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Splunk: Almost Unaffected

Cloud-based software services have proven to be one of the most resilient sectors in the current Covid-19 environment. Companies with a strong competitive differentiation within this space, such as Splunk Inc (NASDAQ:SPLK), have been able to deliver good quarterly results. While the overall global economic outlook may appear to be highly uncertain, the demand for Splunk's offerings remains solid and the company appears to be on track for another year of double-digit growth.

Company overview

Splunk is a renowned developer and provider of cloud-based software solutions that help organizations gain real-time operational intelligence in the United States and internationally. Its offerings help users to collect, index, investigate, monitor, analyze and act on data regardless of its format or source. Its key offerings include the Splunk Enterprise, Splunk Cloud, Splunk Light, Splunk User Behavior Analytics, Splunk Machine Learning Toolkit, Splunkbase, Splunk Answers Websites and many more services. The company's offerings help companies analyze their machine data and achieve real-time visibility into and intelligence about its operations. Its user behavioral analytics helps to detect, respond to and mitigate advanced, hidden and insider threats.

Beyond its software solutions, Splunk also provides maintenance, customer support, training, consulting and implementation services. Its key target industries include the cloud and online services, education, financial services, government, health care, manufacturing, media, entertainment, retail, e-commerce, technology and telecommunications industries. Splunk is headquartered in San Francisco and has around 5,800 employees.

Strong financial results

Splunk delivered a fantastic quarter, which made its stock soar to a new 52-week high of $186.47. Management reported revenue of $434.08 million, which was slightly below the analyst consensus estimate of $443.21 million but still a good improvement over the prior-year quarter. The company reported an 81% jump in cloud-based revenue and a 52% increase in annual recurring revenue, while going on to become the market leader in this space. As per Gartner's Market Share research for Enterprise Infrastructure Software carried out in 2019, Splunk has the number one market share position in the Performance Analysis in the AIOps, ITIM and Other Monitoring Tools subsegment with 16.5% market share and also in the Security Software subsegment with 26% market share.

Its bottom line was pretty decent at a loss of around 56 cents per share, which managed to beat the analyst consensus estimate by one cent. The company is also strengthening its relationship with Amazon (NASDAQ:AMZN). Splunk Enterprise and Splunk Cloud work alongside Amazon Web Services to provide valuable enterprise solutions to the corporate world. It is rare for companies to deliver such kind of growth in what can be termed as one of the worst financial quarters in many decades, but Splunk has clearly withstood this test well.

Limited impacts from Covid-19

Splunk's results clearly show that the Covid-19 virus has not had a significant impact on its business. An excellent measure of the company's growth and stability is its annual recurring revenue, which has continued to grow despite the crisis. The cloud business has been a big contributor to this as well. In fact, the demand for cloud-based services is expected to increase along with the growth in the number or people working remotely.

Splunk recently partnered with Alphabet's Google (NASDAQ:GOOGL)(GOOG), bringing its cloud service onto the Google Cloud. This initiative should help the company's customers unlock the value of their data, drive actionable insights and enable fast decisions across the enterprise. The only visible negative impact that the coronavirus seems to have had on Splunk's business is the reduction of the contract durations. As per CEO Douglas Merritt's statements on the earnings call, the company's average contract duration has been reduced from 35 months to 27 months by customers, which is not as bad as it could have been. Despite the decrease in hard-hit sectors like retail, hospitality and travel, the company's outlook continues to be solid.

Final takeaways

Splunk has been transitioning from a total contract value-based revenue model to a subscription-based model. SaaS companies are known to have much greater revenue stability and command higher valuation multiples. Management believes the subscription-based model better aligns with the company's core customer group and their buying preferences. At a price-sales ratio of 12.2, the stock is not cheap, but has shown a solid recovery and might prove to be a good long-term investment.

Disclosure: No positions.

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This article first appeared on GuruFocus.