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Splunk Inc. (SPLK - Snapshot Report) reported fourth-quarter 2013 loss of 6 cents per share, which was wider than the Zacks Consensus Estimate of 2 cents loss. Loss per share remained flat on both year-over-year and sequential basis.

Revenues

Revenues surged 51.0% year over year and 25.3% sequentially to $65.2 million and were ahead of management’s guided range of $58.0 million to $60.0 million. Revenues also beat the Zacks Consensus Estimate of $60.0 million. The better-than-expected result was primarily driven by strong license sales and maintenance & services revenues.

License sales (71.7% of revenues) jumped 42.5% year over year and 35.4% quarter over quarter to $46.8 million. Maintenance and services revenues (28.3% of revenues) increased 77.7% from the year-ago quarter and 5.5% from the previous quarter to $18.4 million.

Splunk continues to generate 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 that include Splunk App for Enterprise Security 2.2, App for VMWare 2.0, App for Palo Alto Networks 3.0 and many more.

These new products are expected to boost Splunk’s market share in the emerging fields of web intelligence, business analytics and industrial data. The company’s cloud and Storm platform had more than 160 customers and 200 paid projects, which include enterprise customers such as Electronic Arts (EA - Analyst Report). Splunk’s total customer base was approximately 5,200 at the end of the fourth quarter.

During the quarter, Splunk signed deals with more than 400 new customers, which include the likes of DuPont (DFT - Snapshot Report). Splunk also expanded its existing customer base, as more than 18 customers, such as Moody’s (MCO - Analyst Report) extended their agreements with the company. Splunk continues to experience strong growth in its existing customer base as over 70.0% of the quarter’s license booking came from them.

In the fourth quarter, Splunk signed 171 orders, worth more than $100,000, compared with 94 in the prior-year quarter and 125 in the previous quarter. Deferred revenues increased to $115.0 million from $74.0 million reported in the previous quarter. This included a $20.0 million order and 117 figure transactions.

Maintenance renewal rate was 92% in the reported quarter. Term-base and perpetual license sales mix was 13.0% in the quarter compared with 8.0% in the year-ago quarter and within the historical range of 10.0% to 20.0%.

International operations represented 26.0% of revenues as Asia-Pacific (“APAC”) and Europe Middle East and Africa (“EMEA”) jumped over 60% from the year-ago quarter.

Margins

Gross margin contracted 220 basis points (“bps”) from the year-ago quarter but expanded a modest 10 bps sequentially. Both license and maintenance & services gross profit contracted on a year-over-year basis. The sequential expansion was primarily due to better product mix.

Splunk continues to invest in research & development (“R&D”), which jumped 81.1% year over year and 20.0% sequentially to $13.3 million in the quarter. Sales & marketing (“S&M”) expense surged 52.6% from the prior-year quarter and 22.8% from the previous quarter to $40.3 million. General & administrative expense (“G&A”) increased 65.2% year over year and 42.7% quarter over quarter to $10.9 million.

The sharp jump in operating expenses (up 59.8% year over year and 25.2% sequentially) negatively hurt profitability in the quarter. Operating loss was $5.9 million compared with a loss of $0.6 million in the prior-year quarter and a loss of $5.4 million in the previous quarter.

Net loss was $6.2 million compared with a loss of $1.3 million in the prior-year quarter and a loss of $5.5 million in the previous quarter.

Balance Sheet and Cash Flow

Splunk exited the fourth quarter with $305.9 million in cash & cash equivalents compared with $273.3 million in the previous quarter and $31.6 million in the year-ago quarter.

Cash flow from operations was $24.8 million compared with $6.5 million in the previous quarter and $10.0 million in the year-ago quarter. Free cash flow improved significantly to $21.4 million compared with $4.2 million in the previous quarter and $7.9 million in the year-ago quarter.

Guidance

Splunk expect revenues in the range of $260.0 million to $270.0 million and break-even operational result for fiscal 2014. For first quarter of 2014, revenues are likely to be in the range of $52.0 to $54.0 million. Operating margin is expected to be negative 10.0% to 12.0% in the first quarter.

Operating margin is expected to improve gradually in the second and third quarter and management expects to report positive figures in the fourth quarter. Headcount is expected to increase by 250 in fiscal 2014.

Our Take

Splunk’s revenue growth is expected to benefit from strong growth in user base, higher renewal rates and expansions 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.

Currently, Splunk has a Zacks Rank #4 (Sell).

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