Ken Tinsley - Vice President, Investor Relations and corporate Treasurer Godfrey Sullivan - Chairman, Chief Executive Officer and President David Conte - Senior Vice President and Chief Financial Officer Doug Merritt - Head of Worldwide Field Operations Haiyan Song - Head of Security Markets

Brent Thill - UBS Keith Weiss - Morgan Stanley Raimo Lenschow - Barclays Capital Brian White - Cantor Fitzgerald PhilipWinslow - Credit Suisse James Moore - FBR Capital Markets Kash Rangan - BofA Merrill Lynch Katherine Egbert - Piper Jaffray Walter Pritchard - Citigroup Clarence Chen - CLSA Limited John DiFucci - Jefferies & Co.

Good day, ladies and gentlemen, and welcome to the Splunk, Incorporated First Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will have a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. Ken Tinsley, Vice President, Investor Relations and Corporate Treasurer. Please go ahead.

Great. Thank you, Nicholas, and good afternoon, everyone. With me on the call today are Splunk CEO, Godfrey Sullivan; CFO, Dave Conte; Head of Worldwide Field Operations Doug Merritt and Head of Security Markets, Haiyan Song. Our press release was issued 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'll be making forward-looking statements including financial guidance and expectations for our second quarter and fiscal year 2016, transaction, product and services mix, investments in international operations and expected growth in international business, planned investments including product, services, sales and facilities and market and use case opportunities. 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 file with the SEC including the Form 8-K filed with today's press release. Those documents contain risks and uncertainties and other factors that may cause our actual results to differ from those contained in our forward-looking statements. These forward-looking statements are being made as of today, and we disclaim any obligation to update or revise these statements. If this call is reviewed after today, the information presented during this call may not contain current or accurate information. We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non-GAAP results is provided in the press release and on our website. With that, let me turn it over to Godfrey.

Thanks, Ken. Hello, everyone. I am happy to report a strong start to the year. Total revenues were $125.7 million, up 46% increase over last year. We welcomed more than 450 new customers to the Splunk family and now have more than 9,500 customers worldwide. It’s now been about three years since our IPO and sometimes to look forward it’s better to look back at our journey thus far. In the year prior to the IPO we put posters in all of our offices with a single message mile three. That message to our employees was that our IPO was not a destination, but just the mile three marker on the long run to build a lasting company and brand. The day after the IPO we took down all the mile three posters and put up our mile six poster with our corporate initiatives. And just last month three years later we tore down the mile six posters and replace them with mile eight. The mile eight poster has four words on it enterprise, partners, solutions and cloud. These words represent the core initiatives that we are pursuing on behalf of our customers. Today, I’d like to spend a few minutes on these initiatives and also to describe how we've organized the company to achieve them. First word is enterprise, it means the scale and quality of our products, it means building an enterprise platform that can drive multiple use cases. It means making it easy for developers to build apps. Enterprise also reflects our customers needs and our investments in technical resources that drive customer success and adoption. Partners, reflects our global ecosystem of resellers, developers and our technical alliances. All are critical to our company growth and customer success. Solutions, means apps, content and driving insights and business outcomes for our customers. Splunk is not just about indexing and searching machine data. We are becoming a solutions company. A solutions company that supported by an enterprise grade platform with apps that we build and our partners build. Cloud, this may seem obvious, but here it means cloud first that is designing everything we do to be easy, to be offered as a service and to provide even shorter deployment cycles for our customers. We offer a unique combination of cloud on-prem or a hybrid of those two worlds and our customers really appreciate and value that approach. These four words say a lot about our next phase of growth and true to Splunk’s open culture, we publish them for everyone to see. Just like mile three and mile six, mile eight is a multiyear run ahead of us. And we've organized our exec team to better derive these initiatives. Guido Schroeder and the core development team are building the enterprise grade foundation. In Q1, the product teams shift version one of Splunk Light, rolled out Splunk Cloud internationally, and released new versions of the app for enterprise security, MINT, and the App For Stream. On the partner side Emilio Umeoka is driving our programs for our go to market partners. Stephen Sorkin is building the developer tools and programs and we now have more than 700 apps on Splunk base and a new framework to help developers build apps faster. Solutions, our core use cases are well known, app dev, IT ops, security, compliance, analytics and IoT. To achieve our goals we have created exact positions to drive these markets. We kicked off this initiative with the security market group and Haiyan Song is shaping our vision, strategies and products for that market. We are coming of a strong showing at RSA and Haiyan will brief you latter on this call. Next, we created the ITOA market group with Rick Fitz leading that team. He is also leading our efforts for mobile. I assured that Rick here to defend himself, but in his absence I am happy to report that we got a really strong Q1 for IT operations. The majority of our large transactions were for IT ops use cases. We also shipped the prerelease of our IT service intelligence app and customer feedback has been outstanding. We expect to launch this app at Conf and I look forward to showing it to you then. Last quarter I mentioned that we would focus next on analytics solutions and I had started a formal search for this position. I am happy to report that we filled that position. Snehal Antani has just joined Splunk as our CTO coming to us from GE Capital. Snehal will also become our market group leader for business analytics and IoT use cases. Many of you will recall Snehal presentation at Conf last year for his message of continuous app development was a hit with our customer. Snehal has a strong background in building apps for commercial analytics and is uniquely qualified to fill both roles of CTO and market group for analytics. On the cloud Marc Olesen is driving our cloud business and has built a strong team. Our Q1 results showed continued acceleration and excluding the very large transactions we doubled our bookings from just two quarters ago. Customers want to spend their budgets on software and training to achieve business results. They are less interested in managing the underlying kit and they are delighted with the speed and ROI of Splunk cloud. These four initiatives reflect a large and growing TAM. Our field organization is doing a fabulous job of taking all these products to market. Our global field teams which represent about half of our headcount are led by Doug Merritt that includes sales, professional services, customer success and our partner teams. Doug’s here today to give you more color on our results and customer success. Given the size of our TAM and our ongoing penetration of new markets, my goal for these earnings calls is to give you increasing transparency into these initiatives not only the milestones but also exposure to the execs who are leading them, and hopefully this will be as much fun for you as it is for me. Today we’ll cover security and field operations. In future calls you’ll hear updates from Cloud, IT operations and more. First up, Haiyan Song who is coming off another impressive quarter in the security market. Haiyan?

Thanks, Godfrey. In Q1 we continued to strengthen our role at the nerve center for security. Our ecosystem of partners is growing rapidly. It was evident at this year’s RSA conference, as our presence went well beyond the Splunk group. We presented alongside key partners like Palo Alto Networks, FireEye, Qualys and Tripwire, about the importance of security analytics. We led discussions with cyber security thought leaders in both the public and private sector on the need for a well-orchestrated security solutions stack. Splunk customer Jonathan Jowers, the CISO of SAIC presented to a standing room only theater and talked about continuous breach response, and how Splunk is their security intelligence platform for an analytics enabled SoC. We made two exciting announcements a new release of the Splunk App for Enterprise Security which continues its triple digit year-over-year growth. In Q1, we booked our first 7-figure order solely for ES. We also announced the second Splunk Aptitude contest, to drive community-led innovation in security. A top price of $100,000 will be awarded to the best App for insider threats and fraud detection. We showcased actionable intelligence by jointly developing and releasing the Verizon DBIR app for Splunk. On the hills of Verizon’s release of the 2015 Data Breach Investigation’s Report. And we capped RSA conference with Splunk Enterprise winning the best fraud prevention solution at the SC Award. Fraud detection, just like Breach Analysis continues to be a growing use case for Splunk. For a customer sure-script standardized on Splunk software to crackdown on healthcare fraud by analyzing billings of electronic prescription and other health data transaction from doctors, pharmacies and health plan. High profile breaches are a continuing business driver leading both to reactive and proactive opportunities across all industries. In public sector, we could say we helped to defend the defenders. Northern Command, a new customer is in command and control of DOD’s homeland defense efforts and selected Splunk Enterprise and ES to replace an existing legacy SIM. Splunk is used for both security and IT ops use cases. And a large federal agency selected the Splunk App for Stream in Q1 to leverage Wire data to support security efforts and to mitigate the risk of insider threats by alerting the agency when sensitive information is being transmitted and ensuring traffic and user activities on the network are trustworthy. One final trend worth noting is the continued momentum from our customers selecting Splunk Cloud with ES for security. The City of Los Angeles and Okta are among the customers selecting Cloud plus ES this quarter. I am proud of the build out of our security ecosystem and the results we have delivered thus far. And we look forward to continue to innovate and expand our security solutions for our customers. Now, over to Doug.

Thank you, Haiyan. Enterprise is the first pillar of our mile eight initiatives. As a reminder enterprise means the scale and quality of our products and reflects our investments in technical resources that drive customer success and adoption with EAA's being a key indicator of this adoption. You will recall we announced a new program in February to allow customers of any size to purchase unlimited licenses with fixed predictable costs. Sony Playstation Network signed an EAA in Q1 for Splunk Enterprise. They also purchased Enterprise Security and Hunk. Our longtime customer, Adobe also signed an EAA. This is the latest multiyear adoption story for Adobe. We also closed EAA with Partners Healthcare to standardize on Splunk Enterprise. They also bought the Splunk application for Microsoft exchange. These are all examples of customers who over a period of years have moved from a single department purchase to cross departmental usage to standardizing on Splunk and they demonstrate the additive value of consuming multiple products from Splunk. Now on to our partners another one of the key pillars of our mile eight initiatives. We are tightly focused on global systems integrators, MSPs, strategic technology partners and of course the channel. In Q1, we announced a distribution agreement with Arrow Electronics for North America and are working with CDW on the go-to-market for Splunk light. We also rolled out our Partner Plus Program at Partner Kick Offs around the world. The program has already been named the channel reseller news five-star partner program. We continue to drive strategic technology partners for examples of execution are the co-selling momentum with our partner Syncsort and joint marketing initiatives at Palo Alto Networks. And we extended our strategic alliance with Amazon Web Services financing the international availability of Splunk cloud on AWS. Splunk cloud is now available through nine AWS global regions and early results from our international launcher promising. So first in the UK uses Splunk cloud for analytics to support a Security Operations Center, Katana 1 head of Australia relies on Splunk cloud as the backbone for their marketing analytics solution and Polycom is using Splunk cloud across their global operations to drive visibility across IT in their services and business centers. Domestically Splunk cloud wins include AOL to send it for a large terabyte Splunk cloud instance for real time performance monitoring, log analysis and dev ops. The city of Los Angeles purchased Splunk cloud and the app for enterprise security to correlate cyber threat information with several other governments and monitor and analyze network traffic to identify discrepancies that indicate malicious attacks. And one of our largest transactions to the quarter was a 7-figure order for a customer who was moving 90% of all data to AWS and is turning to Splunk for enterprise assurance and transparency. In addition to our international cloud expansion we are also pleased with our adoption and our new pricing programs are spreading globally. Swisscom, our longstanding Splunk customer signed a large transaction to build the strategic data platform with Splunk. In addition we had transactions with Saudi Arabian Airlines, SIX Swiss Exchange, Laing O’Rourke in Australia, Sky Brasil and Measat Broadcast Network Systems in Malaysia. Interestingly enough, Measat will be using Splunk to gain operational intelligence from their pay television service. Haiyan already covered the security use cases we all set a great quarter for IT operations. Let me give you a few examples. Bloomberg as a longtime Splunk customer and increased their investment in Splunk Enterprise for IT ops and security. And the centers for Medicare and Medicaid services and agency within the Department of Health and Human Services committed to a large expansion of Splunk Enterprise to help keep healthcare.gov online and ensure that Americans are able to sign up for healthcare. On to business analytics we had significant wins in this market segment. Thomson Reuters upgraded their Splunk license to analyze client usage trends for income securities, derivatives and bank loans. Shazam is a longtime customer and expanded their use of Splunk for business analytics dashboards with new and current user trends in real time for better targeting. And as always some of the best stories have come from the Internet of Things, a great IoT story from Splunk Live Zurich came from Graphmasters, a German customer. The company is behind a new navigation app, which helps drivers map their trips. Splunk Enterprise helps Graphmasters correlate data from traffic feeds and suggest the quickest route at any time. And in Splunk Light Hong Kong, the Hong Kong Marine department shared its use to Splunk to keep traffic jams from happening in their harbor. By leveraging Splunk for radar and vessel identifier data, the department monitors shipping vessels as they enter dock, and exit. In summary, it was a good quarter on many dimensions. EAA execution, partner expansion, cloud and market solutions. Now back to you Godfrey.

Thanks Doug and Haiyan. The diversity of customer stories is always an inspiration for our employees and those stories just keep getting better. I recently attended Splunk Lives in DC and London great customer presentations as always. In that spirit I'm delighted to tell you that we've created a new section on our website that holds most of the customer presentations by city. If you ever want to see the breadth of our market opportunity or just a good old-fashioned shot of adrenaline, go check out these great customer presentations at SplunkLive.com from customers like Social Security Administration, Ticketmaster and DirecTV to name just a few. In closing, I’d like to thank everyone who works at Splunk after we were named for the eighth consecutive year as one of the best places to work in the Bay Area. Now let me turn the call over to Dave Conte.

Thanks, Godfrey. Good afternoon everyone thanks for joining the call. Q1 was a strong quarter and a solid start to fiscal 2016 and we’re pleased with our results. First quarter revenues were a $125.7 million a 46% increase over Q1 of last year. License revenues grew 40% over last year totaling $71.9 million. Once again in Q1 more than 70% of our license bookings came from existing customers. We continue to see about two-thirds of our upsells coming from horizontal expansions into new use cases. We added over 450 new customers in the quarter and recorded 226 orders greater than a $100,000. Consistent with our expectations, the ratable mix continues to vary substantially quarter-to-quarter. With the impact from the 7-figure cloud transaction Doug described earlier as well as the overall strength of our cloud business, our Q1 ratable mix was 43%. Given Q1 as our seasonally lowest bookings quarter we still expect our full year ratable mix to range between 30% and 40%. In Q1, international operations represented approximately 24% of total revenues consistent with previous levels and comparable on a year-over-year basis. We will continue to make investments in our international business and look forward to continued growth and global expansion. Our education and professional services represented 8% of revenue in Q1 in the range of prior and expected levels of between 5% and 10%. Once again remember, since we generally recognize revenues on services when they are delivered in full, services bookings typically do not flow through the balance sheet as deferred revenues. Turning to margins, which are all non-GAAP. Q1 overall gross margin was 88% consistent with Q1 last year and our expectations. Operating loss is about $1 million representing a negative margin of approximately 1%. Q1 net loss was also about $1 million and EPS was a negative $0.01 per share based on a weighted average share count of 124.5 million shares. Cash flow from operations was $28.6 million. Free cash flow was about $22 million and we ended the quarter with just over a $1 billion in total cash and investments. Now looking forward to the rest of the year, we expect Q2 total revenues of between $138 million to $140 million with a 1% to 2% positive operating margin. With our Q1 performance and our Q2 outlook we now expect total revenues for the year to range between $610 million and $614 million up from our prior guidance of approximately $600 million. Remember that we denominate revenue globally in U.S. dollars and therefore have no foreign exchange exposure to our 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 our prior expectation. Recall last quarter, but I said over the medium-term, our operating margin targets will include the impact of the gradual one to two point increase in the cost of services to reflect the impact of ramping our cloud business. Additionally, you can expect that we will continue expanding our service capabilities tailored towards the use cases and solutions that align with our market group focus. As we said in the past customers who consume our services have a higher likelihood to also deploy more of our software over time, so happy to offer those additional capabilities. Remember, since we expect to be profitable on a non-GAAP basis for the balance of the year for your EPS calculations you should use a fully diluted share count of approximately 132 million shares in Q2, which will accrete about 2 million shares per quarter thereafter. 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 the total revenues with the quarterly levels following the trend we've seen over the past several years. As I mentioned on our last call, fiscal 2016 will be a higher than typical CapEx year for us as we expect the bulk of our San Francisco headquarters build-out costs to be incurred this year. We combined with global facility expansions to accommodate our growing employee base, we are planning for approximately $50 million in total CapEx this year. Last quarter I said this CapEx would be weighted about $20 million in the first half and $30 million in the second. Based on how that San Francisco project is tracking specifically. Our current estimate is now about $12 million in the first half and $38 million in the second. In closing, our team continues to execute on our mission to deliver exceptional value to our customers and we are committed to continuing investments in our products, solutions and overall global reach. Q1 was solid and I'm enthusiastic about our outlook for the remainder of fiscal 2016. Thanks much for your time and interest. With that, we'll open it up for questions.

[Operator Instructions] And our first question comes from the line of Brent Thill with UBS. Your line is now open. Please proceed with your question.

Good afternoon. I know the EAA program is fairly new. I'm curious if you could give us more input in terms what you're seeing. I know Doug mentioned Adobe and Sony, but maybe a little more color. And then also for Doug, if you could maybe just chat about your go-to-market strategy for the year. Did you make any tweaks or changes to the sales force go-to-market model for Q1 for the fiscal year?

I will take - Doug is swallowing some cough syrup, so I'll take the first half of the question and he will come in for the second. So yes we just rolled out the EAA program at the end of February to the field organization at our sales kickoff, and of course they’ve been out taking it to selected customers. As Doug mentioned in the prepared typically a customer goes from departmental over a period of years, goes from departmental to multi-departmental and at that point in time is when they're more interested in standardizing on a large-scale license. So I think the combination of sort of it’s early in the rollout phase plus it takes some customers some years of experience to get to the place where that’s really appropriate thing for them to do. I would call it very early stage we have just think of it as having just rolled it out and some customers now getting an explanation of it. So I think over the next several quarters it will be a good opportunity for us to give you more feedback because the sale cycles on these things are not instantaneous, but the reaction to it has been quite positive. So second half of the question in terms of changes over the in Q1 or near-term and to the go-to-market model, Doug any comment on that.

Thanks Godfrey. The core of the go-to-market remains the same Brent, but one of the bigger shifts that we made I guess one of the more explicit shifts, was leveraging the success that we saw and the Americas with effective sales segmentation between larger, medium and smaller accounts. We have reflected that throughout Q1 into our major countries internationally with the invocation of majors and enterprise segments, or larger and then medium large accounts within those countries. And I think we’re seeing some good positive effects from that move.

Great, thank you.

Thanks Brent.

Our next question comes from the line of Keith Weiss with Morgan Stanley. Your line is now open. Please proceed with your question.

Excellent. Thank you guys and very nice quarter. There's been lot of discussion amongst the investor community about the competitive environment around Splunk, and I think it comes from two sides. One from the domain expertise competitors, so to say like an ArcSight, an HP in the security space and then also from the open source community, particularly with the ELK Stack and what people are doing around Hadoop. I was wondering if you could comment on whether you’re seeing any change yourself, what you're seeing in the marketplace? Are you seeing open-source becoming more competitive, are you getting into more engagements with the domain experts like an ArcSight within HP, and how are your win rates holding up against those types of competitors?

Thanks for the comments and yes, happy to address that. I don't think there was any change in the competitive landscape in Q1. Splunk’s competitive landscape has always been – when it’s a use case, security, or infrastructure, or analytics when it’s a use case, which most of them are, it’s always about who has a better solution and how quickly can it provide ROI. And we’re in fantastic shape there. Most of our competitors only do that very narrow vertical solution and we usually have the advantage of saying we do that use case and when you get the data in the Splunk you can then solve a lot of other departmental use cases off of that same data. So there's nothing we like better in a competitive landscape situation and to come up against a vertical use case only company, you’ve already named a couple of names because the flexibility of our system and the speed and time to successful deployment and how quickly you can expand other use cases is a huge advantage and it shows up in very high win rates globally. So couldn’t be happier about that. So then I think about customers who either have a bias to build or bias to buy. And if you look at Enterprise software over the many, many years I've been in this business, there have been some fairly steady percentages between the percentage of customers who want to spend – they want to buy commercial off-the-shelf software because they don't want to build anything and that’s about 60% of total spend and about 40 years of customers who were using a whole variety of build technologies to actually build custom enterprise applications. So you have that kind of look at the market through those two lenders and say which customer type is it. If it’s a customer who wants to buy software and not build it, the open-source thing never comes up. And the customers who have a tendency to build, the banks would be a good example. Building big custom enterprise apps, often large development staffs and a high propensity to build things they will always go look at the next open-source technology to say that’s something that provides value. But when you get there Hadoop and ELK are two very different animals. So Hadoop really good at cheap batch storage, ELK really good at solving very narrow questions, but you have to apply about five times the amount of hardware to get it to work. And the reason for that is because it parses the data ahead of time at read and write time and then you have to create key value pairs, it’s custom development all the way just to answer each question for all the key creating key value pairs causes an explosion in data which is why you need five times more hardware to run it and you’ve only narrowed answered a narrow question every time you want add a new question or add a new data source types you have to get the developers back involved to create more key value pairs and custom code all that stuff. So it’s really expensive I mean I know everybody says it's free it’s really expensive to build on ELK both from our hardware standpoint, storage and cost of ownership and maintenance and it’s not a very flexible system. So there's no secret that why it’s been really good at documents and web logs over the years, web analytics and its primary use case outside of documents, but it hasn’t done very well in terms of going into the types of multi-source type multi question, the flexibility that we provide and how quickly we deploy is something that I simply can't touch. So we have a lot of customers who wander often try to build that stuff and they come back bruised and bloody and say boy that was hard and we didn’t get very far and we – and every time we want to make a change we had to go back and then open up the system. So go back to the original length there are customers who want to buy software because they don’t want to build stuff and we never see them and it’s only really in the accounts that have a higher propensity to build where the stuff comes up and they usually wander off in the woods for a while and they come back.

Excellent. All right, thank you very much guys.

Thanks, Keith.

Thanks, Keith.

Our next question comes from the line of Raimo Lenschow with Barclays. Your line is now open. Please proceed with your question.

Thanks, and congrats on up great first quarter. Two quick ones. First if you think about Cloud and how customers are thinking about Cloud, can you talk a little bit about the evolution of that market? Initially, it was all about like Cloud apps and then you add Splunk on it, but from the conversations I have, it feels like it's getting broader and people are taking on-premise stuff into the Cloud. Can you just say what you see there, is that something that excites you? And since we talked about security, a lot of these things at RSA, a lot of the messages there was that a lot vendors started on analytics, and it's not the same. I see your progress there, but how do you think about that? Is just that confirming use case, but is that long-term a competitive threat for you? Thank you.

Well, I’ll reverse of course on the question, so thanks for your comments. I’ve been going to RSA for a number of years now six or seven years now and Haiyan twice that longer more, and it’s so funny that five years ago all the booth signs said SIM and we were the only ones talking about security analytics and now if you go to RSA the word SIM is completely disappeared and everybody is talking about security analytics. So I feel like the market is coming to us in a big way and so I get a big charge out of watching that whole thing pivot. I'm sure Haiyan, will have a much more articulate answer to that then I will, but that’s my two cents on it. Haiyan, do you care to go further?

Sure, you asked about do we see that as competitive threat coming in. We actually think the other way around like Godfrey just talked about we led the market and what we have build as a platform and solution is really for our customer to use the big data and analytics capabilities to gain visibility at insight. And no other companies as I know has that holistic view of all the data from the enterprise and have that particular ability to go across that the silos to bring that insights for the business. Securities no longer IT related issue, is actually business related issue so that holistic view is very important.

To go back to the cloud question. Doug talked about one of our large orders for the quarter was actually a customer whose is moving - it was a dev ops led initiatives, it was led by the developers of the company. And they're trying to move their entire stack apps, infrastructure and storage all to the cloud. So that was an unusual – that’s an unusual customer who is saying let's just go all cloud. But in that case when you're moving all that to the cloud you have to have Splunk there you effectively have all the same issues when you’re trying to monitor and manage and analyze on-prem, you just happen to have them somewhere else. So as those types of migrations occur we’re a natural part of the architecture going in. What’s actually what happens more often than that is that a customer who has most of their activity on-prem they identify an app or a business initiative or a unit of some kind and they say lets do that thing in the cloud. So it’s usually a combination of a lot of stuff on-prem and a new thing on the cloud but they want to be able to traverse those environments. So that our ability to provide a hybrid search ability to provide unified analysis regardless of whether your app is in the cloud or you have brother and sister apps on-prem it’s a huge competitive advantage for us. We’re really the only company in this space that can do both. So yes, that’s what we see most.

Perfect. Thank you.

Thanks Raimo.

Our next question comes from the line of Brian White with Cantor Fitzgerald. Your line is now open. Please proceed with your question.

Godfrey, just following up on the Cloud question there. How important is this to expand with AWS into – it looks you'll be in total nine global regions for that business? And could you just remind us how many Cloud partners do you have today? Is it just AWS, are there other Cloud partners? If it is AWS only, are you going to expand that Cloud network? Thank you.

Yes, we are writing exclusively to the AWS cloud stack and we’re pretty happy about that, we participated in their global launch. So Marc Olesen was running around the world with them as a part of their presentations to launch the international instances. So I think there's a massive market opportunity to help international customers. I was hearing about interest from customers in AWS in Australia as early as I was in the U.S. I think there's opportunity for us to go capture and it’s a long time before we can run out of that opportunity. So we’re pretty excited about the relationship and the ability to go to market with them and I think they have what five times the market share of the number two competitors. So it’s a great partnership to have we’re really happy about it.

And Godfrey, are there any metrics to kind of track how the Cloud business is trending, either customers or growth rates, percentage of revenue?

I will turn that over to our grouch, Conte I mean our CFO, Conte.

But you can hear the background is Doug choking on all the cloud pipeline that we’re dealing with. Unfortunately Doug is not feeling so well. In terms of cloud we’re certainly pleased with where we are, in terms of its contribution today particularly to revenue it’s de minimis, we’ve got a lot of momentum in terms of number of transactions. We specifically call out we did another 7-figure order one of our largest of the quarter in the cloud. So the scalability that we provide to those customers is starting to show in transactions. We’ll get further down the road in terms of track record and provide you what we think the right reporting metrics to demonstrate like how we are doing in terms of cloud, but overall we’re really happy with that momentum. And just pile-on the Godfrey's earlier point the differentiation about our ability to deliver a hybrid environment between cloud and on-prem is really important. So we see a number of our existing on-prem customers also deploying Splunk in the cloud. So sometimes there's a transaction that includes both components, which muddies the waters a little bit in terms your question like how are you guys doing, what metrics do you have, but again as we get more miles down the road we will come back and give you guys some insight.

And we’ll certainly have a presentation on it at Conf so I encourage everybody to be out there.

Okay, thanks a lot. Great quarter.

Thanks, Brian.

Thanks.

Our next question comes from line of Phil Winslow with Crédit Suisse. Your line is now open. Please proceed with your question.

Hi, thanks guys and congrats on another great quarter. I've often described Splunk as the Grateful Dead of Big Data. Nobody does what you do, the way you do it. Kind of along those lines, when you think about that platform, the way you do it, and two of those initiatives you laid out, solutions and partners, how do you delineate about how you want to move up the stack, so to speak, and offer yourselves as applications, versus find partners for it? In some of the moving up stack solutions, on top of that platform sort of a way in your mind to get the flywheel going to also attract partners, hey, see what I can do on this? Maybe you can do something else? And get that virtuous cycle going of applications and platform?

Yes, exactly Phil so thanks for the compliment on the quarter and it’s a – every data engine over time becomes an engine on which applications and solutions are built that’s just the way markets evolve and the money goes there as well and you'd be surprised how many customers start a conversation with us saying I have this business requirement. They don't say we should come in and analyze my machine data for me can you ingest our logs. They actually have a business problem they are trying to solve and that’s most often represented by an app or solution of some kind, so we need to do two things. One is we need to build our own solutions for the core markets where you have to have that solution to compete with the whole product and the second thing when you just develop an evangelizing health our partners go get those solutions that we can't possibly hope to cover. So security is a good example I think it was five or six years ago that we actually purchase enterprise security to app from a partner and over the last five years have build it into a really core part of our offering because you can't really compete in the security market as the serious player unless you have the combination of the engine and app that’s a kind of a minimum component to compete, but the two of them together Gardner says that equals 97% of what they see as a world-class sum. So it really is a market that evolves to accommodation of the platform plus the solutions that are appropriate for customer and are our opportunity to long-term is to do just that and when customers come to us asking us to put their stuff, whatever stuff it is in the cloud it’s typically a solution of some kind, it’s an application that’s doing a job and we are a part of that initiatives. So anyway long answer to a short question, yes it’s important for us to become a solutions company and as we do so those solutions that are not what we build ourselves are a perfect opportunity to go build a partner ecosystem. And Haiyan is trying to correct me on something. Haiyan go ahead.

I just wanted to add. So if you take security is actually a good example of how it takes a whole suite of solutions to provide a complete security solutions back to a customer. So we have yes and together from our ecosystem partners they have build great apps like Palo Alto Networks that build an app that not only help their customers view and analyze their data inside Splunk, but also having the ability to take the intelligence derived from it and actually take actions onto their appliances. So those are great exampled of why it takes the whole community and a village to provide the best solutions to our customers.

Great thanks guys.

Thanks, Phil.

Thanks, Phil.

Thanks, Phil.

Our next question comes from the line of Dan Ives with FBR Capital Markets. Your line is now open. Please proceed with your question.

Great thanks this is Jim Moore in for Dan Ives. Good quarter guys.

Hi, Jim.

On the security side again, could you talk about what you are seeing on the federal front. You talked about some government deals and just the increased focus from their end, and how this might be shaping spending over the coming quarters?

As I mentioned we see great moment in the both public sector and private sector and partly it’s fueled by all those high profile breaches that we have seen in the last year or so. We continue to get a lot of momentum for two reasons, one is breach analysis is a big use case and it’s continue to grow and insider threats it’s one of the top priorities for lot of the federal agencies. Two understand what’s happening insight their agency. We have double down lot of our investment in the public sector area in terms of building government relationships and eventualizing we definitely going to continue to benefit from all the investment we are putting that area.

Great thanks for taking the question.

Thank you.

Our next question comes from the line of Kash Rangan with Merrill Lynch. Your line is now open. Please proceed with your question.

Thanks I like Phil's musical analogy, but I will say you guys are the champions of Big Data. One thing that occurred to me is looking at the fairly significant trend that's happening, the ratable going from 45% to 43%, actually 25% to 43% on a year-over-year basis that looks pretty massive. So judging by my rough back of the envelope calculations, this means three-year breakeven for a subscription versus license. Looks like the value of your business was up somewhere 80% to 85%, so clearly very impressive. And also, your billings on a reported basis looks to have stayed course at 47%. But how am I to reconcile that with the fact that deferred revenues were flat, and we have typically seen that bump up nicely from Q4 to Q1? Obviously there is some strength beneath the reported metrics that I'm trying to get a better handle on. And secondly, what's your sales quota carrying headcount today, and where do you plan to end the year? That's it for me, thank you.

I don't know if I just say thanks Kash or thanks Freddie.

Nice one.

Thank you. As it relates to deferred as I look back over the sequential change over the last number of years between Q4 and Q1 I think it’s been pretty flat Kash and you can see, you pointed out the calculated and derived billings number grew in the upper 40th percentile which you can see in the revenue line, where we over delivered in terms of our expectation. And I repeatedly have the comment in my prepared remarks just as a reminder that services and services bookings typically don't flow through the balance sheet and it’s an area that we think is really important in terms of getting customers to value customer come back and deploy more of our software. And we’re going to be doing more work around providing those types of services capabilities around our solutions that align with the market groups. So I think the composition and the geography of the bookings between the income statement and the balance sheet are actually positive and consistent with how we've had in the past. As it relates to quota carriers, we ended the quarter with 328 quota carriers in total. What we’ve done in the past is we get to the middle of the year and we provide some type of guidance and where we think we are going to end the year in terms of total quota. Recall at dot Conf last year during the analyst session and I introduced the idea that our go to market and our overall field capacity is evolving and it includes the impact of not just pure quota carrying folks, but a lot of the channel investments that Doug referred to before as well as some of the specialists that we are adding to the field organization that can go deliver the right amount of value to a customer that has a security use case or an IT operations use case or business analytic use case. So when we look at our overall investment in the field we are still digesting and working through like how do we think about overall field capacity and what’s the right way to set that expectation with you all externally and that something that again at dot Conf last year I committed that we would come back with what is the right overall field capacity metric to think about and I'm targeting dot Conf for this year so hopefully we are going to see all you guys there and we will be able to share some of that. In summary, I think the best way to think about it is we’re continuing to invest in our GTM teams and you can see that in terms of the allocation of expenses on the face of the income statement, where we consistently provided again on a non-GAAP basis anywhere from 55% to 60% of revenue into sales and marketing and I expect that to be – continue to see that as the allocation in terms of investment.

And if I may, why is the percentage of ratable expanding so dramatically? That is a big shift. What's going on in your end market and the way customers are buying?

Yes, I think you mentioned the year-over-year comparison Q1 of last year was 25%, Q1 of this year is 43% and it specifically ties into a very large cloud specific transaction which is in that calculation momentum in the cloud business overall we’re certainly pleased with having rolled out a formal program around EAAs and Doug listed off the handful of examples of those customer. So we’re enabling the customers with the structure that gives them the predictive economic that they need and we’re seeing those types of transactions materialize all of that feeds into what the percentage is I think the last component which I tried to articulate in prepared remarks is Q1 is our seasonally lowest quarter so when you have a large cloud transaction in the numerator and the denominator it can’t skew the percentage. So what we’re committed to when you guys know because I’ve updated metric probably five times as we see a trend line that says our full year ratable percentages increasing that we’re going to update that expectation. But again even though last year we ended at a 45% ratable in Q4 the overall full year percentage was 38%, so inside of our current range which is 30% to 40% that's our expectation for this year.

Got it. Thanks so much.

Bye Kash. Thank you.

Thanks Kash.

Our next question comes from the line of Katherine Egbert with Piper Jaffray. Your line is now open. Please proceed with your question.

Thanks to follow up a bit more on that, can you talk about the revenue recognition, specifically on the EAAs, Dave? Are they ratable, or are they more up front? And also given, if they are more ratable, and given that you're doing more in the Cloud, why isn't your ratable percentage going up for the year and forward?

Sure, Katherine. So a majority of adoption transactions I would characterize as ratable. But by definition - by default in EAA does not mean ratable. Okay another clarification that I would like to throw in, when we talked about large transactions every quarter those greater than a $100,000 annually we report the number of 7-figure transactions. But it’s important to note that every large order is not synonymous with an EAA, but to answer your question a majority of EAA's would fall into the ratable category. In terms of why isn’t the percentage going up again as we get further down into the year and if we see a sustained level of mix being higher than what is our current guidance of 30%, 40% then we’ll update that, but I can tell you that the way we built our own model uses assumptions that are in that range.

Okay, and just to put a finer point on it, are EAAs that are ratable taking over from previous deals that were non-ratable? So is there a shift going on a little bit here?

What I see you know if you think about the composition of our transactions. We have this growing number of large transactions. ASPs overtime have been pretty consistent and the only way you get a growing number of large transactions with consistent ASPs is a growing number of smaller transactions as well. Q4 was our largest number of transactions in our history and we were pretty close to that, seasonally low Q1. So I wouldn’t say that the large ratable transactions are taking over for what would have otherwise been upfront transactions rather as customers mature with us and get broader amounts of deployment and ultimately standardize across the platform those will tend to turn into ratable transactions. The entry-level point those will tend to be perpetual or upfront.

Okay that makes sense, and just one last quick question. Can you give us EAA as a percentage of revenue in the quarter?

Yes that’s not a metric that we provide today if we think it's relevant in terms of how to build a model then we will provide it. Again what we build our own estimates around adoption transactions and what that means in terms of flow into revenue that's all part of our 30% to 40% mix range that’s contemplated.

Okay. Got it thanks good job.

Thank you.

Our next question comes from the line of Walter Pritchard with Citi. Your line is now open. Please proceed with your question.

Hi, thanks, not to beat this topic to death David, but on the ratable, or on the EAA transactions can you tell how many have a term nature, as opposed to a ratable but perpetual?

Sure hey Walter. The majority of our enterprise adoption transactions are termed transactions or have a term element. What I mean by that is some might be a straight term transaction called it three years certain amount of capacity at the top end of our program that's unlimited capacity. Others might be perpetual in nature that say for you own a certain amount of the software as a perpetual license we’re going to give you headroom beyond that capacity for a period of time i.e. a term, when that term expires you own what you own. So this program that we rolled out last quarter we talked mostly about the top end of that program, which is unlimited adoption transactions those are characterized as three-year terms. We have this headroom concept where as I just mentioned you can buy a perpetual license that has additional capacity available to you that you can keep if you deploy within a certain amount of time and then we have an adoption bundle that is mostly a perpetual license that's wrapped around a set of services and account management resources that are focused on ensuring a successful deployment on the adoption side of the enterprise.

Great, and just one quick one on the product side. It sounded like ITON was a big driver this quarter, and I'm wondering obviously sometimes big deals drive those trends and they're rather lumpy. But do you contribute that success to anything specific on the product side, or anything you've done that might be repeatable? Do you look at that more as a product of lumpiness? Godfrey R. Sullivan: It’s just a quarter-to-quarter situation, the security has been running along in the mid to high 30s over the last couple of quarters it was more like a third in Q1. But I think it’s just more about pipeline in which customers and what use cases in the like in Q4 a lot of the 7-figure transactions were security most of them are a big majority of them and in Q1 a lot of them are ops. The thing I'm most excited about is the IT service intelligence app that we’re out in preview with right now. We have about 20 or 25 customers around the world that have actually installed it and they’re using it and the customer reaction to that is just been extraordinary. So I look forward to getting three or four months more sort of prerelease testing with those large scale customers so that we can launch it at Conf. So it shouldn’t be a Conf if I haven’t said that already on this call we are going to have some exciting stuff to show.

Great, thanks.

Thanks Walter.

Our next question comes from the line of Ed Maguire with CLSA. Your line is now open. Please proceed with your question.

Great, good afternoon. This is Clarence Chen sitting in for Ed, thank you for taking our questions. Two quick ones. The first one, I'm wondering if you could comment on whether you see more customers switching between perpetual and term licenses recently, and if so, is there any reason behind it? And the second one is, I'm wondering if you could also elaborate a bit more on your expectations on the adoption curve of Splunk Light, as well as the expectation on the Arrow Electronics deal from March? Thank you.

Yes, so tell Ed that I am upset that he is not on the call, tell him I want him to call me.

I will let him know. Okay.

Well, the hard thing about whole term versus perpetual and customers have an opinion about this stuff and so when they – if they say I want to take a lower price and set up an annual term service and pay for capacity over a period of years with the term contract that not have a perpetual ownership of software we do what they want them to do. So cloud is impacting that to some degree because more and more customers getting used to a subscription model that hits OpEx and kind of goes against the traditional way that people brought enterprise software on a CapEx model. So there has been a shift going on in the business and I’d say if I look at the way the wind direction is changing I would say it’s changing a little bit towards the OpEx model as opposed to the CapEx model led by our good friends of sales force in others words we sort of start with that wave. So I think over the years as Dave has had updated our model how many times four, five times and continue to increase the percentage of our bookings that are treated in some sort of ratable way. I think it reflects the shift that’s going on slowly in the marketplace, cloud will exacerbate that so at least to add to it. So now I think that’s going to go up not down.

Got it. And then would you be able to also comment on the second one as well, in regard to the adoption for Splunk Light and the Arrow Electronics agreement?

Ask me that question again on the Q2 call we just got the contract signed in late Q1 and we’re doing training and all that sort of things and kind of early in the relationship there it’s probably better to – I think I would be better off to bring that one back for Q2 question.

Understood. Okay, thank you very much. I appreciate it.

Thanks Clarence.

Thank you.

Our next question comes from the line of John DiFucci with Jefferies. Your line is now open. Please proceed with your question.

Thank you. Thanks for taking my question. Its question for Godfrey and Doug, I am just curious how you think the sort of program to have technology specialist you know at Haiyan speak today to complement a more general sales forces going. I guess when you've got some experience now with this and I mean there is obviously demand you guys are continue to put up really good numbers and good momentum. Have you considered expanding the sales force more quickly? Now it seems like you can it you might be able to do something like that.

The last I saw Doug he was living the room chucking cough syrup so he might be back in here to answer the question, but in the meantime I'll take a swing as we continue to invest in the old sources overall there is an enormous competition for both sales capacity as well as technical resources. As our customers get larger they want more help from us in professional services and client architect solutions specialist for market use cases like security. So it is not quite so easy anymore just to add account execs and SEs you have unit of one. The unit of one in the field anymore is more technically waited than it used to be. So yes I would like to expand revenue generation that is carrying capacity as fast as we can inside of brother Conti’s financial on board which is always a strengthening but I have learned accommodate that we have our hammer size but we get along otherwise. And inside that ability to invest as much as the financial envelope will allow is also a constraint call is the market ready it doesn’t do good to put a lot of sales and/or technical resources into a territory unless it's ready unless it’s a place where we feel like we can turn Greenfield into something else. So I think we’re approaching at about the right way right now. We divide territories or we invest in new countries or invest in new verticals, we invest in new technical capacity based on where our analytic show us the market opportunity is and I have to say at this moment I feel like we’re in pretty good balance.

I guess Godfrey, okay, that makes sense, but how would you gauge how that's going? I mean there was a time, not long ago when you would hire sales people and it took them a long time to come up to speed because it's still a pretty sophisticated sale, there's a lot of different use cases, it's very technical. And then you said, listen, we're going to bring in technologists to sort of supplement that, and maybe we can use sales people that aren't quite as technical, and it'll help them get up to speed more quickly. Are you happy with how that has developed, or has that been slower, faster than you would have expected? Because when I see the numbers you guys put up, and listen, if you are going to invest for growth, you have to grow, right? We've seen companies invest for growth and not grow, that's not a good thing. But frankly if it's out there and there's all these other companies and someone asked a question about competition, because everybody wants to be like Splunk, they want to be. There's companies that go out and say, we're like Splunk. Which is a great compliment, but most of the time, they're not like Splunk. Are you satisfied with that program, or I don't know if it's a program, that strategy?

Yes, so got I understand your question and appreciate that. I would say that the one thing that is still an obstacle is the time it takes to ramp people. There is a lot more resource Haiyan has a whole, she has a lot of technical resources that’s security specific across the globe now. We’re in a lot better shape than we were a year or two ago in terms of being able to go into almost any country or any customer or any POC or any competitive challenge and now that we have the field coverage plus we have the technical specialists on the security side where we are a formidable competitor going into an opportunity. That part I feel massively good about, very satisfied with the strategy and the design. The thing that actually hasn't changed very much is how long it takes to ramp new people coming into Splunk. The complexity of the marketplace, the complexity of all the data sources and the number of use types, the number of use cases, the number of differences between the types of problems customers are trying to solve is so diverse that it still takes a long time to learn from however I’ve just joined Splunk to I'm actually able to go and have a conversation with the customer about a variety of use cases and actually build a pipeline, actually build pipeline. That’s the thing that still take some time and I think to some degree you know when Doug talked last quarter about it we said we are not going to go into any as many new countries this year we’re really going to try to backfill and put more people in each country that still a big part of our plan of record and we’re executing against that. And one of the reasons we are doing that is because when you have this many use cases in this wide of range of market opportunity, critical mass is a lot more important than breadth of coverage and so we’re still pursuing that design point with as much conviction as we ever have, so I'm very satisfied with the strategy, but this marketplace is technical enough, complex enough, diverse enough that you can't just throw people in a territory and have them automatically generate pipeline its not quite that’s easy.

And John we’ve talked over the years that we are very cautious about the rate at which we bring folks on board, hiring them is the easy piece, getting them productive and setting them up for success as Godfrey just articulated is more art than science. So we want to be very thoughtful about the rate at which we bring people on so that they are ultimately successful and can deliver for the customer. So that's not new for us in terms of how we set our objectives and ultimately make those investments of the rate at which we invest.

Great, that all makes sense. Thanks, a lot, Dave, one quick question, the renewal rate?

Renewal rate, the DiFucci org design is alive and well that renewal rate again was well above 90% in the quarter in fact it was 94% I think that's the eighth quarter in a row that it's been at 94%. I think it was a call or two ago that we retire the metric just because it was consistently at that 94% range or about 94%. So many quarters in a row that it was no longer really that interesting.

Still interesting to me. Thanks a lot.

Thanks a lot John.

All right, John. End of Q&A

Thank you. Ladies and gentlemen this concludes today's Q&A session. I would like to turn the call back over to Ken Tinsley for closing remarks.

Okay, great. Thanks Nicholas appreciates your help today. Thanks everyone for your participation. As always if you have any questions we are available tonight if you need. Please give us a call. Thanks and have a good evening.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may now disconnect. Have a good day everyone.