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Splunk Inc. (NASDAQ:SPLK)

Q2 2015 Results Earnings Conference Call

August 28, 2014, 04:30 PM ET

Executives

Ken Tinsley - Corporate Treasurer and Director of Investor Relations

Godfrey Sullivan - Chief Executive Officer

Dave Conte - Chief Financial Officer

Analysts

Brian White - Cantor Fitzgerald

Kash Rangan - Merrill Lynch

Steve Koenig - Wedbush Securities

Brent Thill - UBS.

Ed Maguire - CLSA

Phil Winslow - Credit Suisse

Greg McDowell - JMP Securities.

Karl Keirstead - Deutsche Bank

James Gilman - Drexel Hamilton

Brendan Barnicle - Pacific Crest

Keith Weiss - Morgan Stanley

Operator

Good day, ladies and gentlemen, and welcome to the Splunk Second Quarter 2015 Financial Results Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).

I would like to turn the call over to our host, Ken Tinsley, Splunk’s Corporate Treasurer and Director of Investor Relations. Please, go ahead.

Ken Tinsley

Great. Thank you, Patrick, and good afternoon everyone. With me on the call today are Splunk's CEO, Godfrey Sullivan; and CFO, Dave Conte. Our press release was issued after close of market today and is posted on our website. This conference call is being broadcast live via webcast. And following the call, an audio replay will be available on our website.

On this call, we will be making forward-looking statements, including financial guidance and expectations for our third quarter and fiscal 2015, uses of our software, planned product sales and facilities investments, the increasing enterprise adoption of our products and apps, market and used case opportunities. These statements reflect our best judgment based on practice currently known to us, and actual events or results may differ materially. Please refer to documents we file with the SEC, including the Form 8-K filed with today's press release. Those documents contain risks and uncertainties and factors that may cause actual results to differ from those contained in our forward-looking statements.

These forward-looking statements are being made as of today, and we disclaim any obligation to update or revise these statements. If this call is reviewed after today, the information presented during this call may not contain current or accurate information.

We will also discuss non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of GAAP and non-GAAP results is provided in the press release and on our website.

With that, let me turn it over to Godfrey.

Godfrey Sullivan

Greetings everyone, I’m thrilled with the Splunk team’s performance in Q2 and I always wanted to thank our customers and partners for their outstanding support. Q2 revenues were $101.5 million or 52%. Licensed revenues were 62.1% or 44%. We welcomed more than 500 new customers and now have than more than 7900 worldwide.

Notable customer wins included Dell, U.S. bureau of [Indian] affairs, Dropbox, Nordstrom and the Chinese University of Hong Kong. I’d like to cover three topics early in this call. Enterprise Adoption Agreements, our success in the cloud and pricing. Since our last call, we closed Enterprise Adoption opportunities with Aetna, U.S. Department of Defense and Adobe. I am pleased to report that Adobe has standardized on Splunk for operational intelligence. Adobe brought a new multi-terabyte license, covered Splunk Enterprise, Splunk Cloud and our app for Enterprise Securities among other products.

Adobe is a long standing customer with many proven used cases and we’re delighted to see them standardized on our products. Our public sector team had another strong quarter; including a major expansion agreement with the department of defense we purchased a multi terabyte license for auditing and security. We are continuing to move to multi departmental to more enterprise agreements and I want to thank our customers for their confidence in us.

Let’s go to Cloud. We reached a significant milestone in our cloud efforts like guaranteeing an industry first 100% uptime SLA for Splunk Cloud. We’re able to make this offer because Splunk Clouds is built on a proven, scalable, enterprise great architecture. We also launched the Online Sandbox to make it easier for customers to try Splunk. We’re happy to report that in just 30 days there are more than a thousand users of our Online Sandbox.

Global data center company Equinix purchased Splunk Cloud, including our app for enterprise security and VMware. Our team was able to demonstrate to Equinix how easy it is to deploy Splunk Cloud versus the competition. We signed a diverse group of Cloud customers, including a leading commercial real-estate company, a start up in San Francisco Employment Corporation, a company that underwrites weather insurance for farmers.

On the pricing, in all my years of meeting with customers, two things are true. First, our customers love Splunk products and second, the more data they put in, the more inversing and valuable used cases they get back, but with this new generation of data, most customers need to learn the used cases and the value over a period of time. The best that we can do to help our customers is to make it easier and more affordable to put data into Splunk, because we have more than 7500 customers with a wide range of used cases to pay it back, therefore we are willing to take on Amazon like approach and gradually drive down the cost of indexing.

As an example, in Q1 we doubled the license capacity for entry level customers. That change resulted in much higher order volumes that offset the price decreases. In Q2, we lowered the price for Splunk Cloud by 33%, that price cut was a result of us passing on our operational efficiencies to our customers. Our Cloud customers are delighted by the change and unit volumes were up. In higher education, our program with Internet 2 is being well received.

This partnership offers three negotiated contracts and subscription pricing to member universities. In the last two quarters alone, 25 universities were brought under this program including Rice University, University of Washington and the University of Minnesota. We are finding that the average license capacity under the IT program is several times larger than non-IT orders. Our higher end customers are happy and we’re happy.

Now, into the product report. As for our multi product offerings are driving adoption and expansion across our customer base. In Q2, we announced the relief of Splunk Enterprise 6.1 which includes enahancements such as multi site clustering, [Z] Linux main frame support and interactive analytics. Over 70% of our global customers are now running V6, an amazing stat that highlights the ease of upgrading and the value of our new releases.

Bass Pro is a new customer that selected 6.1 because there CIO had a great experience with Splunk at its previous company. We’ll start in IT ops to help support your e-commerce business and then move onto to web analytics.

In Q2, we also announced Splunk 6.1. New capabilities include the ability to analyze data in multiple no sequel stores all without the need to move data. Pulse, one of Canada’s largest telcos purchased Hunk for security analytics, a leading online market place for vacation rentals purchase Hunk for customer analytics. Other customers purchasing Hunk include a U.S. Intelligence Agency, Aetna Insurance and a large European retail.

Just a few weeks ago, we announced the Splunk App for Stream. This is the Cloudmeter technology that makes it easy for our customers to get network data also called wire data into all Splunk products. Wire data is transmitted between app locations over the network and provides information about business activity, app location performance, security and IT infrastructure issues all without needing to recode or code instrumentation for each application. The Stream app also gives our users the extent of ability or filter the data to ensure that they are indexing just the high value data or just the field they select and excluding all the network noise under our market segments.

For the first time, Splunk was recognized as one of the top ten APM vendors by Gartner, and our recent stream announcement has made us a much more serious player there. Our customers were increasingly using Splunk as part of their continuous app delivery process. Energy management provider EnerNOC is using Splunk to improve the quality of their codes and reduce the time to bring new releases to market. Developers at [Amaya Gaming] use Splunk to pinpoint code level of use to improve the lease quality and reliability to track usage analytics and drive higher monetization.

Now onto IT operations, healthcare.gov expanded their use of Splunk in Q2 to monitor the infrastructure and security of the health insurance market place, and we are seeing similar success for healthcare exchanges at the state level.

Good data is deploying Splunk and their Cloud to better support IT operations and gain better visibility into their VI Analytics Cloud platform. Our momentum and security continues to accelerate. Gartner once again named Splunk as the leader in the -- magic quadrant. Infact, one of the CIOs on our customer advisory council called Splunk a poor man’s SIEM because we provide all the benefits of traditional SIEMS at a fraction of the cost. We are often used as a complimentary on our system to existing SIEMS but now more increasingly as a replacement as customers look to Splunk as their next generation security platform.

As an example, Jefferies global investment banking firm choose us as their core security analytics platform replacing a legacy Splunk. In Q2, more (indiscernible) a long time customer for app management purchased the Splunk app or Enterprise security as well as apps for VMware, PCI and Microsoft exchange. And Banco BPI, one of the largest banks in Portugal and a long time customer purchased our app for enterprise security and named Splunk their Enterprise platform for security analytics.

Under business analytics, Itaú Unibanco, the largest Latin America bank will analyze the data from 28,000 ATMs to deliver customer analytics reports to maximize their marketing campaigns. U.K. retailer John Lewis monitors their online store with Splunk, to gain insights into application usage, user behavior and customer experience.

And Multimedia recently spoke at SplunkLive! in Houston about how their mining data from Splunk to increase revenues by understanding the factors that influence gain performance. So as I wrap up a couple of innovative used cased by our customers. From Israel, the red alert app where developers created an app that alerts its reigning citizens of a rocket strike in their area and alerts them where to find shelter. In less than two weeks, this app became the number one downloaded app on Google Play in Israel.

The developers is a Splunk BugSense customer and is using our Cloud based mobile analytics product to monitor and trouble shoots their mobile app. And this from SplunkLive! Brisbane. The Royal client Doctor service in Australia is an agency that provides medical services to citizens in the remote parts of the country. They are using Splunk as a core operational system monitoring aircraft performance, flight schedules and even the temperature of medicines we are delivering. The most amazing and rewarding thing about working at Splunk is witnessing the innovation from our customers and watching the continual expansion of our market opportunity.

Finally, you all know that comp is coming, so if you want to see some amazing customer stories, the most fun you can possibly have in Vegas is either with Splunk customers or with Dave Conti. So with that, thanks and over to Dave.

Dave Conte

All right. Well thanks Godfrey, good afternoon everyone. Thanks for joining us. As you see in our press release, Q2 was an outstanding quarter for us. On the strength of our field crisp execution, we exceeded our own revenue plans and over delivered across all our core metrics.

Second quarter revenues were $101.5 million, a 52% increase over Q2 of last year. License revenues grew 44% over Q2 of last year totaling $62.1 million. Our customers continue to realize value from Splunk software and are continuing to expand their use of our products. Once again, in Q2 more than 70% of our license bookings came from existing customers in the form of upgrades and expansions.

As in prior quarters about two thirds of upsells came from horizontal expansions into new used cases within the enterprise. We added more than 500 new customers and recorded 226 orders greater than a $100,000. We also closed more transactions overall in Q2 than in any other quarter in our history.

On prior calls, I have estimated that our full year license component for ratable transactions would range between 20%and 30%. Q2s mix was 37% ratable. While this mix has continued to be highly variable quarter-to-quarter, it’s now our expectation that the contribution for ratable transactions will be higher than our previous range and will likely average between 25% and 35% annually going forward.

Seasonally, we typically expect our ratable mix to be the lowest in our first quarter. On the field side, we continue to build our capacity globally. We ended Q2 with 266 quota carriers in total of which approximately 60% were 10 year twelve months or more as of July 31. We will continue to the expansion of our field organization in the back half of the year and I anticipate we’ll finish the year with between 300 and 310 quota carriers worldwide.

As Godfrey mentioned, our public sector continue to gain momentum and had another record quarter. From a geographic perspective, I’m also pleased with our international performance which represented approximately 25% of total revenues in Q2.

And I’ve said on many occasions that our philosophy has been to deliver high customer value from our investments and products and field coverage. Consistent with this, a couple of years ago, we created a dedicated renewals team which overtime has driven steady increases in our quarterly renewal rates. With another quarter, where our maintenance renewal rate was 94%, I’m satisfied we have reached a level of scale in our renewal efforts to deliver this type of performance going forward. Regarding services, education and pro serve represented 7% of revenue in Q2 in the range of prior and expected levels of between 5% and 10%.

Recall, since we generally recognize revenue on services and they are delivered in bill [ph] services bookings which have been growing in terms of absolute dollars typically do not go through the balance sheet as deferred revenue.

Over to margins. Q2 overall non-GAAP gross margin was 90% in line with prior quarters. Non-GAAP operating income was $1.6 million, representing a positive margin of approximately 1%, better than our expectations due to higher-than-forecasted revenues but also reflective of our continued investment strategy and our products, our field and our overall global scale.

Non-GAAP net income for the quarter was $1.2 million and EPS was positive $0.01 per share based on a fully diluted share count of 125.6 million. Cash flow from operations was $9.3 million and free cash flow was $6.4 million positive and we ended the period with about $930 million and total cash and investments.

Looking forward to Q3, we expect total revenues of between $105 million and $107 million. We expect Q3 non-GAAP operating margin of about 1% positive as we continue to build on our market segment specialization, our product portfolio and expand our field coverage.

With our first half results and our Q3 outlook, we now expect total revenues for the year to range between $423 million and $428 million, up from our prior guidance of $402 million and $410 million. With our higher revenue plan, we now expect to generate positive non-GAAP operating margin of about 1% for the full year versus our previous guidance of break even.

Remember, because we expect to be profitable on a non-GAAP basis in Q3, Q4 in the full year, we should use our fully diluted share count for our EPS calculations for those periods. We continue to run the business, positive cash flow and we reiterate our full year operating cash flow margin to be 20% of total revenues. We are tracking our full year CapEx plan of around $20 million, again due mostly to facility expansions globally.

In closing, our team continues to execute on our mission to deliver extraordinary value to our customers and I’m very pleased with our Q2 performance and results. Thanks much for your time and interest. With that, lets’ open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Brian White with Cantor Fitzgerald. Your line is open.

Brian White - Cantor Fitzgerald

Okay. Great, congratulations. I’m wondering if you could give us a little bit of color on number of customers you have in Splunk Cloud and also with Hunk. And secondly, give us some color on Cloudmeter. Now I heard Cloudmeter is being used for the Stream app, is that really the only area using Cloudmeter and is Stream app a paper app? Thank you.

Godfrey Sullivan

I’ll go in the reverse order. So, the app for Stream is the first product that we have released as a result of the functionality that we acquired in the Cloudmeter case. We have not announced any further products from that, but we will, we could in a few weeks. So it is a free app, it’s really quite important and that think about [Rugs] think about all the different ways you get the data in the Splunk and if there could be a field missing from a lot like a customer account name or a product ID code or pricing, and to get that data you would have to go back and re-instrument the applications in order to get that field.

But that field is flowing across the network and so as long as you have the way to capture all the network information, all that data then you can get all those fields without having to go back and re-instrument your core enterprise applications. So that’s the big win of the Stream app and we also include the other concerned about when I heard from some press article is that with all the Stream, all those wire information blow up with Splunk in there and so it caused customers licensing problems.

And the answer is no, you can’t talk about, is that ahead of time and the Stream app has very precise controls in it that enable customers to pick and choose the fields that are falling across the wire and only index for example a customer account name or product ID code or pricing those fields and exclude all of the high volume network charter. So it’s a very our customer [approve] about it because it enables them to get at a lot more fields without having to index massive amounts of information or to go back and re-instrument their apps in some ways.

So this is a really important announcement and that we’re just thrilled with the -- we saw our customers. To the Hunk and Cloud customer we have not, we have chosen not to announce numbers of customers at this time, we’ll continue to give you a color on how it goes and there could be a time when it’s worthwhile to give you that information and when it is we will. The one thing I would like to highlight though is in just the 30 days since we opened up the Splunk Online Sandbox we already have more than a 1000 customers up using that Online Sandbox. So when you go to our website now you have a choice, you can either download the Splunk app on [friends] you can store it on a computer or server on your site or you can stand up on Online Sandbox and do it there and send data to that place. So we’ll see how it goes, but you know early results are very promising.

Brian White - Cantor Fitzgerald

Great. Thank you.

Godfrey Sullivan

Thanks, Brian.

Operator

Our next question comes from Kash Rangan with Merrill Lynch. Your line is open.

Kash Rangan - Merrill Lynch

Hey guys thanks for taking my question. With respect to the shift we’re saying in more ratable revenues coming into your income statement. I’m wondering if you could put a billings or booking value perspective, because I think it’s very important and I don’t think there’s a real appreciation atleast from my end as to how much your real business our available growth rate of the business for instance if you got a $100 million business growing 40% is whether your shift of the percentage of ratable goes from 20% to 25% in just one year or my rough math is I assume every dollar subscription revenue equals $3 of licenses, although your growth rates maybe roughly the same, the real value of your growth rate if you adjust for this, that shift in the model is actually by my estimation is about 10 to 15 point higher.

So can you just walk us through David the best possible way to understand the true growth in your business and maybe help us with an ACV bookings metric and one for you Godfrey, as you have the change in sales leadership coming through next year, what are we going to see more verticalization or more product specialization of the sales force and also if you could offer our comments for the lengthier on the impact of expanding the capacities during the quarter with that, what kind of business impacted that have positive or negative? Thank you.

Godfrey Sullivan

Hey, Kash, Godfrey here. I’m willing to take the first part of it and then turn it over to Dave for all the meet of the issue. But I really just wanted to spend a moment on two topics. One is the sort of my philosophy around this whole notion of subscription rate of ratable which we started years ago down this path, they start offering a blend of models that would start to layer in subscription business on top of perpetual because we could see the cloud business] coming and who wants to be that company that had to go through the areba of 10-year not hold of reconstructing themselves. I mean Bob [Cavalier] really did a beautiful job. He is one of the few people who even pulled it off. I have enormous respect for what they did.

But who wants to repeat that experience, so you need to start moving and transitioning you business from perpetual to a blend of perpetual and ratable, so that you can accommodate a growing business like subscription for Hunk or like subscription for IT or like subscription for cloud and know that it’s a blended model. So I think Splunk deserve some credit for having anticipated this a long time ago and it may understate our revenue in a given quarter, but the stability of the business, to help the business, our ability to invest against the more predictable expense plan, all those things about it, I like an awful lot and so I’m very, very pleased with the progress we’ve made and I’ll defer to Dave on all the math, because anything I say would be incorrect.

Now, second thing is just on this whole market segment piece, which is -- we’ve known that because Splunk covers so many market segments that we would never be able to do this effectively with a purely functional organization. And the first place we chose to go after some level of verticalization within security area, because our first lend of segmentation is around our use cases, because that’s our customers are organized, that’s the type of things -- those are the affinity groups and security is the first one that was pretty distinct.

And so now high-end song with us is -- we just promoted her to SVP. She is now member of the Executive staff and I’m effectively delegated that market segment to her and said, I am going to make Splunk a world power in the security market and she is willing to do just that, so doing phenomenal job. So as Doug comes in and starts running the field organization, he has a market segment leader, where he can work with and they just work directly together to say, okay how do we structure everything from product design out to customer, go-to-market the customer support and make sure that we alone are the very best providers in the security market and I think you can see the progress we’re making so. The model is working pretty well; I am very pleased with our staff there and Dave you can explain why we did what we do.

David Conte

Hey, Kash. Thanks a lot and thanks for the question. We talk about lot of our investment pieces on expanding the product portfolio from single product to multi product and we highlight specific uses cases and success we’re having. And Brian asked a question about how we’re going with Hunk and Cloud. So as Godfrey mentioned, we really are operating a hybrid model that [first] lines along the new products that we’re bringing to market which are almost exclusively subscription type.

Of course, they are dwarfed by the contribution – their contribution is dwarfed by just how much success we’re having with our core product and the assets sit on top and that’s where we see a great component or greater component of both transactions being ratable for a number of reasons that we’ve talked about in the past. It’s highly variable, which I’d mentioned in my remarks. So thinking about how do you feather that in and what would growth have been and if all that dropped to revenue, you spot on -- you figure this out long ago, clearly our growth rate would be notably higher if we hadn’t been making this move to enabling adoptions around our core products and introducing these other subscriptions.

I am excite where we want to give a metric that says, here is what you should expect from us on a billing perspective, but if you look at the growth rate of deferred revenue it continuous to be high than the growth rate for revenue which I think is I n line with how you’re thinking about it.

Kash Rangan - Merrill Lynch

Got it. What stunning is last year was 18%, this year was 37%. And if I assume a 2/1, 3/1 for the incremental 18.6 you business or your swap in 60%, 70%, so I just want to make sure that you guys were being recognized for that in the absence in the ACV of bookings metric.

David Conte

Well Kash, thank you for that. And put in other way, this quarter we grew over 50% on the top line and 37% of our license bookings were ratable.

Kash Rangan - Merrill Lynch

Right.

Godfrey Sullivan

Right. You put those two together you can do whatever tax was implied -- you liked around what a normalized growth rate would be, but its clear that the growth rate would be notably higher if not for the that change in mix. The hard part of us and for certainly everybody listening on the call is how do I model that? You keep changing the range on me, Dave, can you give me a specific number. And I sure wish I could, but you guys were trying to give you a insight in terms of how we run our model and we have great variability in terms of what that mix is going to be and it has to do with customer buying preference. Order of magnitude of the transactions, you get a handful of enterprise adoption arrangement in a particular quarter where customer decides they’re going to standardized across their enterprise with all of our products that kind really skew the metric. So, we’ve had four quarters now where we’ve had 30% or greater. Q1 we always expect to be lightest in terms of that mix, so I thought it appropriate to up the range.

Operator

Thank you. Our next question comes from Steve Koenig with Wedbush Securities. Your line is open.

Steve Koenig - Wedbush Securities

Hi, gentlemen. Thanks for taking my question. I’d like add perhaps a little bit about the pricing adjustments and God for you, you refer to Splunk is taking an Amazon type approach to making sure customers are able to have enough capacity to do the use cases they want to run. I guess my question here is how will you manage these pricing adjustments, assuming they will be -- we will see them from time to time, so as not to cause hiccups for license deals or any of pauses and customer buying, and do you expect to go a more programmatic. You sort of scheduled approach to managing those pricing adjustments or will they be done opportunistically. How should we think about that going forward?

Godfrey Sullivan

Thank Steve. There’ll be opportunistic, and one of the things that we loved about our relationship with Amazon is that -- I get, we get an email, our IT organization gets email from those guys about every 60 days it says, here’s some new thing. Here’s the -- here’s the new service, here’s a new system we’re offering and here’s the price in it and by the get a little bit better than it use to be. But if you look at our overall spend with Amazon over the last several years, it double last year and it might double again this year, because we’re using so much of it.

And I think if there is any good model when you – when you have a great product, you have great series of technologies and you are first mover vantage and customers love your products, you’re better off to established in their mind the confidence that Splunk is always going to make it easier for you to put more data and that’s the really massive is start to get across to the marketplace to our customers as this response will continually make it easier for you to acquire index and store, machine generated data and the Splunk App for Stream is a great example of that where we didn’t just load up the index, but even fine very in control to say here’s what I want to actually index so I have very high value data.

So anyway we’re approaching at from a variety of different directions, so we’ll be opportunistic rather than programmatic, but we’ll do it in a careful way. We’re not going to do it in some way that you know that screws up the business. So we’ll just have to – we will be careful.

Steve Koenig - Wedbush Securities

Thank you so much. Congratulations on the quarter.

Godfrey Sullivan

Thanks, Steve.

Operator

Our next question comes from Brent Thill with UBS. Your line is open.

Brent Thill - UBS.

Good afternoon. Just on the customer number, it was a pretty big sequential jump on total customers this Q2 versus last Q2. So, when you look at Doug Merritt and his team, either they had red bull before they came to work or there were something that change. What’s going on with that customer number from what you’re seeing on the adoption side?

Godfrey Sullivan

Hey, Brent. So the short answer to it is price decrease. So if you look at the large -- I don’t what it is, 70%, 80% of our new customers every quarter come from the low price band. I mean, they come in and they start with the small license and then they grow with this over time. And so, when I say that transaction volumes were up significantly from last year, you can almost correlate that with the fact that we had a lot more new customers signing up at those sort of entry level price point. So that’s a short answer.

Brent Thill - UBS.

And Godfrey, you mentioned a win where you were seeing cross-fertilization from security operations, management into other categories. Are you seeing an increase where before, it may have stayed inside one of those big bucketed areas, but now you’re seen a jump over the fire loss, you were under this new areas cross the enterprise and I’m curious how your, in that time, enterprise license agreements into those that type of situation.?

Godfrey Sullivan

Yes. So there was a time a few years back when it was quite often that we entered to our company through security department, we would sit there for a while, maybe a year or two because the security guys want really in close collaboration with IT or the Apps guys, in fact the security guys have never had a technology before that was used outside their own org chart. And so, they weren’t use to having a technology that was a collaborative one.

Splunk is probably unique in the fact that we have changed that and torn down those walls between -- the silos between the departments. Now all that’s data that’s going into IT operations is also considered to be security relevant and all the data that the security guys are harvesting that data can helps the app guy build and manage their applications better.

So yes this whole multi -- departmental to multi-departmental to enterprise transformation is very beneficial to our customers and therefore to us and it is a change over the last several years, and that’s why these customers are saying let’s standardized on Splunk. So yes, I couldn’t be happy about it.

Brent Thill - UBS.

Thanks for the color.

Godfrey Sullivan

Thanks, Brent.

Dave Conte

Thanks, Brent.

Operator

Next question comes from Ed Maguire with CLSA. Your line is open.

Ed Maguire - CLSA

I just wondering if you comment a bit on displacement activity within your customers, so what I’m trying to get is that clearly on the security side, you’ve been able to replace a lot of existing applications and therefore corral budget that may have been allocated to other vendors, is that happening in other parts of your business or is budget to Splunk largely is result of new use cases?

Godfrey Sullivan

It’s all over the board. So one of the challenges of Splunk is that historically nobody had a line item in their IT budget that says Splunk on it, and that’s finally beginning to change. So we have to do it all. We have to evangelize what it is. We have to then prove a use case that’s budgeted in the IT organization somewhere, we have to win that thing and then we have to get money, so and then do the successful deployment.

So part of the length of our sales cycle is because A, we’re doing evangelism around a new generation of data, its not always understand. B, we have to win projects that may or may not be budgeted already. And then we have to go complete it and win it. So it does make our sales cycle a little longer, but we are finding with the customers who want to this data enough that they will reallocate other money in our direction. And the security guys love it because they’ve being paying enormous amounts of money over time in high maintenance costs and high deployment costs for these [SEIMs] and so that’s a pretty – those are easy pickings for them to say let’s just turn down the amount of money we’re spending on that, Splunk is so much more affordable, its so much easier to installed, its so much less expensive to maintain and we get so much more flexibility and value out of it, they will definitely reallocate, we’re seeing more and more customers reallocate SEIM spending to us.

Ed Maguire - CLSA

Great, and just a quick follow-up on your Internet of Things business group as we’re talking about new allocation of new budget, could you comment on your progress there and expectations going forward?

Godfrey Sullivan

This is little bit of puzzle. So, we have a lot of really interesting use cases and unlike our security or operation business where the segmentation that you would normally apply typically around the software use case or even the org chart of you will, the security group, for the app group.

Most of what I’m seeing in the Internet of Things tends to be around industry line. So its building systems management, healthcare devices is something like -- as we evaluate how to attack the Internet of Things marketplace. What we’re finding is we have to think about it differently from almost 90 degree angle in terms of segmentation compared to how we look at our core markets to begin with. And I think that will mean different types of partnerships, different types of go-to-market models and choosing carefully which industry segments we can go into and make a big difference.

So, rather than giving the answer to IoT, which has to your question. I think I’m actually answering it with another question, which is how will we ultimately define our segmentation strategy and I can give you a little more color as the time goes on. But its still a little bit earlier on that.

Ed Maguire - CLSA

That was great. Thanks.

Dave Conte

I want to reiterate something for folks on the call, the last Brent question and your question, its -- I’ve stated before that the kind of productivity for our field organization tends to be on the longer side, now we measure it as a year and its indicative of the breadth of use cases that Godfrey mentioned in his prepared remarks how we see up-sales and expansions occur inside the installed base and of course new customer acquisition.

Not a repeatable sales motion that you might find in certainly prior lines that Godfrey and I have lived that data enterprise software companies. So it’s really testament to the execution of the field organization in terms of how we’re getting upsell in the installed base. Two-thirds horizontal expansion each of those representing in most cases a unique sale cycle. So to perfect that level of expertise not just inside of IT operations and ops management but to move it into security all with the single Salesforce or Internet of Things is a great challenge.

So you know the combination of the expansion bookings that we saw in the quarter. The total customer acquisition is really I think a compliment that the investment we’ve made in the field that we’re starting to see it. They get to a certain level of critical mass where they can continue to accelerate and you see those results in the income statement.

Ed Maguire - CLSA

Thanks.

Operator

Our next question come Phil Winslow with Credit Suisse. Your line is open.

Phil Winslow - Credit Suisse

Hi. Thanks guys and congrats on another quarter. One of thing you highlight was international expansion, I wonder if you just provide some more color there particular just how feel about go-to-market organization over in Europe and how that evolving in this room broadly what you’re seen an international push?

Godfrey Sullivan

Hi, Phil, Godfrey here, so thank and we’ve been investing in international for years now and they’ve been doing a great job of growth, the problem that they’ve had is it the Americas and specifically United States has been growing so fast, they couldn’t catch up, the could make ground on and we’ve been sort of stuck at that 20%, 21%, 22% level for a while, so its kind of fun to see international teams actually talk up a little higher growth rate this quarter and gain some ground.

Now 25% is not where we want them to be long term. I think that you go back to all the places they are not working before and international was 40% or 45%, so I think we’ve still have enormous amount of growth [indiscernible] but lot of its about getting the teams further build up, more critical mass in country and all that sort of thing.

Dough and the team, Doug has made several changes of like one is that he promoted Vishal Rao to the SVP of Global Direct Sales. So Vishal who was running the Americas, now he’s running off our direct sales globally. He promoted ahead of our channel, so you’ve heard from our partners for along time Splunk can do a better job in the partner basis and we have now have global channel -- Global partners Exec on broad.

We just ahead of our European operations just left the company, so we have a vacancy there. Tom Schodorf who was actually sitting in Europe right now helping Europe as they go through the transition we were recruiting new leader for Europe. And Asia continues just to rock along smoking with gas. So, anywhere its maybe that’s more than you are asking, but what a good stuff going on the international front. We are investing heavily in those markets, the more critical mass we deploy there, the better off will be and they will continue to climb up the curve in terms of the percentage of overall revenues.

Phil Winslow - Credit Suisse

Got it. Perfect. Thanks.

Godfrey Sullivan

Thanks Phil.

Operator

Our next question comes from Greg McDowell with JMP Securities. Your line is open.

Greg McDowell - JMP Securities.

Great. Thank you very much. Nice results. I have a question about Splunk App for Stream and I want to back to that subject for a minute. And what I’m trying to do is gauge how big of a move this is into sort of the traditional APM and MPM market because these are multibillion dollar markets and I’m just trying get how much of those market is Stream going after and then how are you sort of balancing some of our previous partnerships with sort of the traditional APM or pure-play APM vendors out there? Thanks.

Godfrey Sullivan

Sure. There’s a distinction between folks who were considered classic APM vendors and that they’re typically doing byte code instrumentation and very deep analytics around application performance that is not something we do. And we are not – I don’t think competitors that puts fear in their hearts because of that – that’s not -- that’s their specialization, not ours, but the things that’s helpful to us where and where the Stream App is really important is that we are now able to gather all the data that’s being send across the wire by networks, by applications, by any other type of device without having to go get it by specifically having a instrument a log in an app which is work for developer to do.

So the Stream App actually gives us access to all the data, which our customers want and that data can be use for security analytics, it can be use for operational analytics, its really, really important to the analytics marketplace because for example, developers, they’re usually logging for errors and failures and all things that they care about, probably didn’t originally think about it in terms of hey, if I logged all the customers IDs and the product ID codes and pricing and all these other things, SKU numbers that we can use logs of analytics.

So their logs were often applications are often not build to instrument all that data that flowing across the network. But that all those fields are happening on the network. They are on the wire. So our ability to capture those and filter them and chose them, means that we can all of that data which is what we want and our customers want for all the different use case including business analytics, including web analytics, including securities and by the way including better application performance. So the Stream path is important for us in every segment we operate in just by the way including application monitoring.

So I think it really changes the relationship with our partners and all that. Some overlap. I mean there overlap in terms of acquiring network data, but there is not much overlap in terms of classic APM used cases. So you know as always in technologies there is some level of competition going on and maybe you’re partnering in lot of use cases when some you’re going to be.

Greg McDowell - JMP Securities.

Great. Thank you.

Godfrey Sullivan

Thank you.

Operator

Your next question comes from Karl Keirstead with Deutsche Bank. Your line is open.

Karl Keirstead - Deutsche Bank

Thanks. I just wanted to ask you question about the what I view as the improving momentum from Q1 to 2Q, it felt like Q1 in terms of the growth, the full year revs guide provision growth in the number of large deals was I’d say good not great, but in this most recent quarter the revenue guide for the full year up $20 million, acceleration in license and bookings growth, big deals dropped, it just felt like the momentum was much stronger in the July quarter. Beyond just seasonality Godfrey or Dave maybe are there one or two things that you felt like inflected up in the July quarter to make this what I think is a very, very strong quarter?

Godfrey Sullivan

Well, first – this is Godfrey. But first Q1 is Q1, but always remember that when you have a phenomenal Q4 which we’ve had multiple years in a row now, you have kind of restart the year in Q1. So Q1 is Q1, that said, the business is strong , bookings are strong, the various parts of the business always the multiple products, the various part of the business all that stuff is doing well. Every segment did well, every geography did well, business is good. You just add up actuals plus outlook, its bigger number than it use to be and therefore you have a quarterly – you’ve also have a good quarterly outlook and you have a full year race. And then you probably would prefer a more precise answer to that questions but I would prefer to give my answers than yours. So here we go.

Dave Conte

Godfrey, your answer is also brighter than mine.

Godfrey Sullivan

It’s true Karl that our Q4 was particularly strong quarter, up against tough comp the year before. That said, we look at our own plans for Q1, we were satisfied with the outcome. I know lot of the year comps made is tough, but I just think that from a overall how the company is executing as we’re scaling and getting into in these markets, folks are really focused delivering to the customers, customers are getting the value and its showing up in our results.

Karl Keirstead - Deutsche Bank

Got it. And then, Godfrey, if I could ask one follow-up. I heard an interesting stat the other day that some 25%, 30% of all the data that’s currently stored in enterprise Hadoop Clusters might be machine data including log file data, which leads me to want ask you as the log file storage alternatives change and become much cheaper how that effects Splunk’s business? I know you prices on volume index not volume stored, so it shouldn’t really affect your P&L but maybe it doesn’t in some other less obvious way?

Godfrey Sullivan

Well, I haven’t really heard that number in terms of percentage data stored or anything. Let just assume as true that’s tells me there an opportunity for Hunk out there, because that’s an easy thing for us to go out there and analyze that’s an Hadoop Cluster. But what I see happening most in the world of Hadoop is that customers are going after enterprise data warehouse replacements. You see it written all the time that the difference in the cost of storage and Hadoop versus the traditional EDW, is typically a high-speed we write very first scene relational warehouse and there is 10 or 20 years some huge acts different in terms of the cost to store. And so everybody I talk to. But the reason why they are setting Hadoop clusters is for cheaper storage.

And I get it, that why we have a save as Hadoop out of Splunk. If it’s cheaper for you once you done your – so Splunk is typically for hot data. Customer are looking at us, they want to see a data in real time, they want to see analytics over the last five minutes or five days, this rare that customers keep large amounts of data in our storage, in our index without exploring it to some other type of warm or cold store after a period of time and Hadoop is the one of those stores.

So, I think it’s a complementary market to us. The use cases are very, very different. Now with that said, I still look at Hunk and say, Hunk has a huge advantage here. So of all the companies that are out there sort of professing to be able to report or analyze on Hadoop data, almost all of them, cause you to have to move data out of Hadoop into some other store, so that they can analyze it and customers just simply hate that. They just pay all those money to stand up cluster and now they have to duplicate it or move a big chunk data somewhere else as they can analyze it.

Customers absolutely detest that whole notion. Hunk is one of the few technologies out there that actually creates the index inside the Hadoop node itself so you can type a simple Splunk research and see the visualization of it and very short period of time you can continue it, you can pull it, you can revise it, all that’s happening inside the Hadoop node itself and we’re not moving the data.

So I watch this market, the stock market mature or the Hadoop market mature, I think Hunk is very well-positioned to become the analytical engine on top of that. And I think that our ability to export data from Splunk to Hadoop for long-term storage is good and our ability to suck data out of it is also good. So I don’t know, I kind of look at this two years ago everybody thought that this was a huge competitive threat. Two years latter we’re looking at it has a market opportunities. So I think we just have to be real about it. Keep our eyes open and do the best we can to create value for that ecosystem because it is an important ecosystem.

Karl Keirstead - Deutsche Bank

Got it. Very helpful and congrats. Thank you.

Godfrey Sullivan

Thanks, Karl.

Operator

Our next question comes from James Gilman with Drexel Hamilton. Your line is open.

James Gilman - Drexel Hamilton

Good afternoon and congratulations on the nice quarter there. I want to follow-up on Godfrey there a little bit about the storage in Hunk and things. It were considered maybe doing an appliance type of model that has in storage associated with it that might bring in the partner community or something like that. Is there are use case for that and have you considered it?

Godfrey Sullivan

We have considered it from time to time. We actually have a partner out in Asia. This offers a very highly two version of Splunk on the X-box that’s our partner [Sistec] and they have some market perception to that and so I think that’s a very well be a place for partners at local implementation, deployment, support, exchange all that a physical hardware that I simply don’t want to get to. The thing what I see happening that’s probably the mega trend of all times is that our customers large and small are looking at what Amazon is doing in terms of driving down the cost of infrastructure and they’re saying well, that’s getting more and more attractive all the time.

So I think for Splunk our best move is to continue to strengthen our relationship with Amazon and make sure that Splunk products including Hunk Enterprise et cetera are available to be the monitoring standard for those environments as customer move to grid computing and meaning utility computing called really inexpensive and really easy to turn off. So for example in the future you will see the ability to go up to Amazon and turn on an EMR than elastic MapR Cluster and in that same you’re turning on – you just turn on Hunk and you’ve got analytics right there in your environment. That is a appliance. It just happens to be somewhere else and you didn’t have to install or maintain it. So you know there is an appliance ruled out there, my humble opinion about it is that’s a big market for us, it’s not in the physical appliance delivery, but in the virtual appliance delivery the Amazon will bring.

James Gilman - Drexel Hamilton

Great. And one other question here, now you announced a relationship with tableau a while back. I was just wondering if you are seeing any benefits from that. Can you comment on that please?

Godfrey Sullivan

Well we’ve done a couple of events together; we have some customer used cases evolving. I like to talk about it more than I have a handful of really rock solid customer use cases to talk about. We’ll do some of that comp and in periods following that, so that’s my key way of really come out with David and hang out with Conte.

James Gilman - Drexel Hamilton

Well I look to being there, so seeing see you here in – with a little over a month, but thanks for taking the questions and again congratulation on a nice quarter.

Godfrey Sullivan

Well thanks very much.

James Gilman - Drexel Hamilton

Thanks guys.

Operator

Our next question comes from Brendan Barnicle with Pacific Crest. Your line is open.

Brendan Barnicle - Pacific Crest

Thanks so much. Godfrey you highlighted a bunch of government wins that you had in the quarter it’s the first time I remember you talking about that specifically. Is that seasonality or is there some thorn in your cycle where the government piece just really start to take off for you this quarter, I was wondering if you could give us any more color on that?

Godfrey Sullivan

The thing you know Brendan, the thing that its probably be a little different for us in the government area in public sector because that also includes [stay] with the government to, but the thing that’s probably a little different is how much IT Ops business we’re now getting there. So if you were to look back on a couple of years ago, it was mostly security. And we always had a good business with public sector especially Federal, but it was very tightly aligned with the security market and we are off in the sort of analytical engine sitting next to an art side box or something like that.

What’s really changed over the last couple of years, first we have a great federal team, we have a very strong leadership there, we have incredible and growing team out in the (indiscernible) and they have really started to move Splunk from our sort of onclave and security out into IT operations. And so when I talked about healthcare.gov here you have you know a very well known website that had a few operational problems and what did they do? They brought Splunk in there along with the HP folks from a services side and a bunch of other vendors who were – all and they are working as a team to try to make this work the best as it possibly can and we become a core part of that platform.

So I would say that’s the biggest change is the fact that we have – our brand in federal government is now not just a security analytics tool but we will really become known as an IT operations tool and that’s what’s causing some of these large government agencies to make big big investment in Splunk as their knowledge at work, how far we can help them.

Brendan Barnicle - Pacific Crest

Great. And then just Dave, I notice stock based comps took a bigger step up than usual this most recent quarter anything in particular contributing to that?

Dave Conte

There was a specific transaction maybe Godfrey you should address it but there were some fears that had been granted by our comp committee that one of our employees opted to return and an ongoing employee and under the accounting rules you have to any deferred compensation that you had recorded for future amortization you have to accelerate into the period of forfeiture.

Godfrey Sullivan

Terrific. And those were my shares.

Dave Conte

Those were Godfrey’s shares.

Godfrey Sullivan

You guys all know that there was a no vote on sale and pay for those grants and while I might disagree with the vote and there’s a long story behind it, I’d rather explain why I turned them in and they tried to explain why I kept them. So from the start to the top and I felt it was the right message to send to our employee that I’m not to except any type of remuneration if it somehow has a no vote on it from our shareholders. So I turn them back in.

Brendan Barnicle - Pacific Crest

Great. Thanks for the color on that.

Godfrey Sullivan

Thanks Brendan.

Dave Conte

Hey Brendan, you like how I didn’t nail him directly.

Brendan Barnicle - Pacific Crest

Yes.

Dave Conte

Yes thank you.

Operator

Our final question comes from Keith Weiss with Morgan Stanley. Your line is open.

Keith Weiss - Morgan Stanley

Excellent guys and a good quarter and thanks for sneaking me in. I don’t if you have mentioned this, but did you mention the amount of the quota-carrying sales reps you were able to hire in the quarter, and kind of whether you will be able to keep up the pace of that for the back half of the year?

Dave Conte

Yeah hey Keith, it’s Dave. We ended the quarter with 266 quota-carriers and we expect to end the year with between 300 and 310.

Keith Weiss - Morgan Stanley

Excellent. And maybe if you could give us some color commentary on sort of in the past you’ve talked about what percentage of them are fully of the quarter and what not, and how those the productivity against the fully productive reps, how that’s being trending for you guys?

Godfrey Sullivan

So as I mentioned in my prepared remarks again at the end of the quarter about 60% of those quota-carriers met our definition of tenured. That’s consistent you know a couple of hundred basis points plus or minus every quarter with what we’ve seen over the say last four quarters.

Keith Weiss - Morgan Stanley

Got it. Thank you very much guys.

Godfrey Sullivan

Thank you.

Dave Conte

All right Keith.

Operator

This ends the Q&A session for today. I'll turn it back to management for closing remarks.

Godfrey Sullivan

Great, thanks, Patrick. I appreciate your help today and thanks everyone for joining. We look forward to seeing you at [conf] and hope you have a nice evening.

Operator

Ladies and gentlemen, thanks for participating in today’s programs. This concludes the program. You may all disconnect.

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Source: Splunk's (SPLK) CEO Godfrey Sullivan on Q2 2015 Results - Earnings Call Transcript
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