Splunk Inc SPLK
Q1 2014 Earnings Call Transcript
Transcript Call Date 05/30/2013

Operator: Good day, ladies and gentlemen, and thank you for standing by and welcome to the Splunk Incorporated First Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference may be recorded.

It's now my pleasure to turn the floor over to Ken Tinsley. Sir, the floor is yours.

Ken Tinsley - IR: Great. Thank you, we appreciate that, and good afternoon everybody. With me on the call today are Splunk's CEO, Godfrey Sullivan and CFO, David Conte. Just to hands up, we've had a power disruption to the building today. So if you drop off, we'll direct by Kim.

As a reminder, today's conference call is being broadcast live via webcast. An 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. I'd like to remind you today that during today's call we will be making forward-looking statements including our guidance for our second quarter and full fiscal 2014, expanded use of our software by our existing customs, the size of license purchases, our investments and 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 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 today. Forward-looking statements made today based on facts known to us. If the call is replayed at a future date, the information presented during this call today 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 to 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 today that we provide today exclude stock-based compensation expense and payroll taxes related to employee stock transactions which cannot be determined at this time and are therefore not reconciled in today's press release.

So, with that, let me turn it over to Godfrey.

Godfrey R. Sullivan - Chairman and CEO: Thank you, Ken. I always hope that that disclaimer introduction will get better and it just doesn't. Hi everyone, and welcome to the call. We're off to a strong start in Q1. Revenue for our fiscal first quarter was $57.2 million, up 54% compared to Q1 last year. License revenue was $36.2 million, up 48% compared to Q1 last year. We had more than 350 new customers. New and upgraded customers in Q1 included the Bank of New York Mellon, Level 3 Communications, the State of Texas - Health and Human Services, Nordstrom, the Bank of New Zealand and Winn-Dixie.

Thanks to all of our customers around the world for their ongoing encouragement and support. I spent a lot of time on the road in Q1 with trips to APAC, Europe, and around the U.S. I'll probably had 50 individual customers meetings during that period, most related to our core markets, but also some interesting activities in the world of mobile and the Internet of things. The biggest change a year ago we were meeting with departmental managers and our champions. This year most of the meetings are at the CTO, CIO or VP of Engineering level, as Splunk is expanding from core IT to mission critical operational analytics.

A few examples, in Hong Kong an online gaming company is using Splunk not only for core IT used cases but for authentication, device behavior and security, but they are also using Splunk to analyze how users are arbitraging their online betting with sub-second trading patterns.

Another example we met in Europe with the fee level team of an auto manufacturer who is using Splunk to analyze the output of their electric cars.

They are already splunking the car's charging information and operational health. Their goals now is to provide the driver with interactive information onscreen so the driver knows where the nearest charging stations are located and ultimately to provide an online marketplace where restaurants and movie theaters can promote their destination with the recharge as part of the offering.

Another example in Europe is a wireless telephone carrier that is using Splunk to track their customers via wireless routers.

These days the routers are only 50 to 100 yards apart so they can see 50,000 customers at a soccer match and then through a time based geo analysis understand where those customers went after the game what towns, what bars, what highways they took.

The opportunity is to link companies together with this data to create mobile offerings. Every telco I visited is thinking about how to use their machine data to create a competitive advantage and a better customer experience.

Domestically iRhythm a medical device company is using Splunk's software to index data from their devices to understand how patients use them to identify potential manufacturing defects and ensure regulatory compliance.

McKenney's, a building automation company, is using Splunk to help Eglin Air Force Base to take data from 20,000 building sensors to analyze energy usage and reduce energy costs. So while our core business still tends to be related to improving security and performance of applications and IT infrastructure, we see more companies combining that data with mobile data, device data and structure data to create a better customer experience and a competitive advantage.

A few comments about markets; IT operations was yet again above 30% of our total business in Q1. A few of our new customers choosing Splunk for IT ops this quarter, included the Arizona DOT, The U.S. Department of Energy, The Ministry of Presidential Affairs in Abu Dhabi and my Alma Mater, Baylor University in Texas. Baylor will rely on Splunk for centralized logging, real-time analysis and an understanding of what's happening across their IT systems and infrastructure and of course also to proactively identify unknown threats and network anomalies.

In a recent report on the IT operations market, Gartner mentioned that 'Splunk's value proposition has moved it squarely into this market, resonating with IT managers that are required to turn complex log files, events, metrics and alerts into visualization tools.' In the report, Gartner mentioned Splunk as one of the fastest growing new generation of IT operations management market vendors, referring to Splunk as a platform that is taking market share away from the big four.

In the security market, we are seeing more validation that traditional SIMs are no longer adequate for today's cyber-security threats. Companies need solutions that are capable of ingesting massive streams of diverse data and performing analytics on that data. Gartner's most recent Magic Quadrant report, places Splunk squarely in the leader's quadrant. That recognition is a clear reflection of the changing requirements of the security market, from static reporting to real-time statistical analysis. Gartner also named Splunk as the fastest-growing security vendor in their 2012 Security Market Share report.

In addition, we are proud that the readers of SC Magazine awarded Splunk the best SIEM solution in the U.S. and the Best Enterprise Security Solution in Europe. Customers selecting Splunk in Q1 for security included the NASA Johnson Space Center, Nomura Securities, Orange France, Arizona State University and NCG Banco.

NCG Banco, a European financial institution with 3 million customers in Spain and beyond significantly expanded their use of Splunk for security. The bank initially selected us as a SIEM to correlate log from other parameters devices. Now Splunk Enterprise is their security intelligence platform for global fraud monitoring. The bank now tracks all money movement, transactions from ATMs, e-banking, branch offices and internal applications and then correlates and analyzes that movement as a part of their fraud detection system.

This quarter, one of our largest orders is a new customer, a large domestic bank. Our champion had come from another large bank a Splunk customer. It had a successful relationship with Splunk at his previous company and therefore, one of the first things he did coming onboard was to bring Splunk into his new world. Proven customer success and it drives more customer success.

To expand our market coverage we continue to invest in apps and content. There are now more than 400 apps and add-ons available on Splunk base. This past quarter we introduced new versions of the Splunk app for enterprise security and an app for Paulo Alto networks.

A new partner developed app is box for Splunk. This app indexes machine data from box to track and understand metrics such as most active users, the most read files or folders and other trends based on organizations usage of box's service. Another long-time partner Sideview is selling an app on Splunk base for ShoreTel that enables users to intuitively browse and report on their call records generated by ShoreTel telephone systems.

Content like these apps and templates continue to help us close business such as the Bank of New York Mellon or the Splunk app for Microsoft exchange was a primary driver for their purchase.

For our Hadoop users we released the latest version of the Splunk app for Hadoop box, which provides real time end-to-end monitoring, analysis and troubleshooting of Hadoop clusters.

We also recently announced partnerships with two of the leading Hadoop distributions, Cloudera and Hortonworks. These relationships are driven by our customer's needs to use Splunk to collect monitor, alert and analyze their machine data and then in some cases use Hadoop for low cost batch storage and additional batch analytics.

Now on to the cloud, we now have more than 200 paying customers on Splunk Storm, which represents more than 40% growth over the prior quarter. One notable example of a Storm customer is RevMob a leading ad network for mobile app developers. RevMob is sending 250 gigs of data storm from their cloud production environment. RevMob needed a centralized platform for analyzing their machine data, but preferred a service offering to an on-prem solution.

We also now see customers using Storm like the SaaS version of our free download. They test their use cases in the cloud, and then they go on to purchase Splunk Enterprise for on-prem deployments. An example of this is InstantCab, a company that matches people who need a ride to cabs that are near them. Basically InstantCab allows you to see the cabs, book a cab, track it on its way to you and then pay for it automatically through their app. They have over 1,000 drivers in San Francisco and are providing tens of thousands of rides every month. InstantCab, started with Splunk Storm in a dev test environment and then moved on with Splunk Enterprise to an Enterprise license.

While our SaaS business is still on the early innings, we're continuing to invest in building out the team. This past quarter, we brought on two highly experienced executives to head our cloud-devs and cloud ops teams. We'll continue to invest in a seamless customer experience, which enables customers to use Splunk in whatever way makes most sense for their specific needs; on-prem, in the cloud or in a combination environment.

I also want to say it was great to see many of you at our SplunkLive!, events recently with over 400 customers each in London and New York City and more than 750 in Washington D.C. I really appreciate all of you taking the time to learn about our business and I especially thank our customers for their compelling presentations of these events.

Before I turn it over to Dave, I want to extend a warm Splunk welcome to Patty Morrison, who has joined the Splunk Board of Directors. Patty is an Executive Vice President of Customer Care Shared Services and Chief Information Officer for Cardinal Health and she is a great addition to our Board.

Thanks again, and over to Dave.

David F. Conte - CFO: Thanks Godfrey and good afternoon, everyone. Q1 was a solid quarter for Splunk against a difficult macro environment for software and we're pleased with our result.

As Godfrey mentioned, first quarter revenue was $57.2 million, a 54% increase over Q1 last year and license revenue grew 48% totaling $36.2 million for the quarter. These results represent the second highest quarterly revenue amounts in our history, following our recent Q4 performance, and reflecting the continued value we're providing our customers.

In Q1, we added more than 350 new customers, two of which were the largest order closed in the period. Overall, we recorded 132 orders greater than $100,000 compared to 73 in Q1 of last year. Q1 was also one of our largest quarters in terms of the total number of transactions.

Overall, ASPs have ranged consistently between $30,000 and $40,000 over the last three years, including Q1, as large orders and total order volume have grown proportionately. Collectively, these results reflect the continued momentum we've experienced as more and more enterprises adopt our software and expand its use across their organizations.

As Godfrey described, our customers consume Splunk software across a broad set of use cases. Our core market segments of IT operations, application management and security continue to represent about 90% of quarterly business with each trending at about 30% over time.

We're seeing this type of use case breadth not just in the U.S. markets, but globally as well, and the investments we've been making in field coverage are making an impact. In Q1 the international operations represented approximately 21% of total revenue, up from 19% last Q1.

All 3 geos grew significantly year-over-year with APAC nearly doubling its contribution and EMEA posting a 74% increase. Importantly we continue to leverage our expanding partner ecosystem to reach customers and regions where we don't have feet on the ground.

In the first quarter about 35% of our business worldwide involved our partners.

On the direct side we continue to increase our fuel coverage and we entered the quarter with 174 quota carriers up 11 net from Q4 and representing a growth rate consistent with our historic first quarter trends. Outside quota carriers continue to represent about two-thirds of our direct team and inside one-third. Overall about 50% of our direct quota carrying team has reached full productivity as of the end of Q1.

To reiterate we continue the direct investments into both our own global field coverage as well as our partner ecosystem and I am pleased with how we are performing in these areas.

In terms of bookings composition our mix between term and perpetual license transactions was consistent with our expectations with term representing 16% of Q1 license bookings. As I have described we don't differentiate by license type when compensating our field teams rather we look to enable customers to use our software based on their own buying preferences.

As such we expect term license arrangements to continue to fluctuate between 10% and 20% of any quarter's license business. I have described on our last few calls that we also booked what I call enterprise adoption arrangements which can contain provisions which require them to be deferred and treated ratably. These types of transactions are typically larger orders in the seven-figure category, and are designed to enable broad adoption of Splunk across an enterprise. We typically see these types of transactions in the second half of the year just as we did in Q4. The level of EAAs recorded in Q1 is consistent with our expectations. Just to reemphasize, we expect to see continued variability not only in the mix of term and perpetual licenses, but also the number and timing of enterprise adoption arrangements in the future.

Our maintenance renewal rate increased to 93% in Q1, our fourth consecutive quarter where renewals exceeded 90%. As I've mentioned, we've built a dedicated renewals team, which now totals 11 of the 174 total quota carriers, double the number from last year.

Customers also continued to leverage our professional services and educational offerings, which together represented 6% of revenue in Q1, in line with our past levels of 5% to 10%. Recall, the following non-GAAP operating metrics exclude non-cash stock-based compensation as well as employer payroll tax expenses related to employee stock plans. Q1 overall non-GAAP gross margin was 90%, in line with prior quarters and gross margin on services, which include support, maintenance, professional services and education was about 70% also consistent with prior periods.

Non-GAAP operating loss was $5.3 million for the quarter or a negative 9.2% of total revenue. Non-GAAP net loss for the quarter was $5.7 million, or $0.06 per share using a weighted average share count of approximately 102 million shares. DSOs were within our expectations at 59 days for Q1 while cash flow from operations was $19.9 million and free cash flow was $18.6 million. We ended the quarter with over $330 million in cash. We'll continue to run the business on a positive operating cash flow basis and expect quarterly cash flows to fluctuate consistent with prior years with Q1 and Q4 being our largest operating cash flow periods.

Also, we expect to increase our capital expenditures over the next 6 to 12 months as we expand our global facilities to support our increasing employee base, as well as expand our cloud infrastructure, consistent with our growing cloud customer base.

We expect Q2 total revenue to be between $61 million and $63 million with license revenue contributing about two-thirds of the total. Going into this year, we had expected between $200 million and $260 million and $270 million in total fiscal 2014 revenue. With our Q1 performance and Q2 outlook, we now expect full year revenue will be between $266 million and $274 million.

Consistent with our prior guidance and investment philosophy, we will also continue to invest in field operations and product development at a rapid controlled pace. When combined with our revenue plan, we expect Q2 non-GAAP operating margin to range between a negative 4% and negative 6% accreting gradually in Q3, then turning positive in Q4. We still expect full year non-GAAP operating margin to be roughly breakeven.

In addition to the continued field investment I have mentioned, we're also continuing to invest in our products. Our customers' success to-date has been the result of great products and we're committed to extending and expanding the way our customers use Splunk, as well as providing them the preferred delivery methods.

As Godfrey mentioned, we now have more than 200 customers using our Storm product, and we expect to have a greater number of use cases in the future where customers access Splunk in the cloud. We'll update you more as that part of the business continues gaining momentum.

Overall I'm pleased with our Q1 results, appreciate all your time and I'll welcome your questions.

Transcript Call Date 05/30/2013

Operator: Kash Rangan, Bank of America Merrill Lynch.

Kash Rangan - Bank of America Merrill Lynch: Good start to the fiscal year and good results considering what has happened in software the last few months. One observation that I had for you Godfrey was I think on the earlier conference call you said that, you intend to finish this year at a 33% growth in sales capacity. When I look at this quarter, you've grown quota carrying sales capacity about at 70% clip are you revaluating your earlier decision to slowdown sales siding and is it possible that you might actually move your sales siding targets up in lieu of how you accomplished in this quarter. You had also talked with what you are doing differently this fiscal year from a go-to-market standpoint increasing specialization of the sales force and how you are going to targeting your opportunities that will be great?

Godfrey R. Sullivan - Chairman and CEO: We probably don't expect to change our projected outlook in terms of hiring it's always better to front end load the steel capacity as opposed to backend load the one thing we've learned is that it takes full six to 12 months and sometimes longer just to ramp. As Dave said about half of our sales force we consider ramped at this point in time. So a big challenge for us right now is just training and ramping and getting everyone up to speed, so I think that's probably the biggest issue. We are investing more heavily in the field this year in specialized resources, so it's a very timely question. We have created a security team in the field that has both – we have a VP in the marketing organization who is our VP of security markets plus our CSO as well as a dedicated set of security leaders in the field, because that portion of the business requires specialized expertise. I can see us mimicking that model in other market segments as times goes on. It's a requirement to map up to the domain expertise in those markets.

Operator: John DiFucci, JPMorgan.

John DiFucci - JPMorgan: Dave, you said that it's a difficult macro environment and certainly it was, we saw a lot of companies put up numbers that were reflected there and Q1 definitely was tough for everybody, but your quarter here looks good. But there's one thing here, the billings were a bit below what we were looking for? I guess was there any areas both Godfrey and David that were more challenging in the quarter than you thought they might have been? And I guess Dave, was there any foreign exchange impact on deferred revenue, because deferred was a little lower than what we thought it would be?

David F. Conte - CFO: John, in terms of geo-pressure, and you are right and I mentioned in my prepared statements that software sector overall, I think, had a challenging period and not so much of us, but we were pretty consistently strong across the three major geos. Now, if there is one area where you know the predictability and the uncertainty is certainly still present, it's in the public sector and particular the federal government. But overall, you know we saw strength across the board.

John DiFucci - JPMorgan: Was there any foreign exchange impact on deferred revenue?

Godfrey R. Sullivan - Chairman and CEO: Our foreign exchange amounts I think for the quarter were less than – yeah, it's less than 100,000 which you can see in the other income/expenses category. That combined with our international tax, you can see it below the operating margin line. So, it was pretty small. Deferred revenue for the quarter grew from Q4 sequentially, even though we obviously came in on top of our prior guidance.

John DiFucci - JPMorgan: And if I could, just one more Dave you mentioned maintenance renewal rates 93%, that's great to hear, and you mentioned 11 people on your renewals team. I guess are the other field reps still getting paid on renewals? And commissions on the renewals or have you transferred this entirely to the renewals team?

Godfrey R. Sullivan - Chairman and CEO: I would say it is. The majority now transferred, John. There are pockets in across the globe where we don't have dedicated resources that we still ask our direct field team to carry the burden for renewals. But a majority of the field is now segregated between do business, license and first year maintenance versus maintenance renewals. John by the way, I knew you'd like that.

John DiFucci - JPMorgan: Great to hear, it's nice to see some results especially relative to what everybody else has done. So thanks a lot guys?

Godfrey R. Sullivan - Chairman and CEO: Thanks.

Operator: Daniel Ives, FBR Capital Markets.

Daniel Ives - FBR Capital Markets: My question is can you just talk about certainly anecdotally changes that you are seeing with cost figures in terms of your solution and just more attach rates that you are seeing throughout our verticals?

Godfrey R. Sullivan - Chairman and CEO: Probably the single callout for Q1 was this kind of sea change in the security markets. So we had a strong quarter in the security market I have to call that market a solution. When customers are attempting to improve their security posture or defend themselves against advanced persistent threats. They fully understand now that the old fashion SIMs that were kind of rules engine built on an RDB are simply not sufficient against – defending against these ongoing attacks. I had a CIO in our office a few weeks back, $35 billion company describing to me that basically what you read in the report it was scarier to hear what's really going on. and they need and have a full time team of half of dozen people that are sitting there and watching full time attacks on their systems and they are using Splunk to spot those anomalies these are very clever people and so we are just seeing that security market is really moving off of sort of yesterday's model of a rules engine to a model where you have to have the ability to do sophisticated statistics on large data sets. And so when you see us moved into the leader's quadrant for Gartner, you'll see us getting product awards by SC Magazine, you see Gartner describing us as the fastest growing security vendor, et cetera. It's the same set of products we've had in the market for several years. It's Splunk Enterprise plus our Security App. But the market is coming to us because of the need to be able to do free form analysis against large data sets. So, that's just one example. You see, I could give you example-after-example sort of market-by-market, but I think the Security one is a good call out just because it's been such a noticeable change and you see it in the conferences and you see it in the press, you see it in the customers.

Daniel Ives - FBR Capital Markets: That's very insightful. Great job in a tough environment thanks.

David F. Conte - CFO: Thanks, Daniel and appreciate your work on the initiation piece as well.

Operator: Brian White, Topeka.

Brian White - Topeka Capital Markets: Could you talk a little bit about DB Connect? You announced it, I guess back in or released it back in March. Maybe walk through the reception so far and what are you trying to accomplish here in the database market and is it opening up new growth opportunities for Splunk?

Godfrey R. Sullivan - Chairman and CEO: I had a paragraph in the script and I took it out because my script was getting too long. But now you just gave me the chance to talk about it. So, we run GA with a DB Connect App during Q1. In a very short period of time it has had more than 5,000 downloads of the Splunk base. Our customers love it and they are now sort of using it to combine streaming event data with data that's held in a warehouse or a relational table somewhere or an Excel spreadsheet for that matter. So you see customers doing things like combining their – matching up IP address and host IDs that are coming in to their website from who is downloading their content or whitepapers for example and map that over to their sales force environment and know which customers are their top customers who are visiting their site. We see customers looking at everybody with online web customer facing websites. Anybody who is selling a high-transaction volume on a dotcom environment, you have to be able to take those logs and correlate them against the relational database or a warehouse to know which customers are they, what products are they looking at, multiplier product times of prices and get real-time revenue on your website. It's all in the log, but the ability of DB Connect to connect that real-time streaming activity back to customers, products, skews and prices is just a compelling event. So, it's sort of gone from GA to the most popular download just in a matter of 30 days.

Operator: Brent Thill, UBS.

Brent Thill - UBS: Godfrey, even the software companies that have done well in Q1 have said it's taken about 10% more perspiration to get these deals done, and clearly your results have been really good relative to what we've seen as highlighted by some of my colleagues earlier. But I just carry such – if you feel like kind of when you dig down one layer deeper, is the environment changed at all? Or are you just in such a unique position with the product in the pipeline that you are kind of cutting through this headwind, if you will?

Godfrey R. Sullivan - Chairman and CEO: I mean it's nice to have such a highly differentiated product like Splunk. You feel great for it. But you know the downside of that is that we have different competitors in every market segment. So, the guys we went into with that management are different than the ops guys, different than the security guys, different from the web intelligence guys on and on. And so, we see plenty of competition in the marketplace and I would agree with the other execs who have said there was 10% more perspiration involved in bringing the business across the line. It's just, you have to go fight for the budget, and any time budgets are tight and the macroeconomic environment is what it is CapEx gets constrained, OpEx gets constrained and you are just fighting against everybody not because you have necessarily a competitive product because you are fighting for scarce budget dollars. So no I would acknowledge that there was more perspiration involved and I think brother (indiscernible) would agree with that.

Brent Thill - UBS: Dave just a quick follow-up on the quota carrying growth last year was over 70 did you update the kind of the growth rates you are thinking about for '14 and also just the big deal flow. You had a big deal in Q4 did you see any of those type of contracts in Q1?

David F. Conte - CFO: We did not have any $20 million transactions in the first quarter, like we did in Q4 we did have 132 transactions greater than $100,000 which is our cut off point for the definition of large so we are definitely seeing more volume and larger transactions and I think its commensurate with Godfrey's earlier point that what's different from a year ago is the level that we are having discussions that at our customers and prospects has really elevated to the CE level and VP level and as you would expect they have a broader set of use cases that they look to deploy our product around. In terms of what we are expecting in terms of sales force expansion and capacity we haven't specifically quantified quota carriers for fiscal '14. But you can expect that our headcount growth will be consistent in terms of absolute numbers with the prior year. And will follow the line items of the P&L. So you'll see a 50% to 60% of our revenue invested in sales and marketing. The headcount will fall in that regard.

Operator: Raimo Lenschow, Barclays Capital.

Raimo Lenschow - Barclays Capital: Two quick questions and congrats on a great start to the year. The first one is going back to Brent's question, I'm just off the Palo Alto call and we have a big debate at the moment, did April got worse than March and maybe you can – I know you didn't see it and you still executed well that. Maybe any comments there in terms of how the linearity in the quarter played out? And then a question I asked a couple of quarters ago, and that's kind of the dynamic between larger clients and deciding about ELA versus volume pricing, and any update on that one? Thank you.

Godfrey R. Sullivan - Chairman and CEO: Sure. Well, since our fiscal period is April 30 and not March 30, so there's – I know Palo Alto is on the same as us, but Q1 is always more backend loaded than other quarters, because sales compensation plans for enterprise software or what they are, everybody drags every possible order across the line at the end of Q4. And if there is ever a time in the software business, where the covers are there and you have to rebuild the pipeline, it is Q1. And so it's not all that surprising that you see some softness from companies this quarter. So, that part of it – I don't know, it's just Q1 is Q1 in software. What was the second part of the question?

Raimo Lenschow - Barclays Capital: ELAs and volume pricing.

Godfrey R. Sullivan - Chairman and CEO: So ELAs and volume pricing. So, even though Q1 is Q1, we did in fact have some seven-figure transactions that were enterprise agreements and get treated deferred over time type transaction. So, yeah, there is still momentum in the business at the high end and we're making really good progress in terms of the conversations with customers around arrangement with Splunk to give them lots of capacity to try new things and deploy in lots of new places. So, I am very encouraged by the pace of those conversations and the level at which we're having it.

Operator: Brendan Barnicle, Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities: Dave, I wanted to follow-up on a couple of metrics. I think you gave us in the Q&A on the last call. When was percentage revenue from existing customers and then of that, that breakdown from expansions and upgrades dandy then also last quarter you gave us this metric around original purchase size over three year period. You said that's obviously four times. So, those – are those trends all remaining the same?

David F. Conte - CFO: So the trend around how large the purchase size is or how many dollars they bring or a customer represent after their initial purchase, I'd have to refer back to our prior commentary. We haven't updated that analysis at that time when we're going through the Q&A. Our analysis show that customers spend somewhere between 4.5 and 5 times the amount with Splunk in the three years following their initial purchase. So, that, again, we'll update that probably on annual basis because we like looking at the same customer base, the same sample size to see what those trends are. As it relates to upsell versus new versus upgrade and expansion, in this quarter I'd mentioned our two largest transactions were new customers. So, our new customer percentage actually was higher than it prior quarter. That said, upsell still represent over 50% of the business for Q1. That mix is still probably two-third expansion in terms of new use cases and one-third in terms of upgrade of capacity.

Brendan Barnicle - Pacific Crest Securities: Then just one for Godfrey, great momentum you guys are having on the upside now that you are over 400 are you seeing more acceleration I mean it may play out some of that earlier commentary you had around kind of the increasing adoption you are seeing in the security vertical are you just seeing sort of a standardization where it's at an inflection point or is this sort of more of the same?

Godfrey R. Sullivan - Chairman and CEO: Well I didn't see anything that was so different in Q1 that its worth a callout to your question with a specific answer. But I would like to just touch on this whole notion of absent content up on spot base. The one of our partners that I mentioned Sideview this is one of the first examples of where one of our partners is actually selling an app on Splunk base. So I really view this whole notion of content on top of the Splunk platform as a place that will ultimately drive an enormous amount of traction and further enterprise adoption. That to me I really exciting they are actually using the same kind of a sort of free trial that we use with our download where you can try the product for an x amount of time and then buy it for I think it's $2,500 for a two year subscription. And it's a good example where we want to encourage an ecosystem to build content on top of the Splunk engine. And we want them to be financial successful off of it. So just like we have couple of pieces of content that we charge for which is out enterprise, security and PCI solutions. Over time as things grow up from sort of a template to a full scale app with product lifecycle management and documentation and support and all of that stuff. We'll see additional pieces of content that move from free into paid. So I think this sort of notion of more and more content and more valuable content and more fully developed and baked content is going to help us become a standard across enterprises as they realize that the indexing engine itself is a beta platform and you can get enormous value in multiple department. So I'll try to give more color on that on the next call. I don't have a specific story from Q1 about that other than just sort of general momentum.

Operator: Phil Winslow, Credit Suisse.

Sitikantha Panigrahi - Credit Suisse: This is Siti Panigrahi for Phil Winslow. Congrats on a great quarter. Definitely it's impressive to see so many diverse use cases for Splunk. I was just wondering if you could talk about competitive landscape and also dig a little bit more into the cross-sell opportunity in the U.S. as well as your strategy to expand into international markets?

Godfrey R. Sullivan - Chairman and CEO: Well, competitive landscape discussion can be quite lengthy, because we have competitors in so many segments. So I'll try to oversimplify that and say, in the security landscape, in security market, the landscape did not change much. Most of the places where we complement is when customers put us in (NXT) 2.0 SIM. There are other places where they are actually using Splunk to replace the SIM or they are buying Splunk and they were buying a SIM. So that's probably the place where the most noticeable shift is underway. In the whole area of infrastructure, it was business as usual. The competitors were also saying there was nothing much that changed there, not too much in the app management space. If there was a fun call out, it was when we did our – for those of you who had a chance to attend our SplunkLive! In Washington D.C. at the Reagan Center where it was packed house 750 people, you also saw for the first time we had about 10 partner exhibitors there showing the solution that they are building on top of Splunk and most of those were in the app management or infrastructure use cases. So I actually think we're kind of gaining some traction there in terms of building an ecosystem around us in that category. And then the other place where it was just the most noticeable change for me personally in the quarter was the number of conversations that I had, a lot of it was in the script. Number of conversations I had in the quarter with executives about non-IT use cases where they combine non-IT data that we already have in Splunk with device generated or mobile generated data that has to do with our customer analytics or business analytics. To me, that's the one that's just really a change from a year ago, and that's not so much competitive dynamic, as it is a new set of use cases coming up. They might have used, in the past that might have been a – it sounded an awfully lot like the old BI conversations, while you said in Iberian days where they are really asking questions around changes in customer behavior, product velocity all that sort of thing. But now, the product velocity and customer behavior is coming from mobile devices. It's coming from websites, it's coming from streaming events information and so they are asking what you think, what sound like BI questions, but it's actually operational analytics off of machine data?

Operator: Peter Goldmacher, Cowen & Co.

Peter Goldmacher - Cowen & Co.: Godfrey, I want to talk about your last comment, because this is the first call you got, you posted where I think the majority of your use cases will be on the traditional IT operations use case. It seems to me as you move out beyond IT operations, your total addressable market expands pretty dramatically and that presents its own unique challenges as perhaps you need to reorient the sales force to go after vertical opportunities and go after specific industries. So, what I'd like to hear a couple of things one is of your non-traditional IT used cases are they coming from customers that already exist using your product and IT operations they gain familiarity and then they see opportunities beyond IT or is it a whole new category of customer that their first time use is something non-IT. And as you build out your three year plan how do you intend to approach that opportunity. And my bonus question is how are you going to think about the business on-premise versus on-demand as you grow into the future.

Godfrey R. Sullivan - Chairman and CEO: I am going to probably take a subset swing at that with an example and see how many of those questions I can click off with an example. So when I was in Europe I met with probably in the span of two week travel period, I probably met with four or five major telco customers and the conversations sounded like; Splunk we love you guys for IT operations, we got good success with you, we have you in three or four different departments. We are up to 1 terabyte or 2 terabyte or some number like that. But we now see that we need to use you on a larger scale because we really need to analyze all the mobile data in order to understand customer analytics changes over time all that stuff. By the way because these data volumes are so large we have been throwing a lot of that stuff in Hadoop and the only problem is we can't get it back very easily and so I actually had one large telco on the continent called Hadoop they are data grave that's not meant to be a belittling remark but rather they understand that it's kind of like cold data that's where you send data to rest and now they know they need analytical tool on top of it, so that they can get real-time analytics from both the real-time streaming data off of their systems as well as data that's at rest or somewhere staged. And so they were asking us a very different set of question. It wasn't a conversation around how does Splunk compare to some competitor in IT ops? The question was Splunk, how do you see yourselves as a core part of our enterprise software architecture and what role do you play compared to the visualization guys, the open-source back storage guys, the OLTP transaction engine, how and where do you fit in that world? Now, to your question now about all these different use cases is when you get out into that world of industrial data, more and more, that's the question they have. That sort of, where does Splunk fit in my enterprise software architecture because I have lots of other tools that I have applied against these use cases often without very much success. They have the same headaches that the BI vendors used to have in terms of aggregating lots of data and it takes years before you ever get any analytics out of it. So, I see this is a very interesting time for us as we move from being an IT search vendor to operational intelligence in the category we've been trying to define and create. It's actually starting to emerge more and more people writing about it, we're being invited into C level conversations and the likes. So, it poses challenges for us, because the use cases tend to be very different, just like the operational side of BI has lot of diversity to it. What we have to do there is to do a really good job of explaining where is Splunk a fit and where is it not a fit, and I think we're getting better at that. We're seeing it because of all these diverse use cases. And then, you can apply that to – how do they want it delivered. The delivery is in these cases a secondary or tertiary concern. They are more concerned about solving the problem, and so that's that. So, let me pause there and say, that I guess some of it or all of it or is there anything you want further discussion around?

Peter Goldmacher - Cowen & Co.: That's a great answer, a really good story. One of the things I think about is the utility, part of the value of what you guys were able to do with Storm is, just create an enormous body of data. And so there is typically a challenge for a company going from a traditional to profession on-premise license to a software-as-a-service model with subscription, but the benefits – there is real upside because of the data you get to work with. And what I was trying to get a sense of is, how are you thinking about that transition and what I heard you say was, right now we're letting our customers decide and there is no Splunk-preferred method and I suppose that works for now but am I right to suspect that at some point down the line, you are going to get a little more disciplined internally on premise versus software-as-a-service model?

Godfrey R. Sullivan - Chairman and CEO: Okay. So, let me take on sort of (cloud in) as a specific topic as opposed to sort of operational analytic and how that and all the different ways that gets done. So, I had to give sort of an observation on that, it would be that the questions customers are – when a customer asks us to deliver them a service, they rarely say, Splunk, I'd like for you just to do generic logging for me in the cloud. That's really how the conversation goes. They say, something that sounds much more like solution, and especially when you get to a CIO level they say I'd like to have a security service where you are able to take data and the learnings from it and help me have a better security posture because of your learnings, what you get from looking across large data sets and working with lots of customers. And so that's a good example where I really believe that three years from now we'll be talking about the cloud as a series of solutions delivered as opposed to, we spend a lot of time today talking about Splunk as an analytical engine and the cloud we'll be talking a lot more about solutions delivered. So for example we have 20 MSPs worldwide right now that are using Splunk as the engine to deliver managed services for security including having signed up NTT in Japan in Q1. So we will have there are multiple ways to use a logging engine an analytical engine like Splunk to deliver a SaaS based a service based if you will solution for customers. I've had customer say the same thing about PCI about customer analytics about this, but they never say, oh, I just like to move my logging to the cloud what they say is I would like to get a solution to this problem and can you deliver to the service. So the hard answer to your question is we have to over the next few years as we evolve Storm and we evolve its architecture and we evolve it's content and whatever else it's to determine which solutions do you want to deliver to customers so that you can do the same thing a thousand times as opposed to one thing a thousand things one time you want to do, if you got people motion if you are going to offer a cloud service and I think that will look more like a solution and/or series of solutions delivered off of somewhat more predictable data sets. Yes, when a Barclays presents in London and says we are using multiple terabytes of Splunk data per day and we are feeding 430 data sources into it and we're doing enterprise level et cetera. That's a pretty hard model to replicate in the cloud. So that's why I think you'll see smaller numbers of data sets more focused types of feedback and reports back off of it. So let me stop there.

Peter Goldmacher - Cowen & Co.: So, more and more of an application approach through Storm and more of an infrastructure approach through the on-premise stuff?

Godfrey R. Sullivan - Chairman and CEO: There you go.

David F. Conte - CFO: I wish I said that upfront, it's saving a lot of time.

Operator: Ed Maguire, CLSA.

Ed Maguire - CLSA: I'd like to just backup. Godfrey, last quarter you had thrown the gauntlet down and said that on the security segment you guys were – you were starting to really take a lot of business away from point solutions. And I was wondering if you were seeing a similar trend play out in your other IT, either the application performance management or some of the web analytics side?

Godfrey R. Sullivan - Chairman and CEO: I guess it has played out to a degree in Q1 on the security side as you see the number of awards we've gotten and market share reports and all that. So I think we were justified in our commentary on that one. On the other segments, I don't have a story or a proof point or a claim to make that there are some huge shift going on other than the shift that's been going on really for the last five years, which is the move from point solutions. I've got my network monitoring tool, I've got my database monitoring tool, I've got all those point tools, but I still can't find where the breakdown was or where the transaction failed. So, I would say it's but as usual at management and IT operations where customers are finding that being able to put all the data in one place, that's the place being Splunk Enterprise is the new way. It's still certainly working in our favor.

Ed Maguire - CLSA: Just one follow-up which is that, if I look at the targets that you laid out for this year, I mean you've got hiring – it seems to be running maybe ahead of pace. What if any constraints or gating factors do you see – continuing to scale the business whether it's just operational or do the condition of the macro markets or just the pace of the ability of your customers and partners to sort of digest and implement the software?

Godfrey R. Sullivan - Chairman and CEO: It's the latter. It just takes time. You know, it's the old mystical (nine months) in software development. You can apply nine people to the baby, but that doesn't mean you will have it in one month. So, it's just a matter of – it takes time to hire people onboard them, get them productive, have them all working in harmony, and paying close attention to customer requirements and being responsive. You have to be agile, but you have to stay focused. So, I think's it's the hardest part of our business when you are growing at our rate is trying to onboard both people, partners, software developers and so forth, and keep moving at pace.

Operator: Karl Keirstead, BMO Capital Markets.

Karl Keirstead - BMO Capital Markets: David, I'm just thing through how this mix shift enterprise adoption armaments as you call them affect the financials. One obviously way is that your long-term DR got an uptick in 4Q, but I am just thinking of other stuff for instance, is there a portion maybe you could remind us of these arrangements that are not yet billed would create an unbilled backlog and if so if you could help size it and if there is any other P&L or cash flow impacts of these arrangements that are worth calling out? Thank you.

David F. Conte - CFO: On very infrequent basis we might have a contract that has an extended billing cycle where we might bill annually or even quarterly, but those are very infrequent and de minimis overall. Obviously when you look at the geography between deferred revenue and revenue you'll see it can fluctuate any quarter depending on the types of term mix that we'll see as well as the impact of these enterprise adoption arrangements. So in terms of any other elements on the balance sheet or the income statement from those, it's really that geographic mix and there is again very little that isn't billed at this point.

Operator: Keith Weiss, Morgan Stanley.

Shawn Hazewood - Morgan Stanley: This is (Shawn Hazewood) filling in for Keith. So I wanted go back Godfrey and revisit kind of the topic of monetizing apps. And it sounds like you've introduced a number of apps this past quarter. And you are kind of charging for some of them. How do you kind of see that going forward so for instance how do you decide when to start charging and how do you monitor usage for apps that you haven't charged for yet?

Godfrey R. Sullivan - Chairman and CEO: We actually internally, externally we over use the term apps because its easiest to describe content in that way. Internally we actually have three tiers we have apps, real app. We have templates and we have add-ons, which are almost like connectors or do something much more specific. We don't generally think about charging for templates now or probably ever, because they are pretty thinware. It's like a macro for Excel where you get a template that you would drop on top of Excel and it helps you do income statements, but you wouldn't think about buying. It's very helpful, but probably not chargeable. When templates go to full product lifecycle management, where we have MRDs and PRDs and dev teams working on it, and we probably put the workflow into it. In fact we have put workflow into it, and has very specific around its functionality in order to meet some customer requirements, that's when it goes from a template to an app and that's when we start charging for it, because it's something that we have to maintain and continue develop over time. So Enterprise Security and PCI are good examples of things that started as templates, works into apps over time and now they are significant in terms of their functionality and workflow and we charge for them. I can see some of our templates that are currently free, ultimately going to paid as they grow and mature. So, I could see a day when, for example, our Microsoft Exchange, our Active Directory, the Windows stuff like – pull all the Windows stuff into one environment, put a user interface on it, put workflow notifications and put in enough functionality into it where a customer feels like paying for it is a good value. I could see that kind of evolution. I could see these things in IT operations where you are combining multiple templates and having a more consolidated view. So we have work like that. It's always under consideration. I'm not ready to announce anything and right now we're just trying to make sure we understand customer's needs and keep moving towards that. But yeah, you will see – I wouldn't be surprised if next year that we have more content that has a price tag on it.

Shawn Hazewood - Morgan Stanley: Then I have a quick second question. In terms of the sale force ramping, you said, you must know about 50% ramp. It takes about 6 to 12 months for the average sales person to ramp up. How does that look internationally? So, is that breakdown, you know as high and also is it still kind of the same 6 to 12 months timeline?

Godfrey R. Sullivan - Chairman and CEO: I spend a lot of time overseas and I don't see a significant difference between domestic and international in terms of ramping. If anything, the domestic guys have a little bit of advantage, because they have more help nearby, whereas the international guys were often times lonely and far some somewhere. So, I would say that the domestic guys have a little bit of an advantage on them.

Operator: Kirk Materne, Evercore Partners.

Kirk Materne - Evercore Partners: As you guys get into more complex discussions with partners looking to build sort of new and different apps on top of your platform, I guess how do you think about sort of building up professional services organization or partnering with more smaller SIs or bigger SIs? Even make sure that there is the technology I guess capabilities in the market to allow them to really experiment with your platforms that's so open ended in so many ways. I guess what sort of your thought process on that, particularly interested in sort of your thought about bring on more small system integrators into the ecosystem.

Godfrey R. Sullivan - Chairman and CEO: I forget what we have right now. I think worldwide we might have 15 people in professional service it is a small theme, mostly formed up to help our partners, ramp, as well as take care of core customers and just one professional services from us and they want our skin in the game. I really look at our partners today and it's kind of tiering model it was very difficult for us to build an integrator ecosystem in the early days, because Splunk is so easy to deploy and the time to deploy is so short that there hasn't been much of an economic model for partners. Most of our customers that are in the 1 to 28 even up to 50 gigs a day size. They deploy in 24 to 48 hours. So there is no business proposition for a partner to go in there and self-service this. Its only when you get to a larger installation with the customer where Splunk has become the data platform and now we are talking about our data architecture and efficiency and servers and storage and fail over and all that stuff. All of a sudden the business is complex enough that the integrator start to get interested. So now we have multiple integrators who have approached us, we've approached them and we are sort of working on accounts together and I think it's looking pretty good. As Dave said we had something like 35% of our business go through partners in Q1 so it was a healthy piece of business for them and for us. So I think it's as we expand from really easy to use quick to deploy departmental tool to large scale enterprise vendor that really offers them a consultation opportunity that they didn't have a few years ago. So I would just say stay tuned on that I'll try to give you a little bit more maybe in the next call we'll give a little bit more color around some of our partner activities. Making really good progress there, if the big standardization actions in customers that really drive that opportunity for them.

Operator: James Gilman, Drexel Hamilton.

James Gilman - Drexel Hamilton: Godfrey, I just want to – you mentioned earlier in the call your discussions with your customers are going to how we use in a much larger scale. And I was wondering, has the discussion around maybe pricing changed a little bit how you might price the solution and then I have a follow-up question.

Godfrey R. Sullivan - Chairman and CEO: When we have those ELA type discussions, it's often about what – for us still it's about data volumes, because you can roughly approximate a 50 gig front license in a large installation to a quad-core server and say okay, that's the level of performance you get in order to do X, Y and Z and then when you put ten of them together you get up to enough terabytes and you are talking about a significant amount of hardware for indexing, search ads, distributed storage all that sort of things. So it's a deployment. So, the customers who what to have that conversation actually don't mind still using our data volume, our indexing volume as a proxy for how big is. So, no, it hasn't really been – as long as the price per gig is reasonable and the way they can pay for it is reasonable and the way our deployment model is done is reasonable we are pretty happy. So, now I haven't – it's quite possible we could look at other models, but for right now the conversation still reverts back to indexing capacity.

James Gilman - Drexel Hamilton: The last one here is, I don't know if I missed this when we were talking about metrics. Last quarter, I think you had if I had my data correctly, 11 deals that were above $1 million. Did you give out the number? I know you mentioned several. Could you quantify that?

David F. Conte - CFO: We did give out 11 in terms of seven figure transactions in the fourth quarter, 25 for the full fiscal year last year. But that's the metric we'll likely just give on an annual basis.

Operator: Derrick Wood, SIG.

Rakesh Kumar - SIG: This (Rakesh Kumar) for Derrick. My question is for Godfrey. I just wanted to follow-up on the BNY Mellon example with Microsoft Exchange app. Do you see that as a trend where apps lead the conversation for new business?

Godfrey R. Sullivan - Chairman and CEO: You broke up there. Can you say – well, I heard Bank of New York Mellow and Microsoft Exchange app and then you blanked out. Can you say the last part again?

Rakesh Kumar - SIG: Do you see that as a trend where apps lead the conversation for new business?

Godfrey R. Sullivan - Chairman and CEO: Yes, absolutely. You have to have an entry point to go into a customer. You are always looking for a way to identify the technology that you have with a pain that your customer has because that pain is likely to be where they have allocated budgets or where they have allocated organizational attention. So, to just go in and say hi, I have a logging engine is not sufficient to generate the kind of attention you want. So, big part of the attraction of these apps is we're able to go right into. They are like a sharp entry point. You can go right into the department where they are managing the F5 load balancers or the Palo Alto Networks for the Microsoft Exchange environment, the guy who is running active directory. These guys have specific pain and the fact that you can show them almost immediately how Splunk can solve the problems they have, becomes a real accelerator. And it's also a real accelerator on deployment, because Splunk deploys rapidly now, but with an app on top of it you further accelerate the time to live deployment. So, yes, the apps are a significant advantage.

Operator: Thank you. That does conclude our time for questions. I'd like to turn the program back over to Ken Tinsley for any additional or closing remarks.

Ken Tinsley - IR: That's great. Thanks, Huey for all your help today we appreciate it and thanks, everybody for your participation. Have a good evening.

Operator: Thank you, sir. Again ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may now disconnect.