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Why Splunk Stock Dropped Today

By Steve Symington – Updated Aug 22, 2019 at 3:00PM

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More of the same cash-flow concerns surfaced on strong momentum for its cloud-based subscription model.

What happened

Shares of Splunk (SPLK 1.27%) were down 8.4% as of 3:15 p.m. EDT Thursday despite another exceptional quarterly report from the operational-intelligence platform leader.

Splunk said late Wednesday that its fiscal second-quarter revenue soared 33% year over year to $516.6 million, translating to adjusted earnings of $46.6 million, or $0.30 per share. By comparison, Splunk's guidance called for lower revenue of $485 million, and most analysts were looking for significantly lower earnings of $0.12 per share.

Frustrated investor holding the bridge of his nose in front of a computer screen.

Image source: Getty Images.

So what

Splunk added nearly 500 new enterprise customers during the quarter, including the likes of ABB, Verizon Media Group, and Zoom Communications. And in a separate press release, the company revealed it has agreed to pay roughly $1.05 billion (60% in cash, 40% in stock) to acquire cloud-monitoring leader Signal FX -- a move CEO Doug Merritt says will give it industry leadership "in monitoring and observability at massive scale."

What's more, CFO Jason Child says Splunk's cloud business grew 80% year over year, and now boasts annualized recurring revenue (ARR) of more than $300 million. The company believes that by the end of the year "virtually all new software sales will be cloud or term license-based."

But in Wall Street's eyes, that's also the problem.

While Splunk followed by increasing its fiscal-2020 guidance to call for revenue of roughly $2.30 billion (up from $2.25 billion three months ago), it also told investors it expects net negative operating cash flow of $300 million for the full fiscal year -- a big reduction from previous expectations for positive cash flow of $250 million.

Now what

During the subsequent conference call -- and with echoes of the same concerns following last quarter's report in late May -- management explained that Splunk's accelerated shift toward renewable licenses is hurting the timing of cash collection in the near term.

"Again, this is all about timing," Child added during the call. "While we expect long-term cash yield to return to the mid-20% levels, the timing to get there is dependent on our term-cloud mix over the next few years."

Make no mistake, it's an enviable "problem" for Splunk to see such incredible momentum in its shift toward a cloud-based recurring revenue model. And I think in time, this pullback will prove an excellent buying opportunity for patient, long-term investors.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Splunk. The Motley Fool has a disclosure policy.

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