Big data parsing outfit Splunk (SPLK +0.00%) kept up its torrid pace during its fiscal 2020 second quarter, or the three months ended July 31, 2019. Revenue was up another 33%, including a 46% increase in revenue from the company's lucrative cloud and licensing software segment.
In addition, Splunk got back to making acquisitions, announcing that it would be purchasing cloud computing software SignalFX for $1.05 billion. With its foot on the gas to take advantage of the myriad of businesses around the globe making the move to digital, Splunk remains one of the best software plays around.
The first half by the numbers
Total revenue through the first six months of the year is now up 34%, with cloud (data center-based software and services) and subscription sales leading the charge. Within that total, the licensing software segment still carries an incredibly high gross profit margin and grew at a 42% rate. In total, Splunk is operating a business model that only continues to get better as it adds new customers (there were almost 500 new additions in Q2).
|
Metric |
Six Months Ended July 31, 2019 |
Six Months Ended July 31, 2018 |
Change (YOY) |
|---|---|---|---|
|
License revenue |
$482 million |
$340 million |
42% |
|
Total revenue |
$941 million |
$700 million |
34% |
|
Total gross profit margin |
79.4% |
76.9% |
2.5 pp |
|
Operating profit (loss) |
($232 million) |
($225 million) |
N/A |
|
Adjusted earnings (loss) per share |
$0.32 |
$0.02 |
N/A |
YOY = year over year. Pp = percentage point. Data source: Splunk.
Businesses are awash in data, and Splunk's software is getting put to use in a variety of cases. Some of its clients are retailers looking to gain insight into customer interactions -- DoorDash was mentioned as a success story on the last earnings call, as it's using Splunk to help restaurants reach new customers -- while others are financial institutions monitoring financial data and making sure transactions are secure.
The trend is set to continue, which provides plenty of opportunity for this software technologist to keep finding new use cases. CEO Doug Merritt cited an IDC study that predicts worldwide data will increase over 60% from 2018 levels, and much of that new information is uncategorized and unsecured. Splunk has a solution for both, enabling both analytics and security monitoring to give organizations deep insight into what is going on with their operations.
Image source: Getty Images.
Staying on the offensive
One of the key areas of growth in the big data movement is the cloud. Global spending on cloud services and infrastructure should double by 2023, again according to IDC. Splunk's cloud-based revenue is currently running at around 15% of its total, but it's growing north of 80% and is expected to be about half of the total mix within the next few years.
Doubling down on this trend, management announced it expects to close on the purchase of real-time cloud infrastructure monitoring company SignalFX. 60% of the $1.05 billion price tag will be paid for with cash on the books (Splunk had $1.67 billion in cash and equivalents at quarter end), with the balance paid in new stock. While new shares being issued will dilute current shareholders' interest, this will be a small hit as Splunk's current market cap is $19.3 billion. Overall, this is about growing a larger pie for everyone, so it's a smart move that should help Splunk maintain its sales momentum.
But here's the one downside to the quarter: more negative free cash flow, a basic profit metric that calculates cash after basic operations and capital expenditures are paid for. It isn't exactly a surprise, as management called out the dip in profits during the last quarter, the result of a transition in renewable licensing contracts and subsequent revenue recognition. Splunk also said it will soon be rolling out new pricing plans, reducing the cost of its data volume-dependent model to help its customers run more information through the Splunk system -- and subsequently making the company more customer-centric. Nevertheless, while timing is certainly a factor, free cash flow is now at negative $120 million so far this year, compared to positive $102 million through the first half of last year.
Headwinds to the bottom line will persist through at least the end of this year, and while some investors may fret over this situation, it's still all about top-line growth for this software company. With management giving another slight upgrade to full-year expectations and sales forecast to grow about 28%, Splunk looks like one of the best big data investments around.
