Splunk (SPLK) Q3 2021 Earnings Call Transcript

Splunk (SPLK)
Q3 2021 Earnings Call
Dec 02, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Splunk Inc. third-quarter 2021 financial results conference call. [Operator instructions] As a reminder, today's program may be recorded. I would now like to introduce your host for today's program, Ken Tinsley, corporate treasurer and vice president of investor relations.

Please go ahead, sir.

Ken Tinsley -- Corporate Treasurer and Vice President of Investor Relations

Great. Thank you, Jonathan, and good afternoon, everyone. With me on the call today are Doug Merritt and Jason Child. After market closed today, we issued a press release, which is posted on our website.

Also, note that we have posted supplemental material on the Investor Relations web page as well. This conference call is being broadcast live via webcast. And following the call, an audio replay will be available on the website. On today's call, we will be making forward-looking statements, including financial guidance and expectations such as our forecast for our fourth quarter as well as revenue mix, cloud gross margin, full-year and long-term ARR and operating cash flow; and statements and benefits regarding our recently announced intent to acquire Flowmill, which we expect to close during this quarter; and trends in our markets, as well as our expectations regarding our acquisitions, products, technology, strategy, customers, demand, and markets.

These statements are made on our assumptions as to the macroeconomic environment in which we will be operating and reflect our best judgment based on factors currently known to us, and actual events or results may differ materially. Many of these assumptions relate to matters that are beyond our control and changing rapidly, including the impact of the COVID-19 pandemic on our business and the overall economic environment. Please refer to the documents we file with the SEC, including the Form 8-K filed with today's press release. Those documents contain risks 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 Doug.

Doug Merritt -- President, Chief Executive Officer, and Board Member

Thank you, Ken. Welcome, everyone, and thanks for joining us today. The environment we saw in the third quarter was similar to the first half of the year. There is continued pressure brought on by macro conditions, which resulted in some customers hesitating to commit to long-term contracts.

As we reached the end of October, we saw a much lower-than-normal close rate among our largest deals, which caused us to fall short of our bookings target. Overall, our third quarter did not meet our expectations. Despite these near-term headwinds and our Q3 performance, Splunk remains one of the fastest-growing enterprise software companies in history. As we outlined at our Investor and Analyst Day, we're early in the penetration of our $81 billion TAM.

Demand continues to grow. Our customers are buying more over time through data and infrastructure expansion. More and more customers are adopting Splunk broadly throughout their organizations and increasing their commitments, which is seen through ARRs of seven and eight figures. And our Q4 pipeline is robust.

We also reached an important milestone this quarter, exceeding $2 billion in ARR, up 44% over last year. And our cloud momentum continued with cloud ARR growth of 71% and cloud revenue growth of 80%. Splunk customers continue to be on the front line to the rapidly digitizing enterprise, driving cloud, IT, security, and dev ops transformations to create new ways of working. The Splunk platform uniquely accommodates every stage of the cloud journey, being able to meet our customers where they are, when they need us, and how they want to operate.

Whether that's on-prem or in the cloud has been a critical part of our success. Our Data-to-Everything Platform is delivering on our customers' expansive and heterogeneous data needs by bringing together our scalable index with the set of the most powerful capabilities in the market, including stream processing, machine learning, federated search and analytics, and collaboration and orchestration. Our acquisitions of Plumbr and Rigor as well as our recent announcement of our intent to acquire Flowmill are extending Splunk's observability portfolio into the most comprehensive in the industry, enabling us to continue the momentum of a strengthening win rate against incumbent vendors across the dev ops and observability space. where we see a $17 billion TAM opportunity.

In October, we hosted over 30,000 customers, partners, and Splunkers at our .conf20 user conference, where the switch to a virtual event made this our biggest, and in my opinion, our best .conf yet. We were grateful to the hundreds of customers who brought their Splunk stories to life on stage with us, companies like Zoom, University of Arizona, NASDAQ, the New York City Department of Education, and more. In addition to the stories from those customers, we also saw a number of impressive wins this quarter. Herbalife Nutrition, a premier global nutrition company, is a longtime customer and was an early adopter of Splunk Cloud to better manage its application and infrastructure ecosystem.

Herbalife recently expanded to include Enterprise Security to support a significant increase in online business for the company's independent distributors. A major retailer recently expanded their use of Splunk Enterprise to accommodate for the increase in online retail brought on by COVID-19. With our IT, cloud monitoring, and security solutions, this global retailer is improving customer experience and avoiding costly additives as their e-commerce environment continues to grow. Global skin care leader, Nu Skin Enterprises, upgraded their use of Splunk Cloud, which they've standardized across IT, dev ops, and security use cases.

Nu Skin can now take action on data across their entire business and more effectively access historical data to better train custom-built machine learning models. Special thanks for our friends at AWS, who are instrumental in that deal. And this is a customer story I'm particularly excited to share: one of the world's largest technology companies signed a significant 8-figure deal with us, expanding their use of Splunk Enterprise, ITSI, and Phantom. With this major Phantom expansion, this Fortune 50 organization is going all-in on security orchestration, automation, and response.

This customer ingests multiple petabytes of data per day with Splunk and is another great example of how organizations can leverage our technology to build and scale custom in-house solutions, no matter what their infrastructure looks like. Moving on from customer wins. I'm pleased to welcome retired General Dennis Via to our board of directors. General Via brings over 40 years of military, technology, and public sector leadership experience.

We are thrilled with his addition to the board and confident that his extensive experience will help accelerate our impact on our public sector opportunity and broader customer base. In summary, despite our Q3 results falling short of expectations, I continue to believe that our opportunity is massive, and our fundamentals remain strong. I want to thank our customers, along with our partners and Splunkers, for their commitment to delivering data-driven insights in today's data age. Now for more on the quarter, I'll hand it over to Jason.

Jason Child -- Chief Financial Officer

Thanks, Doug, and good afternoon, everyone. Thanks for joining us. Just as we saw in Q2, uncertainty and volatility for macro factors persisted in Q3, causing customers to delay spending commitments, particularly for high-value contracts. As a result, close rates for several large transactions slowed significantly in the final weeks of the quarter, resulting in total bookings coming in below plan, which you'll see reflected in our reported revenue as well as RPO.

Since quarter end, we've scrutinized the transaction pipeline and factors impacting our close rates. All indicators point to continued strong demand overall, and we're confident in the eventual closing of delayed transactions in the pipeline, but when they will actually close remains uncertain. As a result, we remain cautious on near-term market dynamics but confident in our long-term growth trajectory. As challenging as the environment and bookings were, momentum in our cloud performance remains strong.

Cloud was nearly 50% of total software bookings in the quarter, and we ended the period with cloud ARR of $630 million, up 71% year over year. For the entire business, total ARR surpassed $2 billion, up 44% from a year ago. We ended with total RPO of $1.7 billion, up 18% over Q3 last year. And a portion of RPO which we expect to recognize as revenue over the next 12 months was just over $1 billion at period end, up 20% over last year.

We ended Q3 with 444 customers with ARR of $1 million or more, compared to 310 in Q3 of last year. Turning to the P&L, third-quarter total revenues were $559 million, down 11% year over year, reflecting substantially higher cloud mix and total bookings below plan. Cloud revenue was $145 million, up 80% over last year, reflecting continued acceleration of customer migration to our cloud platform. Professional services and education revenues were 9% of total revenues.

Non-GAAP cloud gross margin was our highest ever at 62% in Q3, compared to 54% last year, with continued progress toward our long-term target of at least 75%. Total non-GAAP gross margin in Q3 was 80%, down on a year-over-year basis due to the greater proportion of revenue contribution coming from cloud. Non-GAAP operating margin was negative 2% in Q3, which was below plan due to lower reported revenue. Turning to guidance, given Q3 performance and current visibility, or lack thereof, we are tightening our ARR expectation for the remainder of the year.

While we have a path to mid-40% growth, we are incorporating a lower end to the growth range to account for market uncertainty. As such, we expect to end Q4 with total ARR of between $2.3 billion and $2.35 billion. On the income statement, the acceleration of our cloud transition continues to drive variability in our revenue and operating margin results. Just as we've seen in prior quarters this year, Q4 total revenues are expected to be relatively flat on a year-over-year basis or between $650 million and $700 million based on our plan of mid-50% contribution from cloud, with a non-GAAP operating margin of between negative 4% and positive 3% given the wider revenue range.

Looking further out. While we remain confident in the health of our long-term ARR and operating cash flow growth rates, volatility in the near-term is driving significant variability in our long-term targets. As a result, we're withdrawing our FY '23 ARR and OCF guidance until we close out this year and have a greater understanding of the macro factors affecting the operating environment. In closing, Q3 was the most unusual selling environment we've ever seen, and it was a slow finish to an otherwise strong quarter.

We believe this is a temporary market condition, and the underlying demand remains strong, particularly for cloud. And we remain confident that the drivers we outlined during the analyst session at .conf create a solid foundation to build durable long-term growth. With that, let's open it up for questions.

Questions & Answers:

Operator

Certainly. [Operator instructions] Our first question comes from the line of Raimo Lenschow from Barclays. Your question, please?

Raimo Lenschow -- Barclays -- Analyst

Hey. Can you just talk a little bit about the deal slippage at the end of the quarter? Like you obviously had your Head of Sales leave. How much of this is execution-related and disruption coming from the changes on the internal side versus the market? And what's kind of confidence gives you that some of this is coming back in Q4? Because it looks like not many other vendors in the space have really talked about that. And then I had one follow-up.

Doug Merritt -- President, Chief Executive Officer, and Board Member

Thanks, Raimo. Yes. What we had -- what I started to describe in Q2 of unusual interventions and buying cycles that typically, for our larger deals, high seven-figure, eight-figure deals, we are dealing with the C-suite, the CIO, the CISO. And the team is pretty darn rigorous and effective in making sure that they understand that the economic buyer has got budget, that they're approved to make this acquisition, etc.

And when we saw at the end of Q2 just compounded in Q3, which is deals that the exec team at the customer and our own team thought were going through, that in the final hours or days of routing for approval got stopped by an extraneous group, the CEO or board of directors or CFO. As a context, when we go back and look quarter over quarter, the top 10 deals that we went into a quarter with, we tend to close seven, eight, or nine of those top 10 deals. This quarter, we wound up closing three. Many of those deals, as we talked about every quarter, are back-end loaded.

And I guess the realities and dynamics of the enterprise software business. So I don't view this as an internal issue or a sudden shift in capabilities or process within the sales force, but unusual surprises with customers that have authority that had that authority pulled at the very end.

Raimo Lenschow -- Barclays -- Analyst

Yes. OK. And then one for [Audio gap] duration and that customers didn't commit to kind of bigger engagement, longer-term engagement. I'm just looking at your duration, like kind of how do I marry that up? Because that doesn't show anything.

That looks all pretty normal there. Like, help me understand that, please.

Jason Child -- Chief Financial Officer

Yes. Well, so duration is down because last year, we had an unusually high duration because of an exceptionally strong public sector quarter and specifically, even with a number of beyond three-year deals, and so we didn't see that dynamic this year. So yes, sequentially, duration looks relatively consistent year on year. It's definitely a bigger headwind.

It was down 22% or something like that year on year. But, yes, so I think overall, I would expect duration probably continues to look like it has all year going forward.

Raimo Lenschow -- Barclays -- Analyst

OK. Perfect. Thanks.

Doug Merritt -- President, Chief Executive Officer, and Board Member

Thanks, Raimo.

Operator

Thank you. Our next question comes from the line of Keith Weiss from Morgan Stanley. Your question, please?

Keith Weiss -- Morgan Stanley -- Analyst

Excellent. Thank you, guys, for taking the questions. Doug, I want to dig in a little bit. You started touching on this.

I know a lot of investors are going to go to sales execution. You had a change in leadership. Can you help us understand like sort of where the confidence that you have that this isn't an execution issue, this doesn't have to do with the change of leadership, that this was more of a market event than a Splunk event if you will?

Doug Merritt -- President, Chief Executive Officer, and Board Member

Yes. Thanks, Keith. So what we had said when Susan announced her transition was she had three strong leaders. Christian Smith had been leading global sales for the past two-plus years.

Carrie, obviously, as our continuing CMO and John Sabino as our continuing chief customer officer. So from the day in, day out management and everything from pipeline build, overall process flow, customer engagement, it's the same team underneath Susan that's still driving those activities. Just in looking at the progression of this quarter, there was -- the unusual component was the number of our largest deals that, by the way, are still in play. They got pushed into Q4.

That just has never happened before. And so I've been looking -- scrutinizing this in every way possible with the finance team, the sales ops team, the sales field leaders, myself, that the concerns that we had in Q2, that there was is some really aberrant buying behavior happening as -- again, large transactions got scrutiny that in the past seven years or really the past probably 30 years of enterprise software, but the past 37 years here, I've never seen yet that level of scrutiny is the one common thread across a quarter that still delivered 44% ARR growth and 80% cloud revenue growth. So it's still, on a contextual basis, is an impressive growth quarter, but certainly short of both our expectations and our communication of those expectations.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. And then as a follow-up, if we look at like cloud ARR versus total ARR, my expectation has always been that like the cloud deals tend to be smaller in size. Did you see impacts on the cloud side of the equation as well, or is it more so in kind of like the term business? And was that cloud ARR number, did that come in kind of where you guys were expecting? Was there weakness on that side of the equation too?

Doug Merritt -- President, Chief Executive Officer, and Board Member

It affected both large cloud transactions and large term transactions. There were some material large term transactions that got pushed. That would have, I think, had obviously a much more noticeable impact on revenue, which then flows through to RPO, both current and total RPO. But one of the interesting parts about our cloud business in the past two, three years is there are a high number of million-dollar-plus deals and tens of terabytes now approaching 100 terabytes, per day range within the cloud footprint as well.

Jason Child -- Chief Financial Officer

Keith, just one more thing I would add. On cloud, the ARR, you saw that it decelerated to 71%. If you adjust for SignalFx, which we now started comping this quarter, it would have been 86%. And so if you adjust for that, it's not much of an impact, which is why if you look at the revenue aspect of cloud, it actually accelerated, going from 79% up to 80% year on year.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. Got it. And then just one last one. When we're thinking about the cloud dollar-based net retention rate, that's ticked down like a percentage point for the past two quarters.

I'm assuming that's more really sort of lower expansions versus any degradation in the underlying gross retention rate? Would that be the correct interpretation?

Doug Merritt -- President, Chief Executive Officer, and Board Member

That is a great question.

Jason Child -- Chief Financial Officer

Look, the cloud business, I mean, look at where it was a year ago at, what, 300 -- it's growing very quickly. The number -- it's still, on an overall basis, growing significantly. Our view is anything over 130%, that's our target, and we feel good about that. I think you're going to see it bounce down a little bit from time to time.

But I think 130% off of a year ago -- what was it? $300-plus million revenue.

Doug Merritt -- President, Chief Executive Officer, and Board Member

Yes. $80 million of revenue.

Jason Child -- Chief Financial Officer

Or $80 million. Yes, annualized, our ARR would be $300 million. Still, $368 million a year ago is still strong and within the target that we expected.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. Excellent. Thank you, guys.

Jason Child -- Chief Financial Officer

Thanks, Keith.

Doug Merritt -- President, Chief Executive Officer, and Board Member

Thanks.

Operator

Thank you. Our next question comes from the line of Brent Thill from Jefferies. Your question, please?

Brent Thill -- Jefferies -- Analyst

Doug, back October 21st, you guys spoke to all of us and had pretty strong conviction, reiterated all the numbers. And I guess that would leave us to assume that, obviously, the sell part pretty hard at the back half and that these deals were effectively probably late stage, meaning that this was not a competitive loss scenario, this was more of a timing scenario. So I just want to confirm post that Analyst Day on the 21st that that's really where you saw this fall apart? And secondarily, that you don't believe that this was lost to competitors?

Doug Merritt -- President, Chief Executive Officer, and Board Member

Yes. Two really good points, Brent. No. There is not -- one of the seven push deals, that was a competitor loss.

They all are still active, and we are working aggressively to bringing them in Q4. Part of the slight readjustment to Q4 and the suspension of guidance, although I guess suspension of long-term model is the variability on the pandemic is obviously, at least what we're seeing, is relatively high. And I brought that up in Q2 as well. We do play across 20,000-plus customers, 100-plus countries, multiple buying -- three major buying centers across those customers and virtually every industry.

And as you all know, from following the global news, I said there's lots of wins and losses out there as people are dealing with the pandemic. So it's super unusual. I honestly have never seen a approved deal within an approved budget envelope sponsored by a C-level executive get stalled by an outside party. And so part of the -- let's continue to watch what's happening in the landscape.

We obviously felt confident going into .conf in the Analyst Day on the team's ability to perform this quarter and then had some very, very unusual and unexpected activity occur, at least from our vantage point. But no, the deals are still in play. They're not competitive losses. And yes, they're all very late-stage deals that were just in the process of going through the PO approval routing aspect, which is why those top 10 deals generally are coming in at seven, eight, or nine close rates of the top 10.

Brent Thill -- Jefferies -- Analyst

OK. That's helpful. And can you confirm if you closed any of those transactions that pushed in Q4 already?

Doug Merritt -- President, Chief Executive Officer, and Board Member

I think that we have closed -- yes, we have closed one or two. I have to go back and look specifically. I should have looked at that coming in.

Brent Thill -- Jefferies -- Analyst

OK. Thanks for the color.

Jason Child -- Chief Financial Officer

Thanks, Brent.

Operator

Thank you. Our next question comes from the line of Matt Hedberg from RBC Capital Markets. Your question, please?

Matt Swanson -- RBC Capital Markets -- Analyst

Yeah. Thanks. This is Matt Swanson on for Matt. Doug, we've seen a lot of M&A during the quarter with Plumbr and Rigor and then now Flowmill.

Could you just give us a little more color on what you're seeing in the market more holistically that's kind of encouraging you to accelerate the platform build out around observability?

Doug Merritt -- President, Chief Executive Officer, and Board Member

Yes. Again, thank you for highlighting that. We're obviously very excited and very focused on this observability trend. We all are seeing, and I think you guys are seeing as well, you can see it with some of the recent IPOs, the massive shifts are happening to development teams.

They're driven by this next-gen dev ops motion and the convergence that's beginning to happen. But both of these are still in early days around next-gen SecOps. They're intertwined with dev ops is a trend that I think we all feel is irrefutable. Certainly, as we move to a cloud-first perspective, built up a world-class fully functioning SRE team, really move to a full CI/CD and natural framework.

Our own tools become critical to our development teams. We can see that with the many, many more in the cloud companies and strong cloud movement companies that we sell to within that observability arena. The TAM on that sector is roughly $17 billion, and our lean in with SignalFx and Omnition and then Plumbr, Rigor, Flowmill is just representing the excitement that we see as the pandemic on the positive side has really pushed people to get a bit more aggressive on cloud and cloud development. And we think that those trends are real, moving, and likely accelerating.

And our intent is to be the premier and No. 1 organization that is serving this next-gen dev ops and SecOps set of teams that have the world on their back to guide their companies through online transactions and capabilities.

Matt Swanson -- RBC Capital Markets -- Analyst

And sorry, if I could just ask one follow-up on that kind of same line. You've been talking more and more about suite strategies lately. So the observability suite launched at .conf and then Splunk Mission Control. It seems like this could really simplify the on-ramp for enterprises to get to that kind of DevSecOps strategy that you were talking about.

Can you just kind of elaborate more on the go-to-market on those two things?

Doug Merritt -- President, Chief Executive Officer, and Board Member

Yes. We have been serving those three key buying centers, the security teams, the infrastructure management teams, the development of dev ops teams for many years now. Obviously, the big ramp-up is, hey, we really see huge opportunity in this shift that's occurring within dev and dev ops teams. So let's lean in even more aggressively there.

But we have been good, I think, through the years in making sure that we add to security capabilities with acquisitions like Phantom and Caspida and adding to our ITOps capabilities with acquisitions like VictorOps, etc., that wind up getting us No. 1 vendor rating in AIOps and SIM and security ops, etc. So the observability approach is similar, but we have been focusing the past year on, all right, there's these three key buying centers that make sure that we've got an integrated suite or an integrated portfolio that addresses the needs of the security teams, the ITOps teams and the dev ops teams, which goes back to the observability suite, the IT suite, the security suite and then the underlying platform suite that now includes stream processing, orchestration, automation, collaboration services, ML frameworks that powers those three suites. So four core suites, all in processes of being homogenized.

The observability suite is in the front with a consistent UI now and a much more consistent experience, as we've really leaned in to integrate core Splunk with Omnition, SignalFx. And now the teams are hard at work to make sure we're getting the same type of uniform impact with the Plumbr and Rigor capabilities, and they'll be ramping up the Flowmill as well.

Matt Swanson -- RBC Capital Markets -- Analyst

Thank you.

Jason Child -- Chief Financial Officer

Thanks, Matt.

Operator

Thank you. Our next question comes from the line of Keith Bachman from Bank of Montreal. Your question, please?

Keith Bachman -- BMO Capital Markets -- Analyst

Hi. Thank you very much. I have two, and I will ask them concurrently if I could. The first for Jason.

On the current RPO, it was a pretty precipitous drop from 37% gross to 20%. Was that those large deals? Because even on the, say, one out of 10 or two out of 10 closing, it just seems like a startling drop on what is a fairly big base of numbers. But if you could just tease that out for a second. And then, Doug, my second question I want to direct for you is a bit broader than that is, as Brent said, you guys had an Analyst day not too long ago and you reiterated longer-term targets, and what you suggested is these are deal pushouts.

And you've clearly said that these aren't competitive losses, they're just pushouts and part of its macro, COVID, etc. And so given that context, it's a bit surprising to hear you take off the board FY '23 targets altogether or withdrawal altogether rather than giving kind of a time-based stamp, hey, these might be pushed out or something along those lines. But given that you feel these are pushouts of deals and not competitive losses, can you speak to why you're withdrawing longer-term guidance altogether?

Jason Child -- Chief Financial Officer

Yes. So I think there's two aspects on current RPO. One, we are lapping SignalFx, and so that has an impact. That would get it closer to a 30% if you impact that or add that impact.

And then second, if you look at the ARR shortfall that comes from the deal push, it's $50 million to $60 million, if you look at our actual versus what the expectation was. And if you add that to the current RPO, that would then also get you into a number that would be much more similar to what we've seen historically.

Keith Bachman -- BMO Capital Markets -- Analyst

OK. And then, Doug, just on the withdrawal of guidance altogether for '23?

Doug Merritt -- President, Chief Executive Officer, and Board Member

Yes. Given that we went into the year with a pre-COVID guidance that, again, we did talk through at the Analyst Day in mid-October, when you really begin to factor in that $50 million to $60 million that didn't come in this quarter and then the variability that could exist in Q4. Ideally, we make up a big chunk of that. Maybe we don't.

It made it difficult for us to continue with the accuracy that we would want, the confidence I would want because of the amount of variability that we see because of the pandemic effects. So for us, it felt like a more wise and prudent piece, given our disappointment with this quarter, to see what happens in Q4. And then ideally, on the March call, either lean forward with a reinstatement of guidance or an adjusted guidance but I think we really feel that we need to see what happens over the next three months given the size, magnitude and impact of fourth quarter for any enterprise company and for Splunk included.

Keith Bachman -- BMO Capital Markets -- Analyst

OK. Thank you.

Doug Merritt -- President, Chief Executive Officer, and Board Member

Thanks, Keith.

Operator

Thank you. Our next question comes from the line of Michael Turits from KeyBanc. Your question, please?

Michael Turits -- KeyBanc Capital Markets -- Analyst

Hey. Good afternoon. First, for Doug and Jason, just to drill down a little bit on the macro. So you mentioned there's some peers have not been seeing the same thing.

But certainly, tech overall is not, I mean, and areas of digital transformation and security. It's been pretty strong. So what do you -- do you think this is particular to analytics? Is it a deprioritization? So why do you think you're seeing this macro impact more than other segments?

Doug Merritt -- President, Chief Executive Officer, and Board Member

So Michael, if we take out the lapping of SignalFx and look at our ARR close at the end of last year, it's roughly 51%, and we just posted a 44% quarter, and then I compare and contrast that with other tech companies and what they did in Q4 and what they are -- what just posted in Q3 and/or projecting for their Q3 or Q4, the vast majority of those companies, you guys can look at the company, you guess who would compare ourselves to, on a cloud-only basis, some of the smaller direct competitors, the Datadogs, Elastic, Sumos, New Relics on the big ARR basis; the Salesforces, the Workdays, the majority of those had in between 15- and 30-point declines versus 51% to 44%. So we hold ourselves to extremely high standards. We really believe that $81 billion TAM across all buying centers and the roughly $60 billion TAM across our three core technical buying centers and at $2-plus billion ARR, that's incredibly exciting. I think nine enterprise software companies in history have gotten above $2 billion with a 20-plus percent growth rate.

So great to get there. But $2 billion versus $60 billion or $2 billion versus $81 billion is small, and there's still a huge opportunity out there. So we have continued to hold ourselves to expectations on growth and delivery that are above and beyond really anything that other enterprise software companies have done over the past 20, 30 years. My disappointment is we believed and believe that minus the pandemic impacts, a higher Q3 bookings rate was there for us.

And contextually, 44% is great, but that definitely falls short of what we felt internally, what we communicate externally, and what we know would have been possible in a less high-variety landscape.

Michael Turits -- KeyBanc Capital Markets -- Analyst

And then just I think you did 50% of TCV. Software bookings were cloud. Wasn't it 53% last quarter and you were looking for 60% to exit? So is there some logic to why that cloud percentage would have tripped down a little bit?

Doug Merritt -- President, Chief Executive Officer, and Board Member

Yes. From a Q3 to Q3 basis, Q3 is historically our lowest cloud quarter. One of the bigger effects is pub sec tends -- the fed government tends to close in Q3. And while we got our FedRAMP medium out there a few quarters ago, the cloud business in pub sec is not as high as it is in the other theaters and sectors.

The growth rate basis, if we go back to cloud Q3 last year and cloud Q3 this year, it's, I think, the highest acceleration that we've seen in any quarter. But it wasn't a surprise for us to come in below what we saw in Q2. And we're still looking at 50% to 60% final for the year rate. Again, that really is dependent upon some of these big term deals for companies that still want to manage Splunk within their own data centers or they manage it themselves across the public cloud contracts that they have.

But cloud, again, if you get the chance to look at other cloud, pure-play companies, especially any of that went public the past year, year and a half, two years, our cloud revenue has been very, very consistent, maybe high 70s to 80% this quarter with -- that now is $145 million revenue business, bigger than, I think, all those recently public or the majority of those recently public enterprise software cloud companies. So we're viewing cloud as continuing with very strong momentum, and we remain extremely excited about cloud.

Michael Turits -- KeyBanc Capital Markets -- Analyst

OK. Thanks, Doug. Thanks, Jason.

Doug Merritt -- President, Chief Executive Officer, and Board Member

Thanks, Michael.

Operator

Thank you. Our next question comes from the line of Kirk Materne from Evercore ISI. Your question, please?

Kirk Materne -- Evercore ISI -- Analyst

Yeah. Thanks very much. Doug, I was wondering if you could just talk about if there's any commonality in some of the deals that slipped, meaning license deals that were shifting over to term or term that was going sort of into cloud. And then what happens, I mean with the license deal that slips? They can keep paying maintenance, but at some point in time, there has to be a natural rub for the client not to sort of reup with you guys, I would expect.

So I guess just how does that play into kind of your confidence that these are kind of coming back to within a quarter or two? Because I think the concern is that, is this sort of a business model shift that's impacting sort of closures on top of the pandemic? Or I guess just anything you can give us on color, maybe if there's any commonality and then sort of the natural cadence of deals that slip when they need to come back in just in terms of the risk associated, frankly, for your customer.

Doug Merritt -- President, Chief Executive Officer, and Board Member

So I think the biggest commonality among the highlighted deals. Right? Those are not the only deals that slip, but they obviously had the most material impact on our total ACV and ARR number is that they were all big. They were all high seven-figure, eight-figure deals. And the multiyear contract impact, obviously, was a higher factor.

And what we've seen is the unexpected scrutiny that's coming in or the slowdown. There still are thresholds. Deals spend below $1 million in most companies a reasonable size. I don't think the CEO and the Board is going to be worried about that.

But we've seen a $50 million or $100 million or $200 million ceiling come down to as low as $5 million in some of these different organizations that even our buyer that, again, often is a CIO, so a material exec within the company, is not aware of. It kind of surprised them as well. So that's the one comment I was seeing that those deals were across multiple different industries. Not all of them were U.S.-based.

They're international as well as U.S. Some were cloud, some were terms. So there's a variety, but they all were larger deals. For sure, there's no competitive loss while they're still in play is those companies all need expanded capacity.

They're expanding into different additional buying centers, or as they're continuing to get more digital, they need better visibility into those data flows. In almost all cases, there isn't a gun against those organizations' heads for what they currently have. It's a lean forward to make sure that they can cover the landscape that they need to cover. That's where -- at least those organizations and our buyers, obviously, are very upset, our champions.

They wanted it, needed it in Q3. But those organizations are still able to manage and maintain the Splunk that they have and get at least the current visibility they have without that expansion. But we have not had any of those deals disappear yet, and we'll gauge them over the course of Q4 as the teams continue to work -- as our buyers continue to work to make sure that they get the approval that they need and the teams work with them to help them get that across the line.

Kirk Materne -- Evercore ISI -- Analyst

OK. Thanks. And just not to beat a dead horse on the subject, but just anything -- is this global, or have you seen more in the U.S. versus, say, Europe? I'm just trying to get a sense on where you're starting to see more pressure potentially from an economic perspective.

Doug Merritt -- President, Chief Executive Officer, and Board Member

Our bigger deals tend to be U.S. So there was probably a high preponderance in the U.S., but there were a handful of big notable seven-figure deals in all sectors that saw that same impact. There doesn't seem to be any industry -- I've been surprised that, as I think I've talked about in Q1 and Q2 that beleaguered industries, airlines, hotels, cruise ships, or cruise companies are actually still expanding and doing business with Splunk, not all them uniformly, but the numbers are actually surprisingly good across those sectors. So it feels to be more of a company-by-company basis.

Going back to the huge variety of perception reaction and belief of what this pandemic means for individuals, those that are comfortable running around socially and those that are hiding in their homes, that kind of flows in my mind to companies as well. People that are being much more conservative and super prudent and others that are still leaning forward and making sure that they're able to meet the TAM and the demand within the markets.

Kirk Materne -- Evercore ISI -- Analyst

OK. Thanks, very much.

Jason Child -- Chief Financial Officer

Thanks, Kirk.

Operator

Thank you. Our final question for today comes from the line of Chris Merwin from Goldman Sachs. Your question, please?

Chris Merwin -- Goldman Sachs -- Analyst

OK. Great. Thank you. I just wanted to ask about Q4 guidance.

I know that I think it was the seven large deals, right, that slipped like they were very late stage. Can you talk about what you're actually assuming closes in Q4? I think a couple closed already, but just curious what's actually baked into that ARR guidance for Q4. Thanks.

Jason Child -- Chief Financial Officer

Thanks for the question, Chris. This is Jason. So I would say the expectation is that whatever closes that got pushed is likely offset by possibly further pushes. But that's because given the pushes we saw at the end of last quarter, I would assume that the same thing happens.

And then to the extent that there -- we don't see the same impact occur, then you would see us get some or whatever portion of the $50 million to $60 million that we lost last quarter.

Chris Merwin -- Goldman Sachs -- Analyst

Got it. And then maybe just one follow-up on cash flow. I think you mentioned in the release that, that exceeded the target. But op income was a little light, and I think Q4 guidance is a little light as well in op income.

So just curious, what's driving the outperformance on cash flow relative to what we're seeing with EBIT? And how we should also -- any updates on how we should be thinking about the cash flow progression over the next few years? Thanks.

Jason Child -- Chief Financial Officer

Yes. So we'll talk more about the multiyear cash flow projection next quarter. But overall, yes, we have been doing better than our expectation. I think -- obviously, pre-pandemic was a different environment.

I think throughout this year, we assume there might be some increased collections risk. There really hasn't been. And then there has certainly been some upside and maybe reduced travel and some other aspects. I would say the inflow aspect of the business has been kind of exactly as we'd hoped, and that is we moved from collecting upfront to collecting annually over a three-year period.

And so we're, at least at this point, right on track with our expectations of getting back to positive cash flow by the middle of next year and then kind of fully lapping the invoicing change by '23.

Chris Merwin -- Goldman Sachs -- Analyst

Got it. OK. Thanks very much.

Jason Child -- Chief Financial Officer

Thanks, Chris.

Operator

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Doug Merritt for any further remarks.

Doug Merritt -- President, Chief Executive Officer, and Board Member

Thank you. So as I started, I'll deeply express that we are not satisfied with this quarter. This is not the quarter that we anticipate we're going to have. But I also want to reiterate that while the environment that we're in made it much more difficult for us to achieve our original pre-pandemic outlook, I haven't wavered in any way in my optimism about our overall prospects.

We remain one of the fastest-growing enterprise software companies in history. We continue to grow faster than where our larger peers grew when they were at the $2 billion mark. And our cloud business, if you look at that separately, continues to outpace smaller, singularly focused, non-burdened companies in their execution. Our shift to cloud is happening faster than we expected.

Our Data-to-Everything Platform delivers the most powerful capabilities in the market. We continue to invest heavily in the solutions that we push out for security, IT, and our observability buyers. We continue to lean forward with growing the company internally. And more and more, we're the strategic partner for our customers to accelerate their digital transformation.

And we continue to be excited about the opportunities, the TAM, and our ability to fulfill those. So we look forward to Q4 and effective execution across a more robust pipeline going into our Q4 and look forward to a more positive and optimistic call coming out of that quarter.

Operator

[Operator signoff]

Duration: 46 minutes

Call participants:

Ken Tinsley -- Corporate Treasurer and Vice President of Investor Relations

Doug Merritt -- President, Chief Executive Officer, and Board Member

Jason Child -- Chief Financial Officer

Raimo Lenschow -- Barclays -- Analyst

Keith Weiss -- Morgan Stanley -- Analyst

Brent Thill -- Jefferies -- Analyst

Matt Swanson -- RBC Capital Markets -- Analyst

Keith Bachman -- BMO Capital Markets -- Analyst

Michael Turits -- KeyBanc Capital Markets -- Analyst

Kirk Materne -- Evercore ISI -- Analyst

Chris Merwin -- Goldman Sachs -- Analyst

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