Splunk (NASDAQ:SPLK) makes its money by helping businesses make sense of "machine data," the digital information created by the activity of computers, servers, mobile phones, and other networked devices. As the Internet of Things (IoT) grows, so does the amount of machine data, and companies need help using the information. That's where Splunk's software comes in, helping companies sort and analyze all the machine data so that it is intelligible and actionable.
Splunk has an excellent reputation among its customers. At its recent analyst day, management told investors that it had a net promotor score (NPS) of 66.8 for 2016, up from 50 in 2015. A company's NPS (on a scale of -100 to +100) says something about customer loyalty and growth prospects as it measures customers' willingness to recommend a company's products or services.
Splunk produced $1 billion in revenue this past fiscal year and has set its sights on doubling to $2 billion in three years. To do that, it must accomplish two goals to produce more revenue:
- Sell more to its current customers.
- Find more customers.
Let's take a look at where the company is headed.
Customers and revenue
Splunk finished fiscal year 2017 at the end of January with more than 13,000 customers, up a couple of thousand from the prior year. Here's how President and CEO Doug Merritt described the accomplishment:
Customer success is our number one priority. More than 13,000 organizations worldwide depend on Splunk, including nearly 700 new customers this quarter. It is early in our data and analytics journey -- it is a big market with a tremendous opportunity that Splunk is uniquely positioned to win. We are confident in our long-term strategy to become the ubiquitous machine data platform for our customers.
The company counts 85 of the Fortune 100 companies as customers.
Splunk customers typically find out about Splunk when they have a problem. It is not unusual for an individual department within a large company to contact Splunk looking for a solution. Once Splunk creates the solution, word migrates to other departments that may have similar needs. The Splunk sales force promotes Splunk within the customer company and looks for additional opportunities. The goal is to drive enterprise adoption throughout the customer's organization.
Splunk reorganizes the territory covered by its sales force every year. To give its salespeople time to develop the accounts Splunk already does business with, management has been reducing the number of customers served by each member of the sales team. Three years ago, the ratio was 75 accounts per salesperson. This year that number has been reduced to 25 customers per sales rep.
Below is a table showing Splunk's customer total at the end of each fiscal year, revenue for the year, and total revenue divided by the number of customers. The increasing revenue number per customer is the trend investors want to see.
Growing the base
The chart below shows Splunk's customer growth over a longer period of time, up through the most recent third quarter, and its estimate of how it will climb to 20,000 customers in fiscal year 2020.
The importance of developing more customers cannot be overstated. Today there are 18 states that do not have a Splunk-employed sales representative. To manage the accounts that do not have direct Splunk sales coverage, the company has set up a two-tier distribution channel. The company invests resources into developing these channel relationships that will drive new accounts. Over time the goal is to grow the account to a size and a level of importance where it will be migrated out of the distribution channel over to Splunk direct sales coverage.
Tracking the number of customers that Splunk serves is an excellent way to gauge the effectiveness of the company's ability to maximize its revenue potential. Out of today's small accounts will come tomorrow's enterprise-level customer.
Monitoring Splunk's quarterly reports should give investors much of what they need to know regarding Splunk's progress toward meeting its fiscal 2020 strategic goals of $2 billion in sales and 20,000 customers. The company has created a short-term milestone of $231 million to $233 million in revenue for its next quarter ending April 30. The company also announced it brought on 700 more customers last quarter, which it should exceed this quarter.
Knowing Splunk's focus on sales allows us to monitor what is important to the company on a quarter-by-quarter basis. If the company exceeds management's expectations by selling more to current customers or developing new customers faster than expected, investors may benefit from share-price gains.