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Splunk Inc. (SPLK - Snapshot Report) reported fiscal second-quarter 2014 loss of 13 cents per share, which was wider than the Zacks Consensus Estimate of a loss of 11 cents and the year-ago quarter loss of 5 cents per share.

Revenues

Revenues surged 50.3% year over year to $66.9 million and were above management’s guided range of $61.0 to $63.0 million. Revenues beat the Zacks Consensus Estimate of $63.0 million. International operations represented 21.0% of revenues.

Strong license sales and maintenance & services revenues primarily drove the better-than-expected year-over-year result. License sales (64.6% of revenues) jumped 48.0% year over year to $43.2 million. Maintenance and services revenues (35.4% of revenues) increased 65.9% from the year-ago quarter to $23.7 million.

Splunk’s results were mainly driven by continuous adoption and implementation of its products within the enterprises. Moreover, Splunk generated majority of its revenues from core markets, which include app management, infrastructure and operations, and security compliance. Splunk introduced a number of new products during the quarter, which include the beta version of Hunk: Splunk Analytics for Hadoop.

These new products are expected to boost Splunk’s market share in the emerging fields of web business analytics and processing of industrial data. The company also added more than 400 new customers. During the second quarter, Splunk received 163 new orders, worth more than $100K.

Margins

Gross margin contracted 320 basis points (“bps”) from the year-ago quarter. This was primarily due to an unfavorable product mix.  

Splunk continues to invest in research & development (“R&D”), which jumped 72.6% year over year to $16.2 million in the quarter. Sales & marketing (“S&M”) expense surged 60.9% from the prior-year quarter to $44.6 million. General & administrative expense (“G&A”) increased 64.4% year over year to $11.9 million.

The sharp jump in operating expenses (up 63.9% year over year) hurt profitability in the quarter. Operating loss was $13.3 million compared with a loss of $4.5 million in the prior-year quarter.

Net loss was $13.7 million or 13 cents per share compared with a loss of $4.6 million or 5 cents per share in the prior-year quarter.

Balance Sheet and Cash Flow

Splunk exited the second quarter with $347.1 million in cash & cash equivalents compared with $331.3 million in the previous quarter.

Cash flow from operations was $6.2 million compared with $3.8 million in the previous quarter and $11.6 million in the year-ago quarter. Free cash flow was $4.3 million compared with $2.2 million in the year-ago quarter.

Days sales outstanding were 56 days.

Guidance

Splunk expects revenues in the range of $275 million to $281 million (up from the previously guided range $266 million and $274 million) and break-even operational result for fiscal 2014. For fiscal third quarter of 2014, revenues are likely to be in the range of $69 million and $71 million. Operating margin is expected to be 0% to negative 2.0% in the third quarter.

Our Take

Splunk reported mixed fiscal second quarter 2014 results. Splunk’s revenues are expected to benefit from a strong growth in user base, higher renewal rates and expansion into new markets. We believe that Splunk’s strong product pipeline will also boost top-line growth going forward.

However, increasing investments for product development are expected to drag profitability in the near term. As Splunk continues to explore and expand into new markets, sales & marketing expenditure is expected to increase significantly, thereby hurting margins in the near term.

Moreover, the company continues to face tough competition from established players such as BMC Software Inc. ), International Business Machines (IBM - Analyst Report) and Egain Corp. .

Splunk Inc. has a Zacks Rank #2 (Buy).

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