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Bull of the Day: Splunk (SPLK)

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Splunk crossed the $25 billion market cap mark on Tuesday and it's no wonder when you understand how important the big-data platform has become to Fortune 1000 corporations seeking to find and analyze their "dark data."
 
That's what CEO Doug Merritt calls the challenge for companies who are flooded in new sources of new data from the web, from sensors and networks, and from their own internal systems tracking and storing every byte from customer engagement to energy usage.
 
Splunk also helps these enterprises with the security aspects of their data deluge.
 
Splunk’s Q3 Earnings Gain on Cloud and Software Revenues
 
In late November, Splunk reported third-quarter fiscal 2020 (ends January) earnings of 58 cents per share, which beat the Zacks Consensus Estimate by 11.5% and surged 52.6% year over year. The stock has surged 32% since this stellar report.
 
Revenues climbed 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 Detail
 
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.
 
Analyst Reactions
 
After the November 21 report, analysts across the Street raised their price targets, with Morgan Stanley, Wells Fargo, SunTrust, Jefferies and Goldman Sachs creating a new higher consensus above $170. This caused shares to jump above $150 within a week. 
 
Actually, while the Goldman analyst was late to the party with an upgrade to Buy (from Neutral) on December 2, the analyst from Morgan Stanley even preempted the earnings with this upgrade on Nov 18 when shares were still below $120...
 
Morgan Stanley analyst Keith Weiss upgraded Splunk to Overweight from Equal Weight with a price target of $169, up from $140. He wrote in his research note that the "Increasing clarity from a shift to a recurring rev model likely reveals a durable 25%+ ARR growth story, with FY23 FCF approaching $1B - which looks undervalued at current levels."
 
Weiss further described why once Splunk is through its shift to a 100% recurring revenue model and annual invoicing, investors will have better visibility into a company well positioned for key secular trends in data and monitoring. The analyst believes Splunk can sustain 25%-plus software annual recurring revenue growth, with free cash flow margins in the mid-20s, yielding $6 in free cash flow per share. His under-valued thesis was that Splunk shares currently trade at a 30% valuation discount relative to peers on an enterprise value to 2020 sales basis.
 
Then in mid-January, lots of analysts came back with fresh "new year" perspectives on Software and raised their outlooks again, including Weiss at Morgan Stanley with a PT boost to $185...
 
Wells Fargo: Splunk price target raised to $200 from $175 with analyst Phil Winslow saying he anticipates continued healthy growth in software spending in 2020 and expects software stocks as a whole to relatively outperform the market. Winslow also believes the next decade will bring "massive advances" toward a more fully connected and immersive world -- one in which artificial intelligence and machine learning, natural language processing, augmented reality, 5G, edge/fog, and the Internet of Things mature and become both commonplace and transformative. He expects software to be a key enabler of this increasingly connected decade.
 
SunTrust: Analyst Joel Fishbein boosted his SPLK price target to $190 from $175 as part of his broader 2020 Infrastructure Software Outlook research note. The analyst noted that concerns around the company's strategy transition to a recurring revenue model were alleviated by the strong ARR and RPO metrics as well as operating cash flow forecast of $1 billion for FY23. 
 
Jefferies: Analyst Brent Thill maintained a Buy rating on Splunk, and raised his price target on shares to $180 from $165. He called the company one of his top picks in Small/Mid Cap Software, saying it "remains well positioned as a leader at scale in the log management space with ongoing success in workload penetration for ITOM, application delivery and SIEM (security information and event management) use cases." 
 
Bottom line: Splunk remains a unique big-data engine like peer Alteryx and they both are finding plenty of new customers to do for them what Microsoft (MSFT - Free Report) and Alphabet (GOOGL - Free Report) didn't even try.
 
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