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Splunk Takes a Breather After Another Beat and Raise

By Steve Symington - May 26, 2016 at 6:39PM

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Sometimes, great just isn't good enough.

Image source: Splunk, Inc.

Splunk (SPLK 3.96%) may have technically exceeded revenue expectations for the sixth-consecutive quarter, but don't expect the market to give the operational intelligence specialist a pat on the back for its efforts. 

More specifically, shares fell around 8% in Thursday's after-hours trading after Splunk revealed quarterly revenue jumped 48% year over year, to $186 million, including a 41% increase in license revenue, to $101 million, and 57.9% growth from maintenance and services, to $85 million. That was also well above the high-end of Splunk's guidance, which called for revenue between $172 million and $174 million. 

But that also translated to an adjusted operating loss of $1.4 million, good for adjusted operating margin of negative 0.7% -- below guidance for adjusted operating margin to be positive at between 1% and 2%. Based on generally accepted accounting principles (GAAP), Splunk turned in a net loss of $100.9 million, or $0.77 per share. On an adjusted basis, which excludes items like stock-based compensation, Splunk's net loss was a much narrower $2.6 million, or $0.02 per share.

To be fair -- and though we don't generally pay much attention to Wall Street's near-term demands -- that adjusted per-share loss was technically in line with analysts' consensus estimates, while revenue came in significantly above expectations of $174.1 million. 

Splunk CEO Doug Merritt called it a "solid start to the year," elaborating: "Our product team continued to deliver innovation in Splunk Enterprise 6.4, a new Splunk Cloud release, and new versions of Splunk Enterprise Security and Splunk User Behavior Analytics. We will continue to support our customers who are leveraging Splunk as their machine data fabric with increased investments in the Splunk platform, our ecosystem and high value solutions."

Digging deeper

Cash flow from operations rose 24.7% year over year, to $35.7 million, or 19.2% of total revenue, or slightly below the company's long-term target for maintaining operating cash flow margin of at least 20%. After accounting for roughly $3.7 million in property and equipment purchases (down from $6.4 million in last year's first quarter), free cash flow grew 44.1%, to $32 million. 

Meanwhile, Splunk wisely continued investing to foster growth through sales and marketing (up 42.3%, to $145.2 million), and research and development (up 50.7%, to $67.4 million). Splunk also added over 450 new enterprise customers during the quarter, with notable new and expanded customer relationships including Chipotle, Tesco, the University of Virginia, Clemson University, Chicago Public Schools, U.S. Courts, and World Bank Group.

Splunk continued to roll out new and improved versions of its products, as well, including:

  • Splunk Enterprise 6.4 and a new Splunk Cloud release, helping customers drive down big data-analytics costs by reducing storage costs of historical data by 40% to 80%.
  • Splunk Enterprise Security 4.1 and Splunk User Behavior Analytics 2.2, offering better machine learning, anomaly detection, context-enhanced correlation, and rapid investigation capabilities.
  • Splunk Enterprise in the Microsoft Azure Marketplace.
  • A Splunk Add-On for Google Cloud Platform, a free tool for providing IT Ops teams with secure GCP Pub/Sub event access.
  • The new Puppet Enterprise App for Splunk, helping DevOps teams collect and anlyze performance data from Puppet Enterprise.

Splunk also struck a number of strategic deals with channel partners, including an alliance with Accenture to help organizations manage machine data, an alliance with Verizon Enterprise to bring predictive threat detection to enterprise and government agencies, and the formation of a new Adaptive Response Initiative focusing on combating advanced attacks with the best technologies from nine founding industry leaders including Splunk, Carbon Black, CyberArk, Fortinet, Palo Alto Networks, Phantom, Tanium, ThreatConnect, and Ziften.

Looking forward

For the current quarter, Splunk expects revenue between $198 million and $200 million, and adjusted operating margin between 2% and 3%. By comparison, analysts' consensus estimates called for roughly the same second-quarter revenue at $199.4 million, with adjusted net income of $0.03 per share.

For the full fiscal-year 2017, Splunk increased its guidance, and now expects revenue to be between $892 million and $896 million, up from its previous outlook for full-year revenue of $880 million. Trending toward the bottom line, Splunk continues to expect full fiscal year adjusted operating margin to be around 5%. Here again, analysts were expecting a more modest raise, with estimates predicting fiscal 2017 revenue of $882.2 million.

With that in mind, it seems strange to see shares of Splunk significantly lower in after-hours trading as of this writing. But investors should also keep in mind that Splunk stock had climbed more than 30% in the three months since last quarter's report, including a more than 16% jump over the past two weeks alone. So if anything, considering Splunk didn't absolutely crush expectations per its usual habit, the pullback isn't entirely surprising.

However, long-term investors should be content as Splunk continues to consciously forsake bottom-line profitability in favor of successfully driving the top-line higher, and taking market share in these early stages of its growth story.

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