It has been about a month since the last earnings report for Splunk (SPLK). Shares have added about 19% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Splunk due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Splunk’s Q3 Earnings Gain on Cloud and Software Revenues
Splunk reported third-quarter fiscal 2020 non-GAAP earnings of 58 cents per share, which beat the Zacks Consensus Estimate by 11.5% and surged 52.6% year over year.
Revenues soared 30.2% year over year to $626.3 million and comfortably beat the Zacks Consensus Estimate by 4%. The year-over-year upside was driven by greater utilization of Splunk’s products by existing customers and new customer wins.
Quarter in Details
License revenues (59.7% of revenues) were $373.7 million, up 33.6% year over year. Maintenance & service revenues (40.3% of revenues) rose 25.5% to $252.7 million.
Software revenues jumped 40% from the year-ago quarter to $454 million. Splunk stated that 92% of software bookings were either term or cloud.
Third-quarter remaining performance obligation (RPO) was $1.45 billion, up 52% year over year. The company expects to recognize $862 million (up 42% year over year) of this RPO as revenues over the next 12 months.
RPO bookings grew 42% year over year to $839 million.
Cloud revenues soared 78% from the year-ago quarter to $80 million on the back of increased utilization of cloud-based services. Management expects cloud’s contribution to grow 50% over the next few years. In the reported quarter, Cloud ARR was $368 million.
Splunk announced it received FedRAMP authorization from the General Services Administration (GSA) FedRAMP Program Management Office (PMO) at a moderate impact level. Agencies that are eager to remove the barrier between data and action will be able to use Splunk Cloud to turn data into doing.
The company continues its successful transition to a subscription or renewable model, which is evident from the fact that Splunk met its 75% transition rate for fiscal 2020 in fiscal 2019 itself. However, this transition is a headwind for the perpetual business, which is declining rapidly.
Splunk added 450 new enterprise customers in the reported quarter. The company had 134 orders greater than $1 million in total contract value, up 21% from 111 last year.
Splunk unveiled its Data-to-Everything Platform in the third quarter including new products such as Data Fabric Search (DFS), Data Stream Processor (DSP) and Splunk Mission Control.
Additionally, the company also announced new versions of Splunk Enterprise 8.0 and Splunk Enterprise Security 5.0, designed to process massive scale to data in any form.
Non-GAAP gross margin expanded 120 basis points (bps) from the year-ago quarter to 85.7%, driven by large-scale efficiencies in Splunk’s cloud business. Cloud delivered a gross margin of more than 50%, marking a milestone achievement, per the company. Splunk’s long-term cloud gross margin target is 70% or more.
Operating expenses, as a percentage of revenues, declined 200 bps on a year-over-year basis to 68.9%. Research & development (R&D) expanded 100 bps, while sales & marketing (S&M) expenses decreased 300 bps year over year, respectively.
Non-GAAP operating profit was $105.5 million, up 61.3% from the year-ago quarter. Operating margin expanded 320 bps on a year-over-year basis to 16.8%.
Third Quarter Developments
Splunk announced the acquisition of Omnition, a stealth-mode SaaS company that is innovating in distributed tracing and improving monitoring across micro-services applications.
The company also announced acquisition of the open source distributed messaging leader Streamlio. Management expects that the acquisition will help accelerate Splunk’s real-time stream processing.
Balance Sheet & Cash Flow
As of Oct 31, 2019, cash & cash equivalents, including investments, were $873.5 million compared with $1.67 billion reported in the previous quarter.
Cash outflow from operations was $134.8 million due to rapid growth of the multi-year term and cloud contracts.
For fourth-quarter fiscal 2020, Splunk expects revenues of roughly $780 million. Non-GAAP operating margin is likely to be 23%.
Management expects that the elimination of perpetual licenses will increase renewable mix to 99% in the fourth quarter and high 90% for fiscal 2020.
For fiscal 2020, Splunk anticipates revenues of almost $2.35 billion, up from the previous guidance of $2.3 billion. The company maintains its non-GAAP operating margin target of 14%.
The company now expects operating cash outflow for the remainder of the fiscal. Splunk projects operating cash outflow of $300 million for fiscal 2020.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -18.18% due to these changes.
At this time, Splunk has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. Notably, Splunk has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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