What happened

Shares of data visualization expert Splunk (NASDAQ:SPLK) gained 32.4% in May 2020, according to data from S&P Global Market Intelligence. The stock reached fresh all-time highs when the company reported solid first-quarter results on May 21.

So what

Splunk's shares were already on the rise when the earnings report came along, helped by a new cloud-computing partnership with Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary Google.

In the first quarter, Splunk's sales rose 2% year over year to $434 million. The adjusted bottom line swung from earnings of $0.02 per share to a net loss of $0.56 per share. Analysts had been expecting a $0.57 loss per share on revenues in the neighborhood of $443 million. That mixed performance might not sound like a vat of rocket fuel, especially since revenue guidance for the second quarter also fell below analyst projections, but Splunk's shares soared 13% higher the next day.

A businessman's hands holding and using a tablet computer with a line chart on the screen.

Image source: Getty Images.

Now what

Splunk's customers are trading in their old-school software licenses for cloud-service contracts by the busload. Cloud-service sales rose 81% year over year in the first quarter while license revenues fell by 27%. This business mix hurts the company's top line in the short run but promises to replace those lost license sales with subscription-style renewable revenues for years to come. The software sector as a whole has embraced this business model in recent years, and Splunk is a little late to the party. But you know the old adage -- better late than never.

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