In this episode of Making Markets, Gary Steele, CEO of Splunk, talks with host Daniel Newman about the company’s recent earnings and how Splunk is balancing growth and profitability, their current observability approach, and how security has changed in today’s geopolitical environment. Gary also shares his thoughts on the AI boom and what to look forward to at this year’s Splunk .conf 2023 event later this month.
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Transcript:
Daniel Newman: Gary Steele, CEO of Splunk, joins us to talk about the company’s strong Q1 earnings. We also dive into what the company’s customers are looking for and how that’s shifting Splunk’s strategy. We’ll talk about observability and security, and then we’ll tease what’s going to happen at this year’s Splunk’s .conf23 conference. Strap in — you’re with us for this episode of Making Markets.
Announcer: This is the Making Markets Podcast, brought to you by The Futurum Group. We bring you top executives from the world’s most exciting technology companies, bridging the gap between strategy, markets, innovation, and the companies featured on the show. The Making Markets Podcast is for information and entertainment purposes only. Please do not take anything reflected in this show as investment advice. Now, your host, CEO of The Futurum Group, Daniel Newman.
Daniel Newman: Welcome back to Making Markets.
Gary Steele: Thank you, Daniel. It’s great to be here.
Daniel Newman: It is good to have you back, and it hasn’t been that long since we’ve talked. I had you at the Six Five Summit just last month, and that was a great conversation. We dug in a lot on security. One of the things we don’t do at the Six Five Summit that I do here on Making Markets is I like to talk about, well, the market. I like to talk about the financials, the business, the performance, and you had a pretty good Q1, and the market seemed to respond to it really well. Tell us a little bit about the Q1 results and talk about how you’re thinking about running the business right now in this choppy economic era.
Gary Steele: Yeah. No, we felt really good about our results. I really want to thank all the Splunkers that participated in that. We’ve been focused on balancing growth and profitability, and I think we delivered a great set of results. We had nice growth on the top line, and we were able to continue to manage cost quite well. Our actual OPEX was down 1% year over year, and as a result of that, we had great cashflow production, so really right in line with what we wanted to deliver, and we felt really good about that outcome.
Daniel Newman: Yeah. I think that’s important. I mean, one of the things though I was trying to say, Gary, is there is still a lot of uncertainty. I mean, we feel like we’ve seen what has now been deemed the magnificent seven have skyrocketed against the backdrop of what has been economic uncertainty, high interest rates, unknowns on inflations of relatively hawkish fed, some conservativeness in hiring rifts all around the marketplace. So for a growth tech company like Splunk, you don’t have the same latitude in terms of your investors’ institutions to be quite as bold as those seven companies. No one else does. It’s like the seven and by the way, they’re propping up all the averages. They’re making everything look a little better than it maybe really is. So, what are you thinking about or how are you thinking about running the business right now when there is still quite a bit of unknown? And even if there’s going to be that recession in hard landing, I still don’t think we know 100% that there won’t be.
Gary Steele: Yeah. No, it’s really interesting. So if you go back to July of last year, we started to see the impact of the economic environment, and one of our big focuses is moving customers to the cloud. We saw some of those cloud migrations be a little less certain. We saw that all the way through until we got to January. And then we talked about the fact that we saw more deal scrutiny, so more oversight on how deals were getting done.
And so as we walked into this fiscal year, we really were thoughtful about our guidance to make sure that we were accommodating that. And we just have assumed that things frankly don’t get any better, that they stay pretty much constant. And as we execute through that, we’re really focused on how we deliver real value to our customers, help them through the maturity journey. And we do that in a really efficient way. I’ve been on a mission to drive balance between growth and profitability, and we’ve continued to deliver on that, and I think that’s going to be important this year. But we took into account what we had seen from a macro perspective as we built our guidance up for the year. So I feel really good about where we are today, the way the team’s been executing in the value that we’re delivering to customers.
Daniel Newman: Well, that actually segues really nicely to where I wanted to go. I hit you on your strategy and your business decision making, but you also are impacted and affected by your customers and how your customers feel. And frankly, customers that need security and IT operations observability come from all industries. And while the tech industry maybe has fared a little better, and you could probably argue that this generative AI boom has been a bit of a tailwind for everybody in tech. A lot of industries haven’t necessarily felt that same tailwind industries like retail or manufacturing, which has had tons of supply chain issues. Tell me a little bit about what your customers are looking for right now and how you’re thinking about your strategy in terms of supporting their needs in these times.
Gary Steele: Yeah. Overall, our focus has been driving broad resilience in their business, helping organizations deal with the broad range of cyber issues to drive resilience there. But thinking more broadly about how companies build out a more digital footprint, how do we help them keep that up and running all the time? And that’s really our focus, which has been around resilience. And so when we’re engaging with customers, it’s really under that framework. And then also helping them think about how can they save money? Can we actually help them consolidate vendors, drive simplification in their IT infrastructure, make it easier for them to manage these complex environments? And I think that’s been a very important role that we played. And we noted in our earnings script a couple examples of customers where we’re basically, we’re driving consolidation, and that consolidation ultimately saves the money and drives simplification.
Daniel Newman: Yeah. And speaking of simplification, one of the biggest challenges that enterprises have right now is about value from data and dealing with their data at scale. We’re talking a lot of petabyte scale now. We’re talking exabytes, we’re talking massive. And of course, with all the AI boom, ambient data, edge data, cloud data, on-prem data, the need for observability cannot be understated. And you can see it in some of the market moves that are being made by both you and competitors in the market as companies are trying to get a better handle on their IT landscape. They’re trying to figure out how to manage FinOps, the IT ops, the SecOps, everything. And then they’re trying to consolidate it down to one thing, talk about observability because this trend line seems to play in your favor, and how much of a growth engine is this going to be no matter what the market looks like?
Gary Steele: Yeah. No, it’s super interesting actually because observability is a really important growth driver for us. Where what’s really driving that from my perspective is if you look at what happened during the pandemic is many organizations of all kinds and sizes across industry had to become more digital. And as they became more digital, they actually have to make sure those systems are up and running at all times. And so this broad resilience message has been so critical to helping us partner with customers with observability to help them drive the outcomes that they want because those systems have to be up and running.
And so this very steep climb in the number of applications that are out there is really driving the demand for observability solutions. Now, the reality is there’s lots of stuff that’s been bought over a long period of time, and I think customers are staring it down saying, “Hey, I don’t want to have 27 vendors here. I need to narrow this down to a small number, and I need to have an environment that’s easy to manage.” And so that’s another broad theme we see as organizations are driving for resilience, they’re also trying to figure out how can we be more efficient and more cost-effective? And that’s a role that we’re playing today.
Daniel Newman: Yeah, I think that’s a big opportunity. I would never ask you to comment on any other company’s deals, but even just today as we are on this pod and we saw Apptio go, IBM made that acquisition. So you’re seeing this really strong trend line towards companies trying to A, manage cloud expense B, manage their whole IT landscape C, managing things like labor and cost, not just labor for running all the IT. And this is something that you guys at Splunk have been at for a while is helping companies to do this. And I think if you measure this against that backdrop of austerity, and of course that backdrop of how efficiency can be created by generative AI, I wouldn’t call it table stakes, Gary, but I would say any large company with a significant IT sprawl in architecture really would be somewhat crazy not to have a strong observability plus FinOps practice to be always looking at their numbers to make sure they’re never spending money they don’t need to spend.
Gary Steele: No, for sure. And I think this economic environment is forcing people to take a bunch of actions that maybe they wouldn’t have taken in a different economic time. And I think frankly, it’s played well for us. We’re creating a lot of visibility for them where they didn’t have visibility before. And it really speaks to the fact that the volumes of data that people are dealing with, to your point earlier, has just skyrocketed. And they’ve got to get their arms around that, and really understand then how do they drive that into decision making? How do they have visibility around that? And that’s a role that we’re playing every day.
Daniel Newman: So let’s pivot to something I know you really enjoy talking about, and that’s security. So obviously I’ve always kind of said, Gary, that the economy matters less with security, it should matter less with security. The risk profiles go up in tougher economic periods, but the need to spend to invest, and this is not only is your career here at Splunk, but really, you’ve spent many years in this particular space. Talk to me a little bit about what are you seeing and what are your customers seeing as it pertains to security?
Gary Steele: Yeah, I think there’s a few dynamics that are important. I think one is the broad thread environment is probably more complicated today than it’s ever been because of the geopolitical conditions that we’re operating in. Just the world that we’re living is a different place today. The tension with China in particular, I think, is something that’s on a lot of people’s minds.
You couple with that, the fact that the attack service has grown significantly for almost every organization. So as they win digital, that broad digital footprint creates a much more complex attack surface to protect. And so one of the things we see today is that as organizations are thinking about where can I tighten the belt, et cetera, they’re being really careful about their cyber spend. And I think cyber for us has been very resilient. And I think it will continue to be so because of the operating environment that we have. And I honestly just don’t see things fundamentally changing. And while there’s all this amazing optimism about generative AI, it’s yet another set of tools for attackers. And so I think we’re going to see more sophisticated attacks as a result of that. And so it’s incumbent upon organizations to really think about how do they continue to improve and mature their posture.
Daniel Newman: I’m glad you mentioned the generative AI thing because one is you really can’t have a conversation, not talk about it. I think there’s some… I think it’s like on a banned book list or somewhere, you have to talk about generative AI on every tech podcast now for the next eternity. I’ve never seen a trend that’s actually not new, be so new, and then be pervasive. But I do because in my mind, I’m thinking about generative AI for security, and for instance, the ability to automate the creation of more and more sophisticated emails. So like phishing and spear phishing attacks. So the system’s going to be able to scrape really personal data and then make these what have been oftentimes very spammy generic emails from some unknown country into something that’s going to feel and look really real because it’s like they’re going to be able to use imagery and use real things that you’ve written and typed in the past and do it on almost a generatively… Well, on an exactly generative basis. I mean, this is big though. And this is what we really-
Gary Steele: No, actually, Daniel, if you just think about it in the most simplest terms, a lot of these attackers live in foreign countries and our foreign nationals. And so English is a second language, generative AI is going to fix all those issues that were easy to spot.
Daniel Newman: Yeah, that’s kind of what I’m thinking-
Gary Steele: At a very simple level. They’re going to be that much more sophisticated, every single one of those. And why wouldn’t the attackers use these tools? They’re widely available.
Daniel Newman: Well, Gary, I was thinking about, I went to the Salesforce AI, their generative AI launch, and I was looking at how they were cross-referencing a CRM database and a generative AI tool like OpenAI to create these super personalized emails for sales purposes. And it’s going to be-
Gary Steele: It’s the same thing.
Daniel Newman: Yeah. I mean-
Gary Steele: It’s the same thing.
Daniel Newman: … it does create some urgency, and all the companies that have been sitting on their hands are treating security as the minimum viable product for a long time. It’s the least we can do to meet the requirements and have the ability to back ourselves when we get hacked because there’s always the when, it’s never the if anymore these days, it does definitely create a big opportunity. And I think security’s going to continue to be top of mind, and the CSO, CIO, CFO board relationships are going to only get more and more tight as this generative, and this general digital transformation trend continues to accelerate. So as we get a couple of minutes left here, I’d love to talk about an event that you have coming. We’re going to go to the desert in July.
Gary Steele: We are. We are.
Daniel Newman: From .conf. I’m very excited. I will see you there.
Gary Steele: Yes.
Daniel Newman: Talk a little bit about what everyone can expect from .conf, whether they’re there in person or they’re following it online.
Gary Steele: Yeah, you bet. .conf is our big user conference that we hold annually. It’s in Vegas this year, the third week of July, and we’re really focused on the innovation that we’ll be delivering. AI obviously is a hot topic, and we’ll be availing our detailed plans or as it relates to AI. And we have some other really interesting announcements that’ll help people understand where we’re headed from a product point of view. So I’m really looking forward to it. I think it’s going to be an amazing event, and we’re fully out of the pandemic. We’ve opened up the audience to be much larger this year as a result of that. So super excited about it.
Daniel Newman: So AI though, I mean, you’ll have at least one big chunk of your keynote will be all about your AI strategy and your new AI offerings then?
Gary Steele: Well, a piece of what we’ll be talking about and our technical leaders will be discussing is our approach, strategy, and what people can expect. I think people will be excited about that. And then we also have some other very interesting offerings. One of the things that we’ve talked a little bit about that we’re focused on is bridging a lot of these environments that have been hard to bridge. So bridging from IT to OT, so into more traditional manufacturing environments, how can we help organizations deal with those kinds of things as well? So a lot of really good stuff.
Daniel Newman: Yeah, that’s really exciting. So I’ll end here. And by the way, just thank you so much for being such a generous guest with your time. I do appreciate it. You mentioned how you’re running the business with the, I wouldn’t call it “worst case,” but I’d say a very conservative case. I always like to ask the CEOs to join me here on Making Markets. What is your personal sentiment? Not your bullishness on the company. I’m not asking for any sort of guy, just your overall feel from being out shopping, out eating, visiting clients, talking to customers, being on airplanes, just what’s your overall sentiment about how the market is shaping up? Do you think we are being a little over conservative, or do you think that’s still the right posture given what you’re seeing out there in the market?
Gary Steele: Yeah, I think for me, in running the company, I want to make sure that we’re well out ahead of these trends, et cetera. But when I’m out traveling the world and looking across the broad markets, I think all executives have pulled back because they felt like they had to. But if you actually look at what’s going on, the markets look pretty healthy. And I would say given how tight the labor market continues to be, it’s hard to imagine a recession. So I’m probably a little more positive than a lot of other people on the broader economic opportunity and economic sentiment.
Daniel Newman: Well, there you have it. I have to say, I share that I have a cautious dose of optimism, but I also have the cautionary tale of sometimes when it feels too good to be true, maybe it actually is. So we’ve had a relatively soft landing so far, I’m hoping that maybe the experts and the economists figured out something. So people like us can just keep our heads down. We focus on running the businesses, leading our teams, growing our products, delivering great services, and continuing hopefully to come on the Making Markets podcast to entertain our communities. So Gary Steele, CEO of Splunk. Thanks so much for joining me here on Making Markets.
Gary Steele: Thank you, Daniel. It’s great seeing you today.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
