Splunk Smashes Estimates and Makes a Big Acquisition

Splunk (SPLK) announced fiscal second-quarter 2020 results on Wednesday after the market closed. If absolutely trouncing expectations, showing fast progress in its transition to a renewable software model, and raising guidance for the third time this year weren't enough, the operational intelligence platform specialist also unveiled a 10-figure acquisition that should extend its industry leadership that much more.

Let's dive in for a better idea of how Splunk finished the first half, as well as what we should be watching in the coming quarters.

IMAGE SOURCE: GETTY IMAGES.

Splunk results: The raw numbers

Data source: Splunk. *For the quarter ended July 31, 2019. GAAP = generally accepted accounting principles.  

What happened with Splunk this quarter?

• Revenue was far above guidance provided in May for approximately $485 million.
• Adjusted for items like stock-based compensation and acquisition expenses, Splunk generated (non-GAAP) net income of $46.6 million, or $0.30 per share -- also far above estimates for $0.12 per share.
• Adjusted operating margin was 9%, absolutely shaming Splunk's guidance for the metric to arrive at roughly 3%.
• License revenue grew 39.2% to $279.3 million, while maintenance and services revenue jumped 26.5% to $237.3 million. Within those totals, software revenue soared 46% to $350 million.
• Splunk generated operating cash flow of negative $129 million and free cash flow of negative $141 million.
• Splunk added nearly 500 new enterprise customers during the quarter.
• Notable new and expanded customers relationships included ABB, Denny's, Duke University, Harvard Business School, DoorDash, Penn State University, Verizon Media Group, and Zoom.
• In a separate press release Wednesday, Splunk announced it has agreed to acquire cloud-monitoring specialist SignalFX for a total price of $1.05 billion, to be paid with roughly 60% in cash and 40% in Splunk common stock. Assuming it passes regulatory muster, the purchase should close in the second half of this fiscal year.

What management had to say

"I am excited by our strong quarter, tremendous cloud growth, and our agreement to acquire SignalFx," stated Splunk CEO Doug Merritt. "I am particularly pleased with how quickly we are accelerating our business transformation to cloud, and the impact cloud is having on our customers."

More specifically regarding the SignalFX deal, Merritt elaborated:

Data fuels the modern business, and the acquisition of SignalFX squarely puts Splunk in position as a leader in monitoring and observability at massive scale. SignalFx will support our continued commitment to giving customers one platform that can monitor the entire enterprise application lifecycle. We are also incredibly impressed by the SignalFx team and leadership, whose expertise and professionalism are a strong addition to the Splunk family.

"With year-over-year revenue growth of 80% and ARR now over $300 million, the strength of our cloud business is driving a faster transition to a renewable software model," added Splunk CFO Jason Child. "By the end of the year, we expect that virtually all new software sales will be cloud or term license-based."

Looking forward

For the third quarter of fiscal 2020, Splunk sees revenue arriving at approximately $600 million -- around $10 million higher than most investors had expected -- with adjusted operating margin expanding to 16%.

Perhaps unsurprisingly, Splunk followed by increasing its full fiscal-year outlook to call for revenue of $2.30 billion (up from $2.25 billion before). Splunk also reiterated its target for fiscal 2020 adjusted operating margin to be roughly 14%.

From its massive quarterly outperformance to raised guidance and an exciting acquisition to boot, there was little not to love about this report from Splunk -- apart from, perhaps, the modest dilution shareholders will endure for the stock portion of the purchase price helping fund the latter. And while it remains to be seen how the market will react with shares already trading near an all-time high leading into yesterday's close, there's no denying the enviable momentum Splunk's underlying business is riding right now.