost any time you go into an environment, if you're not selling one, you're certainly demonstrating one. I mean, they -- even the many that we offer for free like our app for VMware or our app for Microsoft Exchange environments or for the Cisco Security gear, it puts a face on the Splunk that both shows the customer exactly what Splunk can do for them, and it also shows how we can speed the deployment down to days or a week instead of having to start from scratch. So the apps are enormous enablers. Of the hundreds that are up on Splunkbase, we only charge for 2 of them, PCI and Enterprise Security. So it's a little early to say how much revenue apps will portend in the future. Those are the 2 that we've been developing for quite some time that have now reached the 2.0 stage and are pretty mature and have workflow and a lot of sophistication built into them. But certainly, the apps themselves, the templates, the plug-ins, they're a big part of the Splunk ecosystem and what separates us from the pack. So very bullish about the progress we're making there.

Operator

Our next question comes from Kash Rangan from Merrill Lynch.

Kash G. Rangan - BofA Merrill Lynch, Research Division

It's good to see you guys get into the cloud model relatively soon relative to a lot of other application software companies that didn't decided to push into the cloud at later point of their life cycle. So it feels at one level what could be argued as a destructive threat for you guys, you are actually embracing that potentially destructive threat and you've already gotten 100 customers. Any way to think about what this might do to revenue opportunities as we look at our models for next year just to get some rough ballpark? And I had a follow-up question, but I'll wait till I get your thoughts on the cloud.

Godfrey R. Sullivan

Hi, Kash. Well, yes, it's too early. We'll give guidance next quarter when we report Q4. Right now, all the Storm activity that we see has been new customers for Splunk and a few Enterprise customers who have found they have projects that work really well up in the cloud. So I think that it's probably too early to describe impact on revenue. Right now, it kind of feels like now all plus. Storm was not -- was de minimis in terms of revenue for the quarter, but certainly I think the potential to have just additional offerings is really good for us.

Kash G. Rangan - BofA Merrill Lynch, Research Division

And as I look at your guidance for upcoming Q4, it feels like there's a lot of variable this year, which you pointed out to the term versus the regular license, the what goes into deferral, et cetera. Is that what causes you to take a more conservative view on the license growth rates? I ask that only because I look at the trend in sales capacity growth rate, after a few quarters where you were growing a sales organization at a less rapid rate, it looks like based on the trajectory, we're starting to see a re-acceleration in the numbers. So I'm just curious to reconcile the re-acceleration in your sales headcount growth rate with your license guidance which appears to be conservative. That's it for me.

David F. Conte

Thanks, Kash. As we've mentioned before, the kind of productivity for our new sales guys can be anywhere from 9 to 12 months. So we're certainly happy with the rate at which we've been able to attract and bring on board high-quality sales folks. But in terms of how much we anticipate they contribute to the top line, we see that really towards the back half of next year. As it relates to the fourth quarter, your question about the variability between term and rev rec, our experience has been that the fourth quarter has been our largest in terms of bookings historically and also had our largest number of variable type accounting transactions, whether that be from the size of the transactions or the volume of the transactions. We tend to do -- we tend to experience more variability in term or perpetual that becomes ratable. So that's reflected on our guidance.

Operator

Our next question comes from Philip Winslow from Credit Suisse.

Philip Winslow - Crédit Suisse AG, Research Division

Very impressive new customer growth, and then obviously, the thing that really stood out to me in particular was just those large order metrics you gave. I mean, obviously, a lot of those are probably coming from existing customers. And so my question is, you talked about the mix of revenue from existing versus new and also capacity versus expansion. Expansion just continues to be a home run for you guys this year. What are the use cases that are really driving that expansion? And obviously, you've made some sales changes at the beginning of the year to really push into the existing customer base. Kind of what inning are we in as far as seeing those changes really take effect?

Godfrey R. Sullivan

Second inning. Anything else? Phil, so thanks for the question, from -- you were there at user conference. You've attended a lot of SplunkLive! You've seen this stuff up close and personal and so there's a -- there's some things that are consistent to the customer base that you kind of hear from city to city, and that's the stuff like application management and infrastructure and operations and security. And now what we're seeing in terms of the expansions is that customers are beginning to take that -- take those cross silos and tear them -- tear those walls down and start to use Splunk on more of an Enterprise basis. So we'll have customers buy -- who might have had 100 gigabyte licenses in multiple departments and they come back and say, "Okay, now we want a multiple terabyte license, and we're going to have one big data, one big bit bucket and the departments can all search into that data with access controls and all that." But they're able to get a lot more value because we put more data into the engine. Then the thing that's sort of new that we're seeing more and more often now especially with customers who have large customer-facing web apps is that, that clickstream data, the Apache logs, the authentication data from mobile devices, all that's being thrown in and they're getting product and customer analytical information on top of all the sort of infrastructure, app management, security-type stuff. So it's really seeing more of Splunk being used across the enterprise as a big data engine that's driving a lot of this growth. And so the new customers are still coming on. We're very pleased with that. But when you see the 3 geos all performing at 60-plus percent, it was brought -- it was widespread health and widespread customer acceleration and expansion across the globe. I mean if I could pick on somebody, I would have already done so, and I can't find anybody to pick on this quarter.

Philip Winslow - Crédit Suisse AG, Research Division

Yes, that sounds great. And then just one quick follow-up, one of the things that really struck me from dot-com this year was there's so many things that you're doing around Hadoop and the ecosystem there from the Splunk Hadoop Connect to the Splunk App for HadoopOps. What are you hearing from customers about sort of this vision of being a unified platform for both your real-time and batch processing really frankly across sort of just multiple data repositories?

Godfrey R. Sullivan

I was just having breakfast about a month ago with the CIO of a multibillion, tens of billions of dollar company, and I ask them, I said, "When you hear the term Big Data, what does that mean to you?" And he just started laughing, and he said, "Our data was always big. There was nothing that happened recently that caused it to become big." So to me, the CIO, it's a total hype cycle. But he said, "Yes, my guys are experimenting with Hadoop, and we're trying to throw some data in there and see what happens and so forth." But he said, "The question I keep posing to them is, what question are you trying to solve? What problem are trying to solve?" And that's where, I think, our Connect app can really make a difference. So many customers I talk to are frustrated because they throw a bunch of data into Hadoop and then they don't know exactly how to get it out. It's kind of hard. It's a whole stack of tools. We're giving them a new way to do that, which is bring the data into Splunk and index it, and then you can use it live and then you can archive it into Hadoop. And when you need to get it back, Splunk can pull it right back out and provide you easy search language analytics on that information. So we're just sort of -- we view that as a great way for Hadoop, great cheap batch storage. Splunk, easy-to-use real-time analytics. More and more of our customers are coming back to us and saying, "Yes, that makes perfect sense to me." So I think both our apps for connecting to that environment plus our app for monitoring that environment will help provide value to those customers who have sort of gotten stuck. So it's too early to tell, but you'll hear it directly from our customers since we're pretty open about that stuff. I suspect with SplunkLive! over the next 6 months, we'll start to see what the customer evidence is.

Operator

Our next question comes from Brent Thill from UBS.

Brent Thill - UBS Investment Bank, Research Division

Godfrey, just to follow on the expansion comment, as you mentioned, you're going more enterprise wide. Are you starting to see customers ask for more of a standard enterprise license agreement? Or are you still at this point sticking with the daily index model and you feel as you go broader that, that model will continue to hold up and is responding to new use cases?

Godfrey R. Sullivan

Hi, Brent. Good question. So -- and this question also came up last quarter and probably will for a while. But the specific answer, the daily indexing volume is still a pretty good proxy for how big is the project, how many data sources are you trying to put in, how complex are the correlations, how many people do you expect using it? So it's still a reasonable proxy for how big is big and how complex is complex. So we're not at this moment trying to figure out some other way to do it like, "Oh, let’s look at your numbers of users or number of searches or how much you store." No matter which metric we pick, other than what we use, customers won't like that one either. So then the question becomes how do you help these large enterprises expand and give them a model where they're encouraged to put more data into Splunk instead of being very stingy about putting data into Splunk? And so we're kind of testing some notions right now. It's a little early to declare but -- and part of what we see in Q4 is that as some of these larger transactions come in, we want to be able to say to a customer, “Okay, here's 5 terabytes of capacity and here's some additional capacity so that you can be encouraged to put more data in." I want to create the same model as our premium model, where you encourage people to do things as opposed to discourage. So we haven't quite gotten it nailed down. I'm not quite ready to announce anything, but I can tell you we're out experimenting with some things with customers and we're getting really great feedback. And so more on that as time goes on. But we're, of course, working this issue because it's in our best interest and our customers' best interest for us to take our existing model and improve on it for Enterprise adoption. Hopefully, that answers your questions, but let me just calibrate. Is that more or less what you were asking?

Brent Thill - UBS Investment Bank, Research Division

Yes, that's great. That's great color and looking forward to hearing more as you go. And just to circle back to Adam's question on the applications, clearly that's an area that your customers love. You can get up and going and it's helpful. I guess from a perspective of monetization, 2 of the 100 plus you're charging for, is it just in your opinion a matter of time before those apps mature and then you're able to monetize those apps? Or what are the obstacles or I guess barriers that you have to remove before you can start monetizing that app?

Godfrey R. Sullivan

Yes, you guys would enjoy attending my staff meetings. This is like a live topic of animated discussion. So we have recently been working on the naming and that's just pretty important. So we use to call everything an app and you guys have seen that. We're really trying to break this down into apps, into templates and plug-ins. And a plug-in would be like what I talked about, the dbx plug-in. It's like a connector. It's a data source type that's kind of wired up so it makes it really easy within a Splunk system to go get a customer record out of a relational database. Well, that isn't really an app. That's a connect -- it's a plug-in. It helps you connect to a relational database. That's not the kind of thing that I would see us charging for in the future, even though a lot of our competition charges for those sort of plug-in connector-type things. We give all that stuff away. And our customers help build a lot of that stuff, so it's part of the benefit of the Splunk ecosystem. Then the distinctions get a little bit grayer when you talk about templates and apps. So our VMware template is a set of plug-ins, and it's a set of dashboards and reports and you can set it on top of a Splunk instance, and it will help speed the deployment of Splunk in a VMware virtualized environment. But the customer will do some additional customization on top of it and all that, so a template is what I think of as sort of a framework. Apps are what I think of as finished product. They're on the price list. They have documentation, full support, warranty, representation. They have the Good Housekeeping seal of approval from Splunk, and they are fully productized with a life cycle. The only 2 we have that meet that test right now are PCI and Enterprise Security. But as time goes on, some of those things that are in template land sort of framework land now could go ahead and emerge out in a 2.0 or a 3.0 version into a full app. And I wouldn't be surprised at that form at that time and in that format that we choose to charge for them because we've put an enormous amount of development work into it. So the future will tell. But if I had to predict, I would say, a year from now, we will have more than 2 apps that we charge for because of the amount of maturation that's occurred for those what might now be a template. So stay tuned, but this is about time and development and maturity and then customer appetite for the value.

Operator

Our next question comes from John DiFucci from JPMorgan.

John S. DiFucci - JP Morgan Chase & Co, Research Division

For Dave. Hey, Dave, current deferred revenue was strong in the quarter. Actually quite a bit better than we were looking for, but your long-term deferred revenue declined sequentially and was below what we were looking for, I guess. I realize that long-term deferred is not a big part of deferred, but it has become larger over time. And I'm just curious, is this decline a matter of customers still engaging with Splunk because every indication is that, that is happening or even happening more, but is less likely to engage longer terms? I mean, I realized you engage with your customers, and if they sign a multiyear term deal somehow versus the first year. And it's nice to see that 91% renewal rate, Dave. I was listening for that, but...

David F. Conte

I think of you, John, every time we calculate the maintenance renewal rate.

John S. DiFucci - JP Morgan Chase & Co, Research Division

But I'm just trying to get -- because I'm trying to get back to the macro even to Adam's question at first and just trying to -- it sounds like people are still engaging a lot with Splunk and even more so. But is something -- are people like less likely to engage for longer-term contracts? Or was there just something -- some reason why that's gone up a long-term deferred over the last couple of quarters? Was there something that, that's just kind of bleed off now?

David F. Conte

I think it's really just the law in this case of small numbers, John. Right. So when you have a number of large transactions, again, typically the -- some of the ratable transactions or term transactions will be larger in nature. And as those multiyear transactions get pushed into long term, if one of them gets to the end of a period or it moves into current, it can have an impact because the long-term deferred balance just isn't that high. So it's not really a buying pattern as much as a commentary on scale. When we go to the field -- we're not explicitly driving the field to sign long-term transactions versus short-term transactions. We're trying to sign customers up for the type of transactions they want.

Operator

Our next question comes from Raimo Lenschow from Barclays.

Raimo Lenschow - Barclays Capital, Research Division

I just want to follow-on on the question that Kash had earlier. You mentioned in previous calls that the expansion of the sales force is driven by the visibility that you have, so if you see opportunities then it's worth expanding. You now have made quite a big change here. Can you talk a little bit about the kind of potentially increased opportunity or your thinking around that? And then also, a second one is, if you look at the competitive field, we just saw some big fundraising at Sumo Logic, log logic, is kind of now a software solution client. Can you just talk a little bit about what you see in the market in terms of competition?

Godfrey R. Sullivan

Sure. So let me just take the field one first. We operate our field organization built around a success model that -- where we have a pretty high percentage of people who make plan. And so when we look towards a new year, you can factor in some level of increased productivity per person in your field organization. But what we're really trying to do is get geographic and market and industry coverage. So when we did the segmentation model, for example, in the U.S. at the beginning of this year and tiered the field organization around named accounts, geographic outside territories and then SME, which is all handled over the phone, that enabled us to target customer lists and geographies in a very specific way. And you can extrapolate now that conversation around the world and say, if we intend to reach the Global 2000, the major markets, et cetera, we have a blueprint now for expansion, and our -- we have ambitions there. So we intend to expand as quickly as our checkbook will allow us to do so. And Dave is my -- he is my -- he is the dad who won't give you any more allowance. I continue to ask for more allowance, and he continues to say no. But within the limits of our financial model, which is to be cash flow positive and strive to grow to profitability, we are going to expand as fast as we can. So that's kind of what's going on in the field model and you see it in terms of our hiring. Now David talked -- I'm spelling him because he has the flu today, so I'm giving his throat a rest here. But we had talked to everyone last year about how we had spent last year sort of gearing up the back office to get ready for the IPO. And therefore, within our hiring plan, we had gotten a little bit behind in terms of field expansion. And we saw that constraint in our capacity in sort of the Q4, Q1, Q2 bridge coming into this year. So we're trying to get back on track and get back to a level of field expansion that we think is commensurate with the market opportunities. So that -- hopefully, we're on sort of a track that we can stay on for a while. So I hope that answers the question around productivity. Anything else on the productivity, and then I'll go to the competition?

Raimo Lenschow - Barclays Capital, Research Division

No, perfect for me.

Godfrey R. Sullivan

Okay, all right. So let me just switch over to competition. So we continue to see competition all over the world. It still feels about like it has over historical times. That is, if you're in an application management compete, there will be a handful of folks there. If it's infrastructure, you'll see some of the same or different, get into security, it's usually security-specific competitors. If you're in the world of sort of Web intelligence, there'll be a different cast of characters. So -- and then you've got the ones in the cloud. So we sort of know who they are and we know about when and where we compete, so I don't see any major difference in the competition. What I see is that it makes us better. All that competition makes us better. It just gives us more points of comparison between what we do and others. It gives us more reference points in terms of what functionality customers care about the most. So it's all good. Competition is good for all of us. It makes us raise our game.

Operator

And our next question comes from Ed Maguire from CLSA.

Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division

I saw that the maintenance and services increased pretty significantly sequentially. And I know you called out that you did have a higher component of training and services. But is this a level that you would expect the -- I mean, is there seasonality that's going to be baked in around trunk [ph] -- about -- or dot com or is this a level that you expect to be more sustainable going forward on the services side?

David F. Conte

Yes. We definitely have experienced the seasonal bump in our third quarter in connection with the users' conference and that was consistent with Q3 as well. At the same time, similar to our field capacity, we are looking to continue to grow our direct consulting organization and services as well as our ecosystem of partners that can deliver services on our behalf. So we think that Q3 will be seasonally high, but we'll continue to build capacity in that organization going forward.

Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division

Okay. And a -- oh, I'm sorry.

Godfrey R. Sullivan

I'll weigh in on that just as well. It gives me some joy to think back to the days of when I first arrived at Splunk and we had 150 employees and we had 2 services people and they weren't very busy because of the nature of our business at that time was mostly 1 Gb, 5 Gb, 10 Gb types of deployments that customers, they downloaded it and fired it up and they were alive and running the same day. I have one account now where we have effectively 3 people who report to work there every day because we're indexing almost 70 terabytes a day into that customer. And we've become a mission-critical system there, and simply, it simply cannot go down for 5 minutes. So as the nature of the business changes, as Splunk goes from IT troubleshooting tool to enterprise data fabric, where a lot of our customers have mission-critical systems feeding Splunk and then Splunk in turn feeding other mission-critical systems, we've become and many of our customers a critical middleware component almost like a piece of infrastructure. And in those environments, there will be services work and there will be training and education and the like. So personally, I think we'll start to see an increased level of our business with both partners and with our own services and education organizations because of the nature of our engagement with customers is continuing to mature and evolve and expand, so be ready for a little more of that.

Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division

And I wanted to actually go back really to the sort of the new customer dynamics. I see that there's been this inflection where the expansion business is really driving a lot of your repeat business. But could you comment a bit on the dynamics of conversions of free to Splunk Enterprise and whether there is an opportunity of unconverted users out there that you see? Or whether they're -- whether you're able to track the pace of that uptake and the size of initial orders?

Godfrey R. Sullivan

Sure. We don't actually track downloads as a conversion rate. It's never been a meaningful metric for us. But it's important that we have downloads because it creates people who know the product all over the world. So easiest example for that -- I'll just give you 2 quick ones. One would be a new major account rep going after a named account, life insurance company, Midwest, doesn't allow free download software in their organization. But a couple of their people have downloaded Splunk and gotten to know it over the years on their own time or they work at some other company where they had Splunk. And so we're going in there, not as a result of any download activity at all, we're going in and breaking open the front door and we're having a conversation. But we then can find the Splunk champions that are inside that account, and it operates as a tailwind to our selling efforts because we already have advocates and evangelists inside the customer. So that's a good example. In a lot of our major accounts selling around the world, the download is actually not much of a factor in terms of how the organization behaves, but it's a factor in terms of us having a set of evangelists already on the ground who would help us if there was a project that they could get Splunk attached to. In the small medium enterprise, it tends to be a little bit more direct, where our inside sales organization tracks download activities as hot leads. And if you download Splunk, you'll get a phone call from us in the 24 hours following to say, "Hey, is there something we can do to help you?" And those transactions tend to have a different life cycle to them, where it's really more customer-specific opportunity. Why did you download it? Was it -- were you just curious or did you have a project and so forth and so on? So we understand the difference by download, by customer size and by country, by geography, and they all behave differently. But it's all about knowing -- having enough velocity, having enough of that activity going on where you start to pattern match where it makes sense or not. So freemium is really good for us, but it's not -- you can't actually draw a straight line between downloads and conversion or revenue.

Operator

And our next question comes from Brendan Barnicle from Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Godfrey, we've spent a lot of time this afternoon talking about the internally developed apps, but I was wondering if you could give us any more color on third-party apps and specifically if those vendors are starting to monetize their apps?

Godfrey R. Sullivan

I'll just give one example. I was just having a meeting this morning with a company called Prelert, P-R-E-L-E-R-T. They'll be posting an app on Splunkbase next week, and it will be in preship condition and like in its last 60 days before it goes final. And these are some really hot algorithm guys, mathematicians out of Boston, who had developed an app -- it's basically predictive analytics for application monitoring and it's functionality that's beautifully adjacent to and complementary and beyond what Splunk does. So as they were developing that app, they looked around and said, "Well, we could go chase CA Unicenter or HP OpenView and try to become an adjacent product to that thing and just go chase that business and be the predictive analytics business for it. Or better they could say, well, let's go chase the volume leader. How many people -- how many customers have or how companies have 4,800 customers all over the world, 75 countries and a really easy-to-use product that we could then -- so what did they do? They built a predictive analytics tool that sits right on top of Splunk. And so it's a phenomenal anomaly detection system that helps identify patterns and behaviors and anomalies in application performance that customers when they see it they just love it. So just an example, okay now we need to figure out how to get those guys into our SplunkLive!s and get them more exposure and get them more visibility to our customer base and on and on. Because as their app goes on Splunkbase, they want someday to monetize that app and we want them to monetize it and become a successful company and more power to them. So yes, there's a lot of customers now. There's a lot of other companies that are starting to build plug-in apps, if you will, for the Splunk environment because of our volume and we're an open company. We have that philosophy and attitude and we want to help all those customers be successful. So yes, I'm thrilled about where we are. It's still early days. This is still early days, but we're really making good progress, and I'm bullish about where this thing can go. It's best example -- best evidence of it, if you come to a SplunkLive! now, there'll be 4, 5 people in every town exhibiting in the Splunk out in the lobby and we'll have 200 or 300 people attending. And companies are coming to us now and volunteering to sponsor our SplunkLive!s just so they can show their apps and their plug-ins to our customers. So I'm really -- I'm very bullish about where we're going with the ecosystem.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

That's great. And then, Dave, in the past you guys have talked about how customers are typically buying twice their original purchase during the following 2 years. I think based on the metrics you gave us that, that metric still held. Was that true or did it change at all?

David F. Conte

No, that's true. That pattern continues.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

And then also did you give us -- I might have missed it, did you give us what the growth rate in the new customers was year-over-year?

David F. Conte

We did not.

Godfrey R. Sullivan

It was about even in terms of the number of new customers. It was about the same as this quarter last year. I can't remember, but it was about -- we had about 350 last year.

David F. Conte

That's right.

Godfrey R. Sullivan

I rounded down to 350 this year, but it was about like that.

Operator

Our next question comes from Peter Goldmacher from Cowen and Company.

Peter L. Goldmacher - Cowen and Company, LLC, Research Division

I wanted to ask you just a quick question. Can you tell me what do you think your percent of revenue is from deployments that are built around security and IT operations? And Godfrey, you gave that interesting example with Harris Corp. and the thermostat and very nontraditional Splunk deployments. So I want to know, what's the more traditional business and how are you going after the less traditional business, that is, market opportunity represents market opportunity, multiples larger than the current healthy market you're still in?

Godfrey R. Sullivan

Peter, so you got me on one of my favorite topics. So I'll try to keep this brief. Security was about 30% of the quarter, this quarter, and it kind of varies between 25% and sometimes in the mid -- low 30s. IT operations more or less like that and app management about like that. So if you say -- if you just broadly bucket it, Enterprise IT operations, that would be the applications and the underlying infrastructure, that would typically be 60% or maybe a little more in any given quarter and security will be 1/3. Just think of it as 1/3 and 2/3. But the long tail and some of the other emerging trends have to do with mashing up that data with real-time product analytics and clickstream information and mobile and on and on. So we're starting to see more and more decisions made around revenue analytics because we have this ability to provide in very short deployment times real-time product analytics about almost anything. So back to the fun examples and nobody on the call -- see, I didn't give the answer to you yet about does a dimmer switch save electricity or does it just dim the lights. And none of you guys have asked me for the answer to that yet. So I don't know, maybe -- should I tell them the answer?

David F. Conte

Go.

Godfrey R. Sullivan

So the room was split 50-50. The answer is if you dim the lights, it actually does save electricity, and he proved it out by having a real-time chart of power consumption right off his breaker panel. So all you guys start using your dimmer switches.

Peter L. Goldmacher - Cowen and Company, LLC, Research Division

We didn't ask. We already knew that.

Godfrey R. Sullivan

Yes, s***. You didn't know that. So now here's -- so one more example. You asked -- the second part of your question was about how about all these nontraditional use cases? So a couple of weeks ago, I have a senior ranking official from a European car manufacturer in to see Splunk and we'd worked on a project with them. And they want Splunk to gather all the data that's being transmitted wirelessly from their electric cars to back to the headquarters. The #1, -- in their view, the #1 resistance factor of consumers to electric cars is battery anxiety. So how do you solve that? Well, for the one thing you have to put charging stations all over the place. So when you go to the grocery store, you can just drive your car up and plug it into a charger while you're in getting your groceries or what have you. You guys know what I mean. But how are they going to know the health of the infrastructure for charging stations. Well, the answer is, the cars will have it. The cars as it's getting charged, it will have that information in its little onboard computer, and it'll just transmit that data wirelessly back to headquarters. So we wired up -- they wired up 6,000 cars, and we spent a few weeks testing all that data that was transmitted back to the servers at headquarters that are gathering all those logs. And we were able to show them, not only what the health was of all those vehicles, but we actually showed them that the contract they had with the wireless provider in Europe needed to be adjusted because the bandwidth they needed to transmit all that data was far beyond what they had contracted for. So we saved them in the project, in the POC, we saved them millions of dollars in cellphone charges just by showing them bandwidth consumption. So one of the most fun parts about working at Splunk is you never know quite what you're going to find in the machine events, but if you just crawl around and look in there, there'll be something that surprise -- you'll solve the expected and you'll solve something that's highly unexpected, and that's what keeps all of us young. Thanks, Peter.

Operator

And our final question for today comes from Shebly Seyrafi from FBN Securities.

Shebly Seyrafi - FBN Securities, Inc., Research Division

So you're guiding conservatively right now I think around, I would say, 17% growth sequentially. A year ago, you grew almost 40%. And I'd like to know, you have Splunk Enterprise 5 that just started shipping at the end of October. What's different this time versus a year ago when you grew almost twice as much as you're guiding this quarter? Sequentially?

Godfrey R. Sullivan

It's really the difference between bookings and revenue. It's back to that notion of in Q4, last year in Q4, we had a phenomenal quarter, phenomenal, and so that's not what you necessarily want to use as your planning baseline. But the other thing is, we know, based on some of these enterprise adoption models we're driving, some of these large-scale deployments that we're driving, we know that the likelihood of all that data being recognized as in-quarter perpetual is different. So it's not prudent for us to model quarterly guidance based on a high-perpetual rate. So we fully expect a strong bookings quarter, and we think the guidance is appropriate based on how much revenue would be recognized in-quarter.

Shebly Seyrafi - FBN Securities, Inc., Research Division

Okay. And you did note earlier that your growth in Europe was in line with the growth in the other areas at roughly 60% plus. But for calendar Q4, fiscal Q4, do you expect or are you seeing any weakening trends in Europe for example? And do you expect Europe just to grow in line with the other geos?

Godfrey R. Sullivan

No. We've had -- we had a different issue in Europe, which was we had a change in leadership around the first of the year. We had a couple of quarters in Europe where Europe was behind the other geos in terms of its growth rate. And I was really excited in Q3 to see that they had kind of recovered and we're now matching up with the other geo growth rates. You can't be optimistic about what's going on in Europe, but we're still in sort of the law of small numbers, where we're still signing up so many new customers and expanding at relatively small dollar volumes that I think we can fight the macro trend there for a while.

Ken Tinsley

Okay, Saeed. Thank you. I appreciate it, and thanks for everybody's participation. We're here in Cupertino. If you have any follow-ups, we'd be happy to address any questions you have. Thanks, and have a good evening.

Operator

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

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