Splunk Inc at UBS Global TMT Conference (Virtual) Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Yes, no problem at all. So Jason, you obviously put up results last week. We don't need to go into all the detail, but I will have some financial questions to ask. But I thought the results actually were pretty good. I think the stock was reflecting a fear that you might pull back on your 4Q guide and your out-period guidance, and you didn't. In fact, you surprisingly gave us next year guidance. But the stock, obviously, didn't react favorably, but there was a lot going on in the market. But when you and Ken and Katie were talking to investors and analysts, were there any common questions or any misperceptions that it might be good to take an occasion right now to address?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Got it. Okay. Great. We'll hit on the numbers, but I wanted to open with some broader questions for those that want to understand the broader Splunk environment. So Jason, the macro environment has been a little bit squishy with -- you're seeing it in the volatility in the stock market, but it's stemming from supply chain constraints and labor shortages and COVID concerns and interest rate concerns. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 06, 2021 / 6:00PM, SPLK.OQ - Splunk Inc at UBS Global TMT Conference (Virtual) I'm just wondering, as you engage with customers yourself or with Splunk's account exec, did the environment feel similar in the October quarter as the prior quarter? Or do you feel like anything changed on the margin?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Okay. Good stuff. And one of the other common questions I get, Jason, is just on the transformation of the business from traditional SIEM into observability. Can you give us an update on that effort? Obviously, SignalFx was a big part of that push, but how are things tracking in terms of

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Wow, so $100 million in ARR and growing faster than cloud, that's 75-plus percent growth.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Interesting. And is observability, Jason, a big part of Sean's, your new Chief Product Officer's road map looking forward?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Got it. Good. Maybe I'll click a little bit down on the sales organization. And in particular, Jason, you talked about one of the key variables being when will workloads move from on-prem term to cloud. And obviously, you've got Teresa and her whole sales team super focused on driving that even faster. Can you unpack a little bit? What exactly is Teresa and her team doing to accelerate that cloud adoption, be it sales comp changes, pricing? What are the levers that she and her team are using?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Okay. Jason, that trade-in comment was interesting. You and I spoke about this a couple of months back. You had so much to cover on the latest earnings call. I'm not sure you had time for that. But let's focus on that a little bit. So just so I understand, Jason, if there's x number of months or years left on that term contract, you're offering some incentives to -- is it essentially to do an earlier renewal to increase the chances of them adopting cloud? And to what extent, over the coming quarters, might that pull forward some of this huge renewal opportunity that you've been talking about for a while? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 06, 2021 / 6:00PM, SPLK.OQ - Splunk Inc at UBS Global TMT Conference (Virtual)

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Got it. Okay. Interesting. So Jason, I'm starting to get questions already. You're provoking some investors to shoot me questions already. And maybe what I'll do is rather than leave them at the end, I'll ask them at the right time. So given that we're talking about Splunk Cloud, I just got one that I'll throw at your way. What is your best guess as to what portion of Splunk Cloud data is actually being ingested from on-premise environments versus public cloud environments?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : I think the spirit of the question, Jason, is there's a, I think, a misperception that Splunk hosted, let's say, on AWS is really being used to ingest data from your on-premise environment, not from workloads that are sitting in AWS. So I think the spirit of the question is just to get a sense for how much of the cloud data is coming from apps sitting in the cloud versus ingested from on-prem environments. Maybe it's tough to estimate.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Well, this is a good segue to another question I just got, and that is, can you explain, Jason, in simple terms, the difference between ingest-based pricing and workload-based pricing? And why is workload-based pricing not only better for the customer, but also better for Splunk?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Got it. And I know from following Splunk for years that you guys have been adjusting the pricing model here or there to get it right. Do you feel like you're at a place, Jason, where we shouldn't think about a high likelihood of any additional new pricing models next year? You think you're sort of done on the pricing structure front for now?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Good. Good. So maybe the last one I'll ask you before we dive into some of the numbers, Jason, is just around Silver Lake. I think that gave investors a shot in the arm, given the credibility boost that Splunk got from that. What's transpired with the Silver Lake relationship so far? I think Graham said on the public call last week that, frankly, they were no more involved as a Board member in the decision around Doug than any other Board. So what where do things sit with Silver Lake? What -- how has that relationship progressed? What are they encouraging Splunk to do more or less of?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : That's great to hear. Good stuff. So let's get into the sweet spot on some of the numbers, Jason. So a number of things stood out to me from the print last Wednesday, but one is the -- what I thought was a fairly unexpected decision to provide guidance on total ARR and cloud ARR for next year. So the total ARR was $3.9 billion by year-end fiscal '23, Cloud ARR $2 billion-plus, and I'll ask you about that plus in a second. But on the full year guide, I guess, I know it's a hard question to ask a CFO around the degree of conservatism, but my supposition is you're still looking for a CEO. You're obviously not going to want to burden that CEO with "stretch guide." So I'm assuming there's a decent layer of conservatism and comfort in that number. But I throw that to you perhaps to comment on, Jason.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : And then, Jason, to go back to a question you -- I'm sorry, a point you made earlier in the conversation about during fiscal '23, reported revenue growth and ARR growth converging. If you've set a target for, call it, 20%, 25% ARR growth by 4Q fiscal '23, are you suggesting that we could by year-end fiscal '23, see a revenue growth number close to that?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Yes. Okay. That's encouraging. And then maybe, Jason, on the $2 billion of cloud ARR by year-end fiscal '23. This is a question I posed to you after the earnings call. But that requires $650 million of incremental cloud ARR fiscal '22 to fiscal '23. But you're on track to do about $540 million of incremental cloud ARR this year. So $650 million next year against $540 million this year does not strike me as a stretch given how assertively Splunk is leaning into that cloud migration. So maybe to sum that $2 billion sounds like a relatively safe, if not pretty conservative estimate. Do you want to comment on that math? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 06, 2021 / 6:00PM, SPLK.OQ - Splunk Inc at UBS Global TMT Conference (Virtual)

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Got it. Okay. And Jason, maybe now is it's a good time to ask you a little bit about the renewal pool because that when term contracts come up for renewal, obviously, that gives you and the reps a great chance to convert. You've talked a lot about the big renewal opportunity over the next 12-ish months confidence level changed at all, Jason, in terms of the magnitude of that renewal opportunity? And is there any way to size it for everybody listening?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Got it. And in the spirit of that answer, and this broader discussion about cloud, Jason, I'll throw you a question that just came in. How do we gain confidence that the cloud ARR growth is "real" versus simply the shift of term ARR to cloud. So when the transition asymptotes above 80% cloud mix, how should we be thinking about the durability of that cloud NRR and ARR growth?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : That couldn't be more clear. And then maybe let's hit on -- we talked a little bit about fiscal '23. So maybe the October quarter reported, and again, I know I asked you this question after the earnings call, but I still feel like there's a little bit of investor confusion. And that is, if 2 of the dynamics that occurred during the October quarter is that the portion of the bookings mix that came from cloud shot up, and then the duration of term contracts went down, one would think that the way that, that would have manifested itself in the numbers is probably that you would have beaten on cloud ARR and missed on the reported revenue line because of the term contract shortening. But instead, it was the opposite, where it was solid, but you were more in line on cloud ARR and you beat on rev. So how do you explain that, Jason?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Makes sense. Cool. In our last 5 minutes or so, I'd love to hit a little bit on margins and cash flow, Jason, because they're underpinning some of the confidence in the stock. So let's talk about the gross margin side. So I think they came in a little bit below the 70% you were thinking. Do you mind just spending a quick second on why that is and how that gross margin change affects your outlook, perhaps, for cash flow next year? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 06, 2021 / 6:00PM, SPLK.OQ - Splunk Inc at UBS Global TMT Conference (Virtual)

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Okay. Got it. Well, this next question, maybe you just answered, but you can elaborate if you don't think you did. Previously, you had said that at $4 billion in ARR, you would be doing 20% to 25% operating cash flow margins. You didn't provide any cash flow guidance when you gave the $3.9 billion of total ARR. Why not and why the difficulty in forecasting operating cash flow against that $3.9 billion ARR number next year? Perhaps it was just what you just said, Jason, but I'll throw that question to you.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : So it sounds like we'll get a little bit more clarity and maybe even specific fiscal '23 operating cash flow guide maybe on the fourth quarter call, Jason, is that the goal?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Excellent. One last question that just came in. It relates to essentially why wasn't the total ARR guide of $3.9 billion even higher? And here's the logic, Jason. Given the step-up in ASPs that you get around cloud, and obviously, you're leaning heavily in the cloud, and the implied bookings mix shift to cloud, then why wouldn't it translate to total ARR for 4Q next year being even higher than $3.9 billion unless total bookings expectations went down?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Makes sense. Well, that was super helpful. And I want to especially call out the disclosure, Jason, you gave at the beginning around observability being $100 million-plus in ARR, growing faster than cloud ARR. I think those are new-ish disclosures that I think everybody on the line appreciate. So thanks for that.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : I think that disclosure might help to quell some of the concerns around the competitiveness with Datadog. Plenty of room in that space for multiple vendors. So thanks for that. Ken and Katie, thanks for your contributions as well, and thanks, everybody, that asked Jason some good questions to keep him on his toes today. Really appreciate it.