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Splunk (SPLK) to Report Q4 Earnings: What's in the Cards?

Zacks Equity Research

Splunk SPLK is set to report fourth-quarter fiscal 2019 results on Feb 28.

The company delivered average four-quarter positive earnings surprise of 28.4%. In the last reported quarter, the company's earnings of 38 cents per share topped the Zacks Consensus Estimate by 7 cents per share.

Revenues increased 40.4% year over year to $481 million and came ahead of the Zacks Consensus Estimate of $432 million.

For the fourth quarter, Splunk expects revenues of $560 million.

The Zacks Consensus Estimate for fourth-quarter earnings is pegged at 76 cents per share, indicating a year-over-year increase of 105.4%. Further, the consensus mark for revenues is pegged at $560.6 million, up roughly 33.6% from the year-ago quarter.

Let’s see how things are shaping up for the upcoming announcement.

Factors Likely to Influence Q4 Results

Splunk’s innovative portfolio is expected to boost its revenues. The announced the availability of Splunk for Industrial Internet of Things (IoT) in the last reported quarter. The product launch was aimed at helping industrial organizations cut costs and improve performance by expanding access to data that powers connected devices.

Further, the company announced integrations with Amazon Web Services (AWS) Security Hub, AWS Web Access Firewall, and made it easier to absorb AWS data into Splunk solutions via Trumpet in the last reported quarter.

Splunk’s Enterprise Security (ES) solutions also hold promise. Some of the notable customer wins in this segment in the last reported quarter included the Department of Home Affairs and Texas A&M University. These customers leverage Splunk’s solution to centralize security management on a single platform and better handle the big data scale of their security operations center.

The company is also benefiting from the growing traction in its cloud business. Notably, annual recurring revenue (ARR) of cloud-only reached $200 million in the last reported quarter, which is double from a year ago. This was primarily driven by increased adoption of cloud-based services.

Moreover, Splunk’s customer base continues to expand. It added more than 500 new customers in the last reported quarter. The company had 111 orders of $1 million in the third quarter compared with 61 in the second quarter, which was a significant positive.

Expanding international presence is also a tailwind for the company. Notably, international operations contributed 24% of total third-quarter revenues.

Splunk’s remaining performance obligations (RPO), which include the company’s total backlog, increased 58% year over year to $950 million.  

The company continues its transition to a subscription or renewable model, which is evident from the fact that Splunk is expected to meet its 75% transition rate for fiscal 2020 in fiscal 2019. Moreover, the company witnessed an increase in the number of renewable terms contracts in the last reported quarter, which is a tailwind.

These factors are expected to fuel Splunk’s top line in the fourth quarter of fiscal 2019.

However, the transition is a headwind for the perpetual business, which is declining rapidly. This is expected to hurt profitability in the to-be reported quarter.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or #5) are best avoided.

Splunk has a Zacks Rank #3 and an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks With a Favorable Combination

Here are some companies, which, per our model, have the right combination of elements to post an earnings beat this quarter:

Momo Inc. MOMO has an Earnings ESP of +1.55% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Broadcom Inc. AVGO has an Earnings ESP of +2.68% and a Zacks Rank #3.

Tencent Holding Ltd. TCEHY has an Earnings ESP of +3.57% and a Zacks Rank #3.

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