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Splunk Inc. (SPLK - Snapshot Report) reported fiscal third-quarter 2014 loss of 12 cents per share, which was inline with the Zacks Consensus Estimate of a loss of 12 cents but widens from the year-ago quarter loss of 6 cents per share.

Despite the loss, Splunk shares moved up 10.2% ($6.10) in after hours trading, due to higher revenue and better geographic success.

Revenues

Revenues surged 51.1% year over year to $78.6 million and were above management’s guided range of $69.0 million and $71.0 million. Revenues also beat the Zacks Consensus Estimate of $71.0 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 (64.7% of revenues) jumped 47.2% year over year to $50.9 million. Maintenance and services revenues (35.3% of revenues) increased 58.7% from the year-ago quarter to $23.7 million.

Adoption and implementation of its products within the enterprises is also helping the company to generate more revenues. The company also added 450 new customers, which resulted in more than 6,400 customers world wide including Tesla Motors, NASDAQ, ING DIRECT, University of Sney, Urban Outfitters, UCLA and Intuit.

The company witnessed substantial business growth across geographies.  Moreover, the company also witnessed a record quarter in the public sector the company has benefited immensely.

Moreover, the company also completed several transactions with the Department of Defense, several civilian agencies along with state and local governments. Moreover, the company also witnessed an increase in business from the U.S. Army, the U.S. Air Force and Texas Health and Human Services Commission, generating good volumes for Splunk.

Margins

Gross margin contracted 209 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 71.2% year over year to $53.0 million in the quarter. Sales & marketing (S&M) expense surged 61.5% from the prior-year quarter to $53.0 million. General & administrative expense (G&A) increased 69.4% year over year to $12.9 million.

The sharp jump in operating expenses (up 64.8% year over year) hurt profitability in the quarter. Operating loss was $16.8 million compared with a loss of $5.4 million in the prior-year quarter.

Net loss was $16.5 million or 16 cents per share compared with a loss of $5.5 million or 6 cents per share in the prior-year quarter. Adjusted net loss per share for the company was 14 cents deteriorating from a loss of 6 cents per share in the year ago quarter.

Balance Sheet and Cash Flow

Splunk exited the third quarter with $351.9 million in cash & cash equivalents compared with $347.1 million in the previous quarter.

Cash flow from operations was $13.3 million compared with $6.2 million in the previous quarter. Free cash flow was $9.3 million compared with $4.3 million in the previous quarter. DSO for the quarter was 63 days.

Guidance

Splunk expects revenues in the range of $291 million and $293 million (previously expected to be between $275 million and $281 million).For fiscal fourth quarter of 2014, revenues are likely to be in the range of $88 million and $90 million. Operating margin is expected to be 6% to 8% in the third quarter.

Our Take

Splunk reported mixed fiscal third quarter 2014 results. Splunk’s revenues benefited from a strong growth in user base, higher execution of orders and good performance of the new geographical markets. We believe that Splunk’s strong product pipeline will also boost top-line growth going forward.

However, increasing investments for research & development and higher operating cost 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., IBM (IBM - Analyst Report) and Egain Corp. .

Splunk Inc. has a Zacks Rank #3 (Hold).

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