Splunk (SPLK) may not be the most familiar candidate for your portfolio just yet, but make no mistake: The operational intelligence specialist continues to become more indispensable to its clients by the day.
Having first shipped its software in 2006, Splunk already counts more than two-thirds of the Fortune 100 among its 7,900+ customer base, 500 of which were added last quarter. But earlier this week, Splunk provided an encouraging update through a press release highlighting its particularly promising relationship with tech giant Adobe Systems (ADBE 2.02%). Specifically, Splunk says, Adobe has chosen to not only expand its use of Splunk Enterprise deployed on Amazon Web Services, but will also now use Splunk Cloud -- which runs on AWS -- and the Splunk App for Enterprise Security to support global IT operations, application delivery, and security.
One big vote of confidence
Splunk's press release goes on to state, "Adobe believes that Splunk solutions are vital to both its cloud transformation and continuously evolving security portfolio to help ensure customers receive a great experience with the highest levels of service and security." But with so many customers added each quarter, why does this merit a press release all of its own?
Consider the fact Adobe itself is right in the middle of implementing a massive, accelerating transition away from traditional license-based software, and toward its new cloud-based subscription offerings. In fact, Adobe added more than 500,000 Creative Cloud subscriptions last quarter alone, good for a nearly 22% sequential increase, and bringing its total to 2.81 million. All told, 63% of Adobe's third-quarter revenue came from those recurring subscriptions, up from 52% during the previous quarter.
In short, Adobe's decision to essentially double down on Splunk's software at this point in the transition represents an enormous vote of confidence in the smaller company.
On earnings next week
Of course, the timing of the announcement is also convenient. Splunk's fiscal third-quarter 2015 results are slated for release on Nov. 20, after the market's close, and the market has high expectations. Analysts, on average, will be looking for revenue to climb 36.4% year over year, to $107.2 million, which should translate to adjusted earnings of roughly $0.01 per share. Keeping in mind that its top line exceeded expectations by more than $7 million last quarter, Splunk's own guidance calls for quarterly sales between $105 million and $107 million, with adjusted operating margin of roughly 1%.
The latter might not sound particularly impressive, but we should also note Splunk last quarter reiterated guidance for full-year operating cash flow margin to be roughly 20% of total revenue. And Splunk routinely plows tens of millions of dollars each quarter into research and development and sales and marketing, all at the expense of its bottom line. This, according to management, is to ensure it maintains its leadership position as it fights for share in the continuously growing market opportunity for operational intelligence software.
For now, it makes perfect sense for Splunk to continue its outsized focus on both expanding existing relationships and bringing new customers into the fold. Regardless of where its bottom line clocks in next week, then, investors should keep a close eye on how effectively it has been doing so.
In any case, check back here on Fool.com after the report for my take on how Splunk fared. But if this week's Adobe agreement is an indication of a broader trend, I like Splunk's chances of success.
