• Big data firm Splunk is emerging from bumps in its cloud transition, CEO Doug Merritt tells Insider.
• After first building on Amazon’s cloud, it now works with Google and, soon, with Microsoft.
• Its growth strategy hinges on plans to go after more government deals and win over legacy companies.
• See more stories on Insider’s business page.

Born a data analytics company in the world of private data centers in 2003, before the rise of cloud computing, Splunk was one of the first to catch onto the importance of and opportunity in big data.

The company helps IT professionals sift through and analyze enormous amounts of performance and system data in their networks, and later found that its product was a key tool for security professionals, who needed monitoring and visibility into their companies’ infrastructure.

CEO Doug Merritt has been charged with Splunk’s aggressive transition to cloud since taking on the role six years ago. Merritt’s background is in enterprise software — he led products and solutions marketing at Cisco, and held executive roles at SAP and PeopleSoft, which was bought by Oracle.

In an interview with Insider, he acknowledged Splunk was “behind the curve” when it came to moving from on-premise to the cloud, but a year ago, became a “fully cloud-first” company — with a cyber liability engineering team, a cloud ops team, and regularly-updated cloud products.

Now valued around $22 billion, Splunk went all-in on Amazon Web Services as part of its cloud transition, both in terms of supporting Amazon’s cloud customers and in building its own products on the retail giant’s cloud platform. Last year, it announced a partnership with Google Cloud, and Merritt says Microsoft Azure is next. 

But the road to cloud hasn’t been easy — since Splunk went public in 2012, its ups and downs have all been in the public eye. While the pandemic accelerated overall cloud growth, the company has faced challenges: Splunk reported revenues slipping 5% year-over-year to $2.23 billion in its most recent fiscal year — but cloud revenues jumped up 77% over the same period to $554 million.

As of market close on Friday, Splunk was trading for about $130 a share, down from its 52-week high of around $226. More recently, shares tumbled when CTO Tim Tully — who was instrumental in its cloud transition and orchestrated a series of critical M&A deals — left the company earlier this month.

Now, with hopefully the rockiest period of its cloud transition behind it, Splunk has big plans for the rest of the year. On top of soon adding Microsoft to its cloud partners, it plans to continue going after enterprises slower to adopt cloud, as well as government IT deals under President Biden’s tech modernization and cybersecurity initiatives. The recent hire of a senior executive from Amazon Web Services speaks to the company’s confidence in the public sector as it races to take advantage of pandemic-driven momentum in tech modernization.

A bumpy modernization and cloud journey

As part of its modernization journey, Merritt said Splunk needed to adjust its pricing model, customer go-to market strategy, and update accounting methods to align with a subscription-based revenue model. Some of those changes led to revenue dips and alarm from Wall Street, despite all its cloud business growth.

Tech companies, as well as “aggressive federal government agencies” like the Department of Defense and CIA, were among the first to adopt cloud technologies and recognize the need for Splunk’s products, Merritt said.

Even so, there are plenty of companies still using mainframe computers and other types of legacy systems. The pandemic served as the impetus for even those companies to start using the cloud, which in turn meant they needed security and analytics tools like Splunk’s.

Some of the most cloud apprehensive companies, including in financial services, telecom, and automotive manufacturing, had a breakthrough, telling Merritt, “The only thing that really is working for us is the applications and teams that we have on the public cloud infrastructure,” he said.

Still, Splunk doesn’t plan to stop supporting hybrid or mixed cloud and physical server environments: “I’ve rarely seen any trend be 100% one way or the other, and as exciting as cloud is, and we’re 150% committed to it, there will always be components that will be on-prem,” Merritt said.

AWS helped Splunk, but it can’t stick with one cloud

Merritt views Splunk’s independence from the major cloud players as a huge asset. The company is not in business to “trap and own that data” from customers, but rather to help them analyze it wherever it may reside. In many cases, he said, Splunk’s customers are in a “multi-cloud, multi-data center landscape.”

Yet when it comes to partnerships with the big three, Merritt says AWS is “by far our most strategic and important.” The data analytics company first built its cloud business on and with AWS, and has continued a lucrative relationship with the $51 billion cloud giant.

Describing Splunk’s initial cloud strategy as going “deep” on a single preferred cloud vendor, Merritt said, “Our decision was, ‘Hey, we’re going to do that with AWS. They’re the gorilla, they’ve got the best technology out there. They’re well ahead of everybody else.”

In a marketing video that encapsulates the companies’ relationship, Merritt and Jassy highlight the depth of their collaboration: “One of the things I really like that you guys have done, which is different from some of our other partners, is you didn’t try and pick one area that we integrated together,” Jassy says. “You really integrated end-to-end with AWS.”

AWS is both friend and rival — as Splunk is a strategic customer, partner, and competitor to AWS — and Merritt estimates his company is one of AWS’s top 10 or 20 customers by total volume. 

Yet Merritt acknowledges AWS has released its own products that compete with Splunk’s to one degree or another, including GuardDuty, Control Tower, and Security Hub. Merritt said Splunk worked quickly to integrate with AWS products CloudWatch and Kinesis to avoid “a direct head-on hit.” So while they’re still competitors to some extent, AWS customers can easily use Splunk, thus helping ensure its products stay relevant.

Still, Merritt says Splunk is squarely focused on the data space, and has the latitude to innovate more quickly than AWS in that market: “You have to be able to move faster than the operating system is moving up,” he said.

Working with Microsoft and going after government IT deals

Merritt says Splunk is partnering with Microsoft Azure next, but already has “thousands of customers that run Splunk in Azure themselves.” It also has “connectors to all the clouds,” he said, making the company’s business potentially less reliant on a single cloud vendor.

Splunk recently announced the hire of Teresa Carlson, who joined the company as President and Chief Growth Officer this week. Carlson, a well-known leader in federal IT circles who worked on Azure and built Amazon cloud’s business in the federal government, is helping Splunk put its stake in the ground in targeting public sector deals.

Merritt said Carlson will operate as a “mini-CEO within the business,” running her own public sector playbook and utilizing her relationships within the sector.

“Teresa was that rare executive that came in to Amazon when there was zero in public sector and maybe was able to get that to many, many billions of revenue that they don’t disclose, but we know,” he said. 

Splunk’s government business is significant, analysts say, with the bulk of its federal dollars coming from the Department of Defense and Homeland Security. Fiscal year 2021 was Splunk’s best yet, with $192.45 million in federal contract obligations according to figures from USASpending.gov. 

Chris Cornillie, a federal technology market analyst at Bloomberg Government, told Insider that Splunk’s broad product portfolio could help it win more deals, and its market is growing. The overall opportunity within the public sector continues to expand under President Biden, especially for cloud and cloud services, and as demand for security products ramps up in the wake of the SolarWinds supply chain hack.

“I certainly expect public sector to keep growing at or above the pace of the rest of the business,” Merritt said. “We’ve got a very strong public sector footprint, not just the US, but around the world.”

The Pentagon last week awarded Splunk a deal worth $833 million over 10 years as part of its Enterprise Software Initiative, a modernization program for the defense and intelligence communities. It was jointly awarded to systems integrator Carahsoft, one of Splunk’s partners in the public sector that Merritt says are necessary for landing government contracts.

Other tech giants have chosen not to work with systems integrators, instead brokering deals with the government directly. Palantir, a competitor to Splunk in the government space, goes after contracts on its own, and consequently doesn’t share revenue with those integrators.

Still, Splunk has had success thus far with its partnership tack, and working with cloud giants that have made significant inroads in government and other industries may be key to keeping the deals flowing.

“That will be a really important continued approach,” Merritt said, “Leveraging AWS and in the future [Google Cloud Platform] and Azure, with all the work that they’re doing with their own government oriented clouds both here and in parts of the world.”