Splunk Inc. (NASDAQ:SPLK) Q2 2023 Results Conference Call August 24, 2022 4:30 PM ET Company Participants Ken Tinsley - Head of Investor Relations Gary Steele - Interim Chief Executive Officer Jason Child - Chief Financial Officer Conference Call Participants John DiFucci - Guggenheim Securities Raimo Lenschow - Barclays Brent Thill - Jefferies Phil Winslow - Credit Suisse Matt Hedberg - RBC Michael Turits - KeyBanc Mike Cikos - Needham Brad Sills - Bank of America Steve Koenig - SMBC Nikko America Gray Pow ...

Splunk Inc. (NASDAQ:SPLK) Q1 2023 Earnings Conference Call May 25, 2022 4:30 PM ET Company Participants Ken Tinsley - Corporate Treasurer & Vice President of Investor Relations Gary Steele - Interim Chief Executive Officer Jason Child - Chief Financial Officer Conference Call Participants Kash Rangan - Goldman Sachs Brent Thill - Jefferies Brad Zelnick - Deutsche Bank Raimo Lenschow - Barclays Phil Winslow - Credit Suisse Sanjit Singh - Morgan Stanley Chirag Ved - Evercore ISI Steve Koenig - SMBC Nikko ...

Cloud Services and Revenue Metrics - Cloud Annual Recurring Revenue (Cloud ARR) and Total Annual Recurring Revenue (Total ARR) are key metrics used to monitor the growth of the company's recurring business, with Cloud ARR representing the annualized revenue run-rate of active cloud services contracts and Total ARR including cloud services, term license, and maintenance contracts[134] - The company's revenue mix has shifted from license sales to cloud services, with an increasing percentage of sales being recognized ratably, impacting operating margins and revenue timing[127] - Cloud services revenues grew to $322.9 million, representing 47.9% of total revenues, up from $193.9 million (38.6%) in the same period last year[157] - The company's cloud services annual subscription fees are typically based on the volume of data indexed per day, purchased infrastructure, data storage, and bandwidth, with an increasing share of business based on workload pricing[125] Financial Performance and Cash Flow - Free cash flow for the three months ended April 30, 2022, was $137.7 million, compared to $66.7 million for the same period in 2021[138] - Total revenues increased by $172.0 million, or 34.3%, primarily driven by a $129.0 million (66.5%) increase in cloud services revenues and a $42.5 million (29.7%) increase in license revenues[166] - Net loss improved to $304.3 million (45.1% of revenues) from $471.0 million (93.8% of revenues) in the same period last year[157] - Net cash provided by operating activities increased to $143.3 million for the three months ended April 30, 2022, compared to $70.7 million in the prior year[197] - Net cash used in investing activities was $692.6 million for the three months ended April 30, 2022, primarily due to marketable securities purchases of $681.7 million[198] - Net cash used in financing activities was $65.4 million for the three months ended April 30, 2022, mainly due to taxes paid related to equity awards[199] Remaining Performance Obligations and Deferred Revenue - Total Remaining Performance Obligations (RPO) Bookings for the three months ended April 30, 2022, were $491.5 million, compared to $372.1 million for the same period in 2021[141] - The company expects seasonally higher bookings and billings in the fiscal fourth quarter, with more revenue being recognized ratably, impacting remaining performance obligations and deferred revenue[143] Customer and Market Impact - The company's offerings have been deployed by over 90 of the Fortune 100 companies as of April 30, 2022[143] - The ongoing COVID-19 pandemic has created significant global economic uncertainty, impacting the company's business, customers, partners, and vendors, with potential future impacts on results of operations and cash flows[129] Investments and Capital Allocation - The company continues to invest in product development, sales and marketing, and acquisitions to contribute to long-term growth objectives[128] - The company plans to continue focusing capital expenditures for the remainder of fiscal 2023 to support growth, including acquisitions and product development[192] - In fiscal 2022, the company repurchased 6.9 million shares of common stock for $1.0 billion at an average price of $145.23 per share[193] - The company issued $1.0 billion in 0.75% Convertible Senior Notes due 2026, with net proceeds of $981.7 million after issuance costs[194] Cost and Expense Analysis - Total cost of revenues increased by $30.3 million (17.6%), with cloud services cost of revenues rising by $31.4 million (35.7%) due to higher third-party hosting fees and increased headcount[171] - Research and development expenses increased by $8.5 million (3.4%), primarily due to a $12.1 million rise in salaries and benefits, including $7.8 million in stock-based compensation[184] - Sales and marketing expenses grew by $39.1 million (11.0%), driven by a $32.5 million increase in salaries and benefits, including $17.6 million in stock-based compensation[185] - General and administrative expenses decreased by $49.5 million (30.5%), mainly due to a $54.9 million reduction in facility exit costs[186] Liquidity and Financial Position - The company had $1.8 billion in cash, cash equivalents, and investments as of April 30, 2022, with $392.6 million held by foreign subsidiaries[191] - The company has no significant changes in contractual obligations and commitments as disclosed in its Annual Report on Form 10-K[200] - No off-balance sheet arrangements were established during the three months ended April 30, 2022 and 2021[201] - Indemnification arrangements have not materially impacted the company's financial statements, with no accrual as of April 30, 2022[203] - The company's financial statements are prepared in accordance with GAAP, with estimates based on historical experience and reasonable assumptions[204] Product and Market Strategy - The company's solutions for Security and Observability empower users in technology roles, including DevOps, ITOps, and cybersecurity, to monitor and secure digital systems more efficiently[122] - Maintenance revenues as a percentage of total revenues decreased to 17% in Q2 2022 from 23% in Q2 2021[145]

Financial Data and Key Metrics Changes - For FY 2022, revenue growth accelerated from a decline of 5% to a positive growth of 20% [19] - Total Annual Recurring Revenue (ARR) reached $3.12 billion, up 32% year-over-year, with cloud ARR at $1.34 billion, reflecting a 65% increase [19] - Operating cash flow returned to positive at $130 million, a significant improvement from nearly $200 million negative the previous year [19][22] Business Line Data and Key Metrics Changes - Cloud represented 62% of total software bookings in FY 2022, up from 50% in FY 2021 and 35% in FY 2020 [11] - In Q4, cloud revenue was $289 million, up 69% year-over-year, indicating strong customer adoption of the cloud platform [21] - The company ended the year with 675 customers having ARR greater than $1 million, a 32% increase, with 317 of these customers having cloud ARR over $1 million, up 70% [19] Market Data and Key Metrics Changes - The cloud bookings percentage is expected to approach 70% for FY 2023, indicating a gradual increase in cloud adoption [12][20] - The company anticipates a normalization of financial metrics as the year-over-year changes for FY 2023 will be less pronounced than those for FY 2022 [12][23] Company Strategy and Development Direction - The appointment of Gary Steele as the new CEO is aimed at scaling operations and driving innovation, with a focus on achieving $5 billion in revenue and beyond [8] - The company is transitioning to a workload pricing model, which has gained traction, with over 40% of total cloud ARR based on this model by the end of Q4 [11][12] - Splunk aims to simplify its financial reporting by retiring ARR as a core metric by the end of FY 2023, focusing instead on traditional operating and profitability metrics [13][23] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the demand environment, noting that the impacts from the business transformation are mostly resolved, setting the stage for continued growth [25] - The company is focused on enhancing its cloud offerings and improving customer experience, particularly in security and observability [15][18] - Management highlighted the importance of customer feedback in shaping product roadmaps and emphasized the need for a flexible platform that supports various use cases [15][51] Other Important Information - The company announced the departure of Teresa Carlson, the President and Chief Growth Officer, while expressing gratitude for her contributions [9] - Splunk's cloud business transformation is progressing well, with a significant increase in cloud bookings and customer renewals [11][20] Q&A Session Summary Question: What is the current status of the security segment? - Management indicated that security remains a critical driver of the business, accounting for approximately 50% of revenue, with heightened demand expected due to increased cybersecurity risks [26][27] Question: How is the sales leadership transition being managed? - The interim management will oversee go-to-market strategies until Gary Steele assumes the CEO role, with a focus on customer engagement and data gathering for future decisions [31][32] Question: Can you elaborate on cloud momentum and customer behavior? - Customers typically start with smaller workloads in the cloud and gradually expand as they gain confidence, often integrating observability and security tools [34][35] Question: How will the $1.5 billion in renewals impact revenue? - Most of the renewals are expected to transition from on-premise to cloud, with a projected 1.5x lift in ARR as customers migrate [62][74] Question: What is the impact of workload pricing on renewals? - Workload pricing may lead to lower average selling prices as customers adjust their resource usage, but it is expected to positively influence renewal and growth profiles [80]

Table of Contents Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, par value $0.001 per share SPLK The NASDAQ Global Select Market UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) O ...

Table of Contents Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, par value $0.001 per share SPLK The NASDAQ Global Select Market UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF T ...