Ken Tinsley - IR Godfrey Sullivan - CEO Dave Conte - CFO Marc Olesen - SVP, General Manager Doug Merritt - Head of Worldwide Field Operations Haiyan Song - Head of Security Markets

Brent Thill - UBS Keith Weiss - Morgan Stanley Walter Pritchard - Citi Brian White - Cantor Fitzgerald Matt Hedberg - RBC Capital Markets Mark Murphy - JP Morgan Joanna Kamien - Credit Suisse Michael Turtis - Raymond James Katherine Egbert - Piper Jaffray Kash Rangan - Bank of America Merrill Lynch John Rizzuto - SunTrust Kirk Materne - Evercore ISI

Good day, ladies and gentlemen, and welcome to the Splunk Incorporated Second Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's conference is being recorded. I would now like to hand the meeting over to Mr. Ken Tinsley, Vice President of Investor Relations and Corporate Treasurer. Please go ahead.

Thank you very much Karen, I appreciate that and good afternoon everybody. With me on the call today are Splunk CEO, Godfrey Sullivan; CFO, Dave Conte; Head of Worldwide Field Operations Doug Merritt; Head of Security Markets, Haiyan Song; and Head of Cloud, Doug Olsen [ph]. We issued our press release after the close of the 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 year 2016, transaction, product and services mix, planned investments including product, services, sales, cloud facilities and geographies, expected benefits from our recent acquisitions, and expected benefits from our recent acquisitions and trends and momentum in our business including cloud business and impact on our margins. These statements reflect our best judgment based on factors currently known to us, and actual events or results may differ materially. Please refer to documents we filed with the SEC including the Form 8-K filed with today's press release. These documents contain risks and uncertainties and other 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 to non-GAAP results is provided in the press release and on our website. With that, let me turn it over to Godfrey.

Thanks, Kent. Hello, everyone. We had a great Q2 and I want to thank our customers and partners for their enthusiastic support and our Splunk employees for their many contributions. Total revenues came in at a 148.3 million, up 46% over the last year. We’re delighted to welcome more than 500 new customers to the Splunk family and we now have more than 10,000 customers worldwide. The highlights of any Splunk quarter are always about our customer success. I was really happy to see some of you who attended our recent Splunk Live San Francisco, with our customer Sephora spoke about the challenges of deploying there in-store mobile point of sale systems. Splunk helped them failed customer transactions by 95%, increased customer satisfaction and doubled the revenue through their mobile point of sales systems, Sephora said, “Splunk has helped us to move from ambiguity to transparency. Also at San Francisco Aquanox explained how after deploying Splunk cloud as their security intelligence solution, they went from monitoring 20 billion raw events across multiple silos to just 20 daily actionable alerts, all through the correlations and analytics in our security app. You can check out these and other great customer presentations on our splunklive.com Web site. Our customers continue to create impressive new use cases and they also guide our investments into new solutions areas. Moving on to products, we closed two acquisitions in Q2, Metafor Software and Caspida. Metafor provides anomaly detection and behavioral analytics for IT operations use cases. Caspida provide data science driven behavioral analytics for security use cases. This acquisition is in line with our strategy of expanding our cyber security offerings and will enable us to bring more advanced analytical capabilities to our customers. We're pleased to welcome the Metafor and Caspida teams to Splunk. A remainder everyone on the call, our User Conference is coming up in September and our product teams will be making an impressive set of announcements, including the launch of our new solution for IT service intelligence and of course an exciting new release for Splunk Enterprise. I hope to see you there and we'll certainly be ready to celebrate with you. On the call with me today, Doug will provide our field report, Haiyan will cover security markets and Marc Olesen will provide an update on our velocity in cloud. As always Dave Conte will mesmerize you with his financial updates. Let's go to Doug.

Thank you, Godfrey. I am really proud of our field organization for delivering another strong quarter and first half for the year. We're rapidly building our customer facing organizations to support four initiatives. First, we are concentrating our headcount expansion to major countries where we need critical mask to better support our customers. During Q2, we had more than 100 global field positions. Second, we're aligning our field technical resources with our market groups to ensure that we can deliver a best in class customer experience in our core solutions areas. Third, we're investing in our customer success organization. This is a team that works with customers to drive ROI, value realization and expansion of this critical Splunk use cases. Finally, with our channel partners, we're concentrating our focus and our economics to ensure that those who invest in Splunk capabilities see a higher return on their investment. Public sector is a great example, where we've invested heavily to create teams who are dedicated to federal, state and local government and a new team dedicated to higher education. Great examples of our work in public sector in Q2, include the United State Marine Corp who chose Splunk Enterprise as the anchor of their new IT operations and a federal agency who purchase Splunk Enterprise, ES and Hunk to correlate and analyze terabytes of data across multiple Hadoop environments. We add continued momentum in state, local arena as well. The state of Utah bought Splunk Enterprise and ES to identify suspicious event, our correlating data from firewalls, systems, devices and applications. And many other great wins including New Mexico human services, Pennsylvania development of transportation, Washington D.C. Health Benefit Exchange and the San Diego sheriff’s department. I'm also really pleased about the acceleration of our new higher education team. In addition to how we more than 500 higher end customers, our software is now being taught or used for research at more than 100 universities. Stateside colleges like Georgetown, Northwestern, San Jose State and UC Boulder. Internationally, Singapore's Nanyang Polytechnic, Italy's Sapienza and UK's Oxford are among the campuses providing the workforce of the future with the way to learn Splunk skills reflecting the high demand that we see of these skills in our customer base. As Scot Wheeler of Northwestern put it, students need to understand the power of combining unstructured [technical difficulty] with the structured data that businesses already collect and manage. Integrating Splunk solutions into our curriculum gives an access to a simple-to-use platform that can change the competitive stature of any business. I also want to complement our America's team, who continued to lead with excellence. They had an impressive Q2, touting enterprise adoption agreements with multiple customers, including Staples for IT operations, application delivery and customer analytics. As a reminder our EAA program enables customers of any size to purchase unlimited licenses with fixed predictable costs. Other customer wins included Barnes & Noble for application delivery and Yelp, a new multi-care by customer for business analytics. As we continue to ramp our international coverage, I'm pleased to announce customer wins including Samsung Semiconductor, a new customer in Internet of Things and Atlassian who saw the benefits of Splunk over prior open source initiatives and signed an unlimited EAA to standardize on Splunk. I'll now like to call the few partners including Amazon who were retained to win cloud orders at Chicago Public Schools and Arlington County, Virginia and Kepware, one of our partners for IoT data who received an award for 2015 product of the year by IoT Evolution Magazine for their Industrial Data Forwarder for Splunk. In summary, it was a great quarter. Healthy breath of orders, geographic diversity and Splunk continuing to become a platform that spans multiple departments supporting a wide variety of use cases. Our team also did a fantastic job in the cloud, where our ability to handle on-prem and cloud is a significant advantage. For more on that let me turn it over to Marc Olesen.

Thank Doug. Our Q2 results show continued acceleration in our cloud business. We tripled our orders in nine months. Our customers are excited with the speed and ease of Splunk Cloud. They are happy to focus their time and attention on analyzing the data to achieve their business results rather than procuring and deploying equipment. As a reminder, Splunk Cloud is available through nine AWS global regions and is now available on U.S. GovCloud as well. There are three paths to Splunk Cloud, the first path is our web self-service platform to trial and purchase Splunk Cloud with a credit card. The second path is with our field in-channel where new customers choose Splunk Cloud as the deployment model to accelerate time-to-value. Our few of the customers we added in Q2 include Tenneco, Pernod Ricard in France and Australia's Unify Solutions. The third path is where our existing on-premise customers are expanding their capacity with Splunk Cloud and deploying in a hybrid mode. A few of our hybrid customers this quarter includes AAA, City of Austin and London's Gatwick Airport. We continue to hear from customers that the ability to run a hybrid solution is incredibly powerful and important to them and Splunk is uniquely positioned to deliver on that. So, notable wins this quarter includes Infospace who replaced a competitive cloud-only log search company with Splunk Cloud and the Splunk App for AWS. We are helping them enable continuous delivery to their web publishing customers. GEICO an existing Splunk customer expanded with Splunk Cloud taking advantage of the clouds favorable TCO. Maxim Caterers, the biggest food and beverage company in Hong Kong selected Splunk Cloud and our apps for PCI compliance for securing and analyzing their e-commerce data. And our largest Splunk Cloud order this quarter was from a social media company that signed a seven figure order for our multi-terabyte instance. This existing customer is expanding with Splunk and plans to transition from on-prem to the cloud. Customers want to know that their workloads are as reliable and secure in the cloud as they are on-premise. Splunk is there to help customers move to the cloud with confidence and now over to Haiyan.

Thanks, Marc. In Q2, we had great momentum and continued to strengthen our role at the nerve center for security. We again delivered triple-digit year-over-year bookings growth for ES. Customer demand for solutions that deliver faster time-to-value has driven the growth of ES on-prem and in the cloud. Here are some of our customer examples. The Securities and Exchange Commission expanded their use of Splunk Enterprise in ES as the security analytics platform where all IT and security data is monitored, analyzed and reported. Next time you are enjoying legendary steak at your local Texas road house restaurant. Think of Splunk as their nerve center. Splunk is the security team’s better ability to detect follow and shutdown attackers and give the IT Ops team visibility to improve customer experience on their Web site. In addition to being as SIEM for situational awareness, Splunk is being increasingly viewed as the trusted security intelligence platform for breach response. This past quarter a high profile government agency and a well know university were both breached and subsequently purchased Splunk to beef up their security and breach response. The high note for security in Q2 with our acquisition of Caspida, a leading innovator in machine learning and data driven security, data science driven behavior analytics. It signifies our commitment to invest in accelerated innovation and extending our analytics driven security offering. Customers can benefit from Caspida's machine learning solution to detect advance threat from external attackers and malicious insiders. Recent breaches have shown us the significance of identify and user credentials as an attack surface. And our first combined solution will focus on user and entity behavior analytic to help our customers with this critical security need. We are very excited to welcome this talented team and are working hard towards unveiling our plan for the integrated Splunk and Caspida's solution at our upcoming user conference in Las Vegas. We feel privileged to be at a fore front of leading the industry transformation towards next generation analytics driven security. As 451 research noted, this emerging techniques are fundamentally reshaping the nature of security analytics and are moving towards defining an architecture that goes well beyond SIEM. For the third straight year, Splunk was named a leader in Gardner's magic quadrant for security information and event management in fact Splunk was the only vendor to improve its completeness of vision in their report. We could not ask for a better timing and showcase than this year's Black Hat USA which took place early August. In addition to record visitors at Splunk boot all session on behavioral intuition detection had over a thousand attendees. Although Black Hat's network operation center is hidden in a dark room, Splunk was front-and-center powering the NOC that was described as "the nerve center for one of the most hostile technology environment on the planet". Splunk's analytics and visualizations helped keep that advance network secured and operational. I am proud of the momentum we have in the market and the result we have delivered in the security business and look forward to continuing to innovate and expand our security solution to help our customers. Now back to Godfrey.

Thanks Doug, Marc and Haiyan. I have to say that I'm really proud of the Splunk's executive team. Our core development teams keep cranking out with impressive functionality that shows in our net promoter score of 50 almost unheard of in enterprise software. The market groups are defining strategy, product direction and building an enviable ecosystem for their solutions. Our cloud business is accelerating based on clear strategy and maniacal operational focus. And our superb field organization just keeps getting stronger and even better at delivering customer success. I hope to see you at Comp next month where we will raise a curtain on our product releases, enjoy a wide range of killer presentations by our customers and host for you the financial community an interactive panel with our exec team. It's going to be a great show and I can wait to get together with you there. Again thanks to all of our customers and partners and thanks to everyone who works at Splunk for another great quarter. Now I'll turn the call over to CFO, Dave Conte.

Hey thanks Godfrey. Good afternoon everyone. Thanks for joining the call. Q2 was another strong quarter and we're pleased with our first half performance and certainly excited about our outlook for the remainder of the year. Second quarter revenues were $148.3 million, a 46% increase over Q2 last year. License revenues grew 42% year-over-year totaling $88 million. In Q2 and now for 13 out of 14 quarters as a public company, more than 7% of our license bookies came from existing customers in a form of up sale for additional capacity and expansion from new use cases. Also we booked more orders in Q2 than in any prior quarter in our history. We recorded 327 orders greater than a $100,000. As Godfrey mentioned we have more than 10,000 customers globally. On prior calls I mention that the ratable mix of bookings continues to very substantially quarter to quarter. As a refresher, the contributors to the ratable mix are term license contracts, Splunk Cloud and certain EAAs. Let's talk about EAAs for second, just a few remainders. The EAA is a ratable because they are either a standalone term license or include a term license component. These contracts are typically three years in duration and in many cases, only the first year is immediately billable. Subsequent years of the contract are usually billable on an annual basis. So, you're not going to see those extra three years on the face of the financial statements. Today these unbilled amount have not been significant to the financials overall. Now the mix for the quarter was 41% which is on the high end of our annual range. We've experienced and that we've expressed that to substantial agree the ratable mix will swing from quarter to quarter and it generally follow seasonal patterns. As a result we’ll take a longer range view the mix, given its unpredictable nature. For now, we maintain our current full year guidance of 30% to 40%. Though we’re likely to end the year at the top end of that range based on first half results. We're going to keep updating you guys as we gain more insight in terms of how that mix is trending. Now as Marc mentioned earlier, we're pleased with our cloud momentum. Both existing and new customers are utilizing cloud services for various use cases and hybrid deployments. As it relate to the impacted cloud on our financials, recall that cloud revenue is captured entirely in the services line on the P&L and the associated costs are reflected in the cost of services. Importantly, there are no cloud related revenues allocated to the license line, even though most of this revenue relates to the use of our software. Eventually, when cloud revenues become a significant component of total revenues, we’ll report it separately much like you’re accustomed to seeing with peer staff models. As we’ve said, we expect to growth in our cloud business to continue to impact both the composition of revenues between license and services and associated gross margins. More on margins in a minute. Now back to the results. In Q2, international operations represented approximately 23% of total revenues consistent with previous levels. Our education of professional services represented 7% of revenue in Q2 in the range of prior and expected levels of between 5% and 10%. Remember since we generally recognize revenues on services when they are delivered and billed, services bookings typically do not flow through the balance sheet as deferred revenue. With respect to margins, which are all non-GAAP. Q2 overall gross margin was 88% unchanged from Q1 and as expected, starting to show the impact from our ramping cloud business. Operating income was $4.8 million, representing a positive margin of approximately 3%. Q2 net income was $4.1 million and EPS was $0.03 per share based on a fully diluted share count of 132 million shares. Cash flow from operations was $13.6 million and free cash flow was about $10.8 million. We ended the quarter with over 900 million in total cash and investments which reflects the net cash paid of a $143 million for the Metafor and Caspida acquisitions. Now looking forward to the second half of the year, we expect Q3 total revenues of between $158 million to $160 million with a 1% to 2% positive non-GAAP operating margin. With our first half performance and Q3 outlook, we now expect full year revenues to range between $628 million and $632 million, up from our prior guidance of $610 million to $614 million. Since we denominate revenue globally in U.S. dollars, we do not have foreign exchange exposure on the revenue line. As we continue to increase our investments in market groups, product teams, the field and Splunk cloud we expect to generate positive non-GAAP operating margins of between 2% and 3% for the full-year consistent with last year's level and prior guidance. Note that our OP margin target incorporates the expense run rates of both the Metafor and Caspida acquisitions. I’ve said that our margin targets include the impact of a gradual 1% to 2% increase in cost of services from growing our cloud business. It also includes higher professional services cost delivered around our market group solutions. As a housekeeping item, since we expect to be profitable on a non-GAAP basis for the balance of the year, full year EPS calculations, you should use fully diluted share counts of approximately 134 million in Q3 and a 137 million shares in Q4. We remain committed to running the business on a positive operating cash flow basis and continue to expect that full year operating cash flow will be approximately 20% of total revenues with the quarterly levels following the trend we've seen over the past several years. As I’ve mentioned, fiscal '16 is a higher than typical CapEx year, as we expect the bulk of our San Francisco HQ build-out cost will be incurred this year. When combined with global facility expansion to accommodate our growing employee base, we expect approximately $50 million in total CapEx this year. First half CapEx totaled $10 million and expect the remain 40 million will come in the back half of the year mostly in Q4. In closing, our team continues to execute on our mission to deliver exceptional value to our customers and we're committed to continuing investments in our products, solutions and overall global reach. Q2 ended a solid first half and I’m enthusiastic about our outlook for the remainder of fiscal '16. With that let's open it up for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Brent Thill of UBS.

Dave, the term mix continues to come in above your guide range and I realize you ended with a comment that you expect it to end closer to the high-end of your range and you gave a 30 to 40, but I'm curious just in terms of the economics of what you're seeing in those contracts versus the perpetual world. How you look at the trade-off and how you think about the long-term value to those deals versus what you're seeing on the perpetual side?

As you know the predictability in any 90-days cycle of what that mix is going to be is been a fun item to try to forecast and that's from three-years ago when we first went public. I think what's important about the life-time value of those arrangements when we think about mix is, how we're enabling customers to adopt the product. You know that's our objective. How do we structure arrangements that give the customer the predictability around their investment in Splunk and the freedom to deploy it broadly across the enterprise? So, in terms of life-time value, I mean the mathematics around it, I think a three-year maybe a four-year term contract is equivalent to standard perpetual license, but when looking at the cohort of a customer, and the adoption trends, we think it's obviously far more valuable in terms of overall LTV of those customers.

And quick follow-up for Godfrey and Haiyan on the security side, you had a really impressive run there and I'm just curious when you look at the Halo impact that your security business is now having on other aspects of the Splunk -- go-to-market and new products, so what are you seeing in terms of landing those best security customer, how quickly you're starting to see that now spread into other areas of governance risk compliance?

Well, I just said it, maybe overall comment on that, that which is that, if you would asked me that question three of four years ago, I always coached our field organization to go into IT operations first because you could spread more quickly from then and I was always a little bit reserved around going into security department first with a customer because I was always a little fearful that we'd get deposition there as a security like a SIEM, which would be not great for us. And I think that market has changed so much in the last three years that the security department is often now the keeper of the Splunk index and that -- but the difference is for the first time that it's serving as a steward for a lot of machine data across the organization. So, I think it's as easy for us now to enter security and then expand across to app dev or IT operations or business analytics as it was three or four years ago for us to enter in through IT ops or apps and then spread to the security department. I think that if you look at our -- all of our EAA's and you look at our large customer orders, all of them are multiple use case. Almost every single one of them is because Splunk has become a data platform and we're being used across multiple departments, multiple use cases. So, I think it's changed a lot in the last two or three years, all for the better for our customers and us.

Very well said.

Thank you, our next question comes from the line of Keith Weiss from Morgan Stanley.

Maybe following in on that Dave, when we think about the recent acquisition, the Caspida and the Metafor, are these additional functionality that’s going to be sold as perhaps like a separate application, is it a separate sort of paid for functionality on a going forward basis? Or does this just become sort of part and parcel of the strength of the underlined platform? And on that related note, as we think about that back half guidance is there any revenue contribution attributed to those acquisitions?

So, multi-part question, multi-speaker answer. I'll take the Metafor piece which is to say that, in that case that's really more or like a technology acquisition that you're likely to see incorporated into things like our IT service intelligence solution as opposed to a standalone app for example, but time will tell, we have a lot of -- there is some very robust technology there that we think will be very helpful to us in IT operations Caspida is a little bit different than that, so Haiyan I'll hand to you the Caspida piece.

Caspida had served in this fast moving market called behavior analytics especially focusing on users and we anticipate that's going to be additional capabilities, we continue to build and integrate and we'll continue to offer it as a standalone product as well as giving us options to offer bundles and more choices for the customer. In terms of revenue we are in a very early stage and we are running early accessed programs. As I mentioned I will be unveiling more of the details on this integrated plan at .com. So looking forward to talking to you guys then.

And hey Keith it's Dave, specifically in terms of our model and our outlook as Haiyan mentioned and we're really focused on ensuring that the technology and how we bundle that in with our overall security solution is paired appropriately with our existing ES application. Our model assumes no revenue contribution because we're really not planning to have a major roll out of that solution until towards the end of the year. So we don’t have any revenue built in today.

Got it. And if I could sneak one more clarification in. I think Doug mentioned adding more than 100 global field positions during the quarter, I'm assuming that’s not all quota carrying reps. Can you give us little bit more color on sort of what those global field positions were and maybe give us a number of quota carrying reps exiting the quarter?

Sure Keith. We have been a little more focused going into this year and making sure that we gaining critical mass in different markets and that we have a well-balanced hiring approach. So we've concentrated hiring in a handful of customers where we've seen critical mass in the U.S. and public sector really worked for advantage, we are mirroring that model, but we also are ensuring that we're maintaining the right manager-to-rep ratio so they can actually do their job of growing and developing the reps effectively. We’ve got the right presales ratios. It’s a great technical sale and we’ve seen consistently that having the technical side of the house walk the halls with the reps greatly increases their education and knowledge thus gained can help spread us those use cases. And we’ve been talking about some of these specialized resources that carry distinct security, capability, variety operations capability or app dev our business analytics for others and we're also adding that specialization of both sales and presales around the globe so that we can increase our win rates or maintain our run rates within those categories.

Hey Keith, it’s Dave. Let me pile on little bit. I'm really excited to see adding that type -- over a 100 resources in the field organization all around the initiatives that Doug mentioned. As you guys know we've been talking now over a year about building out our capabilities around our core markets and Haiyan doing a terrific job in security as you know [indiscernible] fits and we're excited about our -- the intelligent app that we’re going be talking about at .com. So these investments have been really important in terms of how we deliver value to the customer. So seeing that type of momentum in terms of our ability to get coverage and reach around all these initiatives and the field organizations create over a 100 in a single quarter. The back half of your question is how many are quota carriers? So we ended the quarter with 362 quota carriers that’s up I think about 36%-37% year-over-year, 30 plus incremental quota carriers since the last quarter.

Excellent and a great August. Thank you.

Thank you.

Thank you. And our next question comes from the line of Walter Pritchard from Citi.

Question of mine is around the drivers of the cloud business and I'm wondering if you could help us understand how many of these customers are sort of born in the cloud or customers that maybe wouldn’t have looked at your product two years ago or three years ago when you didn’t have the cloud offering. And then of the customers that are more traditional based, what's causing them to consider the cloud offering versus just assuming the kind of capacity that they’ve consumed for a while.

Hey Walter this is Marc. Thanks for the question. Obviously we're extremely excited with the demand we are seeing in the market place for cloud solutions and thrilled with our growth to date. It's really as solution and a delivery option that’s appealing to customers of all shapes and sizes, so we have very small customers, small departments that are using cloud as an entry way into Splunk and their first experience and at the same time we've got customers that are sending us the multiple terabytes per day and they are really two main drivers around this. So the first is just, where do you want to focus your time efforts, energy and attention, on running Splunk or on using Splunk. So that’s one of the drivers and the other one is where is the source of the data? So for a lot of work loads that are running in the cloud there is a lack of interest in back hauling all that data to an on premise deployment. It was already in the cloud, we've already rationalized that so really make sense to send it to a smart cloud. But with the additional options the Splunk Cloud presents for customers we definitely see an expanding addressable because of that and of course we offer a hybrid solution for our customer so that they can run Splunk enterprise on-prem and Splunk Cloud and that we’re actually the only solution in the market place that gives customers that true hybrid experience where they can search seamlessly across data stored on-prem and in the cloud and to the user they can be able to get that unified experience.

Okay. Thank you next question please.

Thank you. Our next question comes from the line of Brian White from Cantor Fitzgerald.

I'm wondering if you can talk just a little bit about the orders over a 100,000. I went back in my model, looks like it’s the strongest sequential growth we've even seen for a July quarter for this big orders, so number one, what's kind of the dynamic, you see out in the field? And number two, maybe you talk about price changes in the July quarter and what was the ASP that we saw? I think previously you talked 40,000 to 50,000, what are we looking at this quarter? Thanks.

So on the six and seven figure orders, I think we're just doing, as we saw with the hiring, we talked through with the focus and the expansion we're driving on the rep and overall sales basis, we're just doing an increasingly better job, I think, finding opportunities but even more importantly adding into customer success or really driving these opportunities, driving Splunk across multiple different departments and use cases. So that we can drive ourselves into these organizations as a data -- fabric and data platform and those by nature driver larger deals. So, it's a -- we got the wonderful challenge of making sure we have enough reps to cover the Brownfield [ph] accounts and that we're still paying attention to Greenfield and as we're driving these Brownfields your seeing bigger orders come out. Dave, do you want to handle the ASP?

Yes. So ASPs, we are at the top end of that range at about 50k and it's interesting so you look at to your point sequential increase and the year-over-year increase in terms of large orders and yet ASPs are consistent and back to my prepared remark, this was our individually largest quarter in terms of total orders overall. So the velocity in the business is growing not just in terms of large orders but all orders in total and that's how you get a consistent ASP given 320 something plus, 60 or transactions.

Okay. And just as a follow up any update on Hunk?

As far as market dynamics, we're continuing to see more interest in Hunk, but it's limited by the amount of production, HTFS instances that we see out there. So, we’re slowly growing and I think we'll continue to be -- a little bit held back by how industrial strength and production focused are these HTFS initiatives.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Matt Hedberg from RBC Capital Markets. Mr. Hedberg your line is open.

Sorry about that. Congrats from me as well, thanks again. I know you guys have said in the past, security use cases can make up between 35% and 40% of some of your deals. We had a resource survey, it looks like it could be as high as being 50% next year, I guess with the acquisition that you're doing here, does that level of activity seem reasonable to you guys?

Hey Matt, it's Dave. So, as you know, security maybe two plus years ago was 20% to 25% of business and the end of last year it ended up to being not quite 50%, but over 40%. Q2 was about 40% of the total business, how that massages over time, the challenge for any individual market group is the other market groups are doing really well also. So, our core markets of ITOA now over 50% of the business is looking great. I'm sure Snehal who has business analytics will have something to say about it, once he gets some more tenure under his belt, but I wouldn't say it's unreasonable but really will fluctuate quarter to quarter and this is important, when you look at the composition of our transactions, some of our more mature customers who tend to do the large orders, can swing that percentage on a quarterly basis from an annual trend I think it's still appropriate to think about security as that 35% to 45% of the business until we see something change in terms of the analytics based.

I hate to pile on an answer, but I will here. Which is, in the six figure orders, the five figure and low six figure orders tend to be easier to track because they're often a single use case. Most of our large six figure on almost every seven figure order is because a customer is using Splunk as a data platform and they're using it across multiple departments and use cases, and then you get into allocation game, so I don't know how precise this market group number will be as we continue to move into a platform and we’ll just have to give you the best color we have based on going to the customer information and trying our best to sort it out. But part of being a platform is that you got multiple use cases with always big orders.

That's helpful. And then maybe I guess as a follow up to that, you guys obviously have great partnerships Palo Alto in particular, it seems like there are number of nice deals through that partner, is there a risk that you guys could start to incorporate additional features that could eventually start to compete with some of these partners or is it still of the mindset that its complementary to some of those existing relationships?

I don't think there is much overlap and I don't see any on the near horizon. Do you Haiyan?

I think great question, in security there is a lot of overlapping in terms of the words people used. But in terms of the particular problems, the angle we’re solving problems just like Godfrey was saying, I don't think there is any overlap per say, so we continue to have great partnerships and for us Splunk will be a successful as the ecosystem we serve and the ecosystem that customer uses to put up their security defenses.

So there is just not enough marketing words to go around.

Thank you. Our next question comes from the line of Mark Murphy from JP Morgan.

Yes, thank you all. I’ll add my congratulations. Godfrey, I wanted to ask you, as you build toward the seasonally strong fiscal Q4, we look back at past years and you’ve produced approximately 60% sequential growth in billings and I know that the numbers are getting larger and that might not always happen. But we know that you build pipeline toward that all year long. So just given some of the recent gyrations in the equity markets, I was curious what is your sense of pipeline build, are customers calm and thinking rationally, and maybe how do you feel about the set up for year-end budget flush activity?

Yes, I mean enterprise software is enterprise software. So customers are well trained to try to use end of near to their advantage and so I don’t think this Splunk is different than any other company in that regard. I don’t know that we’ll see impact of equity markets for another quarter or two because what if any impact all this equity market gyration will have doesn’t show up on a day-to-day basis. It would really be more about does it impact company’s budget for next year, do they change their outlook for next year. But I don’t sense that the market has had much impact over the last week, in last 30 minutes. It's really hard to sort that out and our guidance as we’ve constructed it for Q3 and Q4 take that into consideration.

Thank you. And as a follow-up Godfrey I was looking on full Splunk pace and the number of aps by vendor, there are 151 for Microsoft, 29 for Cisco, 13 for Oracle. Just wondering why do you think that it is so heavily skewed towards Microsoft, is Microsoft that disproportionate in terms of the critical systems that are producing all this high value machine data or do you think the others are just temporarily underrepresented in there and that they are likely to close that gap overtime?

No, I would say is because Microsoft tends to be a little bit more -- it's closer to the operating system level. You almost have to compare Microsoft and our apps on Splunk based to Unix as opposed to comparing it to Cisco for example and there is just so many different utilities. They might not rise to the -- they certainly don’t rise to the description of a solution or a full app they might be more of a connector or plug-in and description. So the words are little bit hard to -- like there aren’t enough words to go around that either and we try to over simplify. But I would say that in the case of Cisco there are enough different security environments and enough different products in the Cisco world that almost all the apps apply to a product or technology that’s distinct. In the Microsoft world there is sometime three or four of them that customers have published, that’s all the same problem in a slightly different way. So it's a little bit, I just wouldn’t over analyze it, it's an -- it's not something we spend any time on, let's put it that way.

Thank you. And our next question comes from the line of Phil Winslow from Credit Suisse.

It's Joanna Kamien on for Phil, thanks for taking my question. I was just wondering with this integrated solution with Caspida, from a competitive standpoint, who you guys are going to be going up against or displacing, and if you are displacing generation one SIEM vendor. Do you think Splunk is also seeing a net broader deployment inside of these customers versus the generation one SIEM vendor? Thanks guys.

I’ll take that, so Caspida brings behavior analytics into our already very much analytics driven and centric solution to security. So we have seen great momentum in adoption of the new approach, we’re seeing great momentum in replacing like you said, the previous generation solutions around SIEM and we also -- I think as I mentioned in the prepared remarks, people are increasingly looking to us to provide the best solution around breach response. So definitely an expanded use case beyond SIEM and we see very good traction in replacing some of the old generation solutions that were there.

And while you are on the horn we’d like to know if you can throw little dirt about Phil on the horn, since he is not on the call.

Thank you. And our next question comes from the line of Michael Turtis from Raymond James.

It's Michael Turtis, question on EA is anything more you can tell us about the rate of adoption, whether it's getting material and what the use case has been for EA? And then I’ve got a follow-up.

Sure Michael, so as we contagiously talk about 70% of our revenue roughly comes from existing accounts and I think that in the [indiscernible] got for years ago, I am calling this enterprise adoption agreement is the key. We’re seeing growth within these accounts to try and treat Splunk as a platform and in enterprise agreements of various flavors are helping to thrive that. They wrap in things like professional services and some instances, Splunk advisory engineers are customer success oriented folks, education credits, headroom that the account can grow into and I do think that they are important contributor to that 300 plus six and seven figure deal accounts that we saw this quarter. It’s just, anything that we can do to make it easier for our customers to learn Splunk, get more data into Splunk, see the value of the additional correlations and use cases as they do that. It's great for the customer and I think obviously ultimately long-term, really good for Splunk too.

Hey Michael it's [indiscernible]. I think in term of quantifying how many EAA's are we doing. The absolute number isn't as relevant. I think it's important that we have the program and the vehicle so that customers can actually get to standardization. But what we are seeing that ultimately bridges from the initial new customer using Splunk over the lifecycle and the maturity of their deployments to becoming a EAA customer is -- I’d say velocity around multiple use cases in the same account and I think that's part in parcel to the previously mentioned metric that again over 70% of the business is in installed base, that doesn’t means 70% or more of the bookings are EAAs, that’s customers deploying multiple use cases across their departments and now paired with hybrid search capabilities in the cloud. So the combination of on-prem plus Cloud deployments, plus multiple use cases across multiple departments. That’s what we’re seeing I think quite frequently in the customer base. Ultimately those customers will become EAA's in our contract, but they are not there today.

Got it. And then my final question was around the issue of the mix -- the shift towards ratable and the impact on growth obviously We’ve all tried to do calculations on it, anything else that we can help us for this quarter 46% revenue, 43% billings growth is very strong, but and we also expect that something, the quota run rate or real rates are bit higher, any that helps us there?

While I’ll try to add some clarity; we measure the mix as the percentage of our gross bookings. The calculations that we can all do off the face of the financial statements are effectively the derived billings number and as I mentioned in prepared remarks, we do have a component of contract value that’s unbilled. It's not significant in the context of the overall financials that I'll be disclosing it, but it would obviously when included, uptake the growth rate some, but it's not so differentiating that I would say holy smokes, the 46% growth rate isn’t good enough and you guys should understand that there is this whole other basket of growth. But as we see more and more multiyear contracts in the billing characteristic for those and we think that there is a components that lacking that you don’t -- that you are not getting clear visibility in terms of assessing our performance, then we'll obviously include that. I think as reported -- I think it demonstrate the strength of the quarter and the momentum we have in the business.

Thank you. And our next question comes from the line of Katherine Egbert from Piper Jaffray.

Hi thanks. You mentioned a couple of times in the call about win rates. Can you just give us an update on the competition and how its pricing is going?

We remain in an enviable position on win rates. I just sat through a series of QVR's as would normally happen the first month of the new quarter and one of things we review is, how we’re doing against competition and that Splunk is a data platform approach that we have still seems to be pretty big darn differentiated. We had a couple of nice win backs or takeaways from competitors, some open source competitors, some smaller cloud or other based competitors and what I just keep seeing over and over is customers no matter what they experiment with come back to Splunk as the most complete solution that drives the lowest total cost of ownership for them and I think more importantly get production worthy high value visibility around this complex data equation quickest for them. It's just -- it’s been fun to watch.

Okay, thanks. Dave and then a couple of quick financial questions, you are now solidly profitable in terms of operating margin and it looks like it will be that way for the rest of the year. Will you stay that way you’re thinking into fiscal '17?

Yes. Hey Katherine I think obviously we expect this year fiscal '16's margin to be consistent with the prior year. And the rate at which we're investing on annual basis I would not expect to deviate significantly from that two year trend. Might that be a couple of 100 basis points up or couple of 100 basis points down as we manage our investments across all these initiatives and when we get to the end of the year and we look at our priorities and we set our internal objectives that we then will share with you guys. We'll update it for sure. But in terms of the position that we are in, in terms of the maturity of our market and our penetration in terms of the size of the TAM we're really focused on continue to investment because we see just a tremendous amount of growth ahead, so making sure that we go capture all those customer use cases and continue to delight them with our products and reach them with our field organization and elevate our value with solutions is critical and of course that requires investment. So, again I would expect maybe a couple of hundred basis points of deviation but I’ll update you when we get to the end of the year.

Okay and then just quickly, did the acquisitions add any revenue this quarter?

No.

Okay. Thanks, good job.

Thank you. And our next question comes from the line of Kash Rangan from Bank of America Merrill Lynch.

Couple of questions, with respect to the success Splunk has had in its widely adopted, get to the point where customers like it so much that it then starts to get expensive and then you come back with the EAAs and cloud. To what extent is that, oh I love it, but it's little expensive, is still prevalent in your sales cycle? Is the come down stable? And secondly, when your business mix are shifting towards more subscription, how are you measuring sales productivity and what is the trend there? And third and final my favorite question for Dave Conte, you said 40% of gross bookings subscription, but I would assume that given that roughly half your businesses is off the income statement, on the balance sheet, off the balance sheet, what does your growth rate not at least 2x of your reported growth? Thank you.

Tricky question.

[Multiple speakers] So, I do think that the EAA discussion options and especially the unlimited EAA have helped a bit as far as people’s perception of a variable pricing metric that they don't have, that they perceive they don't have full control over around the per gigabytes of data invested. But what I'm seeing is the more notable trend within more of the bigger companies that have now gotten their minds more wrapped around any big data solutions is they’re understanding the total cost of driving these types of solutions in their company and no matter what we charge for our software, whether we give it away, keep current price, we're 10% to 15% of the total investment necessary on compute, network, storage, manpower around that and why I just see this clip that's been really consistent, let me go try something else and then come back to Splunk is great product characteristics, great time-to-value. But ultimately they realize, you guys are significantly cheaper because the huge boat that follows you and follows anyone that's going to be big data arena is so much smaller and so much more efficient and then the manpower against it, is significantly more efficient. So, I think that are competitive differentiation will continue to be really, really quick time to value because of our integrated approach across the multiple aspects of our platform and the differentiation of our technology.

And Kash, it's Dave. As we have discussed in prior periods, I do agree with you that if you look at total gross bookings, the growth rate would be higher than what you see derive from the financial statements. But I'm not necessarily agreeing with the map that you have in terms of the rate that growth would be if you include all the contract value.

So I guess, the booking is a one year booking, right? But the breakeven point for a subscription versus license is more like a three years, so if were to convert that into a pro forma basis, my thinking is that the growth rate is not just a little bit above, but a lot above, that conceptually that's what I'm steering towards.

Sure. Now, remember though that a typical large order that has a term component is three year in duration, now not all of that contract value is on the financial statement as I mentioned in prepared remarks and in the one year variety, we're not measuring any renewal stream that we expect to receive, we're not doing any pro forma calculations that will take an annual contract value and converted into a total contract value, we're not doing that math implied growth rate.

I'm doing that, and that's why I'm getting much higher growth rates.

That's right.

And Kash, I want to thank you for making Conte work a little bit on this call.

Thank you. And our next question comes from the line of John Rizzuto from SunTrust.

This question is little bit more qualitative than anything and it's really -- if you look at the potential for Splunk, I know, you like to think I kind of forecast it, you are only scratching the surface of how big you can be. So in that sense, you're really only just starting the race and the metrics just they keep coming up, they look great, you could be on autopilot but clearly you're not doing that internally, what are the things? To what you can that you’re looking at internally to make sure that your business is operating or grabbing the opportunity in front of it that it has, such that as growth rates potentially may flow, you're still solidifying your grip and your hold of the marketplace?

Well a good question and I'm happy to give a very short answer to that. There are three things that I think about on a continuing basis to make sure we are driving this opportunity as hard as we can. Number one is improving the technology from top to bottom of the stack. We continue to improve the core Splunk enterprise and all the core platform elements so that it can be the very best indexing engine and data analytics device known to man. But that also has to encompass the solutions business, hence our market groups. So being able to add solutions and apps on top of that like Enterprise Security which has become such a force in the marketplace, like a Speedo which we'll be next year like IT service intelligence and on and on. So making sure that we have the best whole product regardless of what the customers' use case is, so that R&D spend is job one. Closely following that is cloud because the next major growth area for us is to make sure that we capture everyone's business regardless of where they want to deploy it and there are so many customers who have a lot of on-prem business but also are putting new projects in the cloud and we're so uniquely positioned to help the company bridge their way from on-prem to the cloud because of our hybrid approach and because of the flexibility of our software and our fast deployment times. We're just -- there's nobody in the market place as Doug said, there's nobody that can deploy and deliver success as fast as we can. And the third is coverage. And it's all about field, it's about field expansion, it's about as Doug said it's about sales positions, technical positions, customer success, it's a highly technical world we live in and you can't just put salespeople on the street and be successful, you have to put a very strong technical team on the street to help the customer achieve success and really understand these complex issues and somehow Splunk magically translates all these very complex dated issues into very rapid deployment success. So now back to the beginning. Core R&D plus solutions is one, cloud is two and all types of coverage is three. And that's it. As long as we keep doing that I think we have a pretty good runway in front of us.

Great, and then just a follow up to that, looking at one, you bought two companies here in anomaly detection and behavioral analytics which is, they could be thought of as run of the mill applications but that actually seems like it may be an inflection point on where you can take your technology particularly in terms of the remediation, prescriptive, analytic, automation and detection. What do you think that tech -- how important these technologies are to the next generation Splunk or are they not?

They're important, Splunk's reputation, Splunk's brand to the degree that are technology brand is built around highly flexible search, it's fantastic, but customers don't want to be limited to just search, like if I just keep searching I'll find the anomalies or I'll find the unusual patterns or I'll find the outliers. They want Splunk to tell them where those patterns are and to tell them where the outliers are to be able to compare known versus new so that you don't have to do everything through a query. So it doesn't matter whether you're talking about security or IT operations or business analytics, the customer transactional sort of questions, any type of process analysis, you want to be able to compare new versus old or rare versus normal and those types of things. So the whole notion of machine learning, anomaly detection and the like is core to a whole new set of applications of which insider threat and user behavior analytics are just two examples, but you have to have those core technologies in order to move from sort of query to pattern recognition.

If I may just add, one quick thing, I mentioned we're increasingly being playing the role at the nerve center, you can just think of that, two acquisitions as a major boost to the brainpower that we'll bring to the customer.

Thank you. And we have time for one final question for today. Our next question comes from the line of Kirk Materne from Evercore ISI.

I guess Godfrey, I just wanted a quick update on what you're thinking about some of the opportunity to sort of expand the ICE platform -- ICE partner opportunity on top of your data platform, I think you talked a couple of times in the call about Splunk evolving into more of a data platform. Obviously a platform sort of takes the ability to build more and more apps on top of it, you guys have obviously built a lot of apps yourself. I guess where do you guys stand in terms of bringing on new ICE's that might be approaching data from a more vertical perspective or could help you guys extend some of the used cases and build solutions around, some of your underlying technology. I'm just curious, where we stand on that heading into .com next month?

I'll probably, I'll give you a short answer today and punt the rest of that answer to come because I didn't really do a lot of homework around our most recent stats there, but part of what I've asked Snehal to do is to really beef up the team we have that’s doing all of the developer certifications. We have all the tools, we have all the API's and the FDK's, we have a lot of the technology bits to help the developer organization and ISV set of companies, become more and more competent and capable of success on top of the Slunk engine. Where we’re a little behind on resources is actually helping them test and certified those apps to make sure that when stuff goes up on Splunk base that it's really easy for customers to tell what’s like an open source submission versus something that’s been tested in an enterprise environment and the I think that for the IVFs of the world the number one thing enterprise customers ask me is have those apps been tested and you're certain, if they can work in an enterprise production environment without fail. And that’s a very different level of fit and finish that the customers are now asking us to make sure of. So the organization we have that helps our developers, our developers be successful is kind of a next area of major investment for us and I think it will be a little easier for us to kind of give you a complete walkthrough on that, or at least a brief walkthrough on it at comp, I’ll try to build that into the remarks we’re preparing for the investor Q&A for the panel. But anyway, it's something that’s high on my mind, I think I would probably will get a little better organized to answer it for comp.

Great look forward to it. Thanks guys.

Okay, thanks everyone. Thanks Karen for your help and we appreciate it. And we’re around here tonight if you have any follow-up questions. Hope you have a nice evening. Thanks everyone.

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. And you may now disconnect. Everyone have a good day.